e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
May 25, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number
001-01185
GENERAL MILLS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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41-0274440
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(State or other jurisdiction
of incorporation or organization)
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(IRS Employer
Identification No.)
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Number One General Mills Boulevard
Minneapolis, Minnesota
(Mail: P.O. Box 1113)
(Address of principal executive
offices)
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55426
(Mail: 55440)
(Zip Code)
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(763) 764-7600
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange
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Title of each class
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on which registered
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Common Stock, $.10 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller
reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
Aggregate market value of Common Stock held by non-affiliates of
the registrant, based on the closing price of $57.10 per share
as reported on the New York Stock Exchange on November 23,
2007 (the last business day of the registrants most
recently completed second fiscal quarter):
$19,085.1 million.
Number of shares of Common Stock outstanding as of June 27,
2008: 336,202,897 (excluding 41,103,767 shares held in the
treasury).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2008
Annual Meeting of Stockholders are incorporated by reference
into Part III.
COMPANY
OVERVIEW
General Mills, Inc. is a leading global manufacturer and
marketer of branded consumer foods sold through retail stores.
We are also a leading supplier of branded and unbranded food
products to the foodservice and commercial baking industries. We
manufacture our products in 16 countries and market them in more
than 100 countries. Our joint ventures manufacture and market
products in more than 130 countries and republics worldwide.
General Mills, Inc. was incorporated in Delaware in 1928. The
terms General Mills, Company,
registrant, we, us, and
our mean General Mills, Inc. and all subsidiaries
included in the Consolidated Financial Statements in Item 8
of this report unless the context indicates otherwise.
Certain terms used throughout this report are defined in a
glossary in Item 8 of this report.
PRINCIPAL
PRODUCTS
Our major product categories in the United States are
ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup,
dry dinners, shelf stable and frozen vegetables, refrigerated
and frozen dough products, dessert and baking mixes, frozen
pizza and pizza snacks, grain, fruit and savory snacks,
microwave popcorn, and a wide variety of organic products
including soup, granola bars, and cereal.
In Canada, our major product categories are ready-to-eat
cereals, shelf stable and frozen vegetables, dry dinners,
refrigerated and frozen dough products, dessert and baking
mixes, frozen pizza snacks, and grain, fruit and savory snacks.
In markets outside the United States and Canada, our major
product categories include super-premium ice cream and frozen
desserts, grain snacks, shelf stable and frozen vegetables,
refrigerated and frozen dough products, and dry dinners.
TRADEMARKS
AND PATENTS
Our products are marketed under trademarks and service marks
that are owned by or licensed to us. The most significant
trademarks and service marks used in our businesses are set
forth in italics in this report. Some of the important
trademarks used in our global operations include:
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Ready-to-eat cereals |
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Cheerios, Wheaties, Lucky Charms, Total, Trix, Golden
Grahams, Chex, Kix, Fiber One, Reeses Puffs, Cocoa Puffs,
Nature Valley, Cookie Crisp, Cinnamon Toast Crunch, Clusters,
Oatmeal Crisp, and Basic 4
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Refrigerated yogurt |
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Yoplait, Trix, Yoplait Kids,
Go-GURT,
Fiber One, Yo-Plus, Yoplait Whips!, and Colombo
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Refrigerated and frozen dough products |
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Pillsbury, the Pillsbury Doughboy character,
Grands!, Golden Layers, Big Deluxe Classics, Toaster
Strudel, Toaster Scrambles, Jus-Rol, Forno de Minas, Latina,
Wanchai Ferry, V.Pearl, La Salteña, and
Frescarini
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Dry dinners and shelf stable and frozen
vegetable products |
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Betty Crocker, Hamburger Helper, Tuna Helper, Chicken Helper,
Old El Paso, Green Giant, Potato Buds, Suddenly
Salad, Bac*Os, Betty Crocker Complete Meals, Valley
Selections, Simply Steam, Wanchai Ferry, and
Diablitos
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Grain, fruit, and savory snacks |
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Nature Valley, Fiber One, Betty Crocker, Fruit
Roll-Ups,
Fruit By The Foot, Gushers, Chex Mix, Gardettos,
Bugles, and Lärabar
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Dessert and baking mixes |
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Betty Crocker, SuperMoist, Warm Delights, Bisquick, Gold
Medal, and Creamy Deluxe
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Ready-to-serve soup |
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Progresso
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Ice cream and frozen desserts |
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Häagen-Dazs
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Frozen pizza and pizza snacks |
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Totinos, Jenos, Pizza Rolls, Pillsbury Pizza
Pops, and Pillsbury Pizza Minis
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Microwave popcorn |
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PopSecret
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Organic products |
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Cascadian Farm and Muir Glen
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Trademarks are vital to our businesses. To protect our ownership
and rights, we register our trademarks with the Patent and
Trademark Office in the United States, and we file similar
registrations in foreign jurisdictions. Trademark registrations
in the United States are generally for a term of 10 years,
renewable every 10 years as long as the trademark is used
in the regular course of business.
Some of our products are marketed under or in combination with
trademarks that have been licensed from others, including:
Yoplait for yogurt in the United States;
Dora the Explorer, Blues Clues,
and Diego for yogurt, Dora the Explorer for
cereal, and Dora the Explorer, Diego and
SpongeBob SquarePants for vegetables;
Curves for snack bars, popcorn, and cereal;
Caribou Coffee and Second Cup for
snack bars;
Reeses Puffs for cereal;
Hersheys chocolate for a variety of
products;
Weight Watchers as an endorsement for soup;
Best Life Diet for a variety of products;
Macaroni Grill and Mario Batali for
dry dinners;
Sunkist for baking products and fruit snacks;
Cinnabon for refrigerated dough, frozen
pastries and baking products;
Baileys for super-premium ice
cream; and
a variety of characters and brands for fruit snacks,
including Tonka, My Little Pony, Transformers, Animal
Planet, Care Bears, Teenage Mutant Ninja
Turtles, Polly Pocket, Spider-Man, and various
Warner Bros. characters.
We license all of our cereal trademarks to Cereal Partners
Worldwide (CPW), our joint venture with Nestlé S.A.
(Nestlé). Nestlé similarly licenses certain of its
trademarks to CPW, including the Nestlé and Uncle
Tobys trademarks. We also license our Green Giant
trademark to a third party for use in connection with its
sale of fresh produce in the United States. We own the
Häagen-Dazs trademark and have the right to use the
trademark outside of the United States and Canada. Nestlé
has an exclusive royalty-free license to use the
Häagen-Dazs trademark in the United States and
Canada on ice cream and other frozen dessert products. We also
license this trademark to our joint ventures in Japan and Korea.
The J. M. Smucker Company holds an exclusive royalty-free
license to use the Pillsbury brand and the Pillsbury
Doughboy character in the dessert mix and baking mix
categories in the United States and under limited circumstances
in Canada and Mexico.
Given our focus on developing and marketing innovative,
proprietary products, we consider the collective rights under
our various patents, which expire from time to time, a valuable
asset, but we do not believe that our businesses are materially
dependent upon any single patent or group of related patents.
RAW
MATERIALS AND SUPPLIES
The principal raw materials that we use are grains (wheat, oats,
and corn), sugar, dairy products, vegetables, fruits, meats,
vegetable oils, and other agricultural products. We also use
substantial quantities of carton board, corrugated and plastic
packaging materials, operating supplies, and energy. Most of
these inputs for our domestic and Canadian operations are
purchased from suppliers in the United States. In our
international operations, inputs that are not locally available
in adequate supply may be imported from other countries. The
cost of these inputs may fluctuate widely due to government
policy and regulation, weather conditions, or other unforeseen
circumstances. We have some long-term fixed price contracts, but
the majority of our inputs are purchased on the open market. We
believe that we will be able to obtain an adequate supply of
needed inputs. Occasionally and where possible, we make advance
purchases of items significant to our business in order to
ensure continuity of operations. Our objective is to procure
materials meeting both our quality standards and our production
needs at price levels that allow a targeted profit margin. Since
these inputs generally represent the largest variable cost in
manufacturing our products, to the extent possible, we often
hedge the risk associated with adverse price movements for some
inputs using a variety of risk management strategies. We also
have a grain merchandising operation that provides us efficient
access to, and more informed knowledge of, various commodity
markets, principally wheat and oats. This operation holds
physical inventories that are carried at fair market value and
uses derivatives to hedge its net inventory position and
minimize its market exposures.
