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GENERAL MILLS INC - Quarter Report: 2020 August (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2020

 

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

 

Commission file number: 001-01185

________________

GENERAL MILLS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

41-0274440

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

Number One General Mills Boulevard

 

Minneapolis, Minnesota

55426

(Address of principal executive offices)

(Zip Code)

 

 

 

(763)764-7600

(Registrant’s telephone number, including area code)

 

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

 

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $.10 par value

 

GIS

 

New York Stock Exchange

1.000% Notes due 2023

 

GIS23A

 

New York Stock Exchange

0.450% Notes due 2026

 

GIS26

 

New York Stock Exchange

1.500% Notes due 2027

 

GIS27

 

New York Stock Exchange

 

 

 

________________

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

Yes RNo £

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files). Yes RNo £

 

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

Large accelerated filer R

 

Accelerated filer £

Non-accelerated filer ££

 

Smaller reporting company£

 

 

 

 

Emerging growth company £

 

 

 


 

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

 

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

Yes £No R

 

Number of shares of Common Stock outstanding as of September 15, 2020: 611,333,854 (excluding 143,279,474 shares held in the treasury).

 


 

General Mills, Inc.

 

Table of Contents

 

 

Page

PART I – Financial Information

 

Item 1. Financial Statements

 

Consolidated Statements of Earnings for the quarters ended August 30, 2020 and August 25, 2019

4

Consolidated Statements of Comprehensive Income for the quarters ended August 30, 2020 and August 25, 2019

5

Consolidated Balance Sheets as of August 30, 2020, and May 31, 2020

6

Consolidated Statements of Total Equity and Redeemable Interest for the quarters ended August 30, 2020 and August 25, 2019

7

Consolidated Statements of Cash Flows for the quarters ended August 30, 2020 and August 25, 2019

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

33

Item 4. Controls and Procedures

34

PART II – Other Information

 

Item 6. Exhibits

35

Signatures

36

 

 

3


 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Earnings

GENERAL MILLS, INC. AND SUBSIDIARIES

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

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Net sales

$

4,364.0

 

$

4,002.5

Cost of sales

 

2,773.6

 

 

2,613.0

Selling, general, and administrative expenses

 

736.2

 

 

718.9

Restructuring, impairment, and other exit costs

 

0.5

 

 

8.2

Operating profit

 

853.7

 

 

662.4

Benefit plan non-service income

 

(33.3)

 

 

(30.2)

Interest, net

 

111.1

 

 

118.7

Earnings before income taxes and after-tax earnings from joint ventures

 

775.9

 

 

573.9

Income taxes

 

170.8

 

 

67.2

After-tax earnings from joint ventures

 

41.3

 

 

21.8

Net earnings, including earnings attributable to redeemable and noncontrolling interests

 

646.4

 

 

528.5

Net earnings attributable to redeemable and noncontrolling interests

 

7.5

 

 

7.9

Net earnings attributable to General Mills

$

638.9

 

$

520.6

Earnings per share - basic

$

1.04

 

$

0.86

Earnings per share - diluted

$

1.03

 

$

0.85

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

4


 

Consolidated Statements of Comprehensive Income

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions)

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Net earnings, including earnings attributable to redeemable and noncontrolling interests

$

646.4

 

$

528.5

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation

 

66.2

 

 

(3.7)

Other fair value changes:

 

 

 

 

 

Hedge derivatives

 

(12.1)

 

 

3.8

Reclassification to earnings:

 

 

 

 

 

Hedge derivatives

 

(1.7)

 

 

(0.6)

Amortization of losses and prior service costs

 

19.5

 

 

19.6

Other comprehensive income, net of tax

 

71.9

 

 

19.1

Total comprehensive income

 

718.3

 

 

547.6

Comprehensive income attributable to redeemable and noncontrolling interests

 

73.7

 

 

2.2

Comprehensive income attributable to General Mills

$

644.6

 

$

545.4

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

5


 

Consolidated Balance Sheets

 

GENERAL MILLS, INC. AND SUBSIDIARIES

 

(In Millions, Except Par Value)

 

 

 

 

Aug. 30, 2020

 

 

May 31, 2020

 

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,796.7

 

$

1,677.8

 

Receivables

 

 

1,633.0

 

 

1,615.1

 

Inventories

 

 

1,605.1

 

 

1,426.3

 

Prepaid expenses and other current assets

 

 

320.0

 

 

402.1

 

Total current assets

 

 

5,354.8

 

 

5,121.3

 

Land, buildings, and equipment

 

 

3,557.0

 

 

3,580.6

 

Goodwill

 

 

14,010.1

 

 

13,923.2

 

Other intangible assets

 

 

7,150.4

 

 

7,095.8

 

Other assets

 

 

1,189.9

 

 

1,085.8

 

Total assets

 

$

31,262.2

 

$

30,806.7

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

3,184.4

 

$

3,247.7

 

Current portion of long-term debt

 

 

2,625.7

 

 

2,331.5

 

Notes payable

 

 

162.7

 

 

279.0

 

Other current liabilities

 

 

1,639.9

 

 

1,633.3

 

Total current liabilities

 

 

7,612.7

 

 

7,491.5

 

Long-term debt

 

 

10,832.9

 

 

10,929.0

 

Deferred income taxes

 

 

1,924.5

 

 

1,947.1

 

Other liabilities

 

 

1,549.3

 

 

1,545.0

 

Total liabilities

 

 

21,919.4

 

 

21,912.6

 

Redeemable interest

 

 

584.9

 

 

544.6

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, 754.6 shares issued, $0.10 par value

 

75.5

 

 

75.5

 

Additional paid-in capital

 

 

1,335.5

 

 

1,348.6

 

Retained earnings

 

 

16,312.5

 

 

15,982.1

 

Common stock in treasury, at cost, shares of 143.3 and 144.8

 

(6,370.2)

 

 

(6,433.3)

 

Accumulated other comprehensive loss

 

 

(2,908.7)

 

 

(2,914.4)

 

Total stockholders' equity

 

 

8,444.6

 

 

8,058.5

 

Noncontrolling interests

 

 

313.3

 

 

291.0

 

Total equity

 

 

8,757.9

 

 

8,349.5

 

Total liabilities and equity

 

$

31,262.2

 

$

30,806.7

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

6


 

Consolidated Statements of Total Equity and Redeemable Interest

GENERAL MILLS, INC. AND SUBSIDIARIES

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

 

Quarter Ended

 

Aug. 30, 2020

 

Aug. 25, 2019

 

Shares

 

Amount

 

Shares

 

Amount

Total equity, beginning balance

 

 

$

8,349.5

 

 

 

$

7,367.7

Common stock, 1 billion shares authorized, $0.10 par value

754.6

 

 

75.5

 

754.6

 

 

75.5

Additional paid-in capital:

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

1,348.6

 

 

 

 

1,386.7

Stock compensation plans

 

 

 

23.6

 

 

 

 

18.0

Unearned compensation related to stock unit awards

 

 

 

(74.9)

 

 

 

 

(66.5)

Earned compensation

 

 

 

28.2

 

 

 

 

28.7

Decrease in redemption value of redeemable interest

 

 

 

10.0

 

 

 

 

4.0

Ending balance

 

 

 

1,335.5

 

 

 

 

1,370.9

Retained earnings:

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

15,982.1

 

 

 

 

14,996.7

Comprehensive income

 

 

 

638.9

 

 

 

 

520.6

Cash dividends declared ($0.49 and $0.49 per share)

 

 

 

(302.8)

 

 

 

 

(298.5)

Adoption of current expected credit loss accounting requirements

 

 

 

(5.7)

 

 

 

 

-

Ending balance

 

 

 

16,312.5

 

 

 

 

15,218.8

Common stock in treasury:

 

 

 

 

 

 

 

 

 

Beginning balance

(144.8)

 

 

(6,433.3)

 

(152.7)

 

 

(6,779.0)

Stock compensation plans

1.5

 

 

63.1

 

2.2

 

 

97.2

Ending balance

(143.3)

 

 

(6,370.2)

 

(150.5)

 

 

(6,681.8)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

(2,914.4)

 

 

 

 

(2,625.4)

Comprehensive income

 

 

 

5.7

 

 

 

 

24.8

Ending balance

 

 

 

(2,908.7)

 

 

 

 

(2,600.6)

Noncontrolling interests:

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

291.0

 

 

 

 

313.2

Comprehensive income

 

 

 

23.4

 

 

 

 

2.1

Distributions to noncontrolling interest holders

 

 

 

(1.1)

 

 

 

 

(2.5)

Ending balance

 

 

 

313.3

 

 

 

 

312.8

Total equity, ending balance

 

 

$

8,757.9

 

 

 

$

7,695.6

Redeemable interest:

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

544.6

 

 

 

 

551.7

Comprehensive income

 

 

 

50.3

 

 

 

 

0.1

Decrease in redemption value of redeemable interest

 

 

 

(10.0)

 

 

 

 

(4.0)

Ending balance

 

 

$

584.9

 

 

 

$

547.8

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

7


 

Consolidated Statements of Cash Flows

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions)

 

Quarter Ended

 

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Cash Flows - Operating Activities

 

 

 

 

 

Net earnings, including earnings attributable to redeemable and noncontrolling interests

