GENERAL MILLS INC - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

☑	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED May 26, 2019

 

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

Commission file number: 001-01185

 

 

GENERAL MILLS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		41-0274440
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

Number One General Mills Boulevard
Minneapolis, Minnesota		55426
(Address of principal executive offices)		(Zip Code)

(763) 764-7600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $.10 par value		GIS		New York Stock Exchange
Floating Rate Notes due 2020		GIS20A		New York Stock Exchange
2.100% Notes due 2020		GIS20		New York Stock Exchange
1.000% Notes due 2023		GIS23A		New York Stock Exchange
1.500% Notes due 2027		GIS27		New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):

 

Large accelerated filer ☑		Accelerated filer ☐		Non-accelerated filer ☐		Smaller reporting company ☐
Emerging growth company ☐

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

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

Yes ☐ No ☑

Aggregate market value of Common Stock held by non-affiliates of the registrant, based on the closing price of $43.37 per share as reported on the New York Stock Exchange on November 25, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter): $25,879.8 million.

Number of shares of Common Stock outstanding as of June 10, 2019: 601,959,611 (excluding 152,653,717 shares held in the treasury).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2019 Annual Meeting of Shareholders are incorporated by reference into Part III.

Table of Contents

 

				Page
Part I
Item 1		Business			3
Item 1A		Risk Factors			8
Item 1B		Unresolved Staff Comments			15
Item 2		Properties			15
Item 3		Legal Proceedings			17
Item 4		Mine Safety Disclosures			17
Part II
Item 5		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			17
Item 6		Selected Financial Data			18
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A		Quantitative and Qualitative Disclosures About Market Risk			48
Item 8		Financial Statements and Supplementary Data			50
Item 9		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			109
Item 9A		Controls and Procedures			109
Item 9B		Other Information			110
Part III
Item 10		Directors, Executive Officers and Corporate Governance			110
Item 11		Executive Compensation			111
Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			111
Item 13		Certain Relationships and Related Transactions, and Director Independence			111
Item 14		Principal Accounting Fees and Services			111
Part IV
Item 15		Exhibits, Financial Statement Schedules			112
Item 16		Form 10-K Summary			116
Signatures					117

 

2

PART I

ITEM 1    Business

General Mills, Inc. was incorporated in Delaware in 1928. The terms “General Mills,” “Company,” “registrant,” “we,” “us,” and “our” mean General Mills, Inc. and all subsidiaries included in the Consolidated Financial Statements in Item 8 of this report unless the context indicates otherwise.

Certain terms used throughout this report are defined in a glossary in Item 8 of this report.

COMPANY OVERVIEW

We are a leading global manufacturer and marketer of branded consumer foods sold through retail stores. We also are a leading supplier of branded and unbranded food products to the North American foodservice and commercial baking industries. Following our acquisition of Blue Buffalo Pet Products, Inc. (Blue Buffalo) in fiscal 2018, we are also a leading manufacturer and marketer in the wholesome natural pet food category. We manufacture our products in 13 countries and market them in more than 100 countries. In addition to our consolidated operations, we have 50 percent interests in two strategic joint ventures that manufacture and market food products sold in more than 130 countries worldwide.

We continue to pursue our Consumer First strategy and execute against our global growth framework: 1) competing effectively on all brands and across all geographies through strong innovation, effective consumer marketing, and excellent in-store execution; 2) accelerating growth on our four differential growth platforms, which are Häagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and our portfolio of natural and organic food brands; and 3) reshaping our portfolio through growth-enhancing acquisitions and divestitures. We believe executing against this growth framework should result in long-term value creation for our shareholders.

As part of our portfolio shaping strategy, in fiscal 2018, we acquired Blue Buffalo for an aggregate purchase price of $8.0 billion. We financed the transaction with a combination of $6.0 billion in debt, $1.0 billion in equity, and cash on hand. The consolidated results of Blue Buffalo are reported as our Pet operating segment on a one-month lag. In fiscal 2018, our Consolidated Statements of Earnings did not include Pet operating segment results. For further information on the acquisition of Blue Buffalo, please see Note 3 to the Consolidated Financial Statements in Item 8 of this report.

We manage and review the financial results of our business under five operating segments: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet. See Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Item 7 of this report for a description of our segments.

We offer a variety of food products that provide great taste, nutrition, convenience, and value for consumers around the world. Our business is focused on the following large, global categories:

 

•

snacks, including grain, fruit and savory snacks, nutrition bars, and frozen hot snacks;

 

•

ready-to-eat cereal;

 

•

convenient meals, including meal kits, ethnic meals, pizza, soup, side dish mixes, frozen breakfast, and frozen entrees;

 

•

yogurt;

 

•

pet food;

 

3

•

super-premium ice cream;

 

•

baking mixes and ingredients; and

 

•

refrigerated and frozen dough.

Our Cereal Partners Worldwide (CPW) joint venture with Nestlé S.A. (Nestlé) competes in the ready-to-eat cereal category in markets outside North America, and our Häagen-Dazs Japan, Inc. (HDJ) joint venture competes in the super-premium ice cream category in Japan. For net sales contributed by each class of similar products, please see Note 16 to the Consolidated Financial Statements in Item 8 of this report.

Customers. Our primary customers are grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, e-commerce retailers, commercial and noncommercial foodservice distributors and operators, restaurants, convenience stores, and pet specialty stores. We generally sell to these customers through our direct sales force. We use broker and distribution arrangements for certain products and to serve certain types of customers. For further information on our customer credit and product return practices, please refer to Note 2 to the Consolidated Financial Statements in Item 8 of this report. During fiscal 2019, Walmart Inc. and its affiliates (Walmart) accounted for 20 percent of our consolidated net sales and 31 percent of net sales of our North America Retail segment. No other customer accounted for 10 percent or more of our consolidated net sales. For further information on significant customers, please refer to Note 7 to the Consolidated Financial Statements in Item 8 of this report.

Competition. The packaged foods categories are highly competitive, with numerous manufacturers of varying sizes in the United States and throughout the world. The categories in which we participate also are very competitive. Our principal competitors in these categories are manufacturers, as well as retailers with their own branded products. Competitors market and sell their products through brick-and-mortar stores and e-commerce. All of our principal competitors have substantial financial, marketing, and other resources. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, convenient ordering and delivery to the consumer, and the ability to identify and satisfy consumer preferences. Our principal strategies for competing in each of our segments include unique consumer insights, effective customer relationships, superior product quality, innovative advertising, product promotion, product innovation aligned with consumers’ needs, an efficient supply chain, and price. In most product categories, we compete not only with other widely advertised, branded products, but also with regional brands and with generic and private label products that are generally sold at lower prices. Internationally, we compete with both multi-national and local manufacturers, and each country includes a unique group of competitors.

Raw materials, ingredients, and packaging. The principal raw materials that we use are grains (wheat, oats, and corn), dairy products, sugar, fruits, vegetable oils, meats, nuts, vegetables, and other agricultural products. We also use substantial quantities of carton board, corrugated, plastic and metal packaging materials, operating supplies, and energy. Most of these inputs for our domestic and Canadian operations are purchased from suppliers in the United States. In our other international operations, inputs that are not locally available in adequate supply may be imported from other countries. The cost of these inputs may fluctuate widely due to external conditions such as weather, product scarcity, limited sources of supply, commodity market fluctuations, currency fluctuations, trade tariffs, and changes in governmental agricultural and energy policies and regulations. We have some long-term fixed price contracts, but the majority of our inputs are purchased on the open market. We believe that we will be able to obtain an adequate supply of needed inputs. Occasionally and where possible, we make advance purchases of items significant to our business in order to ensure continuity of operations. Our objective is to procure materials meeting both our quality standards and our production needs at price levels that allow a targeted profit margin. Since these inputs generally represent the largest variable cost in manufacturing our products, to the extent possible, we often manage the risk associated with adverse price movements for some inputs using a variety of risk management strategies. We also have a grain merchandising operation that provides

 

4

us efficient access to, and more informed knowledge of, various commodity markets, principally wheat and oats. This operation holds physical inventories that are carried at net realizable value and uses derivatives to manage its net inventory position and minimize its market exposures.

RESEARCH AND DEVELOPMENT

Our research and development resources are focused on new product development, product improvement, process design and improvement, packaging, and exploratory research in new business and technology areas. Research and development expenditures were $222 million in fiscal 2019 and $219 million in fiscal 2018.

TRADEMARKS AND PATENTS

Our products are marketed under a variety of valuable trademarks. Some of the more important trademarks used in our global operations (set forth in italics in this report) include Annie’s, Betty Crocker, Bisquick, Blue Buffalo, BLUE Basics, BLUE Freedom, BLUE Wilderness, Bugles, Cascadian Farm, Cheerios, Chex, Cinnamon Toast Crunch, Cocoa Puffs, Cookie Crisp, EPIC, Fiber One, Food Should Taste Good, Fruit by the Foot, Fruit Gushers, Fruit Roll-Ups, Gardetto’s, Go-Gurt, Gold Medal, Golden Grahams, Häagen-Dazs, Helpers, Jeno’s, Jus-Rol, Kitano, Kix, Lärabar, Latina, Liberté, Lucky Charms, Muir Glen, Nature Valley, Oatmeal Crisp, Old El Paso, Pillsbury, Progresso, Raisin Nut Bran, Total, Totino’s, Trix, Wanchai Ferry, Wheaties, Yoki, and Yoplait. We protect these marks as appropriate through registrations in the United States and other jurisdictions. Depending on the jurisdiction, trademarks are generally valid as long as they are in use or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely for as long as the trademarks are in use.

Some of our products are marketed under or in combination with trademarks that have been licensed from others for both long-standing products (e.g., Reese’s Puffs for cereal, Green Giant for vegetables in certain countries, and Cinnabon for refrigerated dough, frozen pastries, and baking products) and shorter term promotional products (e.g., fruit snacks sold under various third party equities).

Our cereal trademarks are licensed to CPW and may be used in association with the Nestlé trademark. Nestlé licenses certain of its trademarks to CPW, including the Nestlé and Uncle Toby’s trademarks. The Häagen-Dazs trademark is licensed royalty-free and exclusively to Nestlé for ice cream and other frozen dessert products in the United States and Canada. The Häagen-Dazs trademark is also licensed to HDJ. The Pillsbury brand and the Pillsbury Doughboy character are subject to an exclusive, royalty-free license that was granted to a third party and its successors in the dessert mix and baking mix categories in the United States and under limited circumstances in Canada and Mexico.

The Yoplait trademark and other related trademarks are owned by Yoplait Marques SNC, an entity in which we own a 50 percent interest. These marks are licensed exclusively to Yoplait SAS, an entity in which we own a 51 percent interest. Yoplait SAS licenses these trademarks to its franchisees. The Liberté trademark and other related trademarks are owned by Liberté Marques Sàrl, an entity in which we own a 50 percent interest.

We continue our focus on developing and marketing innovative, proprietary products, many of which use proprietary expertise, recipes and formulations. We consider the collective rights under our various patents, which expire from time to time, a valuable asset, but we do not believe that our businesses are materially dependent upon any single patent or group of related patents.

SEASONALITY

In general, demand for our products is evenly balanced throughout the year. However, within our North America Retail segment demand for refrigerated dough, frozen baked goods, and baking products is stronger in the fourth calendar quarter. Demand for Progresso soup is higher during the fall and winter months. Internationally, within

 

5

our Europe & Australia and Asia & Latin America segments, demand for Häagen-Dazs ice cream is higher during the summer months and demand for baking mix and dough products increases during winter months. Due to the offsetting impact of these demand trends, as well as the different seasons in the northern and southern hemispheres, our international segments’ net sales are generally evenly balanced throughout the year.

BACKLOG

Orders are generally filled within a few days of receipt and are subject to cancellation at any time prior to shipment. The backlog of any unfilled orders as of May 26, 2019, was not material.

WORKING CAPITAL

A description of our working capital is included in the Liquidity section of MD&A in Item 7 of this report. Our product return practices are described in Note 2 to the Consolidated Financial Statements in Item 8 of this report.