RESEARCH
AND DEVELOPMENT
Our principal research and development facilities are located in
Minneapolis, Minnesota. Our research and development resources
are focused on new product development, product improvement,
process design and improvement, packaging, and
exploratory research in new business areas. Research and
development expenditures were $204.7 million in fiscal
2008, $191.1 million in fiscal 2007, and
$178.4 million in fiscal 2006.
FINANCIAL
INFORMATION ABOUT SEGMENTS
We review the financial results of our business under three
operating segments U.S. Retail, International,
and Bakeries and Foodservice. See Managements Discussion
and Analysis of Financial Condition and Results of Operations
(MD&A) in Item 7 of this report for a description of
our segments. For financial information by segment and
geographic area, see Note 16 to the Consolidated Financial
Statements in Item 8 of this report.
JOINT
VENTURES
In addition to our consolidated operations, we participate in
several joint ventures, including CPW and Häagen-Dazs
ice cream joint ventures in Japan and Korea.
CUSTOMERS
Our primary customers are grocery stores, mass merchandisers,
membership stores, natural food chains, drug, dollar and
discount chains, commercial and noncommercial foodservice
distributors and operators, restaurants, and convenience stores.
We generally sell to these customers through our direct sales
force. We use broker and distribution arrangements for certain
products or to serve certain types of customers.
During fiscal 2008, Wal-Mart Stores, Inc. and its affiliates
(Wal-Mart), accounted for 19 percent of our consolidated
net sales and 27 percent of our net sales in the
U.S. Retail segment. No other customer accounted for
10 percent or more of our consolidated net sales. Wal-Mart
also represented 5 percent of our net sales in the
International segment and 5 percent of our net sales in the
Bakeries and Foodservice segment. As of May 25, 2008,
Wal-Mart accounted for 23 percent of our U.S. Retail
receivables, 4 percent of our International receivables,
and 2 percent of our Bakeries and Foodservice receivables.
The 5 largest customers in our U.S. Retail segment
accounted for 57 percent of its fiscal 2008 net sales,
the 5 largest customers in our International segment accounted
for 26 percent of its fiscal 2008 net sales, and the 5
largest customers in our Bakeries and Foodservice segment
accounted for 39 percent of its fiscal 2008 net sales.
For further information on our customer credit and product
return practices please refer to Note 2 to the Consolidated
Financial Statements in Item 8 of this report.
COMPETITION
The consumer foods industry is highly competitive, with numerous
manufacturers of varying sizes in the United States and
throughout the world. The food categories in which we
participate are very competitive. Our principal competitors in
these categories all have substantial financial, marketing, and
other resources. Competition in our product categories is based
on product innovation, product quality, price, brand recognition
and loyalty, effectiveness of marketing, promotional activity,
and the ability to identify and satisfy consumer preferences.
Our principal strategies for competing in each of our segments
include effective customer relationships, superior product
quality, innovative advertising, product promotion, product
innovation, an efficient supply chain, and price. In most
product categories, we compete not only with other widely
advertised branded products, but also with generic and private
label products that are generally sold at lower prices.
Internationally, we compete with both multi-national and local
manufacturers, and each country includes a unique group of
competitors.
SEASONALITY
In general, demand for our products is evenly balanced
throughout the year. However, within our U.S. Retail
segment demand for refrigerated dough, frozen baked goods, and
baking products is stronger in the fourth calendar quarter.
Demand for Progresso soup and Green Giant canned
and frozen vegetables is higher during the fall and winter
months. Internationally, demand for Häagen-Dazs ice
cream is higher during the summer months and demand for baking
mix and dough products increases during winter months. Due to
the offsetting impact of these demand trends, as well as the
different seasons in the northern and southern hemispheres, our
International segment net sales are generally evenly balanced
throughout the year.
BACKLOG
Orders are generally filled within a few days of receipt and are
subject to cancellation at any time prior to shipment. The
backlog of any unfilled orders as of May 25, 2008, was not
material.
WORKING
CAPITAL
A description of our working capital is included in the
Liquidity section of MD&A in Item 7 of this report.
Our product return practices are described in Note 2 to the
Consolidated Financial Statements in Item 8 of this report.
EMPLOYEES
As of May 25, 2008, we had approximately 29,500 full- and
part-time employees.
FOOD
QUALITY AND SAFETY REGULATION
The manufacture and sale of consumer food products is highly
regulated. In the United States, our activities are subject to
regulation by various federal government agencies, including the
Food and Drug Administration, Department of Agriculture, Federal
Trade Commission, Department of Commerce, and Environmental
Protection Agency, as well as various state and local agencies.
Our business is also regulated by similar agencies outside of
the United States.
ENVIRONMENTAL
MATTERS
As of May 25, 2008, we were involved with four active
cleanup sites associated with the alleged or threatened release
of hazardous substances or wastes located in: Minneapolis,
Minnesota; Sauget, Illinois; Moonachie, New Jersey; and
Doolittle, Missouri. These matters involve several different
actions, including administrative proceedings commenced by
regulatory agencies and demand letters by regulatory agencies
and private parties.
We recognize that our potential exposure with respect to any of
these sites may be joint and several, but have concluded that
our probable aggregate exposure is not material to our
consolidated financial position or cash flows from operations.
This conclusion is based upon, among other things: our payments
and accruals with respect to each site; the number, ranking and
financial strength of other potentially responsible parties; the
status of the proceedings, including various settlement
agreements, consent decrees, or court orders; allocations of
volumetric waste contributions and allocations of relative
responsibility among potentially responsible parties developed
by regulatory agencies and by private parties; remediation cost
estimates prepared by governmental authorities or private
technical consultants; and our historical experience in
negotiating and settling disputes with respect to similar sites.
Our operations are subject to the Clean Air Act, Clean Water
Act, Resource Conservation and Recovery Act, Comprehensive
Environmental Response, Compensation, and Liability Act, and the
Federal Insecticide, Fungicide, and Rodenticide Act, and all
similar state, local, and foreign environmental laws and
regulations applicable to the jurisdictions in which we operate.
Based on current facts and circumstances, we believe that
neither the results of our environmental proceedings nor our
compliance in general with environmental laws or regulations
will have a material adverse effect upon our capital
expenditures, earnings, or competitive position.
EXECUTIVE
OFFICERS
The section below provides information regarding our executive
officers as of July 4, 2008:
Y. Marc Belton, age 49, is Executive
Vice President, Worldwide Health, Brand and New Business
Development. Mr. Belton joined General Mills in 1983 and
has held various positions, including President of Snacks
Unlimited from 1994 to 1997, New Ventures from 1997 to 1999, and
Big G cereals from 1999 to 2002. He had oversight responsibility
for Yoplait, General Mills Canada, and New Business Development
from 2002 to May 2005, and has had oversight responsibility for
Worldwide Health, Brand and New Business Development since May
2005. Mr. Belton was elected a Vice President of General
Mills in 1991, a Senior Vice President in 1994, and an Executive
Vice President in June 2006. He is a director of Navistar
International Corporation.
Randy G. Darcy, age 57, is Executive Vice
President, Worldwide Operations and Technology. Mr. Darcy
joined General Mills in 1987, was named Vice President, Director
of Manufacturing, Technology and Operations in 1989, served as
Senior Vice President, Supply Chain from 1994 to 2003, and as
Senior Vice President, Chief Technical Officer with
responsibilities for Supply Chain, Research and Development, and
Quality and Regulatory Operations from 2003 to 2005. He was
named to his present position in May 2005. Mr. Darcy was
employed by The Procter & Gamble Company from 1973 to
1987, serving in a variety of management positions.
Mr. Darcy is retiring effective August 1, 2008.
Ian R. Friendly, age 48, is Executive Vice
President and Chief Operating Officer, U.S. Retail.
Mr. Friendly joined General Mills in 1983 and held various
positions before becoming Vice President of CPW in 1994,
President of Yoplait in 1998, Senior Vice
President of General Mills in 2000, and President of the Big G
cereals division in 2002. In May 2004, he was named Chief
Executive Officer of CPW. Mr. Friendly was named to his
present position in June 2006.
Richard O. Lund, age 58, is Vice President,
Controller. Mr. Lund joined General Mills in 1981 and held
various positions before becoming Vice President, Director of
Financial Operations for the Gold Medal division in 1994. He was
appointed Vice President, Corporate Financial Operations in 2000
and was elected to his present position in December 2007. Prior
to joining General Mills, Mr. Lund spent 9 years with
Coopers & Lybrand (now PricewaterhouseCoopers LLP).