$

646.4

 

$

528.5

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

146.1

 

 

154.1

After-tax earnings from joint ventures

 

(41.3)

 

 

(21.8)

Distributions of earnings from joint ventures

 

19.9

 

 

20.7

Stock-based compensation

 

28.3

 

 

28.8

Deferred income taxes

 

23.0

 

 

(37.2)

Pension and other postretirement benefit plan contributions

 

(5.6)

 

 

(6.9)

Pension and other postretirement benefit plan costs

 

(8.6)

 

 

(7.8)

Restructuring, impairment, and other exit costs

 

(2.7)

 

 

4.9

Changes in current assets and liabilities

 

(157.8)

 

 

(84.6)

Other, net

 

(64.1)

 

 

(6.6)

Net cash provided by operating activities

 

583.6

 

 

572.1

Cash Flows - Investing Activities

 

 

 

 

 

Purchases of land, buildings, and equipment

 

(117.0)

 

 

(69.8)

Investments in affiliates, net

 

(0.7)

 

 

(12.5)

Proceeds from disposal of land, buildings, and equipment

 

0.3

 

 

0.3

Other, net

 

(5.6)

 

 

(1.7)

Net cash used by investing activities

 

(123.0)

 

 

(83.7)

Cash Flows - Financing Activities

 

 

 

 

 

Change in notes payable

 

(120.9)

 

 

(170.0)

Issuance of long-term debt

 

595.2

 

 

-

Payment of long-term debt

 

(555.1)

 

 

(0.1)

Proceeds from common stock issued on exercised options

 

30.0

 

 

55.8

Dividends paid

 

(302.8)

 

 

(298.5)

Distributions to noncontrolling and redeemable interest holders

 

(1.1)

 

 

(2.5)

Other, net

 

(18.0)

 

 

(13.3)

Net cash used by financing activities

 

(372.7)

 

 

(428.6)

Effect of exchange rate changes on cash and cash equivalents

 

31.0

 

 

(5.0)

Increase in cash and cash equivalents

 

118.9

 

 

54.8

Cash and cash equivalents - beginning of year

 

1,677.8

 

 

450.0

Cash and cash equivalents - end of period

$

1,796.7

 

$

504.8

Cash Flow from changes in current assets and liabilities:

 

 

 

 

 

Receivables

$

7.2

 

$

(37.4)

Inventories

 

(158.6)

 

 

(145.3)

Prepaid expenses and other current assets

 

88.2

 

 

148.0

Accounts payable

 

(45.9)

 

 

(35.8)

Other current liabilities

 

(48.7)

 

 

(14.1)

Changes in current assets and liabilities

$

(157.8)

 

$

(84.6)

See accompanying notes to consolidated financial statements.

 

 

 

 

8


 

GENERAL MILLS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) Background

 

The accompanying Consolidated Financial Statements of General Mills, Inc. (we, us, our, General Mills, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions and any noncontrolling and redeemable interests’ share of those transactions. Operating results for the quarter ended August 30, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ending May 30, 2021.

 

These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 2 to the Consolidated Financial Statements in that Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2021.

In the first quarter of fiscal 2021, we adopted new accounting requirements related to the measurement of credit losses on financial instruments, including trade receivables. The new standard and subsequent amendments replace the incurred loss impairment model with a forward-looking expected credit loss model, which will generally result in earlier recognition of credit losses. Our allowance for doubtful accounts represents our estimate of expected credit losses related to our trade receivables. We pool our trade receivables based on similar risk characteristics, such as geographic location, business channel, and other account data. To estimate our allowance for doubtful accounts, we leverage information on historical losses, asset-specific risk characteristics, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when we deem the amount is uncollectible. We adopted the requirements of the new standard and subsequent amendments using the modified retrospective transition approach, and recorded a decrease to retained earnings of $5.7 million after-tax.

Certain terms used throughout this report are defined in the “Glossary” section below.

 

 

(2) Restructuring, Impairment, and Other Exit Costs

 

During the first quarter of fiscal 2021, we did not undertake any new restructuring actions. We recorded $1.0 million of restructuring charges in the first quarter of fiscal 2021 for previously announced restructuring actions. We recorded $14.3 million of restructuring charges in the first quarter of fiscal 2020. The restructuring charges primarily relate to actions to drive efficiencies in targeted areas of our global supply chain. Certain actions are subject to union negotiations and works counsel consultations, where required. We expect these actions to be completed by the end of fiscal 2022.

 

We paid net $3.7 million of cash in the first quarter of fiscal 2021 related to restructuring actions previously announced. We paid net $9.4 million of cash in the same period of fiscal 2020.

 

Restructuring and impairment charges are recorded in our Consolidated Statements of Earnings as follows:

 

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

Aug. 25, 2019

Restructuring, impairment, and other exit costs

$

0.5

$

8.2

Cost of sales

 

0.5

 

6.1

Total restructuring charges

$

1.0

$

14.3

9


 

(3) Goodwill and Other Intangible Assets

 

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

 

In Millions

 

Aug. 30, 2020

 

May 31, 2020

Goodwill

$

14,010.1

$

13,923.2

Other intangible assets:

 

 

 

 

Intangible assets not subject to amortization:

 

 

 

 

Brands and other indefinite-lived intangibles

 

6,606.6

 

6,561.4

Intangible assets subject to amortization:

 

 

 

 

Franchise agreements, customer relationships, and other finite-lived intangibles

 

809.8

 

777.8

Less accumulated amortization

 

(266.0)

 

(243.4)

Intangible assets subject to amortization, net

 

543.8

 

534.4

Other intangible assets

 

7,150.4

 

7,095.8

Total

$

21,160.5

$

21,019.0

 

Based on the carrying value of finite-lived intangible assets as of August 30, 2020, annual amortization expense for each of the next five fiscal years is estimated to be approximately $40 million.

 

The changes in the carrying amount of goodwill during the first quarter of fiscal 2021 were as follows:

 

In Millions

 

North America Retail

 

Pet

 

Convenience Stores & Foodservice

 

Europe & Australia

 

Asia & Latin America

 

Joint Ventures

 

Total

Balance as of May 31, 2020

 

$

6,403.7

 

$

5,300.5

 

$

918.8

 

$

690.7

 

$

203.8

 

$

405.7

 

$

13,923.2

Other activity, primarily foreign currency translation

 

 

5.8

 

 

-

 

 

-

 

 

51.3

 

 

0.5

 

 

29.3

 

 

86.9

Balance as of Aug. 30, 2020

 

$

6,409.5

 

$

5,300.5

 

$

918.8

 

$

742.0

 

$

204.3

 

$

435.0

 

$

14,010.1

 

The changes in the carrying amount of other intangible assets during the first quarter of fiscal 2021 were as follows:

 

In Millions

 

 

Total

Balance as of May 31, 2020

 

$

7,095.8

Other activity, primarily foreign currency translation

 

 

54.6

Balance as of Aug. 30, 2020

 

$

7,150.4

 

Our annual goodwill and indefinite-lived intangible assets impairment test was performed on the first day of the second quarter of fiscal 2020, and we determined there was no impairment of our intangible assets as their related fair values were substantially in excess of the carrying values, except for the Europe & Australia reporting unit and the Progresso brand intangible asset.

 

The excess fair value as of the fiscal 2020 test date of the Europe & Australia reporting unit and the Progresso brand intangible asset is as follows:

 

In Millions

 

Carrying Value of Intangible Asset

 

 

Excess Fair Value as of Fiscal 2020 Test Date

Europe & Australia

$

672.6

 

 

14%

Progresso

$

330.0

 

 

5%

 

In addition, while having significant coverage as of our fiscal 2020 assessment date, the Pillsbury brand intangible asset had risk of decreasing coverage. We will continue to monitor these businesses for potential impairment.

10


 

(4) Inventories

 

The components of inventories were as follows:

 

In Millions

 

Aug. 30, 2020

 

 

May 31, 2020

Raw materials and packaging

$

436.3

 

$

392.2

Finished goods

 

1,286.4

 

 

1,142.6

Grain

 

78.5

 

 

93.6

Excess of FIFO over LIFO cost

 

(196.1)

 

 

(202.1)

Total

$

1,605.1

 

$

1,426.3

 

(5) Risk Management Activities

 

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

 

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

 

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

 

Unallocated corporate items for the quarters ended August 30, 2020, and August 25, 2019, included:

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Net gain (loss) on mark-to-market valuation of certain commodity positions

$

10.4

 

$

(20.7)

Net loss on commodity positions reclassified from unallocated corporate items to segment operating profit

 

12.0

 

 

11.3

Net mark-to-market revaluation of certain grain inventories

 

(6.0)

 

 

(5.6)

Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items

$

16.4

 

$

(15.0)

 

 

As of August 30, 2020, the net notional value of commodity derivatives was $252.7 million, of which $74.7 million related to energy inputs and $178.0 million related to agricultural inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.

 

In advance of planned debt financing, in the fourth quarter of fiscal 2020, we entered into $300 million of treasury locks due January 13, 2022 with an average fixed rate of 0.85 percent.

 

During the third quarter of fiscal 2020, we entered into a €600 million interest rate swap to convert our €600 million fixed rate notes due January 15, 2026, to a floating rate.