EMPLOYEES

As of May 26, 2019, we had approximately 40,000 full- and part-time employees.

QUALITY AND SAFETY REGULATION

The manufacture and sale of consumer and pet food products is highly regulated. In the United States, our activities are subject to regulation by various federal government agencies, including the Food and Drug Administration, Department of Agriculture, Federal Trade Commission, Department of Commerce, and Environmental Protection Agency, as well as various state and local agencies. Our business is also regulated by similar agencies outside of the United States.

ENVIRONMENTAL MATTERS

As of May 26, 2019, we were involved with two active cleanup sites associated with the alleged or threatened release of hazardous substances or wastes located in Minneapolis, Minnesota and Moonachie, New Jersey.

Our operations are subject to the Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act, and the Federal Insecticide, Fungicide, and Rodenticide Act, and all similar state, local, and foreign environmental laws and regulations applicable to the jurisdictions in which we operate.

Based on current facts and circumstances, we believe that neither the results of our environmental proceedings nor our compliance in general with environmental laws or regulations will have a material adverse effect upon our capital expenditures, earnings, or competitive position.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

The section below provides information regarding our executive officers as of June 27, 2019:

Richard C. Allendorf, age 58, is General Counsel and Secretary. Mr. Allendorf joined General Mills in 2001 from The Pillsbury Company. He was promoted to Vice President, Deputy General Counsel in 2010, first overseeing the legal affairs of the U.S. Retail segment and Consumer Food Sales and then, in 2012, overseeing the legal affairs of the International segment and Global Ethics and Compliance. He was named to his present position in February 2015. Prior to joining General Mills, he practiced law with the Shearman and Sterling and Mackall, Crounse and Moore law firms. He was in finance with General Electric prior to his legal career.

 

6

Jodi Benson, age 54, is Chief Innovation, Technology and Quality Officer. Ms. Benson joined General Mills in 2001 from The Pillsbury Company. She held a variety of positions before becoming the leader of our One Global Dairy Platform from 2011 to March 2016. She was named Vice President for our International business segment from April 2016 to March 2017, and Vice President of the Global Innovation, Technology, and Quality Capabilities Group from April 2017 to July 2018. She was named to her current position in August 2018.

William W. Bishop, Jr., age 48, is Group President, Pet. Mr. Bishop joined General Mills from Blue Buffalo in April 2018. Prior to joining General Mills, Mr. Bishop served as Chief Executive Officer of Blue Buffalo since January 2017. From 2003 until January 2017, Mr. Bishop served as Chief Operating Officer of Blue Buffalo and was named President in 2012. He co-founded Blue Buffalo in 2002. He was named to his present position in April 2018.

Kofi A. Bruce, age 49, is Vice President, Controller. Mr. Bruce joined General Mills in 2009 as Vice President, Treasurer after serving in a variety of senior management positions with Ecolab and Ford Motor Company. He served as Treasurer until 2010 when he was named Vice President, Finance for Yoplait. Mr. Bruce reassumed his role as Vice President, Treasurer from 2012 until July 2014 when he was named Vice President, Finance for Convenience Stores & Foodservice. He served in that role until he was named to his present position in August 2017.

John R. Church, age 53, is Chief Supply Chain Officer and Global Business Solutions Officer. Mr. Church joined General Mills in 1988 as a Product Developer in the Big G cereals division and held various positions before becoming Vice President, Engineering in 2003. In 2005, his role was expanded to include development of the Company’s strategy for the global sourcing of raw materials and manufacturing capabilities. He was named Vice President, Supply Chain Operations in 2007, Senior Vice President, Supply Chain in 2008, Executive Vice President, Supply Chain in 2013, and to his present position in June 2017.

Jeffrey L. Harmening, age 52, is Chairman of the Board and Chief Executive Officer. Mr. Harmening joined General Mills in 1994 and served in various marketing roles in the Betty Crocker, Yoplait, and Big G cereal divisions. He was named Vice President, Marketing for CPW in 2003 and Vice President of the Big G cereal division in 2007. In 2011, he was promoted to Senior Vice President for the Big G cereal division. Mr. Harmening was appointed Senior Vice President, Chief Executive Officer of CPW in 2012. Mr. Harmening returned from CPW in 2014 and was named Executive Vice President, Chief Operating Officer, U.S. Retail. He became President, Chief Operating Officer in July 2016. He was named Chief Executive Officer in June 2017 and Chairman of the Board in January 2018. Mr. Harmening is a director of The Toro Company.

Donal L. Mulligan, age 58, is Chief Financial Officer. Mr. Mulligan joined General Mills in 2001 from The Pillsbury Company. He served as Vice President, Financial Operations for our International division until 2004, when he was named Vice President, Financial Operations for Operations and Technology. Mr. Mulligan was appointed Treasurer in 2006 and Senior Vice President, Financial Operations in 2007. He was elected to his present position in 2007. From 1987 to 1998, he held several international positions at PepsiCo, Inc. and YUM! Brands, Inc. Mr. Mulligan is a director of Tennant Company.

Jon J. Nudi, age 49, is Group President, North America Retail. Mr. Nudi joined General Mills in 1993 as a Sales Representative and held a variety of roles in Consumer Foods Sales. In 2005, he moved into marketing roles in the Meals division and was elected Vice President in 2007. Mr. Nudi was named Vice President; President, Snacks, in 2010, Senior Vice President, President, Europe/Australasia in 2014, and Senior Vice President; President, U.S. Retail in September 2016. He was named to his present position in January 2017.

Shawn P. O’Grady, age 55, is Group President, Convenience Stores & Foodservice and Chief Revenue Development Officer. Mr. O’Grady joined General Mills in 1990 and held several marketing roles in the Snacks, Meals, and Big G cereal divisions. He was promoted to Vice President in 1998 and held marketing positions in the Betty Crocker and Pillsbury USA divisions. In 2004, he moved into Consumer Foods Sales, becoming Vice

 

7

President, President, U.S. Retail Sales in 2007, Senior Vice President, President, Consumer Foods Sales Division in 2010, and Senior Vice President, President, Sales & Channel Development in 2012. He was named to his current position in January 2017.

Ivan Pollard, age 56, is Global Chief Marketing Officer. Mr. Pollard assumed his current role in July 2017 when he joined General Mills from The Coca-Cola Company. At Coca-Cola, from 2011 to 2014, Mr. Pollard served as Vice President, Global Connections until he was promoted to Senior Vice President, Strategic Marketing, a role he held until June 2017. Prior to joining The Coca-Cola Company, Mr. Pollard was a global partner at Naked Communications, a connections planning company. His prior communications planning experience included work at the BMP, DDP Needham, and Wieden+Kennedy advertising agencies.

Bethany Quam, age 48, is Group President, Europe & Australia. Ms. Quam joined General Mills in 1993 and held a variety of positions before becoming Vice President, Strategic Planning in 2007. She was promoted to Vice President, Field Sales, Channels in 2012, Vice President; President, Convenience Stores & Foodservice in 2014, and Senior Vice President; President, Europe & Australia in August 2016. She was named to her current position in January 2017.

Sean Walker age 53, is Group President, Asia & Latin America. Mr. Walker joined General Mills in 1989 and held a variety of positions before becoming Vice President, President of Latin America in 2009. He was named Senior Vice President, President Latin America in 2012 and Senior Vice President, Corporate Strategy in September 2016. He was named to his current position in February 2019.

Jacqueline Williams-Roll, age 50, is Chief Human Resources Officer. Ms. Williams-Roll joined General Mills in 1995. She held human resources leadership roles in Supply Chain, Finance, Marketing, and Organization Effectiveness, and she also worked a large part of her career on businesses outside of the United States. She was named Vice President, Human Resources, International in 2010, and then promoted to Senior Vice President, Human Resources Operations in 2013. She was named to her present position in September 2014. Prior to joining General Mills, she held sales and management roles with Jenny Craig International.

WEBSITE ACCESS

Our website is www.GeneralMills.com. We make available, free of charge in the “Investors” portion of this website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (1934 Act) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Reports of beneficial ownership filed pursuant to Section 16(a) of the 1934 Act are also available on our website.

ITEM 1A    Risk Factors

Our business is subject to various risks and uncertainties. Any of the risks described below could materially, adversely affect our business, financial condition, and results of operations.

The categories in which we participate are very competitive, and if we are not able to compete effectively, our results of operations could be adversely affected.

The consumer and pet food categories in which we participate are very competitive. Our principal competitors in these categories are manufacturers, as well as retailers with their own branded and private label products. Competitors market and sell their products through brick-and-mortar stores and e-commerce. All of our principal competitors have substantial financial, marketing, and other resources. In most product categories, we compete not only with other widely advertised branded products, but also with regional brands and with generic and private label products that are generally sold at lower prices. Competition in our product categories is based on

 

8

product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, convenient ordering and delivery to the consumer, and the ability to identify and satisfy consumer preferences. If our large competitors were to seek an advantage through pricing or promotional changes, we could choose to do the same, which could adversely affect our margins and profitability. If we did not do the same, our revenues and market share could be adversely affected. Our market share and revenue growth could also be adversely impacted if we are not successful in introducing innovative products in response to changing consumer demands or by new product introductions of our competitors. If we are unable to build and sustain brand equity by offering recognizably superior product quality, we may be unable to maintain premium pricing over generic and private label products.

We may be unable to maintain our profit margins in the face of a consolidating retail environment.

There has been significant consolidation in the grocery industry, resulting in customers with increased purchasing power. In addition, large retail customers may seek to use their position to improve their profitability through improved efficiency, lower pricing, increased reliance on their own brand name products, increased emphasis on generic and other economy brands, and increased promotional programs. If we are unable to use our scale, marketing expertise, product innovation, knowledge of consumers’ needs, and category leadership positions to respond to these demands, our profitability and volume growth could be negatively impacted. In addition, the loss of any large customer could adversely affect our sales and profits. In fiscal 2019, Walmart accounted for 20 percent of our consolidated net sales and 31 percent of net sales of our North America Retail segment. PetSmart and Petco accounted for 36 percent and 14 percent, respectively, of our Pet segment’s net sales in fiscal 2019. National pet superstore chains have experienced reduced store traffic. If national pet superstore chains continue to experience reduced store traffic, or experience any operational difficulties, our Pet segment operating results may be adversely affected. For more information on significant customers, please see Note 7 to the Consolidated Financial Statements in Item 8 of this report.

Price changes for the commodities we depend on for raw materials, packaging, and energy may adversely affect our profitability.

The principal raw materials that we use are commodities that experience price volatility caused by external conditions such as weather, product scarcity, limited sources of supply, commodity market fluctuations, currency fluctuations, trade tariffs, and changes in governmental agricultural and energy policies and regulations. Commodity price changes may result in unexpected increases in raw material, packaging, and energy costs. If we are unable to increase productivity to offset these increased costs or increase our prices, we may experience reduced margins and profitability. We do not fully hedge against changes in commodity prices, and the risk management procedures that we do use may not always work as we intend.

Volatility in the market value of derivatives we use to manage exposures to fluctuations in commodity prices will cause volatility in our gross margins and net earnings.

We utilize derivatives to manage price risk for some of our principal ingredient and energy costs, including grains (oats, wheat, and corn), oils (principally soybean), dairy products, natural gas, and diesel fuel. Changes in the values of these derivatives are recorded in earnings currently, resulting in volatility in both gross margin and net earnings. These gains and losses are reported in cost of sales in our Consolidated Statements of Earnings and in unallocated corporate items outside our segment operating results until we utilize the underlying input in our manufacturing process, at which time the gains and losses are reclassified to segment operating profit. We also record our grain inventories at net realizable value. We may experience volatile earnings as a result of these accounting treatments.

If we are not efficient in our production, our profitability could suffer as a result of the highly competitive environment in which we operate.