Donal L. Mulligan, age 47, is Executive Vice
President, Chief Financial Officer. Mr. Mulligan joined
General Mills in 2001 from The Pillsbury Company. He served as
Vice President, Financial Operations for our International
division until 2004, when he was named Vice President, Financial
Operations for Operations and Technology. Mr. Mulligan was
appointed Treasurer of General Mills in January 2006, Senior
Vice President, Financial Operations in July 2007, and was
elected to his present position in August 2007. From 1987 to
1998, he held several international positions at PepsiCo, Inc.
and YUM! Brands, Inc.
Christopher D. OLeary, age 49, is
Executive Vice President and Chief Operating Officer,
International. Mr. OLeary joined General Mills in
1997 as Vice President, Corporate Growth. He was elected a
Senior Vice President in 1999 and President of the Meals
division in 2001. Mr. OLeary was named to his present
position in June 2006. Prior to joining General Mills, he spent
17 years at PepsiCo, Inc., last serving as President and
Chief Executive Officer of the Hostess Frito-Lay business in
Canada. Mr. OLeary is a director of
Telephone & Data Systems, Inc.
Roderick A. Palmore, age 56, is Executive
Vice President, General Counsel, Chief Compliance and Risk
Management Officer and Secretary. Mr. Palmore joined
General Mills in this position in February 2008 from the Sara
Lee Corporation where he spent 12 years, last serving as
Executive Vice President and General Counsel.
Michael A. Peel, age 58, is Executive Vice
President, Human Resources and Administrative Services.
Mr. Peel joined General Mills as Senior Vice President,
Human Resources and Corporate Services in 1991 from PepsiCo,
Inc. where he spent 14 years, last serving as Senior Vice
President, Human Resources, responsible for PepsiCo Worldwide
Foods. He was named to his present position in December 2007.
Mr. Peel is a director of Select Comfort Corporation.
Kendall J. Powell, age 54, was elected Chief
Executive Officer of General Mills in September 2007 and
Chairman in May 2008. Mr. Powell joined General Mills in
1979 and progressed through a variety of positions in the
company before becoming a Vice President in 1990. He became
President of Yoplait USA in 1996, President of the Big G cereal
division in 1997, and Senior Vice President of General Mills in
1998. From 1999 to 2004, he served as Chief Executive Officer of
CPW in Switzerland. He returned from CPW in 2004 and was elected
Executive Vice President. In 2006, Mr. Powell was elected
President and Chief Operating Officer of General Mills with
overall global operating responsibility for the company. He is a
director of Medtronic, Inc.
Jeffrey J. Rotsch, age 57, is Executive Vice
President, Worldwide Sales and Channel Development.
Mr. Rotsch joined General Mills in 1974 and served as the
President of several divisions, including Betty Crocker and Big
G cereals. He served as Senior Vice President from 1993 to 2005
and as President, Consumer Foods Sales from 1997 to 2005.
Mr. Rotsch was named to his present position in May 2005.
Christina L. Shea, age 55, is Senior Vice
President, External Relations and President, General Mills
Foundation. Ms. Shea joined General Mills in 1977 and has
held various positions in the Big G cereals, Yoplait, Gold
Medal, Snacks, and Betty Crocker divisions. From 1994 to 1999,
she was President of the Betty Crocker division and was named a
Senior Vice President of General Mills in 1998. Ms. Shea
became President of General Mills Community Action and the
General Mills Foundation in 2002 and was named to her current
position in May 2005.
Kenneth L. Thome, age 60, is Senior
Vice President, Deputy Chief Financial Officer. Mr. Thome
joined General Mills in 1969 and was named Vice President,
Controller for the Convenience and International Foods Group in
1985. He became Vice President, Controller for International
Foods in 1989, Vice President, Director of Information Systems
in 1991, Senior Vice President, Financial Operations in 1993 and
was elected to his present position in August 2007.
Mr. Thome is retiring effective August 1, 2008.
AVAILABLE
INFORMATION
Availability of
Reports We are a reporting company under the
Securities Exchange Act of 1934, as amended (1934 Act), and
file
reports, proxy statements, and other information with the
Securities and Exchange Commission (SEC). The public may read
and copy any of our filings at the SECs Public Reference
Room at 100 F Street N.E., Washington, D.C.
20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at
(800) 732-0330.
Because we submit filings to the SEC electronically, you may
access this information at the SECs internet website:
www.sec.gov. This site contains reports, proxies, and
information statements and other information regarding issuers
that file electronically with the SEC.
Website
Access Our website is
www.generalmills.com. We make available, free
of charge in the Investors portion of this website,
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the 1934 Act as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Reports of beneficial
ownership filed pursuant to Section 16(a) of the
1934 Act are also available on our website.
Our business is subject to various risks and uncertainties. Any
of the risks described below could materially adversely affect
our business, financial condition, and results of operations.
The
food categories in which we participate are very competitive,
and if we are not able to compete effectively, our results of
operations could be adversely affected.
The food categories in which we participate are very
competitive. Our principal competitors in these categories all
have substantial financial, marketing, and other resources. In
most product categories, we compete not only with other widely
advertised branded products, but also with generic and private
label products that are generally sold at lower prices.
Competition in our product categories is based on product
innovation, product quality, price, brand recognition and
loyalty, effectiveness of marketing, promotional activity, and
the ability to identify and satisfy consumer preferences. If our
large competitors were to decrease their pricing or were to
increase their promotional spending, we could choose to do the
same, which could adversely affect our margins and
profitability. If we did not do the same, our revenues and
market share could be adversely affected. Our market share and
revenue growth could also be adversely impacted if we are not
successful in introducing innovative products in response to
changing consumer demands or by new product introductions of our
competitors. If we are unable to build and sustain brand equity
by offering recognizably superior product quality, we may be
unable to maintain premium pricing over generic and private
label products.
We
may be unable to maintain our profit margins in the face of a
consolidating retail environment.
The 5 largest customers in our U.S. Retail segment
accounted for 57 percent of its fiscal 2008 net sales,
the 5 largest customers in our International segment accounted
for 26 percent of its net sales for fiscal 2008, and the 5
largest customers in our Bakeries and Foodservice segment
accounted for 39 percent of its net sales for fiscal 2008.
The loss of any large customer for an extended length of time
could adversely affect our sales and profits. There has been
significant worldwide consolidation in the grocery industry in
recent years and we believe that this trend is likely to
continue. As the retail grocery trade continues to consolidate
and mass market retailers become larger, our large retail
customers may seek to use their position to improve their
profitability through improved efficiency, lower pricing,
increased emphasis on generic, private label and other economy
brands, and increased promotional programs. If we are unable to
use our scale, marketing expertise, product innovation,
knowledge of consumers needs, and category leadership
positions to respond to these demands, our profitability or
volume growth could be negatively impacted.
Price
changes for the commodities we depend on for raw materials,
packaging, and energy may adversely affect our
profitability.
The principal raw materials that we use are commodities that
experience price volatility caused by external conditions such
as weather and product scarcity, limited sources of supply,
commodity market fluctuations, currency fluctuations, and
changes in governmental agricultural and energy programs.
Commodity price changes may result in unexpected increases in
raw material, packaging, and energy costs. If we are unable to
increase productivity to offset these increased costs or
increase our prices, we may experience reduced margins and
profitability. We do not fully hedge against changes in
commodity prices, and the hedging procedures that we do use may
not always work as we intend.
Volatility
in the market value of derivatives we use to hedge exposures to
fluctuations in commodity prices will cause volatility in our
gross margins and net earnings.
We utilize derivatives to hedge price risk for some of our
principal ingredient and energy costs, including grains (oats,
wheat, and corn), oils (principally soybean), non-fat dry milk,
natural gas, and diesel fuel. Changes in the values of these
derivatives are recorded in earnings currently, resulting in
volatility in both gross margin and net earnings. These gains
and losses are reported in cost of sales in our Consolidated
Statements of Earnings and in unallocated corporate items in our
segment operating results until we utilize the underlying input
in our manufacturing process, at which time the gains and losses
are reclassified to segment operating profit. We also record our
grain inventories at fair value. We may experience volatile
earnings as a result of these accounting treatments.
If
we are not efficient in our production, our profitability could
suffer as a result of the highly competitive environment in
which we operate.
Our future success and earnings growth depends in part on our
ability to be efficient in the production and manufacture of our
products in highly competitive markets. Gaining additional
efficiencies may become more difficult over time. Our failure to
reduce costs through productivity gains or by eliminating
redundant costs resulting from acquisitions could adversely
affect our profitability and weaken our competitive position.
Many productivity initiatives involve complex reorganization of
manufacturing facilities and production lines. Such
manufacturing realignment may result in the interruption of
production, which may negatively impact product volume and
margins.
Disruption
of our supply chain could adversely affect our
business.