 

During the second quarter of fiscal 2020, we entered into a $500 million interest rate swap to convert a portion of our $850 million floating-rate notes due April 16, 2021, to a fixed rate.

 

The fair values of the derivative positions used in our risk management activities and other assets recorded at fair value were not material as of August 30, 2020, and were Level 1 or Level 2 assets and liabilities in the fair value hierarchy. We did not significantly change our valuation techniques from prior periods.

 

11


 

We offer certain suppliers access to third party services that allow them to view our scheduled payments online. The third party services also allow suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third party. We have no economic interest in these financing arrangements and no direct relationship with the suppliers, the third parties, or any financial institutions concerning these services. All of our accounts payable remain as obligations to our suppliers as stated in our supplier agreements. As of August 30, 2020, $1,337.1 million of our total accounts payable were payable to suppliers who utilize these third party services.

 

(6) Debt

 

The components of notes payable were as follows:

 

In Millions

 

Aug. 30, 2020

 

May 31, 2020

U.S. commercial paper

$

-

$

99.9

Financial institutions

 

162.7

 

179.1

Total

$

162.7

$

279.0

 

To ensure availability of funds, we maintain bank credit lines and have commercial paper programs available to us in the United States and Europe. We also have committed and asset-backed credit lines that support our foreign operations.

 

The following table details the fee-paid committed and uncommitted credit lines we had available as of August 30, 2020:

 

In Billions

 

Facility Amount

 

 

Borrowed Amount

Credit facility expiring:

 

 

 

 

 

May 2022

$

2.7

 

$

-

September 2022

 

0.2

 

 

-

Total committed credit facilities

 

2.9

 

 

-

Uncommitted credit facilities

 

0.7

 

 

0.1

Total committed and uncommitted credit facilities

$

3.6

 

$

0.1

 

The credit facilities contain covenants, including a requirement to maintain a fixed charge coverage ratio of at least 2.5 times. We were in compliance with all credit facility covenants as of August 30, 2020.

 

Long-Term Debt

 

The fair values and carrying amounts of long-term debt, including the current portion, were $14,939.7 million and $13,458.6 million, respectively, as of August 30, 2020. The fair value of long-term debt was estimated using market quotations and discounted cash flows based on our current incremental borrowing rates for similar types of instruments. Long-term debt is a Level 2 liability in the fair value hierarchy.

 

In the first quarter of fiscal 2021, we issued €500.0 million principal amount of 0.00 percent fixed-rate notes due August 21, 2021. We used the net proceeds, together with cash on hand, to repay €500.0 million of 2.1 percent fixed-rate notes.

 

In the fourth quarter of fiscal 2020, we issued $750 million of 2.875 percent fixed-rate notes due April 15, 2030. We used the net proceeds to repay a portion of our outstanding commercial paper and for general corporate purposes.

 

In the third quarter of fiscal 2020, we issued €600.0 million of 0.45 percent fixed-rate notes due January 15, 2026 and €200.0 million of 0.0 percent fixed-rate notes due November 16, 2020. We used the net proceeds, together with cash on hand, to repay €500.0 million of floating-rate notes and €300.0 million of 0.0 percent fixed-rate notes.

 

In the second quarter of fiscal 2020, we repaid $500.0 million of 2.20 percent fixed-rate notes with proceeds from commercial paper.

 

Certain of our long-term debt agreements contain restrictive covenants. As of August 30, 2020, we were in compliance with all of these covenants.

 

12


 

(7) Redeemable and Noncontrolling Interests

 

We have a 51 percent controlling interest in Yoplait SAS and a 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl. Sodiaal International (Sodiaal) holds the remaining interests in each of the entities. On the acquisition date, we recorded the $904.4 million fair value of Sodiaal’s 49 percent euro-denominated interest in Yoplait SAS as a redeemable interest on our Consolidated Balance Sheets. Sodiaal has the ability to put all or a portion of its redeemable interest to us at fair value once per year, up to three times before December 2024. We adjust the value of the redeemable interest through additional paid-in capital on our Consolidated Balance Sheets quarterly to the redeemable interest’s redemption value, which approximates its fair value. Yoplait SAS pays dividends annually if it meets certain financial metrics set forth in its shareholders’ agreement. As of August 30, 2020, the redemption value of the euro-denominated redeemable interest was $584.9 million.

 

A subsidiary of Yoplait SAS has an exclusive milk supply agreement for its European operations with Sodiaal through July 1, 2021. Net purchases totaled $47.8 million for the quarter ended August 30, 2020, and $67.2 million for the quarter ended August 25, 2019.

 

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

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

 

Our noncontrolling interests contain restrictive covenants. As of August 30, 2020, we were in compliance with all of these covenants.

 

(8) Stockholders’ Equity

 

The following tables provide details of total comprehensive income:

 

 

 

Quarter Ended

 

Quarter Ended

 

 

Aug. 30, 2020

 

Aug. 25, 2019

 

 

General Mills

 

Noncontrolling Interests

 

Redeemable Interest

 

General Mills

 

Noncontrolling Interests

 

Redeemable Interest

In Millions

 

Pretax

 

Tax

 

Net

 

Net

 

Net

 

Pretax

 

Tax

 

Net

 

Net

 

Net

Net earnings, including earnings attributable to redeemable and noncontrolling interests

 

 

 

 

$

638.9

$

0.1

$

7.4

 

 

 

 

$

520.6

$

3.6

$

4.3

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

$

(48.1)

$

47.8

 

(0.3)

 

23.3

 

43.2

$

2.7

$

-

 

2.7

 

(1.5)

 

(4.9)

Other fair value changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge derivatives

 

(15.5)

 

3.7

 

(11.8)

 

-

 

(0.3)

 

2.4

 

0.7

 

3.1

 

-

 

0.7

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge derivatives (a)

 

(2.1)

 

0.4

 

(1.7)

 

-

 

-

 

(0.6)

 

-

 

(0.6)

 

-

 

-

Amortization of losses and prior service costs (b)

 

25.3

 

(5.8)

 

19.5

 

-

 

-

 

25.5

 

(5.9)

 

19.6

 

-

 

-

Other comprehensive (loss) income

$

(40.4)

$

46.1

 

5.7

 

23.3

 

42.9

$

30.0

$

(5.2)

 

24.8

 

(1.5)

 

(4.2)

Total comprehensive income

 

 

 

 

$

644.6

$

23.4

$

50.3

 

 

 

 

$

545.4

$

2.1

$

0.1

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

(b)Loss reclassified from AOCI into earnings is reported in benefit plan non-service income.

 

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

 

In Millions

 

 

Aug. 30, 2020

 

 

May 31, 2020

Foreign currency translation adjustments

 

$

(889.3)

 

$

(889.0)

Unrealized loss from:

 

 

 

 

 

 

Hedge derivatives

 

 

(26.1)

 

 

(12.6)

Pension, other postretirement, and postemployment benefits:

 

 

 

 

 

 

Net actuarial loss

 

 

(2,002.4)

 

 

(2,022.5)

Prior service credits

 

 

9.1

 

 

9.7

Accumulated other comprehensive loss

 

$

(2,908.7)

 

$

(2,914.4)

13


 

 

(9) Stock Plans

 

We have various stock-based compensation programs under which awards, including stock options, restricted stock, restricted stock units, and performance awards, may be granted to employees and non-employee directors. These programs and related accounting are described in Note 12 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.

 

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

 

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

Aug. 25, 2019

Compensation expense related to stock-based payments

$

28.3

$

28.8

 

 

 

 

 

 

We recognized windfall tax benefits from stock-based payments in income tax expense in our Consolidated Statements of Earnings of $6.2 million for the first quarter of fiscal 2021 and $6.6 million for the first quarter of fiscal 2020.

 

As of August 30, 2020, unrecognized compensation expense related to non-vested stock options, restricted stock units, and performance share units was $161.4 million. This expense will be recognized over 25 months, on average.

 

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

 

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Net cash proceeds

$

30.0

 

$

55.8

Intrinsic value of options exercised

$

18.7

 

$

30.2

 

We estimate the fair value of each stock option on the grant date using a Black-Scholes option-pricing model. Black-Scholes option-pricing models require us to make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. We estimate our future stock price volatility using the historical volatility over the expected term of the option, excluding time periods of volatility we believe a marketplace participant would exclude in estimating our stock price volatility. We also have considered, but did not use, implied volatility in our estimate, because trading activity in options on our stock, especially those with tenors of greater than 6 months, is insufficient to provide a reliable measure of expected volatility. Our method of selecting the other valuation assumptions is explained in Note 12 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.