Our future success and earnings growth depend in part on our ability to be efficient in the production and manufacture of our products in highly competitive markets. Gaining additional efficiencies may become more

 

9

difficult over time. Our failure to reduce costs through productivity gains or by eliminating redundant costs resulting from acquisitions or divestitures could adversely affect our profitability and weaken our competitive position. Many productivity initiatives involve complex reorganization of manufacturing facilities and production lines. Such manufacturing realignment may result in the interruption of production, which may negatively impact product volume and margins. We periodically engage in restructuring and cost savings initiatives designed to increase our efficiency and reduce expenses. If we are unable to execute those initiatives as planned, we may not realize all or any of the anticipated benefits, which could adversely affect our business and results of operations.

Disruption of our supply chain could adversely affect our business.

Our ability to make, move, and sell products is critical to our success. Damage or disruption to raw material supplies or our manufacturing or distribution capabilities due to weather, including any potential effects of climate change, natural disaster, fire, terrorism, cyber-attack, pandemic, strikes, import/export restrictions, or other factors could impair our ability to manufacture or sell our products. Many of our product lines are manufactured at a single location. Our suppliers’ policies and practices can damage our reputation and the quality and safety of our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single supplier or location, could adversely affect our business and results of operations, as well as require additional resources to restore our supply chain.

Concerns with the safety and quality of food products could cause consumers to avoid certain food products or ingredients.

We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain food products or ingredients. Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.

If our products become adulterated, misbranded, or mislabeled, we might need to recall those items and may experience product liability claims if consumers or their pets are injured.

We may need to recall some of our products if they become adulterated, misbranded, or mislabeled. A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. We could also suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have an adverse effect on our business results and the value of our brands.

We may be unable to anticipate changes in consumer preferences and trends, which may result in decreased demand for our products.

Our success depends in part on our ability to anticipate the tastes, eating habits, and purchasing behaviors of consumers and to offer products that appeal to their preferences in channels where they shop. Consumer preferences and category-level consumption may change from time to time and can be affected by a number of different trends and other factors. If we fail to anticipate, identify or react to these changes and trends, such as adapting to emerging e-commerce channels, or to introduce new and improved products on a timely basis, we may experience reduced demand for our products, which would in turn cause our revenues and profitability to suffer. Similarly, demand for our products could be affected by consumer concerns regarding the health effects of ingredients such as sodium, trans fats, genetically modified organisms, sugar, processed wheat, or other product ingredients or attributes.

 

10

We may be unable to grow our market share or add products that are in faster growing and more profitable categories.

The food industry’s growth potential is constrained by population growth. Our success depends in part on our ability to grow our business faster than populations are growing in the markets that we serve. One way to achieve that growth is to enhance our portfolio by adding innovative new products in faster growing and more profitable categories. Our future results will also depend on our ability to increase market share in our existing product categories. If we do not succeed in developing innovative products for new and existing categories, our growth and profitability could be adversely affected.

Economic downturns could limit consumer demand for our products.

The willingness of consumers to purchase our products depends in part on local economic conditions. In periods of economic uncertainty, consumers may purchase more generic, private label, and other economy brands and may forego certain purchases altogether. In those circumstances, we could experience a reduction in sales of higher margin products or a shift in our product mix to lower margin offerings. In addition, as a result of economic conditions or competitive actions, we may be unable to raise our prices sufficiently to protect margins. Consumers may also reduce the amount of food that they consume away from home at customers that purchase products from our Convenience Stores & Foodservice segment. Any of these events could have an adverse effect on our results of operations.

Our results may be negatively impacted if consumers do not maintain their favorable perception of our brands.

Maintaining and continually enhancing the value of our many iconic brands is critical to the success of our business. The value of our brands is based in large part on the degree to which consumers react and respond positively to these brands. Brand value could diminish significantly due to a number of factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products, our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, concerns about food safety, or our products becoming unavailable to consumers. Consumer demand for our products may also be impacted by changes in the level of advertising or promotional support. The use of social and digital media by consumers, us, and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about us, our brands, or our products on social or digital media could seriously damage our brands and reputation. If we do not maintain the favorable perception of our brands, our business results could be negatively impacted.

Our international operations are subject to political and economic risks.

In fiscal 2019, 26 percent of our consolidated net sales were generated outside of the United States. We are accordingly subject to a number of risks relating to doing business internationally, any of which could significantly harm our business. These risks include:

 

•

political and economic instability;

•

exchange controls and currency exchange rates;

•

tariffs on products and ingredients that we import and export;

•

nationalization of operations;

•

compliance with anti-corruption regulations;

•

uncertainty relating to the United Kingdom’s planned exit from the European Union;

•

foreign tax treaties and policies; and

•

restriction on the transfer of funds to and from foreign countries, including potentially negative tax consequences.

 

11

Our financial performance on a U.S. dollar denominated basis is subject to fluctuations in currency exchange rates. These fluctuations could cause material variations in our results of operations. Our principal exposures are to the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese renminbi, euro, Japanese yen, Mexican peso, and Swiss franc. From time to time, we enter into agreements that are intended to reduce the effects of our exposure to currency fluctuations, but these agreements may not be effective in significantly reducing our exposure.

New regulations or regulatory-based claims could adversely affect our business.

Our facilities and products are subject to many laws and regulations administered by the United States Department of Agriculture, the Federal Food and Drug Administration, the Occupational Safety and Health Administration, and other federal, state, local, and foreign governmental agencies relating to the production, packaging, labelling, storage, distribution, quality, and safety of food products and the health and safety of our employees. Our failure to comply with such laws and regulations could subject us to lawsuits, administrative penalties, and civil remedies, including fines, injunctions, and recalls of our products. We advertise our products and could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations. We may also be subject to new laws or regulations restricting our right to advertise our products, including restrictions on the audience to whom products are marketed. Changes in laws or regulations that impose additional regulatory requirements on us could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected.

We are subject to various federal, state, local, and foreign environmental laws and regulations. Our failure to comply with environmental laws and regulations could subject us to lawsuits, administrative penalties, and civil remedies. We are currently party to a variety of environmental remediation obligations. Due to regulatory complexities, uncertainties inherent in litigation, and the risk of unidentified contaminants on current and former properties of ours, the potential exists for remediation, liability, indemnification, and compliance costs to differ from our estimates. We cannot guarantee that our costs in relation to these matters, or compliance with environmental laws in general, will not exceed our established liabilities or otherwise have an adverse effect on our business and results of operations.

We have a substantial amount of indebtedness, which could limit financing and other options and in some cases adversely affect our ability to pay dividends.

As of May 26, 2019, we had total debt, redeemable interests, and noncontrolling interests of $15.4 billion. The agreements under which we have issued indebtedness do not prevent us from incurring additional unsecured indebtedness in the future. Our level of indebtedness may limit our:

 

•

ability to obtain additional financing for working capital, capital expenditures, or general corporate purposes, particularly if the ratings assigned to our debt securities by rating organizations were revised downward; and

•

flexibility to adjust to changing business and market conditions and may make us more vulnerable to a downturn in general economic conditions.

There are various financial covenants and other restrictions in our debt instruments and noncontrolling interests. If we fail to comply with any of these requirements, the related indebtedness (and other unrelated indebtedness) could become due and payable prior to its stated maturity and our ability to obtain additional or alternative financing may also be adversely affected.

Our ability to make scheduled payments on or to refinance our debt and other obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business, and other factors beyond our control.

 

12

Global capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing, and disrupt the operations of our suppliers and customers.

We depend on stable, liquid, and well-functioning capital and credit markets to fund our operations. Although we believe that our operating cash flows, financial assets, access to capital and credit markets, and revolving credit agreements will permit us to meet our financing needs for the foreseeable future, there can be no assurance that future volatility or disruption in the capital and credit markets will not impair our liquidity or increase our costs of borrowing. We also utilize interest rate derivatives to reduce the volatility of our financing costs. If we are not effective in hedging this volatility, we may experience an increase in our costs of borrowing. Our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy.

From time to time, we issue variable rate securities based on interbank offered rates (IBORs) and enter into interest rate swaps that contain a variable element based on an IBOR. There is currently uncertainty whether certain IBORs will continue to be available after 2021. If certain IBORs cease to be available, we may need to amend affected agreements, and we cannot predict what alternative index would be negotiated with our counterparties and security holders. As a result, our interest expense could increase and our available cash flow for general corporate requirements may be adversely affected.

Volatility in the securities markets, interest rates, and other factors could substantially increase our defined benefit pension, other postretirement benefit, and postemployment benefit costs.

We sponsor a number of defined benefit plans for employees in the United States, Canada, and various foreign locations, including defined benefit pension, retiree health and welfare, severance, and other postemployment plans. Our major defined benefit pension plans are funded with trust assets invested in a globally diversified portfolio of securities and other investments. Changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns, and the market value of plan assets can affect the funded status of our defined benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. A significant increase in our obligations or future funding requirements could have a negative impact on our results of operations and cash flows from operations.

Our business operations could be disrupted if our information technology systems fail to perform adequately or are breached.

Information technology serves an important role in the efficient and effective operation of our business. We rely on information technology networks and systems, including the internet, to process, transmit, and store electronic information to manage a variety of business processes and to comply with regulatory, legal, and tax requirements. Our information technology systems and infrastructure are critical to effectively manage our key business processes including digital marketing, order entry and fulfillment, supply chain management, finance, administration, and other business processes. These technologies enable internal and external communication among our locations, employees, suppliers, customers, and others and include the receipt and storage of personal information about our employees, consumers, and proprietary business information. Our information technology systems, some of which are dependent on services provided by third parties, may be vulnerable to damage, interruption, or shutdown due to any number of causes such as catastrophic events, natural disasters, fires, power outages, systems failures, telecommunications failures, security breaches, computer viruses, hackers, employee error or malfeasance, and other causes. Increased cyber-security threats pose a potential risk to the security and viability of our information technology systems, as well as the confidentiality, integrity, and availability of the data stored on those systems. The failure of our information technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies, data loss, legal claims or proceedings, regulatory penalties, and the loss of sales and customers. Any interruption of our information technology systems could have operational, reputational, legal, and financial impacts that may have a material adverse effect on our business.

 

13

A change in the assumptions regarding the future performance of our businesses or a different weighted-average cost of capital used to value our reporting units or our indefinite-lived intangible assets could negatively affect our consolidated results of operations and net worth.

As of May 26, 2019, we had $20.6 billion of goodwill and indefinite-lived intangible assets. Goodwill for each of our reporting units is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. We compare the carrying value of the reporting unit, including goodwill, to the fair value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, including goodwill, impairment has occurred. Our estimates of fair value are determined based on a discounted cash flow model. Growth rates for sales and profits are determined using inputs from our long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors. Our Latin America and U.S. Yogurt reporting units have experienced declining business performance and we continue to monitor these businesses. While we currently believe that our goodwill is not impaired, different assumptions regarding the future performance of our businesses could result in significant impairment losses.

We evaluate the useful lives of our intangible assets, primarily intangible assets associated with the Blue Buffalo, Pillsbury, Totino’s, Progresso, Yoplait, Old El Paso, Yoki, Häagen-Dazs, and Annie’s 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.

Our indefinite-lived intangible assets are also tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Our estimate of the fair value of the brands is based on a discounted cash flow model using inputs including projected revenues from our long-range plan, assumed royalty rates which could be payable if we did not own the brands, and a discount rate. Our Pillsbury, Yoki, and Progresso brands have experienced declining business performance, and we continue to monitor these businesses. For further information on goodwill and intangible assets, please refer to Note 6 to the Consolidated Financial Statements in Item 8 of this report.

We may fail to realize all of the anticipated benefits of the Blue Buffalo acquisition or those benefits may take longer to realize than expected.

Our ability to realize the anticipated benefits of the Blue Buffalo acquisition will depend, to a large extent, on our ability to integrate Blue Buffalo, which is a complex, costly, and time-consuming process. We had not operated in the pet food sector prior to the acquisition of Blue Buffalo and our lack of experience in this sector may hinder our ability to manage Blue Buffalo successfully following the acquisition.