Our ability to make, move, and sell products is critical to our
success. Damage or disruption to raw material supplies or our
manufacturing or distribution capabilities due to weather,
natural disaster, fire, terrorism, pandemic, strikes, import
restrictions, or other factors could impair our ability to
manufacture or sell our products. Failure to take adequate steps
to mitigate the likelihood or potential impact of such events,
or to effectively manage such events if they occur, particularly
when a product is sourced from a single supplier or location,
could adversely affect our business and results of operations,
as well as require additional resources to restore our supply
chain.
Concerns
with the safety and quality of food products could cause
consumers to avoid certain food products or
ingredients.
We could be adversely affected if consumers in our principal
markets lose confidence in the safety and quality of certain
food products or ingredients. Adverse publicity about these
types of concerns, whether or not valid, may discourage
consumers from buying our products or cause production and
delivery disruptions.
If
our food products become adulterated, misbranded, or mislabeled,
we might need to recall those items and may experience product
liability claims if consumers are injured.
We may need to recall some of our products if they become
adulterated, misbranded, or mislabeled. A widespread product
recall could result in significant losses due to the costs of a
recall, the destruction of product inventory, and lost sales due
to the unavailability of product for a period of time. We could
also suffer losses from a significant product liability judgment
against us. A significant product recall or product liability
case could also result in adverse publicity, damage to our
reputation, and a loss of consumer confidence in our food
products, which could have a material adverse effect on our
business results and the value of our brands.
We
may be unable to anticipate changes in consumer preferences and
trends, which may result in decreased demand for our
products.
Our success depends in part on our ability to anticipate the
tastes and eating habits of consumers and to offer products that
appeal to their preferences. Consumer preferences change from
time to time and can be affected by a number of different
trends. Our failure to anticipate, identify or react to these
changes and trends, or to introduce new and improved products on
a timely basis, could result in reduced demand for our products,
which would in turn cause our revenues and profitability to
suffer. Similarly, demand for our products could be affected by
consumer concerns regarding the health effects of ingredients
such as trans fats, sugar, processed wheat, or other product
ingredients or attributes.
We
may be unable to grow our market share or add products that are
in faster growing and more profitable categories.
The food industrys growth potential is constrained by
population growth. Our success depends in part on our ability to
grow our business faster than populations are growing in the
markets that we serve. One way to achieve that growth is to
enhance our portfolio by adding innovative new products in
faster growing and more profitable categories. Our future
results will also depend on our ability to increase market share
in our existing product categories. If we do not succeed in
developing innovative products for new and existing categories,
our growth may slow, which could adversely affect our
profitability.
Customer
demand for our products may be limited in future periods as a
result of increased purchases in response to promotional
activity.
Our unit volume in the last week of each quarter can be higher
than the average for the preceding weeks of the quarter in
certain circumstances. In comparison to the average daily
shipments in the first 12 weeks of a quarter, the final
week of each quarter may have as much as two to four days
worth of incremental shipments (based on a
five-day
week), reflecting increased promotional activity at the end of
the quarter. This increased activity includes promotions to
assure that our customers have sufficient inventory on hand to
support major marketing events or increased seasonal demand
early in the next quarter, as well as promotions intended to
help achieve interim unit volume targets. If, due to quarter-end
promotions or other reasons, our customers purchase more product
in any reporting period than end-consumer demand will require in
future periods, our sales level in future reporting periods
could be adversely affected.
Economic
downturns could limit consumer demand for our
products.
The willingness of consumers to purchase our products depends in
part on local economic conditions. In periods of economic
uncertainty, consumers may purchase more generic, private label,
and other economy brands and may forego certain purchases
altogether. In those circumstances, we could experience a
reduction in sales of higher margin products or a shift in our
product mix to lower margin offerings. In addition, as a result
of economic conditions or competitive actions, we may be unable
to raise our prices sufficiently to protect margins. Consumers
may also reduce the amount of food that they consume away from
home at customers that purchase products from our Bakeries and
Foodservice segment. Any of these events could have an adverse
effect on our results of operations.
Our
international operations are subject to political and economic
risks.
In fiscal 2008, 19 percent of our consolidated net sales
was generated outside of the United States. We are accordingly
subject to a number of risks relating to doing business
internationally, any of which could significantly harm our
business. These risks include:
political and economic instability;
exchange controls and currency exchange rates;
foreign tax treaties and policies; and
restriction on the transfer of funds to and from
foreign countries.
Our financial performance on a U.S. dollar denominated
basis is subject to fluctuations in currency exchange rates.
These fluctuations could cause material variations in our
results of operations. Our principal exposures are to the
Australian dollar, British pound
sterling, Canadian dollar, Chinese renminbi, euro, Japanese yen,
and Mexican peso. From time to time, we enter into agreements
that are intended to reduce the effects of our exposure to
currency fluctuations, but these agreements may not be effective
in significantly reducing our exposure.
New
regulations or regulatory-based claims could adversely affect
our business.
Food production and marketing are highly regulated by a variety
of federal, state, local, and foreign agencies. Changes in laws
or regulations that impose additional regulatory requirements on
us could increase our cost of doing business or restrict our
actions, causing our results of operations to be adversely
affected. In addition, we advertise our products and could be
the target of claims relating to alleged false or deceptive
advertising under federal, state, and foreign laws and
regulations and of new laws or regulations restricting our right
to advertise products.
We
have a substantial amount of indebtedness, which could limit
financing and other options and in some cases adversely affect
our ability to pay dividends.
As of May 25, 2008, we had total debt and minority
interests of $7.2 billion. The agreements under which we
have issued indebtedness do not prevent us from incurring
additional unsecured indebtedness in the future. Our level of
indebtedness may limit our:
ability to obtain additional financing for working
capital, capital expenditures, or general corporate purposes,
particularly if the ratings assigned to our debt securities by
rating organizations were revised downward; and
flexibility to adjust to changing business and
market conditions and may make us more vulnerable to a downturn
in general economic conditions.
There are various financial covenants and other restrictions in
our debt instruments and minority interests. If we fail to
comply with any of these requirements, the related indebtedness
(and other unrelated indebtedness) could become due and payable
prior to its stated maturity, and our ability to obtain
additional or alternative financing may also be adversely
affected.
Our ability to make scheduled payments on or to refinance our
debt and other obligations will depend on our operating and
financial performance, which in turn is subject to prevailing
economic conditions and to financial, business, and other
factors beyond our control.
Volatility
in the securities markets, interest rates, and other factors or
changes in our employee base could substantially increase our
defined benefit pension, other postretirement, and
postemployment benefit costs.
We sponsor a number of defined benefit plans for employees in
the United States, Canada, and various foreign locations,
including defined benefit pension, retiree health and welfare,
severance, directors life, and other postemployment
benefit plans. Our major defined benefit pension plans are
funded with trust assets invested in a globally diversified
portfolio of securities and other investments. Changes in
interest rates, mortality rates, health care costs, early
retirement rates, investment returns, and the market value of
plan assets can affect the funded status of our defined benefit
pension, other postretirement, and postemployment benefit plans
and cause volatility in the net periodic benefit cost and future
funding requirements of the plans. Although the aggregate fair
value of our defined benefit pension, other postretirement, and
postemployment benefit plan assets exceeded the aggregate
defined benefit pension, other postretirement, and
postemployment benefit obligations as of May 25, 2008, a
significant increase in our obligations or future funding
requirements could have a negative impact on our results of
operations and cash flows from operations.
Our
business operations could be disrupted if our information
technology systems fail to perform adequately.
The efficient operation of our business depends on our
information technology systems. We rely on our information
technology systems to effectively manage our business data,
communications, supply chain, order entry and fulfillment, and
other business processes. The failure of our information
technology systems to perform as we anticipate could disrupt our
business and could result in transaction errors, processing
inefficiencies, and the loss of sales and customers, causing our
business and results of operations to suffer. In addition, our
information technology systems may be vulnerable to damage or
interruption from
circumstances beyond our control, including fire, natural
disasters, systems failures, security breaches, and viruses. Any
such damage or interruption could have a material adverse effect
on our business.
If
other potentially responsible parties (PRPs) are unable to
contribute to remediation costs at certain contaminated sites,
our costs for remediation could be material.
We are subject to various federal, state, local, and foreign
environmental and health and safety laws and regulations. Under
certain of these laws, namely the Comprehensive Environmental
Response, Compensation, and Liability Act and its state
counterparts, liability for investigation and remediation of
hazardous substance contamination at currently or formerly owned
or operated facilities or at third-party waste disposal sites is
joint and several. We currently are involved in active
remediation efforts at certain sites where we have been named a
PRP. If other PRPs at these sites are unable to contribute to
remediation costs, we could be held responsible for their
portion of the remediation costs, and those costs could be
material. We cannot assure that our costs in relation to these
environmental matters or compliance with environmental laws in
general will not exceed our reserves or otherwise have an
adverse effect on our business and results of operations.