 

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

 

 

 

Quarter Ended

 

Aug. 30, 2020

Aug. 25, 2019

Estimated fair values of stock options granted

$

8.03

 

$

7.10

 

Assumptions:

 

 

 

 

 

 

Risk-free interest rate

 

0.7

%

 

2.0

%

Expected term

 

8.5

years

 

8.5

years

Expected volatility

 

19.5

%

 

17.4

%

Dividend yield

 

3.3

%

 

3.6

%

 

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

 

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

Aug. 25, 2019

Total grant date fair value

 

$62.0

 

$43.8

 

 

 

 

 

 

14


 

(10) Earnings Per Share

 

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

 

 

 

 

Quarter Ended

In Millions, Except per Share Data

 

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Net earnings attributable to General Mills

 

$

638.9

 

$

520.6

Average number of common shares - basic EPS

 

 

614.1

 

 

606.0

Incremental share effect from: (a)

 

 

 

 

 

 

Stock options

 

 

3.2

 

 

3.1

Restricted stock units and performance share units

 

 

2.5

 

 

2.4

Average number of common shares - diluted EPS

 

 

619.8

 

 

611.5

Earnings per share - basic

 

$

1.04

 

$

0.86

Earnings per share - diluted

 

$

1.03

 

$

0.85

 

(a) Incremental shares from stock options, restricted stock units, and performance share units are computed by the treasury stock method.

 

Stock options, restricted stock units, and performance share units excluded from our computation of diluted EPS because they were not dilutive were as follows:

 

 

 

Quarter Ended

 

In Millions

 

Aug. 30, 2020

 

Aug. 25, 2019

 

Anti-dilutive stock options, restricted stock units, and performance share units

 

3.1

 

10.1

 

 

 

 

 

 

 

(11) Statements of Cash Flows

 

Our Consolidated Statements of Cash Flows include the following:

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Net cash interest payments

$

80.4

 

$

80.6

Net income tax payments

$

76.2

 

$

32.1

 

(12) Retirement and Postemployment Benefits

 

Components of net periodic benefit (income) expense are as follows:

 

 

 

Defined Benefit Pension Plans

 

Other Postretirement

Benefit Plans

 

Postemployment Benefit Plans

 

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

Aug. 25, 2019

 

Aug. 30, 2020

 

Aug. 25, 2019

 

Aug. 30, 2020

 

Aug. 25, 2019

Service cost

$

26.0

$

23.2

$

2.2

$

2.4

$

2.3

$

2.1

Interest cost

 

48.0

 

57.6

 

4.5

 

6.8

 

0.4

 

0.7

Expected return on plan assets

 

(105.0)

 

(112.5)

 

(8.7)

 

(10.5)

 

-

 

-

Amortization of losses (gains)

 

26.8

 

26.7

 

(1.3)

 

(0.5)

 

0.7

 

0.2

Amortization of prior service costs (credits)

 

0.3

 

0.4

 

(1.4)

 

(1.4)

 

0.2

 

0.1

Other adjustments

 

-

 

-

 

-

 

-

 

2.2

 

2.2

Net (income) expense

$

(3.9)

$

(4.6)

$

(4.7)

$

(3.2)

$

5.8

$

5.3

15


 

(13) Income Taxes

 

During the first quarter of fiscal 2020, we reorganized certain wholly owned subsidiaries, including the movement of certain assets between legal entities. As a result of these actions, we recorded a $53.1 million decrease to our deferred income tax liabilities, with a corresponding discrete, non-cash reduction to income taxes in the first quarter of fiscal 2020.

 

(14) Contingencies

During fiscal 2020, we received notice from the tax authorities of the State of São Paulo, Brazil regarding our compliance with its state sales tax requirements. As a result, we have been assessed additional state sales taxes, interest, and penalties. We believe that we have meritorious defenses against this claim and will vigorously defend our position. As of August 30, 2020, we are unable to estimate any possible loss and have not recorded a loss contingency for this matter.

 

(15) Business Segment and Geographic Information

 

We operate in the packaged foods industry. Our operating segments are as follows: North America Retail; Europe & Australia; Pet; Convenience Stores & Foodservice; and Asia & Latin America.

 

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, snack bars, fruit snacks, savory snacks, and a wide variety of organic products including ready-to-eat cereal, frozen and shelf-stable vegetables, meal kits, fruit snacks, snack bars, and refrigerated yogurt.

 

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, snack bars, super-premium ice cream, refrigerated and frozen dough products, shelf stable vegetables, and dessert and baking mixes. Revenues from franchise fees are reported in the region or country where the franchisee is located.

 

Our Pet operating segment includes pet food products sold primarily in the United States in national pet superstore chains, e-commerce retailers, grocery stores, regional pet store chains, mass merchandisers, and veterinary clinics and hospitals. Our product categories include dog and cat food (dry foods, wet foods, and treats) made with whole meats, fruits, and vegetables and other high-quality natural ingredients. Our tailored pet product offerings address specific dietary, lifestyle, and life-stage needs and span different product types, diet types, breed sizes for dogs, lifestages, flavors, product functions and textures, and cuts for wet foods.

 

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, baking mixes, and bakery flour. Many products we sell are branded to the consumer and nearly all are branded to our customers. We sell to distributors and operators in many customer channels including foodservice, convenience stores, vending, and supermarket bakeries in the United States.

 

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, meal kits, dessert and baking mixes, snack bars, salty snacks, refrigerated and frozen dough products, and wellness beverages. 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.

 

Operating profit for these segments excludes unallocated corporate items, gain or loss on divestitures, and restructuring, impairment, and other exit costs. Unallocated corporate items include corporate overhead expenses, variances to planned North American employee benefits and incentives, contributions to the General Mills Foundation, asset and liability remeasurement impact of hyperinflationary economies, restructuring initiative project-related costs, and other items that are not part of our measurement of segment operating performance. These include gains and losses arising from the revaluation of certain grain inventories and gains and losses from mark-to-market valuation of certain commodity positions until passed back to our operating segments. These items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by executive management. Under our supply chain organization, our manufacturing, warehouse, and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. As a result, fixed assets and depreciation and amortization expenses are neither maintained nor available by operating segment.

 

16


 

Our operating segment results were as follows:

 

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Net sales:

 

 

 

 

 

North America Retail

$

2,707.0

 

$

2,376.1

Europe & Australia

 

491.0

 

 

454.1

Pet

 

391.7

 

 

367.8

Convenience Stores & Foodservice

 

391.6

 

 

445.0

Asia & Latin America

 

382.7

 

 

359.5

Total

$

4,364.0

 

$

4,002.5

Operating profit:

 

 

 

 

 

North America Retail

$

695.4

 

$

559.9

Europe & Australia

 

53.2

 

 

27.6

Pet

 

90.3

 

 

80.9

Convenience Stores & Foodservice

 

69.6

 

 

91.1

Asia & Latin America

 

20.1

 

 

10.1

Total segment operating profit

$

928.6

 

$

769.6

Unallocated corporate items

 

74.4

 

 

99.0

Restructuring, impairment, and other exit costs

 

0.5

 

 

8.2

Operating profit

$

853.7

 

$

662.4

 

Net sales for our North America Retail operating units were as follows:

 

 

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

 

Aug. 25, 2019

U.S. Meals & Baking

$

1,091.5

 

$

830.6

U.S. Cereal

 

650.7

 

 

589.9

U.S. Snacks

 

519.1

 

 

528.2

U.S. Yogurt and Other

 

231.1

 

 

219.2

Canada

 

214.6

 

 

208.2

Total

$

2,707.0

 

$

2,376.1

 

 

17


 

Net sales by class of similar products were as follows:

 

Quarter Ended

In Millions

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Snacks

$

891.7

 

$

869.4

Cereal

 

751.9

 

 

685.5

Convenient meals

 

729.6

 

 

569.2

Yogurt

 

488.0

 

 

495.2

Baking mixes and ingredients

 

398.0

 

 

355.7

Pet

 

391.7

 

 

367.8

Dough

 

384.3

 

 

330.6

Super-premium ice cream

 

232.9

 

 

227.2

Other

 

95.9

 

 

101.9

Total

$

4,364.0

 

$

4,002.5

18


 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

INTRODUCTION

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 for important background regarding, among other things, our key business drivers. Significant trademarks and service marks used in our business are set forth in italics herein. Certain terms used throughout this report are defined in the “Glossary” section below.

 

As the COVID-19 pandemic continues, we expect the largest factor impacting our fiscal 2021 performance will be the relative balance of at-home versus away-from-home consumer food demand. At-home food demand has remained elevated relative to pre-pandemic levels, though it has moderated from the fourth quarter of fiscal 2020. We will continue to evaluate the nature and extent of the impact to our business and consolidated results of operations.

 

CONSOLIDATED RESULTS OF OPERATIONS

 

First Quarter Results

 

In the first quarter of fiscal 2021, net sales increased 9 percent and organic net sales increased 10 percent compared to the same period last year. Operating profit margin of 19.6 percent increased 310 basis points, primarily driven by favorable net price realization and mix, a larger increase in net sales as compared to the increase in selling, general, and administrative (SG&A) expenses, and a favorable change to the mark-to-market valuation of certain commodity positions and grain inventories. Adjusted operating profit margin increased 210 basis points to 19.1 percent compared to the same period last year, primarily driven by favorable net price realization and mix and a larger increase in net sales as compared to the increase in SG&A expenses. Diluted earnings per share of $1.03 increased 21 percent in the first quarter of fiscal 2021. Adjusted diluted earnings per share of $1.00 increased 27 percent on a constant-currency basis compared to the first quarter of fiscal 2020. See the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP.