The integration process may disrupt our business and, if implemented ineffectively, could restrict the realization of the full expected benefits. The failure to meet the challenges involved in the integration process and to realize the anticipated benefits of the Blue Buffalo acquisition could cause an interruption of, or a loss of momentum in, our operations and could adversely affect our business, financial condition, and results of operations.

In addition, the integration of Blue Buffalo may result in material unanticipated problems, expenses, liabilities, competitive responses, and loss of customers and other business relationships. Additional integration challenges include:

 

•

diversion of management’s attention to integration matters;

•

difficulties in achieving anticipated cost savings, synergies, business opportunities, and growth prospects from the acquisition;

 

14

•

difficulties in the integration of operations and systems;

•

difficulties in conforming standards, controls, procedures, and accounting and other policies, business cultures, and compensation structures;

•

difficulties in the assimilation of employees;

•

challenges in keeping existing customers and obtaining new customers;

•

difficulties in building and operating new and existing manufacturing facilities;

•

challenges in attracting and retaining key personnel;

•

the impact of potential liabilities we may be inheriting from Blue Buffalo; and

•

coordinating a geographically dispersed organization.

Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues, and diversion of management’s time and energy, which could adversely affect our business, financial condition, and results of operations and result in us becoming subject to litigation. In addition, even if Blue Buffalo is integrated successfully, the full anticipated benefits of the acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that are anticipated. These benefits may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration process. All of these factors could cause reductions in our earnings per share and decrease or delay the expected accretive effect of the acquisition. As a result, it cannot be assured that the Blue Buffalo acquisition will result in the realization of the full or any anticipated benefits.

Blue Buffalo may underperform relative to our expectations.

The business, prospects, and financial performance of Blue Buffalo are subject to certain risks and uncertainties. We may not be able to maintain the growth rate, levels of revenue, earnings, or operating efficiency that we and Blue Buffalo have achieved or might achieve separately. Our failure to do so could have a material adverse effect on our financial condition and results of operations. When we acquired Blue Buffalo in fiscal 2018, we recorded significant brand intangible and goodwill assets at fair value based on, among other things, our projections of Blue Buffalo’s financial performance. Our failure to meet or exceed our projections could have a material adverse effect on our financial condition and results of operations, including a material impairment to our intangible assets.

Our failure to successfully integrate other acquisitions into our existing operations could adversely affect our financial results.

From time to time, we evaluate potential acquisitions or joint ventures that would further our strategic objectives. Our success depends, in part, upon our ability to integrate acquired and existing operations. If we are unable to successfully integrate acquisitions, our financial results could suffer. Additional potential risks associated with acquisitions include additional debt leverage, the loss of key employees and customers of the acquired business, the assumption of unknown liabilities, the inherent risk associated with entering a geographic area or line of business in which we have no or limited prior experience, failure to achieve anticipated synergies, and the impairment of goodwill or other acquisition-related intangible assets.

ITEM 1B    Unresolved Staff Comments

None.

 

ITEM 2    Properties

We own our principal executive offices and main research facilities, which are located in the Minneapolis, Minnesota metropolitan area. We operate numerous manufacturing facilities and maintain many sales and administrative offices, warehouses, and distribution centers around the world.

 

15

As of May 26, 2019, we operated 51 facilities for the production of a wide variety of food products. Of these facilities, 26 are located in the United States (1 of which is leased), 4 in the Greater China region, 2 in the Asia/Middle East/Africa Region (1 of which is leased), 3 in Canada (2 of which are leased), 8 in Europe/Australia, and 8 in Latin America and Mexico. The following is a list of the locations of our principal production facilities, which primarily support the segment noted:

North America Retail

 

 

Convenience Stores & Foodservice

 

 

Europe & Australia

 

 

Asia & Latin America

 

 

Pet

 

 

We operate numerous grain elevators in the United States in support of our domestic manufacturing activities. We also utilize approximately 13 million square feet of warehouse and distribution space, nearly all of which is leased, that primarily supports our North America Retail segment. We own and lease a number of dedicated sales and administrative offices around the world, totaling approximately 3 million square feet. We have additional warehouse, distribution, and office space in our plant locations.

As part of our Häagen-Dazs business in our Europe & Australia and Asia & Latin America segments, we operate 525 (all leased) and franchise 365 branded ice cream parlors in various countries around the world, all outside of the United States and Canada.

 

16

ITEM 3    Legal Proceedings

We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. In our opinion, there were no claims or litigation pending as of May 26, 2019, that were reasonably likely to have a material adverse effect on our consolidated financial position or results of operations. See the information contained under the section entitled “Environmental Matters” in Item 1 of this report for a discussion of environmental matters in which we are involved.

ITEM 4    Mine Safety Disclosures

None.

PART II

ITEM 5    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities

Our common stock is listed on the New York Stock Exchange under the symbol “GIS.” On June 10, 2019, there were approximately 29,000 record holders of our common stock.

The following table sets forth information with respect to shares of our common stock that we purchased during the fiscal quarter ended May 26, 2019:

 

Period		Total Number of Shares Purchased (a)				Average Price Paid Per Share				Total Number of Shares Purchased as Part of a Publicly Announced Program (b)				Maximum Number of Shares that may yet be Purchased Under the Program (b)
February 25, 2019-
March 31, 2019			250			$	47.22				250				39,498,616
April 1, 2019-
April 28, 2019			8,032				50.99				8,032				39,490,584
April 29, 2109-
May 26, 2019			-				-				-				39,490,584
Total			8,282			$	50.88				8,282				39,490,584

(a)	The total number of shares purchased includes shares of common stock withheld for the payment of withholding taxes upon the distribution of deferred option units.

(b)

On May 6, 2014, our Board of Directors approved an authorization for the repurchase of up to 100,000,000 shares of our common stock. Purchases can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans, and accelerated repurchase programs. The Board did not specify an expiration date for the authorization.

 

17

ITEM 6    Selected Financial Data

The following table sets forth selected financial data for each of the fiscal years in the five-year period ended May 26, 2019:

 

In Millions, Except Per Share Data, Percentages and Ratios		Fiscal Year
		2019 (a)				2018				2017				2016				2015 (b)
Operating data:
Net sales		$	16,865.2			$	15,740.4			$	15,619.8			$	16,563.1			$	17,630.3
Gross margin (c) (d)			5,756.8				5,435.6				5,567.8				5,843.3				5,967.8
Selling, general, and administrative expenses (d)			2,935.8				2,850.1				2,888.8				3,141.4				3,389.9
Operating profit (d)			2,515.9				2,419.9				2,492.1				2,719.1				2,071.8
Net earnings attributable to General Mills			1,752.7				2,131.0				1,657.5				1,697.4				1,221.3
Advertising and media expense			601.6				575.9				623.8				754.4				823.1
Research and development expense			221.9				219.1				218.2				222.1				229.4
Average shares outstanding:
Diluted			605.4				585.7				598.0				611.9				618.8
Earnings per share:
Diluted		$	2.90			$	3.64			$	2.77			$	2.77			$	1.97
Adjusted diluted (c) (e)		$	3.22			$	3.11			$	3.08			$	2.92			$	2.86
Operating ratios:
Gross margin as a percentage of net sales (d)			34.1%				34.5%				35.6%				35.3%				33.8%
Selling, general, and administrative expenses as a percentage of net sales (d)			17.4%				18.1%				18.5%				19.0%				19.2%
Operating profit as a percentage of net sales (d)			14.9%				15.4%				16.0%				16.4%				11.8%
Adjusted operating profit as a percentage of net sales (c) (d) (e)			16.9%				16.6%				17.6%				16.8%				15.7%
Effective income tax rate			17.7%				2.7%				28.8%				31.4%				33.3%
Balance sheet data:
Land, buildings, and equipment		$	3,787.2			$	4,047.2			$	3,687.7			$	3,743.6			$	3,783.3
Total assets			30,111.2				30,624.0				21,812.6				21,712.3				21,832.0
Long-term debt, excluding current portion			11,624.8				12,668.7				7,642.9				7,057.7				7,575.3
Total debt (c)			14,490.0				15,818.6				9,481.7				8,430.9				9,191.5
Cash flow data:
Net cash provided by operating activities (f)		$	2,807.0			$	2,841.0			$	2,415.2			$	2,764.2			$	2,648.5
Capital expenditures			537.6				622.7				684.4				729.3				712.4
Free cash flow (c)			2,269.4				2,218.3				1,730.8				2,034.9				1,936.1
Share data:
Cash dividends per common share		$	1.96			$	1.96			$	1.92			$	1.78			$	1.67

(a)	In fiscal 2018, we acquired Blue Buffalo. Please see Note 3 to the Consolidated Financial Statements in Item 8 of this report.

(b)	Fiscal 2015 was a 53-week year; all other fiscal years were 52 weeks.

(c)	Please see “Glossary” in Item 8 of this report for definition.

(d)

In the first quarter of fiscal 2019, we retrospectively adopted new accounting requirements related to the presentation of net periodic defined benefit pension expense, net periodic postretirement benefit expense, and net periodic postemployment benefit expense. Please see Note 2 to the Consolidated Financial Statements in Item 8 of this report.

(e)	Please see “Non-GAAP Measures” in Item 7 of this report for our discussion of this measure not defined by generally accepted accounting principles.

(f)	In fiscal 2018, we retrospectively adopted new requirements for the accounting and presentation of stock-based payments. Please see Note 2 to the Consolidated Financial Statements in Item 8 of this report.

 

18

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 strategy is the key to winning and sustaining leading share positions in markets around the globe.

Our fundamental financial goal is to generate superior returns for our shareholders over the long term. We believe that increases in organic net sales, adjusted operating profit, adjusted earnings per share (EPS), free cash flow, and cash return to shareholders are key drivers of financial performance for our business.

Our long-term growth objectives are to consistently deliver:

 

•

low single-digit annual growth in organic net sales;

•

mid single-digit annual growth in adjusted operating profit;

•

high single-digit annual growth in adjusted diluted EPS;

•

free cash flow conversion averaging above 95 percent of adjusted net earnings after tax; and

•

cash return to shareholders averaging above 90 percent of free cash flow, including an attractive dividend yield.

We continue to pursue our Consumer First strategy and execute against our global growth framework: 1) competing effectively on all brands and across all geographies through strong innovation, effective consumer marketing, and excellent in-store execution; 2) accelerating growth on our four differential growth platforms, which are Häagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and our portfolio of natural and organic food brands; and 3) reshaping our portfolio through growth-enhancing acquisitions and divestitures, including the acquisition of Blue Buffalo. By focusing on this growth framework, we expect to generate financial performance consistent with the long-term growth objectives listed above, which we believe should result in long-term value creation for our shareholders.

In fiscal 2019 we executed well and met or exceeded each of our key full-year financial targets, including organic net sales growth and constant-currency growth in net sales, adjusted operating profit, and adjusted diluted EPS. Relative to fiscal 2018, we improved our net sales performance in U.S. Yogurt and our emerging market businesses, we increased our contributions from innovation, we stabilized our distribution trends in the U.S., and we generated greater benefits from net price realization and mix through our Strategic Revenue Management capability. These results were partially offset by challenging performance for U.S. snack bars, leaving our organic net sales growth at the low end of the range outlined in our initial annual targets.

We successfully transitioned Blue Buffalo into the General Mills portfolio in fiscal 2019, achieving our goals of double-digit pro forma growth in net sales and segment operating profit excluding the impact of purchase accounting. The combination of record-level Holistic Margin Management (HMM) savings, increased benefits from net price realization and mix, and strong cost management drove growth in constant-currency adjusted operating profit and adjusted diluted EPS ahead of our initial targets. Finally, we continued to maintain a disciplined focus on cash, resulting in another year of strong free cash flow conversion.

Our consolidated net sales for fiscal 2019 rose 7 percent to $16.9 billion. On an organic basis, net sales essentially matched year-ago levels. Operating profit of $2.5 billion increased 4 percent. Adjusted operating profit of $2.8 billion increased 9 percent and increased 10 percent on a constant-currency basis. Diluted EPS of $2.90 was down 20 percent compared to fiscal 2018 results. Adjusted diluted EPS was up 4 percent to $3.22 per share and increased 4 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)).