A
change in the assumptions used to value our reporting units or
our indefinite-lived intangible assets could negatively affect
our consolidated results of operations and net worth.
Goodwill for each of our reporting units is tested for
impairment annually and whenever events or changes in
circumstances indicate that impairment may have occurred. We
compare the carrying value of the net assets of a reporting
unit, including goodwill, to the fair value of the unit. If the
fair value of the net assets of the reporting unit is less than
the net assets including goodwill, impairment has occurred. Our
estimates of fair value are determined based on a discounted
cash flow model. Growth rates for sales and profits are
determined using inputs from our annual long-range planning
process. We also make estimates of discount rates, perpetuity
growth assumptions, market comparables, and other factors. While
we currently believe that our goodwill is not impaired,
materially different assumptions regarding the future
performance of our businesses could result in significant
impairment losses.
We evaluate the useful lives of our intangible assets, primarily
intangible assets associated with the Pillsbury,
Totinos, Progresso, Green Giant,
Old El Paso, Häagen-Dazs, and Uncle
Tobys brands, to determine if they are finite or
indefinite-lived. Reaching a determination on useful life
requires significant judgments and assumptions regarding the
future effects of obsolescence, demand, competition, other
economic factors (such as the stability of the industry, known
technological advances, legislative action that results in an
uncertain or changing regulatory environment, and expected
changes in distribution channels), the level of required
maintenance expenditures, and the expected lives of other
related groups of assets.
Our indefinite-lived intangible assets are also tested for
impairment annually and whenever events or changes in
circumstances indicate that their carrying value may not be
recoverable. Our estimate of the fair value of the brands is
based on a discounted cash flow model using inputs including:
projected revenues from our annual long-range plan; assumed
royalty rates which could be payable if we did not own the
brands; and a discount rate. While we currently believe that the
fair value of each indefinite-lived intangible asset exceeds its
carrying value and that those intangibles so classified will
contribute indefinitely to our cash flows, materially different
assumptions regarding the future performance of our businesses
could result in significant impairment losses and amortization
expense.
Resolution
of uncertain income tax matters could adversely affect our
results of operations or cash flows from operations.
Our consolidated effective income tax rate is influenced by tax
planning opportunities available to us in the various
jurisdictions in which we operate. Management judgment is
involved in determining our effective tax rate and in evaluating
the ultimate resolution of any uncertain tax positions. We are
periodically under examination or engaged in a tax controversy.
We establish reserves in a variety of taxing jurisdictions when,
despite our belief that our tax return positions are
supportable, we believe that certain positions may be challenged
and may need to be
revised. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. Our
effective income tax rate includes the impact of reserve
provisions and changes to those reserves. We also record
interest on these reserves at the appropriate statutory interest
rate. These interest charges are also included in our effective
tax rate. Reserve adjustments for individual issues have
generally not exceeded 1 percent of earnings before income
taxes and after-tax earnings from joint ventures annually.
During fiscal 2008, the Internal Revenue Service (IRS) concluded
field examinations for our 2002 and 2003 federal tax years.
These examinations included review of our determinations of cost
basis, capital losses, and the depreciation of tangible assets
and amortization of intangible assets arising from our
acquisition of Pillsbury and the sale of minority interests in
our General Mills Cereals, LLC subsidiary. The IRS has proposed
adjustments related to a majority of the tax benefits associated
with these items. We believe we have meritorious defenses and
intend to vigorously defend our positions. Our potential
liability for this matter is significant and, notwithstanding
our reserves against this potential liability, an unfavorable
resolution could have a material adverse impact on our results
of operations or cash flows from operations.
|
|
ITEM 1B
|
Unresolved
Staff Comments
|
None.
We own our principal executive offices and main research
facilities, which are located in the Minneapolis, Minnesota
metropolitan area. We operate numerous manufacturing facilities
and maintain many sales and administrative offices and
warehouses, mainly in the United States. Other facilities are
operated in Canada and elsewhere around the world.
As of May 25, 2008, we operated 79 facilities for the
production of a wide variety of food products. Of these
facilities, 49 are located in the United States, 12 in the
Asia/Pacific region (8 of which are leased), 5 in Canada (2 of
which are leased), 7 in Europe (3 of which are leased), 5 in
Latin America and Mexico, and 1 in South Africa. The following
is a list of the locations of our principal production
facilities, which primarily support the segment noted:
U.S.
Retail
|
|
|
Carson, California
|
|
Kansas City, Missouri
|
Lodi, California
|
|
Great Falls, Montana
|
Covington, Georgia
|
|
Vineland, New Jersey
|
Belvidere, Illinois
|
|
Albuquerque, New Mexico
|
West Chicago, Illinois
|
|
Buffalo, New York
|
New Albany, Indiana
|
|
Wellston, Ohio
|
Carlisle, Iowa
|
|
Murfreesboro, Tennessee
|
Cedar Rapids, Iowa
|
|
Milwaukee, Wisconsin
|
Reed City, Michigan
|
|
Irapuato, Mexico
|
Hannibal, Missouri
|
|
|
|
|
|
International
|
|
Bakeries and
Foodservice
|
Rooty Hill, Australia
|
|
Chanhassen, Minnesota
|
Guangzhou, China
|
|
Joplin, Missouri
|
Arras, France
|
|
Martel, Ohio
|
San Adrian, Spain
|
|
|
Berwick, United Kingdom
|
|
|
Cagua, Venezuela
|
|
|
We also own or lease warehouse space totaling 13 million
square feet, of which 10 million square feet are leased,
that primarily supports our U.S. Retail segment. We own and
lease a number of sales and administrative offices in the United
States, Canada, and elsewhere around the world, totaling
3 million square feet (600,000 square feet of which
are leased).
As part of our Häagen-Dazs business in our International
segment, we operate 185 and franchise 451 branded ice cream
parlors in various countries around the world, all outside of
the United States and Canada. All shops we operate are leased,
totaling 180,000 square feet.
We are the subject of various pending or threatened legal
actions in the ordinary course of our business. All such matters
are subject to many uncertainties and outcomes that are not
predictable with assurance. In our opinion, there were no claims
or litigation pending as of May 25, 2008, that were
reasonably likely to have a material adverse effect on our
consolidated financial position or results of operations. See
the information contained under the section entitled
Environmental Matters in Item 1 of this report
for a discussion of environmental matters in which we are
involved.
|
|
ITEM 4
|
Submission
of Matters to a Vote of Security Holders
|
None.
|
|
ITEM 5
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is listed on the New York Stock Exchange. On
June 27, 2008, there were approximately 32,700 record
holders of our common stock. Information regarding the market
prices for our common stock and dividend payments for the two
most recent fiscal years is set forth in Note 18 to the
Consolidated Financial Statements in Item 8 of this report.
On May 20, 2008, we entered into an Agreement and Plan of
Merger to acquire Humm Foods, Inc. The transaction closed on
June 11, 2008. At the closing, we issued
892,535 shares of our common stock to the shareholders of
Humm Foods, Inc. as consideration for the merger. Based on
representations and warranties made by the selling shareholders,
we issued our common stock in a transaction exempt from the
registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2).
The following table sets forth information with respect to
shares of our common stock that we purchased during the fiscal
quarter ended May 25, 2008:
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
Maximum Number of
|
|
|
|
|
Average
|
|
Part of a Publicly
|
|
Shares that may yet
|
|
|
Total Number of
|
|
Price Paid
|
|
Announced
|
|
be Purchased Under
|
Period
|
|
Shares
Purchased(a)
|
|
Per Share
|
|
Program(b)
|
|
the
Program(b)
|
|
Feb. 25, 2008-
Mar. 30, 2008
|
|
|
35,158
|
|
$
|
56.97
|
|
|
35,158
|
|
|
42,833,451
|
|
Mar. 31,
2008-
Apr. 27, 2008
|
|
|
15,762
|
|
|
60.76
|
|
|
15,762
|
|
|
42,817,689
|
|
Apr. 28, 2008-
May 25, 2008
|
|
|
16,697
|
|
|
61.58
|
|
|
16,697
|
|
|
42,800,992
|
|
Total
|
|
|
67,617
|
|
$
|
58.99
|
|
|
67,617
|
|
|
42,800,992
|
|
|
|
|
|
(a)
|
|
The total number of shares
purchased includes: (i) 64,972 shares purchased from
the ESOP fund of our 401(k) savings plan; and
(ii) 2,645 shares of restricted stock withheld for the
payment of withholding taxes upon vesting of restricted stock.