 

A summary of our consolidated financial results for the first quarter of fiscal 2021 follows:

Quarter Ended Aug. 30, 2020

In millions, except per share

 

Quarter Ended

Aug. 30, 2020 vs. Aug. 25, 2019

Percent

of Net

Sales

Constant-Currency Growth (a)

Net sales

$

4,364.0

 

9

%

 

 

 

 

Operating profit

 

853.7

 

29

%

19.6

%

 

 

Net earnings attributable to General Mills

 

638.9

 

23

%

 

 

 

 

Diluted earnings per share

$

1.03

 

21

%

 

 

 

 

Organic net sales growth rate (a)

 

 

 

10

%

 

 

 

 

Adjusted operating profit (a)

 

832.5

 

22

%

19.1

%

22

%

Adjusted diluted earnings per share (a)

$

1.00

 

27

%

 

 

27

%

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

 

 

Consolidated net sales were as follows:

 

 

Quarter Ended

 

Aug. 30, 2020

 

Aug. 30, 2020 vs Aug. 25, 2019

Aug. 25, 2019

Net sales (in millions)

$

4,364.0

 

9%

 

$

4,002.5

Contributions from volume growth (a)

 

 

 

8

pts

 

 

Net price realization and mix

 

 

 

2

pts

 

 

Foreign currency exchange

 

 

 

(1)

pt

 

 

Note: Table may not foot due to rounding.

 

 

 

 

 

 

 

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

 

 

 

 

The 9 percent increase in net sales in the first quarter of fiscal 2021 reflects increased contributions from volume growth and favorable net price realization and mix, partially offset by unfavorable foreign currency exchange.

 

19


 

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

 

Quarter Ended Aug. 30, 2020 vs.

 

 

Quarter Ended Aug. 25, 2019

 

 

Contributions from organic volume growth (a)

 

8 pts

Organic net price realization and mix

 

2 pts

Organic net sales growth

 

10 pts

Foreign currency exchange

 

(1)pt

Net sales growth

 

9 pts

Note: Table may not foot due to rounding.

 

 

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

 

 

Organic net sales increased 10 percent in the first quarter of fiscal 2021 primarily driven by increased contributions from organic volume growth and favorable organic net price realization and mix.

 

Cost of sales increased $161 million to $2,774 million in the first quarter of fiscal 2021 compared to the same period in fiscal 2020. The increase was primarily driven by a $198 million increase due to higher volume, partially offset by a $7 million decrease attributable to product rate and mix. We recorded a $16 million net decrease in cost of sales related to the mark-to-market valuation of certain commodity positions and grain inventories in the first quarter of fiscal 2021 compared to a net increase of $15 million in the first quarter of fiscal 2020. In the first quarter of fiscal 2021, we recorded a $7 million charge related to a product recall in our international Green Giant business. In addition, we recorded an insignificant amount of restructuring charges in cost of sales in the first quarter of fiscal 2021 compared to $6 million in the first quarter of fiscal 2020 (please refer to Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report).

 

SG&A expenses increased $17 million to $736 million in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, primarily reflecting increased other consumer-related expenses and increased media and advertising expenses, partially offset by lower administrative expenses. SG&A expenses as a percent of net sales in the first quarter of fiscal 2021 decreased 110 basis points compared to the first quarter of fiscal 2020.

 

Restructuring, impairment, and other exit costs were insignificant in the first quarter of fiscal 2021 compared to $8 million in the same period last year.

 

Benefit plan non-service income totaled $33 million in the first quarter of fiscal 2021 compared to $30 million in the same period last year, primarily reflecting lower interest costs, partially offset by lower expected return on plan assets.

 

Interest, net for the first quarter of fiscal 2021 totaled $111 million, down $8 million from the first quarter of fiscal 2020, primarily driven by lower average debt levels, partially offset by a change in the mix of debt.

 

The effective tax rate for the first quarter of fiscal 2021 was 22.0 percent compared to 11.7 percent for the first quarter of fiscal 2020. The 10.3 percentage point increase was primarily due to nonrecurring net benefits related to a reorganization of certain wholly owned subsidiaries and certain international discrete tax benefits recorded in the first quarter of fiscal 2020, partially offset by changes in earnings mix by jurisdiction in fiscal 2021. Our adjusted effective tax rate was 21.9 percent in the first quarter of fiscal 2021 compared to 20.9 percent in the first quarter of fiscal 2020 (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP). The 1 percentage point increase in the adjusted effective tax rate was primarily due to certain nonrecurring international discrete tax benefits recorded in the first quarter of fiscal 2020, partially offset by changes in earnings mix by jurisdiction in fiscal 2021.

20


 

After-tax earnings from joint ventures for the first quarter of fiscal 2021 increased to $41 million compared to $22 million in the same period in fiscal 2020, primarily driven by higher net sales and lower input costs at Cereal Partners Worldwide (CPW). On a constant-currency basis, after-tax earnings from joint ventures increased 88 percent (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP). The components of our joint ventures’ net sales growth are shown in the following table:

 

Quarter Ended Aug. 30, 2020 vs.

 

 

 

 

 

 

 

Quarter Ended Aug. 25, 2019

 

CPW

HDJ (a)

Total

Contributions from volume growth (b)

 

7

pts

(6)

pts

 

 

Net price realization and mix

 

2

pts

5

pts

 

 

Net sales growth in constant currency

 

9

pts

(1)

pt

7

pts

Foreign currency exchange

 

(4)

pts

1

pt

(3)

pts

Net sales growth

 

5

pts

Flat

 

4

pts

Note: Table may not foot due to rounding.

 

 

 

 

 

 

 

(a) Häagen-Dazs Japan, Inc. (HDJ)

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Average diluted shares outstanding increased by 8 million in the first quarter of fiscal 2021 from the same period a year ago due to option exercises.

 

 

SEGMENT OPERATING RESULTS

 

Our businesses are organized into five operating segments: North America Retail; Europe & Australia; Pet; Convenience Stores & Foodservice; and Asia & Latin America. Please refer to Note 15 of the Consolidated Financial Statements in Part I, Item 1 of this report for a description of our operating segments.

 

North America Retail Segment Results

 

North America Retail net sales were as follows:

 

 

Quarter Ended

 

Aug. 30, 2020

 

Aug. 30, 2020 vs Aug. 25, 2019

Aug. 25, 2019

Net sales (in millions)

$

2,707.0

 

14

%

$

2,376.1

Contributions from volume growth (a)

 

 

 

17

pts

 

 

Net price realization and mix

 

 

 

(2)

pts

 

 

Foreign currency exchange

 

 

 

Flat

 

 

 

Note: Table may not foot due to rounding.

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

 

North America Retail net sales increased 14 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from volume growth, partially offset by unfavorable net price realization and mix.

 

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

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

Contributions from organic volume growth (a)

 

17

pts

Organic net price realization and mix

 

(2)

pts

Organic net sales growth

 

14

pts

Foreign currency exchange

 

Flat

 

Net sales growth

 

14

pts

Note: Table may not foot due to rounding.

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

 

21


 

North America Retail organic net sales increased 14 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from organic volume growth, partially offset by unfavorable organic net price realization and mix.

 

North America Retail net sales percentage change by operating unit are shown in the following table:

 

 

Quarter Ended

 

Aug. 30, 2020

U.S. Meals & Baking

31

%

U.S. Cereal

10

 

U.S. Yogurt and Other

5

 

U.S. Snacks

(2)

 

Canada (a)

3

 

Total

14

%

(a) On a constant-currency basis, Canada net sales increased 5 percent for the first quarter of fiscal 2021 compared to the same period in fiscal 2020. See the "Non-GAAP Measures" section below for our use of this measure not defined by GAAP.

 

Segment operating profit increased 24 percent to $695 million in the first quarter of fiscal 2021 compared to $560 million in the same period in fiscal 2020, primarily driven by an increase in contributions from volume growth and lower input costs, partially offset by unfavorable net price realization and mix and higher SG&A expenses, including increased media and advertising expenses. Segment operating profit increased 24 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

 

 

Europe & Australia Segment Results

 

Europe & Australia net sales were as follows:

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

 

Aug. 30, 2020 vs. Aug. 25, 2019

 

Aug. 25, 2019

Net sales (in millions)

$

491.0

 

8

%

$

454.1

Contributions from volume growth (a)

 

 

 

(1)

pt

 

 

Net price realization and mix

 

 

 

6

pts

 

 

Foreign currency exchange

 

 

 

3

pts

 

 

Note: Table may not foot due to rounding.

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

 

Europe & Australia net sales increased 8 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by favorable net price realization and mix and favorable foreign currency exchange, partially offset by a decrease in contributions from volume growth.

 

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

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

Contributions from organic volume growth (a)

 

Flat

 

Organic net price realization and mix

 

7

pts

Organic net sales growth

 

7

pts

Foreign currency exchange

 

3

pts

Divestiture

 

(1)

pt

Net sales growth

 

8

pts

Note: Table may not foot due to rounding.

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

 

Europe & Australia organic net sales increased 7 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by favorable organic net price realization and mix.

22


 

 

Segment operating profit increased 93 percent to $53 million in the first quarter of fiscal 2021 from $28 million in the same period in fiscal 2020, driven by favorable net price realization and mix. Segment operating profit increased 89 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

 

 

Pet Segment Results

 

Pet net sales were as follows:

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

 

Aug. 30, 2020 vs Aug. 25, 2019

Aug. 25, 2019

Net sales (in millions)

$

391.7

 

6

%

$

367.8

Contributions from volume growth (a)

 

 

 

11

pts

 

 

Net price realization and mix

 

 

 

(4)

pts

 

 

Foreign currency exchange

 

 

 

Flat

 

 

 

Note: Table may not foot due to rounding.