 

19

Net cash provided by operations totaled $2.8 billion in fiscal 2019 representing a conversion rate of 157 percent of net earnings, including earnings attributable to redeemable and noncontrolling interests. This cash generation supported capital investments totaling $538 million, and our resulting free cash flow was $2.3 billion at a conversion rate of 115 percent of adjusted net earnings, including earnings attributable to redeemable and noncontrolling interests. We also returned cash to shareholders through dividends totaling $1.2 billion and reduced total debt outstanding by $1.3 billion.

A detailed review of our fiscal 2019 performance compared to fiscal 2018 appears below in the section titled “Fiscal 2019 Consolidated Results of Operations.” A detailed review of our fiscal 2018 performance compared to our fiscal 2017 performance is set forth in Part II, Item 7 of our Form 10-K for the fiscal year ended May 27, 2018 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fiscal 2018 Results of Consolidated Operations.”

In fiscal 2020, our plans include continued strong innovation and investments in capabilities and brand building to accelerate our topline growth, efficiency initiatives to maintain our strong margins, and a disciplined focus on cash to further reduce our leverage. We remain confident that executing our Consumer First strategy and our Compete, Accelerate, and Reshape growth framework will drive sustainable, profitable growth and attractive long-term returns for our shareholders.

Our key full-year fiscal 2020 targets are summarized below:

 

•

Organic net sales are expected to increase 1 to 2 percent.

•

Constant-currency adjusted operating profit is expected to increase 2 to 4 percent from the base of $2.8 billion reported in fiscal 2019. Benefit of the 53rd week in fiscal 2020 will be reinvested in capabilities and brand-building initiatives to drive improvement in our organic net sales growth rate in 2020 and beyond.

•

Constant-currency adjusted diluted EPS are expected to increase 3 to 5 percent from the base of $3.22 earned in fiscal 2019.

•

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 2019 CONSOLIDATED RESULTS OF OPERATIONS

In fiscal 2018, we acquired Blue Buffalo, which became our Pet operating segment. We are reporting the Pet operating segment results on a one-month lag and, accordingly, our fiscal 2018 results did not include Pet segment operating results.

In fiscal 2019, net sales increased 7 percent compared to last year, primarily reflecting the addition of Blue Buffalo. Organic net sales were flat in the fiscal year ended May 26, 2019. Operating profit margin of 14.9 percent was down 50 basis points from year-ago levels primarily driven by impairment charges recorded for certain intangible and manufacturing assets and unfavorable mark-to-market valuation of certain commodity positions. Adjusted operating profit margin increased 30 basis points to 16.9 percent, primarily driven by lower selling, general, and administrative expenses in our North America Retail segment and the addition of Blue Buffalo, partially offset by higher input costs. Diluted earnings per share of $2.90 decreased 20 percent primarily driven by a one-time benefit recorded in fiscal 2018 related to the Tax Cuts and Jobs Act (TCJA). Adjusted diluted earnings per share of $3.22 increased 4 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).

 

20

A summary of our consolidated financial results for fiscal 2019 follows:

 

Fiscal 2019		In millions, except per share				Fiscal 2019 vs. Fiscal 2018				Percent of Net Sales				Constant- Currency Growth (a)
Net sales		$	16,865.2				7  %								9 %
Operating profit			2,515.9				4  %				14.9 %
Net earnings attributable to General Mills			1,752.7				(18)  %
Diluted EPS		$	2.90				(20)  %
Organic net sales growth rate (a)							Flat
Adjusted operating profit (a)			2,858.0				9  %				16.9 %				10 %
Adjusted diluted EPS (a)		$	3.22				4  %								4 %

(a)	See the “Non-GAAP Measures” section below for our use of measures not defined by GAAP.

Consolidated net sales were as follows:

 

Fiscal 2019

Fiscal 2019 vs. Fiscal 2018

Fiscal 2018

Net sales (in millions)

$

16,865.2

7  %

$

15,740.4

Contributions from volume growth (a)

5 pts

Net price realization and mix

4 pts

Foreign currency exchange

(2)pts

(a)	Measured in tons based on the stated weight of our product shipments.

The 7 percent increase in net sales in fiscal 2019 reflects the addition of Blue Buffalo, favorable net price realization and mix across all other segments, and higher contributions from volume growth in the Asia & Latin America segment, partially offset by lower contributions from volume growth in the North America Retail, Europe & Australia, and Convenience Stores & Foodservice segments.

Components of organic net sales growth are shown in the following table:

 

Fiscal 2019 vs. Fiscal 2018
Contributions from organic volume growth (a)			(2)pts
Organic net price realization and mix			2 pts
Organic net sales growth			Flat
Foreign currency exchange			(2)pts
Acquisition and divestitures			9 pts
Net sales growth			7 pts

(a)	Measured in tons based on the stated weight of our product shipments.

Organic net sales in fiscal 2019 were flat compared to fiscal 2018, as favorable organic net price realization and mix was offset by declining contributions from organic volume growth.

Cost of sales increased $804 million in fiscal 2019 to $11,108 million. The increase was driven by a $503 million increase due to higher volume and a $194 million increase attributable to product rate and mix, including the impact of the Blue Buffalo acquisition. In fiscal 2019, we recorded a $53 million charge related to the fair value adjustment of inventory acquired in the Blue Buffalo acquisition. We recorded a $36 million net increase in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories compared to a net decrease of $32 million in fiscal 2018 (please see Note 7 to the Consolidated Financial Statements in Item 8 of this report). In fiscal 2019, we recorded $10 million of restructuring charges in cost of

 

21

sales compared to $14 million in fiscal 2018. We also recorded $1 million of restructuring initiative project-related costs in cost of sales in fiscal 2019 compared to $11 million in fiscal 2018 (please see Note 4 to the Consolidated Financial Statements in Item 8 of this report for additional information).

Gross margin increased 6 percent in fiscal 2019 versus fiscal 2018. Gross margin as a percent of net sales of 34.1 percent decreased 40 basis points compared to fiscal 2018.

Selling, general and administrative (SG&A) expenses increased $86 million to $2,936 million in fiscal 2019 compared to fiscal 2018. The increase in SG&A expenses primarily reflects the addition of Blue Buffalo, partially offset by a decrease in media and advertising expense. SG&A expenses as a percent of net sales in fiscal 2019 decreased 70 basis points compared to fiscal 2018.

Divestitures loss totaled $30 million in fiscal 2019. In fiscal 2019, we sold our La Salteña fresh pasta and refrigerated dough business in Argentina, and recorded a pre-tax loss of $35 million. We also sold our yogurt business in China and simultaneously entered into a new Yoplait license agreement with the purchaser for their use of the Yoplait brand. We recorded a pre-tax gain of $5 million.

Restructuring, impairment, and other exit costs totaled $275 million in fiscal 2019 compared to $166 million in fiscal 2018.

In fiscal 2019, as a result of lower sales projections in our long range plans for the businesses supporting our Progresso, Food Should Taste Good, and Mountain High brand intangible assets, we recorded $193 million of impairment charges related to these brand intangible assets (please see Note 6 to the Consolidated Financial Statements in Item 8 of this report for additional information).

In addition, in fiscal 2019, we recorded a $15 million charge related to the impairment of certain manufacturing assets in our North America Retail and Asia & Latin America segments.

Charges associated with our restructuring initiatives recognized in fiscal 2019 consisted of the following:

 

Expense, in Millions
Targeted actions in global supply chain		$	80.2
Charges associated with restructuring actions previously announced			(2.6)
Total (a)		$	77.6

(a)	Includes restructuring charges recorded in cost of sales of $9.9 million.

In fiscal 2019, we approved restructuring actions to drive efficiencies in targeted areas of our global supply chain. In connection with these actions we recorded $80 million of restructuring charges, consisting of $23 million of severance expense and $57 million of other costs, primarily asset write-offs. Four of our operating segments were affected by these actions including $54 million related to our North America Retail segment, $13 million related to our Asia & Latin America segment, $12 million related to our Europe & Australia segment, and $1 million related to our Pet segment. We expect these actions to be completed by the end of fiscal 2022.

We spent $49 million of cash related to restructuring initiatives in fiscal 2019.

Please see Note 4 to the Consolidated Financial Statements in Item 8 of this report for additional information.

Benefit plan non-service income totaled $88 million in fiscal 2019 compared to $89 million in fiscal 2018 (please see to Note 2 to the Consolidated Financial Statements in Item 8 of this report for additional information).

Interest, net for fiscal 2019 totaled $522 million, $148 million higher than fiscal 2018, primarily driven by higher debt levels due to financing for the Blue Buffalo acquisition.

 

22

Our effective tax rate for fiscal 2019 was 17.7 percent compared to 2.7 percent in fiscal 2018. The 15.0 percentage point increase reflects the lower statutory rate in fiscal 2019 being more than offset by the impact of the one-time, provisional net benefit of $524 million recorded in fiscal 2018 related to the TCJA. Our adjusted effective tax rate was 21.8 percent in fiscal 2019 compared to 25.7 percent in fiscal 2018 (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP). The 3.9 percentage point decrease in the adjusted effective tax rate was primarily due to the net benefits associated with the TCJA, partially offset by the change in earnings mix by jurisdiction.

The TCJA includes provisions affecting our fiscal 2019 effective tax rate, including but not limited to: a reduction in the U.S. corporate tax rate on domestic operations to 21 percent; a provision that taxes U.S. allocated expenses and certain income from foreign operations (GILTI); a limitation on deductible interest expense; the repeal of the domestic manufacturing deduction; and a limitation on the deductibility of certain executive compensation. In fiscal 2019, we completed our accounting for the tax effects of the TCJA and recorded a benefit of $7 million which included adjustments to the transition tax and the measurement of our net U.S. deferred tax liability.

After-tax earnings from joint ventures decreased $13 million to $72 million in fiscal 2019 compared to fiscal 2018, primarily driven by our $11 million after-tax share of restructuring charges at CPW, and lower net sales and higher input costs for HDJ. On a constant-currency basis, after-tax earnings from joint ventures decreased 14 percent, including the CPW restructuring charge (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 2019 vs. Fiscal 2018

CPW

HDJ

Total

Contributions from volume growth (a)

(1)  pt

(3) pts

Net price realization and mix

2  pts

(4) pts

Net sales growth in constant currency

1   pt

(7) pts

(1)   pt

Foreign currency exchange

(6) pts

(1)   pt

(5) pts

Net sales growth

(5) pts

(8) pts

(6) pts

(a)	Measured in tons based on the stated weight of our product shipments.

Average diluted shares outstanding increased by 20 million in fiscal 2019 from fiscal 2018 due to the impact of the fiscal 2018 share issuance to partially fund the acquisition of Blue Buffalo and option exercises.

RESULTS OF SEGMENT OPERATIONS

Our businesses are organized into five operating segments: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet. We are reporting the Pet operating segment results on a one-month lag and, accordingly, our fiscal 2018 results did not include Pet segment operating results.

 

23

The following tables provide the dollar amount and percentage of net sales and operating profit from each segment for fiscal 2019 and 2018:

 

		Fiscal Year
		2019								2018
In Millions		Dollars				Percent of Total				Dollars				Percent of Total
Net Sales
North America Retail		$	9,925.2				59%			$	10,115.4				64%
Convenience Stores & Foodservice			1,969.1				12				1,930.2				12
Europe & Australia			1,886.7				11				1,984.6				13
Asia & Latin America			1,653.3				10				1,710.2				11
Pet			1,430.9				8				-				-
Total		$	16,865.2				100%			$	15,740.4				100%
Segment Operating Profit
North America Retail		$	2,277.2				72%			$	2,217.4				80%
Convenience Stores & Foodservice			419.5				13				392.6				14
Europe & Australia			123.3				4				142.1				5
Asia & Latin America			72.4				2				39.6				1
Pet			268.4				9				-				-
Total		$	3,160.8				100%			$	2,791.7				100%

Segment operating profit as reviewed by our executive management excludes unallocated corporate items, net gain/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, and e-commerce grocery providers. Our product categories in this business segment are ready-to-eat cereals, refrigerated yogurt, soup, meal kits, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, and a wide variety of organic products including refrigerated yogurt, nutrition bars, meal kits, salty snacks, ready-to-eat cereal, and grain snacks.