These amounts include 2,185 shares acquired at an average
price of $61.09 for which settlement occurred after May 25,
2008.
|
|
(b)
|
|
On December 11, 2006, our
Board of Directors approved and we announced an authorization
for the repurchase of up to 75 million shares of our common
stock. Purchases can be made in the open market or in privately
negotiated transactions, including the use of call options and
other derivative instruments,
Rule 10b5-1
trading plans, and accelerated repurchase programs. The Board
did not specify an expiration date for the authorization.
|
|
|
ITEM 6
|
Selected
Financial Data
|
The following table sets forth selected financial data for each
of the fiscal years in the five-year period ended May 25,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
In Millions, Except per Share Data, Percentages and Ratios
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$
|
13,652.1
|
|
|
$
|
12,441.5
|
|
|
$
|
11,711.3
|
|
|
$
|
11,307.8
|
|
|
$
|
11,122.2
|
|
Gross
margin(a)
|
|
|
|
4,873.8
|
|
|
|
4,486.4
|
|
|
|
4,166.5
|
|
|
|
3,982.6
|
|
|
|
4,088.1
|
|
Selling, general, and administrative expenses
|
|
|
|
2,625.0
|
|
|
|
2,389.3
|
|
|
|
2,177.7
|
|
|
|
1,998.6
|
|
|
|
2,052.2
|
|
Segment operating
profit(b)
|
|
|
|
2,405.5
|
|
|
|
2,260.1
|
|
|
|
2,111.6
|
|
|
|
2,016.4
|
|
|
|
2,052.9
|
|
After-tax earnings from joint ventures
|
|
|
|
110.8
|
|
|
|
72.7
|
|
|
|
69.2
|
|
|
|
93.9
|
|
|
|
78.5
|
|
Net earnings
|
|
|
|
1,294.7
|
|
|
|
1,143.9
|
|
|
|
1,090.3
|
|
|
|
1,240.0
|
|
|
|
1,055.2
|
|
Depreciation and amortization
|
|
|
|
459.2
|
|
|
|
417.8
|
|
|
|
423.9
|
|
|
|
443.1
|
|
|
|
399.0
|
|
Advertising and media expense
|
|
|
|
628.0
|
|
|
|
543.3
|
|
|
|
524.0
|
|
|
|
480.8
|
|
|
|
514.3
|
|
Research and development expense
|
|
|
|
204.7
|
|
|
|
191.1
|
|
|
|
178.4
|
|
|
|
165.3
|
|
|
|
157.6
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
333.0
|
|
|
|
346.5
|
|
|
|
357.7
|
|
|
|
371.2
|
|
|
|
374.7
|
|
Diluted
|
|
|
|
346.9
|
|
|
|
360.2
|
|
|
|
378.8
|
|
|
|
408.7
|
|
|
|
412.8
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$
|
3.86
|
|
|
$
|
3.30
|
|
|
$
|
3.05
|
|
|
$
|
3.34
|
|
|
$
|
2.82
|
|
Diluted
|
|
|
|
3.71
|
|
|
|
3.18
|
|
|
|
2.90
|
|
|
|
3.08
|
|
|
|
2.60
|
|
Operating ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin as a percentage of net sales
|
|
|
|
35.7
|
%
|
|
|
36.1
|
%
|
|
|
35.6
|
%
|
|
|
35.2
|
%
|
|
|
36.8
|
%
|
Selling, general, and administrative expenses as a percentage of
net sales
|
|
|
|
19.2
|
%
|
|
|
19.2
|
%
|
|
|
18.6
|
%
|
|
|
17.7
|
%
|
|
|
18.5
|
%
|
Segment operating profit as a percentage of net
sales(b)
|
|
|
|
17.6
|
%
|
|
|
18.2
|
%
|
|
|
18.0
|
%
|
|
|
17.8
|
%
|
|
|
18.5
|
%
|
Effective income tax rate
|
|
|
|
34.4
|
%
|
|
|
34.3
|
%
|
|
|
34.5
|
%
|
|
|
36.6
|
%
|
|
|
35.0
|
%
|
Return on average total
capital(a)(b)
|
|
|
|
12.1
|
%
|
|
|
11.1
|
%
|
|
|
10.5
|
%
|
|
|
11.4
|
%
|
|
|
10.0
|
%
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land, buildings, and equipment
|
|
|
$
|
3,108.1
|
|
|
$
|
3,013.9
|
|
|
$
|
2,997.1
|
|
|
$
|
3,111.9
|
|
|
$
|
3,197.4
|
|
Total assets
|
|
|
|
19,041.6
|
|
|
|
18,183.7
|
|
|
|
18,075.3
|
|
|
|
17,924.0
|
|
|
|
18,330.9
|
|
Long-term debt, excluding current portion
|
|
|
|
4,348.7
|
|
|
|
3,217.7
|
|
|
|
2,414.7
|
|
|
|
4,255.2
|
|
|
|
7,409.9
|
|
Total
debt(a)
|
|
|
|
6,999.5
|
|
|
|
6,206.1
|
|
|
|
6,049.3
|
|
|
|
6,193.1
|
|
|
|
8,226.0
|
|
Minority interests
|
|
|
|
242.3
|
|
|
|
1,138.8
|
|
|
|
1,136.2
|
|
|
|
1,133.2
|
|
|
|
299.0
|
|
Stockholders equity
|
|
|
|
6,215.8
|
|
|
|
5,319.1
|
|
|
|
5,772.3
|
|
|
|
5,676.4
|
|
|
|
5,247.6
|
|
Cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
1,729.9
|
|
|
|
1,751.2
|
|
|
|
1,843.5
|
|
|
|
1,785.9
|
|
|
|
1,521.0
|
|
Capital expenditures
|
|
|
|
522.0
|
|
|
|
460.2
|
|
|
|
360.0
|
|
|
|
434.0
|
|
|
|
653.0
|
|
Net cash provided (used) by investing activities
|
|
|
|
(442.4)
|
|
|
|
(597.1)
|
|
|
|
(370.0)
|
|
|
|
413.0
|
|
|
|
(530.0)
|
|
Net cash used by financing activities
|
|
|
|
1,093.0
|
|
|
|
1,398.1
|
|
|
|
1,404.3
|
|
|
|
2,385.0
|
|
|
|
943.0
|
|
Fixed charge coverage ratio
|
|
|
|
4.87
|
|
|
|
4.37
|
|
|
|
4.54
|
|
|
|
4.61
|
|
|
|
3.74
|
|
Operating cash flow to debt
ratio(a)
|
|
|
|
24.7
|
%
|
|
|
28.2
|
%
|
|
|
30.5
|
%
|
|
|
28.8
|
%
|
|
|
18.5
|
%
|
Share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low stock price
|
|
|
$
|
51.43
|
|
|
$
|
49.27
|
|
|
$
|
44.67
|
|
|
$
|
43.01
|
|
|
$
|
43.75
|
|
High stock price
|
|
|
|
62.50
|
|
|
|
61.11
|
|
|
|
52.16
|
|
|
|
53.89
|
|
|
|
49.66
|
|
Closing stock price
|
|
|
|
61.09
|
|
|
|
60.15
|
|
|
|
51.79
|
|
|
|
49.68
|
|
|
|
46.05
|
|
Cash dividends per common share
|
|
|
|
1.57
|
|
|
|
1.44
|
|
|
|
1.34
|
|
|
|
1.24
|
|
|
|
1.10
|
|
|
|
Fiscal 2004 was a 53-week year; all other fiscal years were
52 weeks.
In fiscal 2007, we adopted Statement of Financial Accounting
Standards (SFAS) No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Benefit
Plans an amendment of Financial Accounting Standards Board
(FASB) Statements No. 87, 88, 106 and 132(R),
resulting in an after-tax reduction to stockholders equity
of $440.4 million, and SFAS No. 123R, Share
Based Payment, resulting in a decrease to fiscal
2007 net earnings of $42.9 million, and a decrease to
fiscal 2007 cash flows from operations and corresponding
decrease to cash flows used by financing activities of
$73.1 million. See Notes 2 and 13 to the Consolidated
Financial Statements in Item 8 of this report.
|
|
|
(a)
|
|
See Glossary in Item 8 of this
report for definition.
|
|
(b)
|
|
See MD&A in Item 7 of
this report for our discussion of these measures not defined by
generally accepted accounting principles.
|
|
|
ITEM 7
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
EXECUTIVE
OVERVIEW
We are a global consumer foods company. We develop distinctive
food products and market these value-added products under unique
brand names. We work continuously to improve our established
brands and to create new products that meet consumers
evolving needs and preferences. In addition, we build the equity
of our brands over time with strong consumer-directed marketing
and innovative merchandising. We believe our brand-building
strategy is the key to winning and sustaining leading share
positions in markets around the globe.