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

 

Pet net sales increased 6 percent during the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by increased contributions from volume growth, partially offset by unfavorable net price realization and mix.

 

The components of Pet organic net sales growth are shown in the following table:

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

Contributions from organic volume growth (a)

 

11

pts

Organic net price realization and mix

 

(4)

pts

Organic net sales growth

 

6

pts

Foreign currency exchange

 

Flat

 

Net sales growth

 

6

pts

Note: Table may not foot due to rounding.

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

 

Segment operating profit increased 12 percent to $90 million in the first quarter of fiscal 2021 compared to $81 million in the same period in fiscal 2020, primarily driven by an increase in contributions from volume growth and lower input costs, partially offset by unfavorable net price realization and mix and higher SG&A expenses, including increased media and advertising expenses. Segment operating profit increased 12 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

 

 

Convenience Stores & Foodservice Segment Results

 

Convenience Stores & Foodservice net sales were as follows:

 

 

 

Quarter Ended

 

Aug. 30, 2020

 

Aug. 30, 2020 vs Aug. 25, 2019

 

Aug. 25, 2019

Net sales (in millions)

$

391.6

 

(12)

%

$

445.0

Contributions from volume growth (a)

 

 

 

(9)

pts

 

 

Net price realization and mix

 

 

 

(3)

pts

 

 

Note: Table may not foot due to rounding.

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

23


 

 

Convenience Stores & Foodservice net sales decreased 12 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by a decrease in contributions from volume growth and unfavorable net price realization and mix.

 

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

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

Contributions from organic volume growth (a)

 

(9)pts

Organic net price realization and mix

 

(3)pts

Organic net sales growth

 

(12)pts

Net sales growth

 

(12)pts

Note: Table may not foot due to rounding.

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

 

Segment operating profit decreased 24 percent to $70 million in the first quarter of fiscal 2021 compared to $91 million in the same period in fiscal 2020, primarily driven by unfavorable net price realization and mix and a decrease in contributions from volume growth.

 

 

Asia & Latin America Segment Results

 

Asia & Latin America net sales were as follows:

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

 

Aug. 30, 2020 vs. Aug. 25, 2019

 

Aug. 25, 2019

Net sales (in millions)

$

382.7

 

6

%

$

359.5

Contributions from volume growth (a)

 

 

 

20

pts

 

 

Net price realization and mix

 

 

 

(4)

pts

 

 

Foreign currency exchange

 

 

 

(10)

pts

 

 

Note: Table may not foot due to rounding.

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

 

Asia & Latin America net sales increased 6 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from volume growth, partially offset by unfavorable foreign currency exchange and unfavorable net price realization and mix.

 

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

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

Contributions from organic volume growth (a)

 

20

pts

Organic net price realization and mix

 

(4)

pts

Organic net sales growth

 

17

pts

Foreign currency exchange

 

(10)

pts

Net sales growth

 

6

pts

Note: Table may not foot due to rounding.

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

 

Asia & Latin America organic net sales increased 17 percent in the first quarter of fiscal 2021 compared to the same period in fiscal 2020, driven by an increase in contributions from organic volume growth, partially offset by unfavorable organic net price realization and mix.

 

Segment operating profit increased 99 percent to $20 million in the first quarter of fiscal 2021 from $10 million in the same period in fiscal 2020, driven by an increase in contributions from volume growth, partially offset by unfavorable net price realization and mix.

24


 

Segment operating profit increased 68 percent on a constant-currency basis in the first quarter of fiscal 2021 compared to the same period in fiscal 2020 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

 

 

UNALLOCATED CORPORATE ITEMS

 

Unallocated corporate expense totaled $74 million in the first quarter of fiscal 2021 compared to $99 million in the same period in fiscal 2020. We recorded a $16 million net decrease in expense related to the mark-to-market valuation of certain commodity positions and grain inventories in the first quarter of fiscal 2021 compared to a $15 million net increase in expense in the same period last year. We recorded $13 million of net gains related to valuation adjustments of certain corporate investments in the first quarter of fiscal 2021 compared to $10 million of net gains related to valuation adjustments and the loss on the sale of certain corporate investments in the first quarter of fiscal 2020. We also recorded a $7 million charge related to a product recall in our international Green Giant business in the first quarter of fiscal 2021. We recorded an immaterial amount of restructuring charges in cost of sales in the first quarter of fiscal 2021 compared to $6 million in the same period last year.

 

LIQUIDITY

 

During the first quarter of fiscal 2021, cash provided by operations was $584 million compared to $572 million in the same period last year. The $12 million increase was primarily driven by a $118 million increase in net earnings, partially offset by a $73 million change in current assets and liabilities and a $20 million increase in after-tax earnings from joint ventures. The $73 million change in current assets and liabilities was primarily driven by a $60 million change in prepaid expenses and other current assets mainly due to the timing of certain tax payments and receipts.

 

Cash used by investing activities during the first quarter of fiscal 2021 was $123 million compared to $84 million for the same period in fiscal 2020. Investments of $117 million in land, buildings, and equipment in the first quarter of fiscal 2021 increased by $47 million compared to the same period a year ago.

 

Cash used by financing activities during the first quarter of fiscal 2021 was $373 million compared to $429 million in the same period in fiscal 2020. We had $81 million of net debt repayments in the first quarter of fiscal 2021 compared to $170 million of net debt repayments in the same period a year ago. We paid $303 million of dividends in the first quarter of fiscal 2021 compared to $298 million in the same period last year.

 

Our sources of liquidity were not materially impacted by the COVID-19 pandemic.

 

As of August 30, 2020, we had $650 million of cash and cash equivalents held in foreign jurisdictions. In anticipation of repatriating funds from foreign jurisdictions, we record local country withholding taxes on our international earnings, as applicable. As such, we may repatriate our cash and cash equivalents held by our foreign subsidiaries without such funds being subject to further U.S. income tax liability. Earnings prior to fiscal 2018 from our foreign subsidiaries remain permanently reinvested in those jurisdictions.

 

CAPITAL RESOURCES

 

Our capital structure was as follows:

 

In Millions

 

Aug. 30, 2020

 

 

May 31, 2020

Notes payable

$

162.7

 

$

279.0

Current portion of long-term debt

 

2,625.7

 

 

2,331.5

Long-term debt

 

10,832.9

 

 

10,929.0

Total debt

 

13,621.3

 

 

13,539.5

Redeemable interest

 

584.9

 

 

544.6

Noncontrolling interests

 

313.3

 

 

291.0

Stockholders' equity

 

8,444.6

 

 

8,058.5

Total capital

$

22,964.1

 

$

22,433.6

25


 

The following table details the fee-paid committed and uncommitted credit lines we had available as of August 30, 2020:

 

In Billions

 

Facility Amount

 

 

Borrowed Amount

Credit facility expiring:

 

 

 

 

 

May 2022

$

2.7

 

$

-

September 2022

 

0.2

 

 

-

Total committed credit facilities

 

2.9

 

 

-

Uncommitted credit facilities

 

0.7

 

 

0.1

Total committed and uncommitted credit facilities

$

3.6

 

$

0.1

 

 

 

 

 

 

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 interests in Yoplait Marques SNC and Liberté Marques Sàrl as noncontrolling interests, and its 49 percent interest in Yoplait SAS as a redeemable interest on our Consolidated Balance Sheets. Sodiaal has the ability to put all or a portion of its redeemable interest to us at fair value once per year, up to three times before December 2024. As of August 30, 2020, the redemption value of the redeemable interest was $585 million, which approximates its fair value.

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

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

 

To ensure availability of funds, we maintain bank credit lines and have commercial paper programs available to us in the United States and Europe. In response to uncertainty surrounding the availability and cost of commercial paper borrowings as a result of the COVID-19 pandemic, we issued $750 million of fixed-rate notes in April 2020 and reduced our borrowings under commercial paper programs. As the COVID-19 pandemic evolves, we will continue to evaluate its impact to our sources of liquidity. 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 August 30, 2020, we were in compliance with all of these covenants.

 

We have $2,626 million of long-term debt maturing in the next 12 months that is classified as current, including $100 million of 6.61 percent fixed-rate medium-term notes due for remarketing in October 2020, €200 million of 0.00 percent notes due November 2020, $4 million of floating-rate medium term notes due for remarketing in November 2020, $850 million of floating-rate notes due April 2021, $600 million of 3.2 percent notes due April 2021, €200 million of 2.20 percent fixed-rate notes due June 2021, and €500 million of 0.00 percent fixed-rate notes due August 2021. We believe that cash flows from operations, together with available short- and long-term debt financing, will be adequate to meet our liquidity and capital needs for at least the next 12 months.

 

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

 

There were no material changes outside the ordinary course of our business in our contractual obligations or off-balance sheet arrangements during the first quarter of fiscal 2021.