North America Retail net sales were as follows:

 

Fiscal 2019

Fiscal 2019 vs. 2018 Percentage Change

Fiscal 2018

Net sales (in millions)

$

9,925.2

(2) %

$

10,115.4

Contributions from volume growth (a)

(3)pts

Net price realization and mix

2 pts

Foreign currency exchange

(1)pt

(a)	Measured in tons based on the stated weight of our product shipments.

The 2 percent decrease in North America Retail net sales for fiscal 2019 was driven by a decrease in contributions from volume growth and unfavorable foreign currency exchange, partially offset by an increase in net price realization and mix.

 

24

The components of North America Retail organic net sales growth are shown in the following table:

 

		Fiscal 2019 vs. 2018 Percentage Change
Contributions from organic volume growth (a)			(2)pts
Organic net price realization and mix			1 pt
Organic net sales growth			(1)pt
Foreign currency exchange			(1)pt
Divestiture (b)			Flat
Net sales growth			(2)pts

(a)	Measured in tons based on the stated weight of our product shipments.

(b)	Related to the divestiture of North American Green Giant product lines.

North America Retail organic net sales decreased 1 percent in fiscal 2019 compared to fiscal 2018, driven by a decrease in contributions from organic volume growth partially offset by favorable organic net price realization and mix.

Net sales for our North America Retail operating units are shown in the following table:

 

In Millions			Fiscal 2019				Fiscal 2019 vs. 2018 Percentage Change				Fiscal 2018
U.S. Meals & Baking			$    3,839.8				(1)%				$    3,865.7
U.S. Cereal			2,255.4				Flat				2,251.8
U.S. Snacks			2,060.9				(4)%				2,140.5
U.S. Yogurt and Other			906.7				(2)%				927.4
Canada (a)			862.4				(7)%				930.0
Total			$    9,925.2				(2)%				$    10,115.4

(a)	On a constant currency basis, Canada operating unit net sales decreased 4 percent in fiscal 2019. See the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP.

Segment operating profit increased 3 percent to $2,277 million in fiscal 2019, compared to $2,217 million in fiscal 2018, primarily driven by lower SG&A expenses, partially offset by lower contributions from volume growth. Segment operating profit increased 3 percent on a constant-currency basis in fiscal 2019 compared to fiscal 2018 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

CONVENIENCE STORES & FOODSERVICE SEGMENT

Our major product categories in our Convenience Stores & Foodservice operating segment are ready-to-eat cereals, snacks, refrigerated yogurt, frozen meals, unbaked and fully baked frozen dough products, and baking mixes. Many products we sell are branded to the consumer and nearly all are branded to our customers. We sell to distributors and operators in many customer channels including foodservice, convenience stores, vending, and supermarket bakeries in the United States.

Convenience Stores & Foodservice net sales were as follows:

 

Fiscal 2019

Fiscal 2019 vs. 2018 Percentage Change

Fiscal 2018

Net sales (in millions)

$

1,969.1

2 %

$

1,930.2

Contributions from volume growth (a)

(2)pts

Net price realization and mix

4 pts

(a)	Measured in tons based on the stated weight of our product shipments.

 

25

Convenience Stores & Foodservice net sales increased 2 percent in fiscal 2019, driven by favorable net price realization and mix partially offset by a decrease in contributions from volume growth.

The components of Convenience Stores & Foodservice organic net sales growth are shown in the following table:

 

		Fiscal 2019 vs. 2018 Percentage Change
Contributions from organic volume growth (a)			(2)pts
Organic net price realization and mix			4 pts
Organic net sales growth			2 pts
Net sales growth			2 pts

(a)	Measured in tons based on the stated weight of our product shipments.

Segment operating profit increased 7 percent to $420 million in fiscal 2019, compared to $393 million in fiscal 2018, primarily driven by favorable net price realization and mix, partially offset by higher input costs.

EUROPE & AUSTRALIA SEGMENT

Our Europe & Australia operating segment reflects retail and foodservice businesses in the greater Europe and Australia regions. Our product categories include refrigerated yogurt, meal kits, super-premium ice cream, refrigerated and frozen dough products, shelf stable vegetables, grain snacks, and dessert and baking mixes. We also sell super-premium ice cream directly to consumers through owned retail shops. Revenues from franchise fees are reported in the region or country where the franchisee is located.

Europe & Australia net sales were as follows:

 

Fiscal 2019

Fiscal 2019 vs. 2018 Percentage Change

Fiscal 2018

Net sales (in millions)

$

1,886.7

(5) %

$

1,984.6

Contributions from volume growth (a)

(3)pts

Net price realization and mix

2 pts

Foreign currency exchange

(4)pts

(a)	Measured in tons based on the stated weight of our product shipments.

The 5 percent decrease in Europe & Australia net sales in fiscal 2019 was driven by unfavorable foreign currency exchange and lower contributions from volume growth, partially offset by favorable net price realization and mix.

The components of Europe & Australia organic net sales growth are shown in the following table:

 

		Fiscal 2019 vs. 2018 Percentage Change
Contributions from organic volume growth (a)			(3)pts
Organic net price realization and mix			2 pts
Organic net sales growth			(1)pt
Foreign currency exchange			(4)pts
Net sales growth			(5)pts

(a)	Measured in tons based on the stated weight of our product shipments.

The 1 percent decrease in Europe & Australia organic net sales growth in fiscal 2019 was driven by a decrease in contributions from organic volume growth partially offset by favorable organic net price realization and mix.

 

26

Segment operating profit decreased 13 percent to $123 million in fiscal 2019, compared to $142 million in the same period of fiscal 2018 primarily driven by lower contributions from volume growth and higher input costs, including currency-driven inflation on imported products in certain markets, partially offset by lower SG&A expenses. Segment operating profit decreased 8 percent on a constant-currency basis in fiscal 2019 compared to fiscal 2018 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

ASIA & LATIN AMERICA SEGMENT

Our Asia & Latin America operating segment consists of retail and foodservice businesses in the greater Asia and South America regions. Our product categories include super-premium ice cream and frozen desserts, refrigerated and frozen dough products, dessert and baking mixes, meal kits, salty and grain snacks, wellness beverages, and refrigerated yogurt. We also sell super-premium ice cream and frozen desserts directly to consumers through owned retail shops. Our Asia & Latin America segment also includes products manufactured in the United States for export, mainly to Caribbean and Latin American markets, as well as products we manufacture for sale to our international joint ventures. Revenues from export activities and franchise fees are reported in the region or country where the end customer or franchisee is located.

Asia & Latin America net sales were as follows:

 

Fiscal 2019

Fiscal 2019 vs. 2018 Percentage Change

Fiscal 2018

Net sales (in millions)

$

1,653.3

(3)%

$

1,710.2

Contributions from volume growth (a)

1 pt

Net price realization and mix

3 pts

Foreign currency exchange

(7)pts

(a)	Measured in tons based on the stated weight of our product shipments.

Asia & Latin America net sales decreased 3 percent in fiscal 2019 compared to fiscal 2018, driven by unfavorable foreign currency exchange, partially offset by favorable net price realization and mix and an increase in contributions from volume growth.

The components of Asia & Latin America organic net sales growth are shown in the following table:

 

		Fiscal 2019 vs. 2018 Percentage Change
Contributions from organic volume growth (a)			3 pts
Organic net price realization and mix			3 pts
Organic net sales growth			6 pts
Foreign currency exchange			(7)pts
Divestitures (b)			(2)pts
Net sales growth			(3)pts

(a)	Measured in tons based on the stated weight of our product shipments.

(b)	Impact of the divestiture of our La Salteña business in Argentina and our Yoplait business in China.

The 6 percent increase in Asia & Latin America organic net sales in fiscal 2019 was driven by favorable organic net price realization and mix and an increase in contributions from organic volume growth.

Segment operating profit increased 83 percent to $72 million in fiscal 2019, compared to $40 million in fiscal 2018, primarily driven by higher contributions from volume growth, higher net price realization and mix and lower SG&A expenses, partially offset by higher input costs, including currency-driven inflation on imported

 

27

products in certain markets. Segment operating profit increased 71 percent on a constant-currency basis in fiscal 2019 compared to fiscal 2018 (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 in national pet superstore chains, e-commerce retailers, grocery stores, regional pet store chains, mass merchandisers, and veterinary clinics and hospitals. Our product categories include dog and cat food (dry foods, wet foods, and treats) made with whole meats, fruits, and vegetables and other high-quality natural ingredients. Our tailored pet product offerings address specific dietary, lifestyle, and life-stage needs and span different product types, diet types, breed sizes for dogs, lifestages, flavors, product functions and textures, and cuts for wet foods. We are reporting the Pet operating segment results on a one-month lag and accordingly, our fiscal 2018 results did not include Pet segment operating results.

Pet net sales were as follows:

 

		Fiscal
		2019				2018
Net sales (in millions)		$	1,430.9			$	-

Pet net sales and segment operating profit in fiscal 2019 totaled $1,431 million and $268 million, respectively. Pet operating profit includes a $53 million purchase accounting adjustment related to inventory acquired and $13 million of amortization of the customer list intangible asset.

UNALLOCATED CORPORATE ITEMS

Unallocated corporate items include corporate overhead expenses, variances to planned domestic employee benefits and incentives, contributions to the General Mills Foundation, asset and liability remeasurement impact of hyperinflationary economies, restructuring initiative project-related costs, and other items that are not part of our measurement of segment operating performance. This includes gains and losses from the mark-to-market valuation of certain commodity positions until passed back to our operating segments in accordance with our policy as discussed in Note 7 to the Consolidated Financial Statements in Item 8 of this report.

In fiscal 2019, unallocated corporate expense increased $134 million to $340 million compared to $206 million last year, primarily driven by compensation and benefits expenses. In fiscal 2019, we recorded a $36 million net increase in expense related to mark-to-market valuation of certain commodity positions and grain inventories compared to a $32 million net decrease in expense in the prior year. In addition, we recorded $10 million of restructuring charges, and $1 million of restructuring initiative project-related costs in cost of sales in fiscal 2019, compared to $14 million of restructuring charges and $11 million of restructuring initiative project-related costs in cost of sales in fiscal 2018. In fiscal 2019, we recorded a $16 million gain from a legal recovery related to our Yoplait SAS subsidiary and $23 million of gains related to certain investment valuation adjustments. We also recorded $26 million of integration costs in fiscal 2019 related to our acquisition of Blue Buffalo compared to $34 million of transaction and integration costs in fiscal 2018. In addition, we recorded a $3 million loss related to the impact of hyperinflationary accounting for our Argentina subsidiary in fiscal 2019.

IMPACT OF INFLATION

We experienced input cost inflation of 4 percent in fiscal 2019 and 4 percent in fiscal 2018, primarily on commodity inputs. We expect input cost inflation of approximately 4 percent in fiscal 2020. We attempt to minimize the effects of inflation through HMM, planning, and operating practices. Our risk management practices are discussed in Item 7A of this report.

 

28

LIQUIDITY

The primary source of our liquidity is cash flow from operations. Over the most recent two-year period, our operations have generated $5.6 billion in cash. A substantial portion of this operating cash flow has been returned to shareholders through share repurchases and dividends. We also use cash from operations to fund our capital expenditures and acquisitions. We typically use a combination of cash, notes payable, and long-term debt, and occasionally issue shares of stock, to finance significant acquisitions.