Our fundamental business goal is to generate superior returns
for our stockholders over the long term. We believe that
increases in net sales, segment operating profits, earnings per
share (EPS), and return on average total capital are the key
measures of financial performance for our businesses. See the
Non-GAAP Measures section below for our
discussion of segment operating profit and return on average
total capital, which are not defined by generally accepted
accounting principles (GAAP). Our objectives are to consistently
deliver:
low single-digit annual growth in net sales;
mid single-digit annual growth in total segment
operating profit;
high single-digit annual growth in EPS; and
on average, at least a 50 basis point annual
increase in return on average total capital.
We believe that this financial performance, coupled with an
attractive dividend yield, should result in long-term value
creation for stockholders. We also return a substantial amount
of cash annually to stockholders through share repurchases.
For the fiscal year ended May 25, 2008, our net sales grew
9.7 percent, total segment operating profit grew
6.4 percent, diluted EPS grew 16.7 percent, and our
return on average total capital improved by 100 basis
points. These results met or exceeded our long-term targets.
Diluted EPS for fiscal 2008 includes a $0.10 net gain from
mark-to-market valuation of certain commodity positions and a
$0.09 benefit associated with a favorable court decision on a
discrete tax matter. Net cash provided by operations totaled
$1.7 billion in fiscal 2008, enabling us to increase our
annual dividend payments per share by 9.0 percent from
fiscal 2007 and continue returning cash to stockholders through
share repurchases, which totaled $1,384.6 million in fiscal
2008. We also made significant capital investments totaling
$522.0 million in fiscal 2008, an increase of
13.4 percent from fiscal 2007, to support future growth and
productivity.
We achieved each of our four key operating objectives for fiscal
2008:
We generated broad-based growth in net sales across
our businesses. All of our U.S. Retail divisions,
International geographic regions, and Bakeries and Foodservice
customer segments posted net sales gains in fiscal 2008. We
generated 2.9 points of growth from volume, generated 5.3 points
of growth from net price realization and product mix, and
realized 1.5 points of foreign currency exchange benefit.
Our cost savings initiatives helped to partially
offset input cost inflation in fiscal 2008. We took steps to
manage raw material costs, especially with significant commodity
price increases in fiscal 2008, and we initiated several
restructuring actions to rationalize and simplify our product
portfolio, allowing us to focus on higher margin products.
We invested a significant amount in media and other
brand-building marketing programs, which contributed to sales
growth across our businesses.
We also recorded increases in EPS well above our
target, even excluding the effects of non-cash, mark-to-market
gains and a discrete tax item.
Details of our financial results are provided in the
Fiscal 2008 Consolidated Results of Operations
section below.
In fiscal 2009, input cost inflation will remain a challenge for
us. We plan to offset a significant portion of this cost
inflation with our holistic margin management (HMM) efforts,
which include cost-savings initiatives, marketing spending
efficiencies, and profitable sales mix strategies. We have also
raised prices on a number of our product lines. We believe our
HMM efforts help us keep our price increases moderate and expand
our margins over the long term. In addition, our HMM savings
generate resources for increased advertising and other
brand-building consumer marketing initiatives. Our plans call
for a high single digit increase in consumer marketing support
in fiscal 2009. We believe this support is a key factor in
generating net sales growth, as we believe it builds consumer
loyalty, increases our market share, and defends against
private-label offerings.
In addition to protecting and expanding our margins over time,
and investing in brand-building marketing initiatives, our key
operating objectives for fiscal 2009 include plans for
introducing new products and extending existing brands to new
markets. We
are exploring innovative ways to partner with customers
including traditional food retailers, new retail formats, and
various away-from-home channels. We will continue to grow our
business in international markets, focusing on our core
platforms of super-premium ice cream, world cuisine, and healthy
snacking.
Our plans also call for $550 million of expenditures for
capital projects and a significant amount of cash returned to
stockholders through share repurchases and dividends. Our
long-term objective is to reduce outstanding shares by a
net 2 percent per year. We intend to continue
repurchasing shares in fiscal 2009, with a goal of reducing
average diluted shares outstanding a net 1 percent. On
June 23, 2008, our Board of Directors approved a dividend
increase to an annual rate of $1.72 per share. This represents a
9 percent compound annual growth rate in dividends from
fiscal 2005 to fiscal 2009.
Certain terms used throughout this report are defined in a
glossary in Item 8 of this report.
FISCAL
2008 CONSOLIDATED RESULTS OF OPERATIONS
For fiscal 2008, we reported diluted EPS of $3.71, up
16.7 percent from $3.18 per share earned in fiscal 2007.
Earnings after tax were $1,294.7 million in fiscal 2008, up
13.2 percent from $1,143.9 million in fiscal 2007.
The components of net sales growth are shown in the following
table:
Components of
Net Sales Growth
|
|
|
|
|
|
Fiscal 2008
|
|
|
vs. 2007
|
|
Contributions
from volume
growth(a)
|
|
|
2.9 pts
|
Net price realization and product mix
|
|
|
5.3 pts
|
Foreign currency exchange
|
|
|
1.5 pts
|
|
Net sales growth
|
|
|
9.7 pts
|
|
|
|
|
|
(a)
|
|
Measured in tons based on the
stated weight of our product shipments.
|
Net sales for fiscal 2008 grew 9.7 percent to
$13.7 billion, driven by 2.9 percentage points from
volume growth, mainly in our U.S. Retail and International
segments, and 5.3 percentage points of growth from net
price realization and product mix across many of our businesses.
In addition, foreign currency exchange effects added
1.5 percentage points of growth. During the second quarter
of fiscal 2008, we voluntarily recalled all pepperoni varieties
of Totinos and Jenos frozen pizza
manufactured on or before October 30, 2007 due to potential
contamination. We also voluntarily recalled one flavor of
Progresso soup during the third quarter of fiscal 2008.
The frozen pizza and soup recalls did not significantly impact
our net sales for fiscal 2008.
Cost of sales was up $823.2 million in fiscal 2008
versus fiscal 2007. Cost of sales as a percent of net sales
increased from 63.9 percent in fiscal 2007 to
64.3 percent in fiscal 2008. Higher volume drove
$206.9 million of this increase. Higher input costs and
changes in mix increased cost of sales by $632.1 million.
We recorded net mark-to-market gains of $59.6 million
related to hedges on open commodity positions that will mitigate
future input cost inflation, and a $2.6 million loss from
the revaluation of certain grain inventories to market. We also
recorded $18.5 million of charges to cost of sales,
primarily accelerated depreciation on long-lived assets
associated with previously announced restructuring actions. Our
La Salteña pasta manufacturing plant in
Argentina was destroyed by a fire resulting in a loss of
$1.3 million, net of insurance proceeds, from the write off
of inventory and property, plant, and equipment, and severance
expense related to this event. Cost of sales for fiscal 2008
also includes $21.4 million of costs, including product
write offs, logistics, and other costs related to the voluntary
recalls.
Gross margin grew 8.6 percent in fiscal 2008 versus
fiscal 2007, driven by higher volume, cost savings initiatives
and net price realization. Gross margin as a percent of net
sales declined 40 basis points from fiscal 2007 to fiscal
2008. This primarily reflects declines in our Bakeries and
Foodservice segment, where we took price increases designed to
offset cost increases on a dollar basis, but gross margin as a
percent of net sales declined.
Selling, general, and administrative (SG&A) expenses
increased by $235.7 million in fiscal 2008 versus
fiscal 2007. The increase in SG&A expenses from fiscal 2007
was largely the result of a 13.2 percent increase in media
and other consumer marketing spending consistent with our
brand-building strategy, $30.1 million more foreign
exchange losses than a year ago, higher levels of compensation
and benefits, a 7.1 percent increase in research and
development expense supporting our innovation initiatives, and
$9.2 million of costs associated with the remarketing of
the Class A and
Series B-1
Interests in our subsidiary General Mills Cereals, LLC (GMC).
SG&A expense as a percent of net sales was essentially flat
compared to fiscal 2007.