 

 

SIGNIFICANT ACCOUNTING ESTIMATES

 

Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020. The accounting policies used in preparing our interim fiscal 2021 Consolidated Financial Statements are the same as those described in our Form 10-K with the exception of the new accounting requirements adopted in the first quarter of fiscal 2021 related to the measurement of credit losses on financial instruments, including trade receivables. Please see Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this report for additional information.

 

26


 

Our significant accounting estimates are those that have meaningful impact on the reporting of our financial condition and results of operations. These estimates include our accounting for revenue recognition, valuation of long-lived assets, intangible assets, redeemable interest, stock-based compensation, income taxes, and defined benefit pension, other postretirement benefit, and postemployment benefit plans. The assumptions and methodologies used in the determination of those estimates as of August 30, 2020, are the same as those described in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.

 

Our annual goodwill and indefinite-lived intangible assets impairment test was performed on the first day of the second quarter of fiscal 2020, and we determined there was no impairment of our intangible assets as their related fair values were substantially in excess of the carrying values, except for the Europe & Australia reporting unit and the Progresso brand intangible asset.

 

The excess fair value as of the fiscal 2020 test date of the Europe & Australia reporting unit and the Progresso brand intangible asset is as follows:

 

In Millions

 

Carrying Value of Intangible Asset

 

 

Excess Fair Value as of Fiscal 2020 Test Date

Europe & Australia

$

672.6

 

 

14%

Progresso

$

330.0

 

 

5%

 

In addition, while having significant coverage as of our fiscal 2020 assessment date, the Pillsbury brand intangible asset had risk of decreasing coverage. We will continue to monitor these businesses for potential impairment.

 

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In March 2020, the Financial Accounting Standards Board (FASB) issued optional accounting guidance for a limited period of time to ease the potential burden in accounting for reference rate reform. The new standard provides expedients and exceptions to existing accounting requirements for contract modifications and hedge accounting related to transitioning from discontinued reference rates, such as LIBOR, to alternative reference rates, if certain criteria are met. The new accounting requirements can be applied as of the beginning of the interim period including March 12, 2020, or any date thereafter, through December 31, 2022. We are in the process of reviewing our contracts and arrangements that will be affected by a discontinued reference rate and are analyzing the impact of this guidance on our results of operations and financial position.

 

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, acquisitions, divestitures, and a 53rd week, when applicable, have on year-to-year comparability. A reconciliation of these measures to reported net sales growth rates, the relevant GAAP measures, are included in our Consolidated Results of Operations and Results of Segment Operations discussions in the MD&A above.

 

Adjusted Operating Profit as a Percent of Net Sales (Adjusted Operating Profit Margin)

 

We believe this measure provides useful information to investors because it is important for assessing our operating profit margin on a comparable basis.

27


 

 

Our adjusted operating profit margins are calculated as follows:

 

 

Quarter Ended

 

 

Aug. 30, 2020

 

 

Aug. 25, 2019

 

In Millions

 

Value

 

Percent of

Net Sales

 

 

Value

 

Percent of

Net Sales

Operating profit as reported

$

853.7

 

19.6

%

 

$

662.4

 

16.5

%

Mark-to-market effects (a)

 

(16.4)

 

(0.4)

%

 

 

15.0

 

0.4

%

Investment activity, net (b)

 

(13.0)

 

(0.3)

%

 

 

(9.5)

 

(0.2)

%

Product recall (c)

 

7.1

 

0.2

%

 

 

-

 

-

%

Restructuring charges (d)

 

1.0

 

-

%

 

 

14.3

 

0.4

%

Adjusted operating profit

$

832.5

 

19.1

%

 

$

682.1

 

17.0

%

Note: Table may not foot due to rounding.

(a) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.

(b) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.

(c) Product recall costs related to our international Green Giant business.

(d) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.

 

Adjusted Operating Profit Growth on a Constant-currency Basis

 

This measure is used in reporting to our Board of Directors and executive management and as a component of the measurement of our performance for incentive compensation purposes. We believe that this measure provides useful information to investors because it is the operating profit measure we use to evaluate operating profit performance on a comparable year-to-year basis. The measure is evaluated on a constant-currency basis by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given the volatility in foreign currency exchange rates.

 

Our adjusted operating profit growth on a constant-currency basis is calculated as follows:

 

 

 

 

 

Quarter Ended

 

 

 

 

Aug. 30, 2020

 

 

Aug. 25, 2019

Change

Operating profit as reported

 

 

$

853.7

 

$

662.4

29

%

Mark-to-market effects (a)

 

 

 

(16.4)

 

 

15.0

 

 

Investment activity, net (b)

 

 

 

(13.0)

 

 

(9.5)

 

 

Product recall (c)

 

 

 

7.1

 

 

-

 

 

Restructuring charges (d)

 

 

 

1.0

 

 

14.3

 

 

Adjusted operating profit

 

 

$

832.5

 

$

682.1

22

%

Foreign currency exchange impact

 

 

 

 

 

 

 

Flat

 

Adjusted operating profit growth, on a constant-currency basis

 

 

 

 

 

 

 

22

%

Note: Table may not foot due to rounding.

(a) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.

(b) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.

(c) Product recall costs related to our international Green Giant business.

(d) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.

 

Adjusted Diluted EPS and Related Constant-currency Growth Rate

 

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

 

28


 

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

 

 

Quarter Ended

Per Share Data

 

Aug. 30, 2020

 

Aug. 25, 2019

Change

 

Diluted earnings per share, as reported

$

1.03

$

0.85

21

%

Mark-to-market effects (a)

 

(0.02)

 

0.02

 

 

Investment activity, net (b)

 

(0.02)

 

(0.01)

 

 

Product recall (c)

 

0.01

 

-

 

 

Restructuring charges (d)

 

-

 

0.02

 

 

Tax item (e)

 

-

 

(0.09)

 

 

Adjusted diluted earnings per share

$

1.00

$

0.79

27

%

Foreign currency exchange impact

 

 

 

 

Flat

 

Adjusted diluted earnings per share growth, on a constant-currency basis

 

 

 

 

27

%

Note: Table may not foot due to rounding.

(a) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.

(b) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.

(c) Product recall costs related to our international Green Giant business.

(d) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.

(e) Discrete tax benefit related to the reorganization of certain wholly owned subsidiaries. Please see Note 13 to the Consolidated Financial Statement in Part I, Item 1 of this report.

 

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

 

Constant-currency After-tax Earnings from Joint Ventures Growth Rates

 

We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our joint ventures by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.

 

After-tax earnings from joint ventures growth rate on a constant-currency basis is calculated as follows:

 

 

 

Percentage Change in

After-Tax Earnings from Joint

Ventures as Reported

Impact of Foreign

Currency

Exchange

Percentage Change in After-Tax

Earnings from Joint Ventures

on Constant-Currency Basis

Quarter Ended Aug. 30, 2020

 

89

%

1

pt

88

%

Note: Table may not foot due to rounding.

 

 

 

 

 

 

 

 

Net Sales Growth Rates for Our Canada Operating Unit on Constant-currency Basis

 

We believe that this measure of our Canada operating unit net sales provides useful information to investors because it provides transparency to the underlying performance for the Canada operating unit within our North America Retail segment by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.

 

Net sales growth rate for our Canada operating unit on a constant-currency basis is calculated as follows:

 

 

 

Percentage Change in

Net Sales

as Reported

Impact of Foreign

Currency

Exchange

Percentage Change in

Net Sales on Constant-

Currency Basis

Quarter Ended Aug. 30, 2020

 

3

%

(2)

pts

5

%

Note: Table may not foot due to rounding.

 

 

 

 

 

 

 

 

29


 

Constant-currency Segment Operating Profit Growth Rates

 

We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our segments by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.

 

Our segments’ operating profit growth rates on a constant-currency basis are calculated as follows:

 

 

 

Quarter Ended Aug. 30, 2020

 

 

Percentage Change in

Operating Profit

as Reported

Impact of Foreign

Currency

Exchange

Percentage Change in Operating

Profit on Constant-Currency

Basis

North America Retail

 

24

%

Flat

 

24

%

Europe & Australia

 

93

%

4

pts

89

%

Pet

 

12

%

Flat

 

12

%

Asia & Latin America

 

99

%

31

pts

68

%

Note: Table may not foot due to rounding.

 

 

 

 

 

 

Adjusted Effective Income Tax Rate

 

We believe this measure provides useful information to investors because it presents the adjusted effective income tax rate on a comparable year-to-year basis.

 

Adjusted effective income tax rates are calculated as follows:

 

 

 

Quarter Ended

 

 

Aug. 30, 2020

 

 

Aug. 25, 2019

In Millions

(Except Per Share Data)

 

Pretax

Earnings (a)

 

Income

Taxes

 

 

Pretax

Earnings (a)

 

Income

Taxes

As reported

$

775.9

$

170.8

 

$

573.9

$

67.2

Mark-to-market effects (b)

 

(16.4)

 

(3.8)

 

 

15.0

 

3.5

Investment activity, net (c)

 

(13.0)

 

(3.0)

 

 

(9.5)

 

(2.2)

Product recall (d)

 

7.1

 

0.8

 

 

-

 

-

Restructuring charges (e)

 

1.0

 

0.2

 

 

14.3

 

2.6

Tax item (f)

 

-

 

-

 

 

-

 

53.1

As adjusted

$

754.6

$

165.1

 

$

593.7

$

124.2

Effective tax rate:

 

 

 

 

 

 

 

 

 

As reported

 

 

 

22.0%

 

 

 

 

11.7%

As adjusted

 

 

 

21.9%

 

 

 

 

20.9%

Sum of adjustment to income taxes

 

 

$

(5.7)

 

 

 

$

57.0

Average number of common shares - diluted EPS

 

 

 

619.8

 

 

 

 

611.5

Impact of income tax adjustments on adjusted diluted EPS

 

 

$

(0.01)

 

 

 

$

0.09

Note: Table may not foot due to rounding.