As of May 26, 2019, we had $399 million of cash and cash equivalents held in foreign jurisdictions. As a result of the TCJA, the historic undistributed earnings of our foreign subsidiaries were taxed in the U.S. via the one-time repatriation tax in fiscal 2018. We have re-evaluated our assertion and have concluded that although earnings prior to fiscal 2018 will remain permanently reinvested, we will no longer make a permanent reinvestment assertion beginning with our fiscal 2018 earnings. As part of the accounting for the TCJA, we recorded local country withholding taxes related to certain entities from which we began repatriating undistributed earnings and will continue to record local country withholding taxes on all future earnings. As a result of the transition tax, we may repatriate our cash and cash equivalents held by our foreign subsidiaries without such funds being subject to further U.S. income tax liability (please see Note 14 to the Consolidated Financial Statements in Item 8 of this report for additional information).

Cash Flows from Operations

 

		Fiscal Year
In Millions		2019				2018
Net earnings, including earnings attributable to redeemable and noncontrolling interests		$	1,786.2			$	2,163.0
Depreciation and amortization			620.1				618.8
After-tax earnings from joint ventures			(72.0)				(84.7	)
Distributions of earnings from joint ventures			86.7				113.2
Stock-based compensation			84.9				77.0
Deferred income taxes			93.5				(504.3	)
Pension and other postretirement benefit plan contributions			(28.8)				(31.8	)
Pension and other postretirement benefit plan costs			6.1				4.6
Divestitures loss			30.0				-
Restructuring, impairment, and other exit costs			235.7				126.0
Changes in current assets and liabilities, excluding the effects of acquisitions and divestitures			(7.5)				542.1
Other, net			(27.9)				(182.9	)
Net cash provided by operating activities		$	2,807.0			$	2,841.0

During fiscal 2019, cash provided by operations was $2,807 million compared to $2,841 million in the same period last year. The $34 million decrease was primarily driven by a $377 million decrease in net earnings and a $550 million change in current assets and liabilities, partially offset by a $598 million change in deferred income taxes. The $550 million change in current assets and liabilities was primarily driven by a $413 million change in the timing of accounts payable, including the impact of longer payment terms implemented in prior fiscal years. The change in deferred income taxes was primarily related to the $638 million provisional benefit from revaluing our net U.S. deferred tax liabilities to reflect the new U.S. corporate tax rate as a result of the TCJA in fiscal 2018.

We strive to grow core working capital at or below the rate of growth in our net sales. For fiscal 2019, core working capital decreased 34 percent, compared to a net sales increase of 7 percent. As of May 26, 2019, our core working capital balance totaled $385 million, down 34 percent versus last year, this is primarily driven by continued benefits from our payment terms extension program and lower inventory balances. In fiscal 2018, core working capital decreased 27 percent, compared to a net sales increase of 1 percent.

 

29

Cash Flows from Investing Activities

 

		Fiscal Year
In Millions		2019				2018
Purchases of land, buildings, and equipment		$	(537.6)			$	(622.7)
Acquisitions, net of cash acquired			-				(8,035.8)
Investments in affiliates, net			0.1				(17.3)
Proceeds from disposal of land, buildings, and equipment			14.3				1.4
Proceeds from divestitures			26.4				-
Other, net			(59.7)				(11.0)
Net cash used by investing activities		$	(556.5)			$	(8,685.4)

In fiscal 2019, we used $556 million of cash through investing activities compared to $8.7 billion in fiscal 2018. This decrease was primarily driven by the acquisition of Blue Buffalo for an aggregate purchase price of $8.0 billion, including $103 million of consideration for net debt repaid, in fiscal 2018. We invested $538 million in land, buildings, and equipment in fiscal 2019, $85 million less than fiscal 2018.

We expect capital expenditures to be approximately 3.5 percent of reported net sales in fiscal 2020. 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		2019				2018
Change in notes payable		$	(66.3)			$	327.5
Issuance of long-term debt			339.1				6,550.0
Payment of long-term debt			(1,493.8)				(600.1)
Proceeds from common stock issued on exercised options			241.4				99.3
Proceeds from common stock issued			-				969.9
Purchases of common stock for treasury			(1.1)				(601.6)
Dividends paid			(1,181.7)				(1,139.7)
Investments in redeemable interest			55.7				-
Distributions to noncontrolling and redeemable interest holders			(38.5)				(51.8)
Other, net			(31.2)				(108.0)
Net cash (used) provided by financing activities		$	(2,176.4)			$	5,445.5

Financing activities used $2.2 billion of cash in fiscal 2019 compared to providing $5.4 billion in fiscal 2018. We had $1.2 billion of net debt repayments in fiscal 2019 compared to $6.3 billion of net debt issuances in fiscal 2018, which partially funded the acquisition of Blue Buffalo. For more information on our debt issuances and payments, please refer to Note 8 to the Consolidated Financial Statements in Item 8 of this report.

During fiscal 2019, we received $241 million of net proceeds from common stock issued on exercised options compared to $99 million in fiscal 2018. During fiscal 2018, we received $970 million of net proceeds from common stock issued to fund a portion of the Blue Buffalo acquisition.

Share repurchases in fiscal 2019 were insignificant. During fiscal 2018, we repurchased 11 million shares of our common stock for $602 million.

Dividends paid in fiscal 2019 totaled $1,182 million, or $1.96 per share, consistent with fiscal 2018.

 

30

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		2019				2018
Investments in affiliates, net		$	(0.1)				$    (17.3)
Dividends received			86.7				113.2

CAPITAL RESOURCES

Total capital consisted of the following:

 

In Millions		May 26, 2019				May 27, 2018
Notes payable		$	1,468.7			$	1,549.8
Current portion of long-term debt			1,396.5				1,600.1
Long-term debt			11,624.8				12,668.7
Total debt			14,490.0				15,818.6
Redeemable interest			551.7				776.2
Noncontrolling interests			313.2				351.3
Stockholders’ equity			7,054.5				6,141.1
Total capital		$	22,409.4			$	23,087.2

The following table details the fee-paid committed and uncommitted credit lines we had available as of May 26, 2019:

 

In Billions		Facility Amount				Borrowed Amount
Credit facility expiring:
May 2022		$	2.7			$	-
June 2019			0.2				-
Total committed credit facilities			2.9				-
Uncommitted credit facilities			0.7				0.2
Total committed and uncommitted credit facilities		$	3.6			$	0.2

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

Certain of our long-term debt agreements, our credit facilities, and our noncontrolling interests contain restrictive covenants. As of May 26, 2019, we were in compliance with all of these covenants.

We have $1,396 million of long-term debt maturing in the next 12 months that is classified as current, including $500 million of 2.2 percent notes due October 2019, €300.0 euro-denominated 0.0 percent notes due January 2020, and €500.0 million euro-denominated floating-rate notes due January 2020. We believe that cash flows from operations, together with available short- and long-term debt financing, will be adequate to meet our liquidity and capital needs for at least the next 12 months.

 

31

As of May 26, 2019, our total debt, including the impact of derivative instruments designated as hedges, was 74 percent in fixed-rate and 26 percent in floating-rate instruments, compared to 73 percent in fixed-rate and 27 percent in floating-rate instruments on May 27, 2018.

Our net debt to operating cash flow ratio declined to 5.0 in fiscal 2019 from 5.4 in fiscal 2018, primarily driven by a decrease in long-term debt. Our net debt-to-adjusted earnings before net interest, income taxes, depreciation and amortization ratio declined to 3.9 in fiscal 2019 from 4.2 on a pro forma basis in fiscal 2018, consistent with our plans to reduce our leverage following our acquisition of Blue Buffalo (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

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 these entities. We consolidate these entities into our consolidated financial statements. We record Sodiaal’s 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl as noncontrolling interests, and its 49 percent interest in Yoplait SAS as a redeemable interest on our Consolidated Balance Sheets. These euro- and Canadian dollar-denominated interests are reported in U.S. dollars on our Consolidated Balance Sheets. Sodiaal has the ability to put all or a portion of its redeemable interest to us at fair value once per year, up to three times before December 2024. As of May 26, 2019, the redemption value of the redeemable interest was $552 million which approximates its fair value.

During the second quarter of fiscal 2019, Sodiaal invested $56 million in Yoplait SAS.

The third-party holder of the General Mills Cereals, LLC (GMC) Class A Interests receives quarterly preferred distributions from available net income based on the application of a floating preferred return rate to the holder’s capital account balance established in the most recent mark-to-market valuation (currently $252 million). On June 1, 2018, the floating preferred return rate on GMC’s Class A Interests was reset to the sum of three-month LIBOR plus 142.5 basis points. The preferred return rate is adjusted every three years through a negotiated agreement with the Class A Interest holder or through a remarketing auction.

We have an option to purchase the Class A Interests for consideration equal to the then current capital account value, plus any unpaid preferred return and the prescribed make-whole amount. If we purchase these interests, any change in the third-party holder’s capital account from its original value will be charged directly to retained earnings and will increase or decrease the net earnings used to calculate EPS in that period.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of May 26, 2019, we have issued guarantees and comfort letters of $682 million for the debt and other obligations of consolidated subsidiaries, and guarantees and comfort letters of $134 million for the debt and other obligations of non-consolidated affiliates, mainly CPW. In addition, off-balance sheet arrangements are generally limited to the future payments under non-cancelable operating leases, which totaled $483 million as of May 26, 2019.

As of May 26, 2019, we invested in four variable interest entities (VIEs). None of our VIEs are material to our results of operations, financial condition, or liquidity as of and for the fiscal year ended May 26, 2019.

Our defined benefit plans in the United States are subject to the requirements of the Pension Protection Act (PPA). In the future, the PPA may require us to make additional contributions to our domestic plans. We do not expect to be required to make any contributions in fiscal 2020.

 

32

The following table summarizes our future estimated cash payments under existing contractual obligations, including payments due by period:

 

		Payments Due by Fiscal Year
In Millions		Total				2020				2021 -22				2023 -24				2025 and Thereafter
Long-term debt (a)		$	13,093.0			$	1,396.3			$	3,338.4			$	2,810.2			$	5,548.1
Accrued interest			92.6				92.6				-				-				-
Operating leases (b)			482.6				120.0				186.7				112.9				63.0
Capital leases			0.3				0.2				0.1				-				-
Purchase obligations (c)			2,961.8				2,605.1				321.9				27.6				7.2
Total contractual obligations			16,630.3				4,214.2				3,847.1				2,950.7				5,618.3
Other long-term obligations (d)			1,302.4				-				-				-				-
Total long-term obligations		$	17,932.7			$	4,214.2			$	3,847.1			$	2,950.7			$	5,618.3

(a)	Amounts represent the expected cash payments of our long-term debt and do not include $0.3 million for capital leases or $72.0 million for net unamortized debt issuance costs, premiums and discounts, and fair value adjustments.

(b)	Operating leases represents the minimum rental commitments under non-cancelable operating leases.

(c)

The majority of the purchase obligations represent commitments for raw material and packaging to be utilized in the normal course of business and for consumer marketing spending commitments that support our brands. For purposes of this table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities are excluded from the table above.

(d)

The fair value of our foreign exchange, equity, commodity, and grain derivative contracts with a payable position to the counterparty was $17.3 million as of May 26, 2019, based on fair market values as of that date. Future changes in market values will impact the amount of cash ultimately paid or received to settle those instruments in the future. Other long-term obligations mainly consist of liabilities for accrued compensation and benefits, including the underfunded status of certain of our defined benefit pension, other postretirement benefit, and postemployment benefit plans, and miscellaneous liabilities. We expect to pay approximately $20 million of benefits from our unfunded postemployment benefit plans and approximately $18 million of deferred compensation in fiscal 2020. We are unable to reliably estimate the amount of these payments beyond fiscal 2020. As of May 26, 2019, our total liability for uncertain tax positions and accrued interest and penalties was $165.1 million.

SIGNIFICANT 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 significant 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 promotional expenditures, valuation of long-lived assets, intangible assets, redeemable interest, stock-based compensation, income taxes, and defined benefit pension, other postretirement benefit, and postemployment benefit plans.

Revenue Recognition

Our revenues are reported net of variable consideration and consideration payable to our customers, including trade promotion, consumer coupon redemption and other costs, including estimated allowances for returns, unsalable product, and prompt pay discounts. Trade promotions are recorded using significant judgment of estimated participation and performance levels for offered programs at the time of sale. Differences between estimated expenses and actual costs are recognized as a change in management estimate in a subsequent period. Our accrued trade liabilities were $484 million as of May 26, 2019, and $500 million as of May 27, 2018. 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.