(a) Earnings before income taxes and after-tax earnings from joint ventures.

(b) Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items. Please see Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this report.

(c) Valuation adjustments of certain corporate investments in fiscal 2021. Valuation adjustments and the loss on sale of certain corporate investments in fiscal 2020.

(d) Product recall costs related to our international Green Giant business.

(e) Restructuring charges for previously announced restructuring actions. Please see Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.

(f) Discrete tax benefit related to the reorganization of certain wholly owned subsidiaries. Please see Note 13 to the Consolidated Financial Statements in Part I, Item 1 of this report.

30


 

Glossary

 

Accelerated depreciation associated with restructured assets. The increase in depreciation expense caused by updating the salvage value and shortening the useful life of depreciable fixed assets to coincide with the end of production under an approved restructuring plan, but only if impairment is not present.

 

AOCI. Accumulated other comprehensive income (loss).

 

Adjusted diluted EPS. Diluted EPS adjusted for certain items affecting year-to-year comparability.

 

Adjusted operating profit. Operating profit adjusted for certain items affecting year-to-year comparability.

 

Adjusted operating profit margin. Operating profit adjusted for certain items affecting year-over-year comparability, divided by net sales.

Constant currency. Financial results translated to United States dollars using constant foreign currency exchange rates based on the rates in effect for the comparable prior-year period. To present this information, current period results for entities reporting in currencies other than United States dollars are translated into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

 

Core working capital. Accounts receivable plus inventories less accounts payable.

 

COVID-19. Coronavirus disease (COVID-19) is an infectious disease caused by a newly discovered coronavirus. In March 2020, the World Health Organization declared COVID-19 a global pandemic.

 

Derivatives. Financial instruments such as futures, swaps, options, and forward contracts that we use to manage our risk arising from changes in commodity prices, interest rates, foreign exchange rates, and stock prices.

 

Euribor. Euro Interbank Offered Rate.

 

Fair value hierarchy. For purposes of fair value measurement, we categorize assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:

 

Level 1:Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

 

Level 3:Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.

 

Focus 6 platforms. The Focus 6 platforms for the Convenience Stores & Foodservice segment consist of cereal, yogurt, snacks, frozen meals, frozen biscuits, and frozen baked goods.

 

Free cash flow. Net cash provided by operating activities less purchases of land, buildings, and equipment.

 

Free cash flow conversion rate. Free cash flow divided by our net earnings, including earnings attributable to redeemable and noncontrolling interests adjusted for certain items affecting year-to-year comparability.

 

Generally Accepted Accounting Principles (GAAP). Guidelines, procedures, and practices that we are required to use in recording and reporting accounting information in our financial statements.

 

Goodwill. The difference between the purchase price of acquired companies plus the fair value of any noncontrolling and redeemable interests and the related fair values of net assets acquired.

 

Gross margin. Net sales less cost of sales.

 

31


 

Hedge accounting. Accounting for qualifying hedges that allows changes in a hedging instrument’s fair value to offset corresponding changes in the hedged item in the same reporting period. Hedge accounting is permitted for certain hedging instruments and hedged items only if the hedging relationship is highly effective, and only prospectively from the date a hedging relationship is formally documented.

 

Holistic Margin Management (HMM). Company-wide initiative to use productivity savings, mix management, and price realization to offset input cost inflation, protect margins, and generate funds to reinvest in sales-generating activities.

 

Interest bearing instruments. Notes payable, long-term debt, including current portion, cash and cash equivalents, and certain interest bearing investments classified within prepaid expenses and other current assets and other assets.

 

LIBOR. London Interbank Offered Rate.

 

Mark-to-market. The act of determining a value for financial instruments, commodity contracts, and related assets or liabilities based on the current market price for that item.

 

Net mark-to-market valuation of certain commodity positions. Realized and unrealized gains and losses on derivative contracts that will be allocated to segment operating profit when the exposure we are hedging affects earnings.

 

Net price realization. The impact of list and promoted price changes, net of trade and other price promotion costs.

 

Net realizable value. The estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

 

Noncontrolling interests. Interests of subsidiaries held by third parties.

 

Notional amount. The amount of a position or an agreed upon amount in a derivative contract on which the value of financial instruments are calculated.

 

OCI. Other Comprehensive Income.

 

Organic net sales growth. Net sales growth adjusted for foreign currency translation, acquisitions, divestitures and a 53rd week impact, when applicable.

 

Project-related costs. Costs incurred related to our restructuring initiatives not included in restructuring charges.

 

Redeemable interest. Interest of subsidiaries held by a third party that can be redeemed outside of our control and therefore cannot be classified as a noncontrolling interest in equity.

 

Reporting unit. An operating segment or a business one level below an operating segment.

 

Strategic Revenue Management (SRM). A company-wide capability focused on generating sustainable benefits from net price realization and mix by identifying and executing against specific opportunities to apply tools including pricing, sizing, mix management, and promotion optimization across each of our businesses.

 

Supply chain input costs. Costs incurred to produce and deliver product, including costs for ingredients and conversion, inventory management, logistics, and warehousing.

 

TCJA. U.S. Tax Cuts and Jobs Act which was signed into law on December 22, 2017.

 

Translation adjustments. The impact of the conversion of our foreign affiliates’ financial statements to United States dollars for the purpose of consolidating our financial statements.

 

Variable interest entities (VIEs). A legal structure that is used for business purposes that either (1) does not have equity investors that have voting rights and share in all the entity’s profits and losses or (2) has equity investors that do not provide sufficient financial resources to support the entity’s activities.

 

Working capital. Current assets and current liabilities, all as of the last day of our fiscal year.

32


 

CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and assumptions. We also may make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders.

 

The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “plan,” “project,” or similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those currently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements.

 

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that could affect our financial performance and could cause our actual results in future periods to differ materially from any current opinions or statements.

 

Our future results could be affected by a variety of factors, such as: the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees; disruptions or inefficiencies in the supply chain, including any impact of the COVID-19 pandemic; competitive dynamics in the consumer foods industry and the markets for our products, including new product introductions, advertising activities, pricing actions, and promotional activities of our competitors; economic conditions, including changes in inflation rates, interest rates, tax rates, or the availability of capital; product development and innovation; consumer acceptance of new products and product improvements; consumer reaction to pricing actions and changes in promotion levels; acquisitions or dispositions of businesses or assets; changes in capital structure; changes in the legal and regulatory environment, including tax legislation, labeling and advertising regulations, and litigation; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets, or changes in the useful lives of other intangible assets; changes in accounting standards and the impact of significant accounting estimates; product quality and safety issues, including recalls and product liability; changes in consumer demand for our products; effectiveness of advertising, marketing, and promotional programs; changes in consumer behavior, trends, and preferences, including weight loss trends; consumer perception of health-related issues, including obesity; consolidation in the retail environment; changes in purchasing and inventory levels of significant customers; fluctuations in the cost and availability of supply chain resources, including raw materials, packaging, and energy; effectiveness of restructuring and cost saving initiatives; volatility in the market value of derivatives used to manage price risk for certain commodities; benefit plan expenses due to changes in plan asset values and discount rates used to determine plan liabilities; failure or breach of our information technology systems; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic uncertainty due to terrorism or war.

 

You should also consider the risk factors that we identify in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 which could also affect our future results.

 

We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The estimated maximum potential value-at-risk arising from a one-day loss in fair value for our interest rate, foreign exchange, commodity, and equity market-risk-sensitive instruments outstanding as of August 30, 2020 was as follows:

 

In Millions

 

One-day Loss in Fair Value

 

Change During Quarter Ended Aug. 30, 2020

 

Analysis of Change

Interest rate instruments

$

70

$

(9)

 

Lower Market Volatility

Foreign currency instruments

 

23

 

4

 

Higher Market Volatility

Commodity instruments

 

4

 

1

 

Immaterial

Equity instruments

 

4

 

(1)

 

Immaterial

 

For additional information, see Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.

33


 

Item 4. Controls and Procedures.

 

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of August 30, 2020, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended August 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

34


 

PART II. OTHER INFORMATION

 

Item 6.

Exhibits.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Financial Statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended August 30, 2020, formatted in Inline Extensible Business Reporting Language: (i) Consolidated Statements of Earnings; (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Total Equity and Redeemable Interest; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

104

Cover Page, formatted in Inline Extensible Business Reporting Language and contained in Exhibit 101.

 

 

35


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

GENERAL MILLS, INC.

 

(Registrant)

 

 

Date: September 23, 2020

/s/ Mark A. Pallot

 

Mark A. Pallot

 

Vice President, Chief Accounting Officer

 

(Principal Accounting Officer and Duly Authorized Officer)

36