 

33

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 definite 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 26, 2019, we had $20.6 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 so classified 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 2019 assessment of our intangible assets as of the first day of the second quarter of fiscal 2019. As a result of lower sales projections in our long-range plans for the businesses supporting the Progresso, Food Should Taste Good, and Mountain High brand intangible assets, we recorded the following impairment charges:

 

In Millions		Impairment Charge				Fair Value as of Nov. 25, 2018
Progresso		$	132.1			$	330.0
Food Should Taste Good			45.1				-
Mountain High			15.4				-
Total		$	192.6			$	330.0

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

 

34

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

 

In Millions		Carrying Value of Intangible Asset				Excess Fair Value as of Fiscal 2019 Test Date
Latin America		$	209.0				7%
Yoki		$	49.1				10%

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

Redeemable Interest

In fiscal 2019, we adjusted the redemption value of Sodiaal’s redeemable interest in Yoplait SAS based on a discounted cash flow model. The significant assumptions used to estimate the redemption value include projected revenue growth and profitability from our long-range plan, capital spending, depreciation and taxes, foreign currency exchange rates, and a discount rate. As of May 26, 2019, the redemption value of the redeemable interest was $552 million.

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 11 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
		2019				2018				2017
Estimated fair values of stock options granted		$	5.35			$	6.18			$	8.80
Assumptions:
Risk-free interest rate			2.9 %				2.2 %				1.7 %
Expected term			8.5 years				8.2 years				8.5 years
Expected volatility			16.3 %				15.8 %				17.8 %
Dividend yield			4.3 %				3.6 %				2.9 %

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 increase the grant date fair value by 9 percent. If all other assumptions are held constant, a one percentage point increase in our fiscal 2019 volatility assumption would increase the grant date fair value of our fiscal 2019 option awards by 8 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.

 

35

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 quarter of such change. For more information on income taxes, please see Note 14 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, France, 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 13 to the Consolidated Financial Statements in Item 8 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 6.6 percent, 6.6 percent, 10.3 percent, 8.4 percent, and 7.9 percent for the 1, 5, 10, 15, and 20 year periods ended May 26, 2019.

On a weighted-average basis, the expected rate of return for all defined benefit plans was 7.25 percent for fiscal 2019, 7.88 percent for fiscal 2018, and 8.17 percent for fiscal 2017. For fiscal 2020, we lowered 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 7.0 percent due to asset allocation changes and expected asset returns.

Lowering the expected long-term rate of return on assets by 100 basis points would increase our net pension and postretirement expense by $70 million for fiscal 2020. A market-related valuation basis is used to reduce

 

36

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 2020 service costs			4.17	%			4.04	%			3.51%
Effective rate for fiscal 2020 interest costs			3.45	%			3.28	%			2.84%
Obligations as of May 31, 2019			3.91	%			3.79	%			3.10%
Effective rate for fiscal 2019 service costs			4.34	%			4.27	%			3.99%
Effective rate for fiscal 2019 interest costs			3.92	%			3.80	%			3.37%
Obligations as of May 31, 2018			4.20	%			4.17	%			3.60%
Effective rate for fiscal 2018 service costs			4.37	%			4.27	%			3.54%
Effective rate for fiscal 2018 interest costs			3.45	%			3.24	%			2.67%

Lowering the discount rates by 100 basis points would increase our net defined benefit pension, other postretirement benefit, and postemployment benefit plan expense for fiscal 2020 by approximately $55 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 6.7 percent for retirees age 65 and over and 6.4 percent for retirees under age 65 at the end of fiscal 2019. Rates are graded down annually until the ultimate trend rate of 4.5 percent is reached in 2029 for all retirees. The trend rates are applicable for calculations only if the retirees’ benefits increase as a result of health care inflation. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Assumed trend rates for health care costs have an important effect on the amounts reported for the other postretirement benefit plans.

 

37

A one percentage point change in the health care cost trend rate would have the following effects:

 

In Millions		One Percentage Point Increase				One Percentage Point Decrease
Effect on the aggregate of the service and interest cost components in fiscal 2020		$	1.4			$	(1.3)
Effect on the other post retirement accumulated benefit obligation as of May 26, 2019			43.5				(40.3)

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 2019, we recorded net defined benefit pension, other postretirement benefit, and postemployment benefit plan expense of $24 million compared to $23 million of expense in fiscal 2018 and $56 million of expense in fiscal 2017. As of May 26, 2019, we had cumulative unrecognized actuarial net losses of $2.0 billion on our defined benefit pension plans and cumulative unrecognized actuarial net gains of $81 million on our postretirement and postemployment benefit plans, mainly as the result of liability increases from lower interest rates, partially offset by recent increases in the values of plan assets. 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 August 2017, the Financial Accounting Standards Board (FASB) issued new hedge accounting requirements. The new standard amends the hedge accounting recognition and presentation requirements to better align an entity’s risk management activities and financial reporting. The new standard also simplifies the application of hedge accounting guidance. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, which for us is the first quarter of fiscal 2020. We do not expect this guidance to have a material impact on our results of operations or financial position.

In February 2016, the FASB issued new accounting requirements for accounting, presentation and classification of leases. This will result in certain leases being capitalized as a right of use asset with a related liability on our Consolidated Balance Sheets. The requirements of the new standard and subsequent amendments are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, which for us is the first quarter of fiscal 2020. The requirements of the new standard and subsequent amendments allow for either the modified retrospective transition approach, which requires application of the guidance in all comparative periods presented, or the cumulative effect adjustment approach, which requires application of the guidance at the adoption date.

We are in the process of implementing lease accounting software, developing a centralized business process, and implementing corresponding controls. We have substantially completed our analysis of the impact of this standard on our lease portfolio. We will adopt this guidance in the first quarter of fiscal 2020 using the cumulative effect adjustment approach and electing certain practical expedients permitted under the transition guidance, including not reassessing whether existing contracts contain leases and carrying forward the historical

 

38

classification of those leases. In addition, we will also elect to not recognize leases with an initial term of 12 months or less on our Consolidated Balance Sheets. We do not expect the effects to the Consolidated Financial Statements to be pervasive. We estimate that we will record right of use assets and related liabilities of approximately $400 to $500 million, subject to the completion of our assessment and the fluctuation of our lease portfolio and discount rates. We do not expect this guidance to have a material impact on our Consolidated Statements of Earnings or our Consolidated Statements of Cash Flows. See Note 15 to the Consolidated Financial Statements in Item 8 of this report for noncancelable future lease commitments.

NON-GAAP MEASURES

We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures provide useful information to investors, and include these measures in other communications to investors.

For each of these non-GAAP financial measures, we are providing below a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why we believe the non-GAAP measure provides useful information to investors, and any additional material purposes for which our management or Board of Directors uses the non-GAAP measure. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure.

Several measures below are presented on an adjusted basis. The adjustments are either items resulting from infrequently occurring events or items that, in management’s judgment, significantly affect the year-to-year assessment of operating results.

Organic Net Sales Growth Rates

We provide organic net sales growth rates for our consolidated net sales and segment net sales. This measure is used in reporting to our Board of Directors and executive management and as a component of the measurement of our performance for incentive compensation purposes. We believe that organic net sales growth rates provide useful information to investors because they provide transparency to underlying performance in our net sales by excluding the effect that foreign currency exchange rate fluctuations, as well as acquisitions, divestitures, and a 53^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.

Net Sales Growth Rate on a Constant-currency Basis

We believe this measure of net sales provides useful information to investors because it provides transparency to the underlying performance 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 on a constant-currency basis is calculated as follows:

 

		Fiscal 2019
Percentage change in net sales as reported			7 %
Impact of foreign currency exchange			(2) pts
Percentage change in net sales on a constant-currency basis			9 %

 

39

Adjusted Diluted EPS and Related Constant-currency Growth Rate

This measure is used in reporting to our Board of Directors and executive management and as a component of the measurement of our performance for incentive compensation purposes. We believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate earnings performance on a comparable year-to-year basis.

The reconciliation of our GAAP measure, diluted EPS, to adjusted diluted EPS and the related constant-currency growth rate follows:

 

		Fiscal Year
Per Share Data		2019				2018				2019 vs. 2018     Change				2017				2016				2015
Diluted earnings per share, as reported		$	2.90			$	3.64				(20)  %			$	2.77			$	2.77			$	1.97
Net tax benefit (a)			(0.01	)			(0.89)								-				-				-
Tax items (a)			(0.12	)			0.07								-				-				0.13
Mark-to-market effects (b)			0.05				(0.04)								(0.01)				(0.07)				0.09
Divestitures loss (gain) (c)			0.03				-								0.01				(0.10)				-
Acquisition transaction and integration costs (c)			0.03				0.10								-				-				0.02
Restructuring charges (d)			0.10				0.11								0.26				0.26				0.35
Project-related costs (d)			-				0.01								0.05				0.06				0.01
Asset impairments (d)			0.26				0.11								-				-				0.28
Investment valuation adjustments (e)			(0.03	)			-								-				-				-
CPW restructuring charges (f)			0.02				-								-				-				-
Legal recovery (g)			(0.01	)			-								-				-				-
Venezuela currency devaluation			-				-								-				-				0.01
Adjusted diluted earnings per share		$	3.22			$	3.11				4  %			$	3.08			$	2.92			$	2.86
Foreign currency exchange impact											Flat
Adjusted diluted earnings per share growth, on a constant-currency basis											4  %

(a)	See Note 14 to the Consolidated Financial Statements in Item 8 of this report.

(b)	See Note 7 to the Consolidated Financial Statements in Item 8 of this report.

(c)	See Note 3 to the Consolidated Financial Statements in Item 8 of this report.

(d)	See Note 4 to the Consolidated Financial Statements in Item 8 of this report.

(e)	Valuation gains on certain corporate investments.

(f)	The CPW restructuring charges are related to initiatives designed to improve profitability and growth that were approved in fiscal 2018 and 2019.

(g)	Legal recovery related to our Yoplait SAS subsidiary.

See our reconciliation below of the effective income tax rate as reported to the adjusted effective income tax rate for the tax impact of each item affecting comparability.

 

40

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 2019
Net earnings, including earnings attributable to redeemable and noncontrolling interests, as reported		$	1,786.2
Net tax benefit (a)		$	(7.2)
Tax item (a)			(72.9)
Mark-to-market effects, net of tax (b)			27.7
Acquisition integration costs, net of tax (c)			19.7
Divestitures loss, net of tax (c)			16.4
Restructuring charges, net of tax (d)			63.0
Project-related costs, net of tax (d)			1.1
Asset impairments, net of tax (d)			159.7
Hyperinflationary accounting, net of tax (e)			3.2
Investment valuation adjustments, net of tax (f)			(17.6)
Legal recovery, net of tax (g)			(10.8)
CPW restructuring costs, net of tax (h)			11.1
Adjusted net earnings, including earnings attributable to redeemable and noncontrolling interests		$	1,979.6
Net cash provided by operating activities		$	2,807.0
Purchases of land, buildings, and equipment			(537.6)
Free cash flow		$	2,269.4
Net cash provided by operating activities conversion rate			157%
Free cash flow conversion rate			115%

(a)	See Note 14 to the Consolidated Financial Statements in Item 8 of this report.

(b)	See Note 7 to the Consolidated Financial Statements in Item 8 of this report.

(c)	See Note 3 to the Consolidated Financial Statements in Item 8 of this report.

(d)	See Note 4 to the Consolidated Financial Statements in Item 8 of this report.

(e)	Impact of hyperinflationary accounting for our Argentina subsidiary, which was sold in the third quarter of fiscal 2019.

(f)	Valuation gains on certain corporate investments.

(g)	Legal recovery related to our Yoplait SAS subsidiary.

(h)	The CPW restructuring charges are related to initiatives designed to improve profitability and growth that were approved in fiscal 2018 and 2019.

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.

 

41