Net interest for fiscal 2008 totaled $421.7 million,
$4.8 million lower than fiscal 2007. Average
interest-bearing instruments
increased $467.3 million leading to a $29.3 million
increase in net interest, while average interest rates decreased
50 basis points generating a $34.1 million decrease in
net interest. Net interest includes preferred distributions paid
on minority interests. The average rate on our total outstanding
debt and minority interests was 5.8 percent in fiscal 2008
compared to 6.3 percent in fiscal 2007.
Restructuring, impairment, and other exit costs totaled
$21.0 million in fiscal 2008 as follows:
|
|
|
|
|
Expense (Income), In Millions
|
|
|
|
|
Closure of Poplar, Wisconsin plant
|
|
$
|
2.7
|
|
Closure and sale of Allentown, Pennsylvania frozen waffle plant
|
|
|
9.4
|
|
Closure of leased Trenton, Ontario frozen dough plant
|
|
|
10.9
|
|
Restructuring of production scheduling and discontinuation of
cake product line at Chanhassen, Minnesota plant
|
|
|
1.6
|
|
Gain on sale of previously closed Vallejo, California plant
|
|
|
(7.1
|
)
|
Charges associated with restructuring actions previously
announced
|
|
|
3.5
|
|
|
Total
|
|
$
|
21.0
|
|
|
|
We approved a plan to transfer Old El Paso
production from our Poplar, Wisconsin facility to other
plants and to close the Poplar facility to improve capacity
utilization and reduce costs. This action affects
113 employees at the Poplar facility and resulted in a
charge of $2.7 million consisting entirely of employee
severance. Due to declining financial results, we decided to
exit our frozen waffle product line (retail and foodservice) and
to close our frozen waffle plant in Allentown, Pennsylvania,
affecting 111 employees. We recorded a charge consisting of
$3.5 million of employee severance and a $5.9 million
non-cash impairment charge against long-lived assets at the
plant. We also completed an analysis of the viability of our
Bakeries and Foodservice frozen dough facility in Trenton,
Ontario, and decided to close the facility, affecting
470 employees. We recorded a charge consisting of
$8.4 million for employee expenses and $2.5 million in
charges for shutdown and decommissioning costs. We lease the
Trenton plant under an agreement expiring in fiscal 2013. We
expect to make limited use of the plant during fiscal 2009 while
we evaluate sublease or lease termination options. These
actions, including the anticipated timing of the disposition of
the plants we will close, are expected to be completed by the
end of the third quarter of fiscal 2009. We also restructured
our production scheduling and discontinued our cake production
line at our Chanhassen, Minnesota Bakeries and Foodservice
plant. These actions affected 125 employees, and we
recorded a $3.0 million charge for employee severance,
partially offset by a $1.4 million gain from the sale of
long-lived assets during the fourth quarter of fiscal 2008. This
action is expected to be completed by the end of the first
quarter of fiscal 2009. Finally, we recorded additional charges
of $3.5 million primarily related to previously announced
Bakeries and Foodservice segment restructuring actions including
employee severance for 38 employees.
Collectively, the charges we expect to incur with respect to
these fiscal 2008 restructuring actions total $65 million,
of which $43.3 million has been recognized in fiscal 2008.
This includes a $17.7 million non-cash charge related to
accelerated depreciation on long-lived assets at our plant in
Trenton, Ontario and $0.8 million of inventory write offs
at our plants in Chanhassen, Minnesota and Allentown,
Pennsylvania. The accelerated depreciation charge is recorded in
cost of sales in our Consolidated Statements of Earnings and in
unallocated corporate items in our segment results.
Our consolidated effective income tax rate is influenced
by tax planning opportunities available to us in the various
jurisdictions in which we operate. The effective tax rate for
fiscal 2008 was 34.4 percent compared to 34.3 percent
for the same period of fiscal 2007. The 0.1 percentage
point increase is the result of an increase in the state income
tax rate due to more income in higher rate jurisdictions and
lower foreign tax credits. These items were offset by a
favorable U.S. Federal District Court decision on an
uncertain tax matter that reduced our liability for uncertain
tax positions and related accrued interest by
$30.7 million. The IRS has appealed the District Court
decision, and accordingly, its ultimate resolution is subject to
change.
After-tax earnings from joint ventures totaled
$110.8 million in fiscal 2008, compared to
$72.7 million in fiscal 2007. In fiscal 2008, net sales for
Cereal Partners Worldwide (CPW) grew 23.3 percent driven by
higher volume, key new product introductions including
Oats & More in the United Kingdom and
Nesquik Duo across a number of regions, favorable foreign
currency effects, and the benefit of a full year of sales from
the Uncle Tobys acquisition, which closed in July 2006. Our
fiscal 2008 after-tax earnings from joint ventures was benefited
by $15.9 million for our share of a gain on the sale of a
CPW property in the United Kingdom. Net sales for our
Häagen-Dazs joint ventures in Asia increased
15.7 percent in fiscal 2008 as a result of favorable
foreign exchange and introductory product shipments. During the
third quarter of fiscal 2008, the 8th Continent soymilk
business was sold. Our 50 percent share of the after-tax
gain on the sale was $2.2 million. During fiscal 2008, we
recognized $1.7 million of this gain in after-tax earnings
from joint ventures. We will record an additional after-tax gain
of up to $0.5 million in the first quarter of fiscal 2010
if certain conditions are satisfied.
Average diluted shares outstanding decreased by
13.3 million from fiscal 2007 due to our repurchase of
23.9 million shares of stock during fiscal 2008, partially
offset by the issuance of 14.3 million shares to settle a
forward purchase contract with an affiliate of Lehman Brothers,
Inc. (Lehman Brothers), the issuance of shares upon stock option
exercises, the issuance of annual stock awards, and the vesting
of restricted stock units.
FISCAL
2008 CONSOLIDATED BALANCE SHEET ANALYSIS
Cash and cash equivalents increased $243.9 million
from fiscal 2007, as discussed in the Liquidity
section below.
Receivables increased $128.7 million from fiscal
2007, mainly driven by higher international sales levels and
foreign exchange translation. The allowance for doubtful
accounts was unchanged from fiscal 2007.
Inventories increased $193.4 million from fiscal
2007 due to an increase in the prices and levels of grain
inventories, as well as a higher level of finished goods. These
increases were partially offset by an increase in the reserve
for the excess of first in, first out (FIFO) inventory costs
over last in, first out (LIFO) inventory costs of
$47.7 million.
Prepaid expenses and other current assets increased
$67.5 million, as derivative and other receivables
increased $91.3 million, partially offset by a
$13.2 million decrease in interest rate swap receivables.
Land, buildings, and equipment increased
$94.2 million, as capital expenditures of
$522.0 million were partially offset by depreciation
expense of $455.1 million, including accelerated
depreciation charges against long-lived assets related to
restructured facilities in Trenton, Ontario and Poplar,
Wisconsin. In addition, our Lanus, Argentina plant was destroyed
by fire and we sold facilities in Allentown, Pennsylvania and
Vallejo, California in fiscal 2008.
Goodwill and other intangible assets increased
$33.9 million from fiscal 2007 as increases from foreign
currency translation of $170.5 million and the finalization
of purchase accounting for the Saxby Bros. Limited and Uncle
Tobys acquisitions of $15.3 million were partially offset
by a $151.9 million decrease due to the adoption of
Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement
No. 109 (FIN 48).
Other assets increased $163.5 million from fiscal
2007, driven by a $91.6 million increase in our prepaid
pension asset following our annual update of assumptions and
fiscal 2008 asset performance, and a $92.1 million increase
in interest rate derivative receivables resulting from a
decrease in interest rates.
Accounts payable increased $159.4 million to
$937.3 million in fiscal 2008 from higher vendor payables
associated with increases in inventories and payables for
construction in progress, as well as foreign exchange
translation.
Long-term debt, including current portion, and notes
payable together increased $793.4 million from fiscal
2007 due to borrowings utilized for the repurchase of
$843.0 million of
Series B-1
limited membership interests in GMC.
The current and noncurrent portions of deferred income taxes
increased $117.1 million to $1,483.0 million due
to increases in our pension asset and the beneficial tax
treatment for certain inventories and investments, partially
offset by increases in our deferred compensation deferred tax
asset. We also incurred $98.1 million of deferred income
tax expense in fiscal 2008.
Other current liabilities decreased $839.0 million
to $1,239.8 million, reflecting the adoption of
FIN 48, which required us to reclassify $810.6 million
of accrued taxes and related interest from current to noncurrent
based on the expected timing of any required future payments.
Other liabilities increased $694.0 million, driven
by increases to accrued taxes of $628.6 million from the
adoption of FIN 48 and increases in interest rate swap
liabilities of $66.6 million.
Our minority interests decreased by $896.5 million
mainly as a result of our repurchase of the
Series B-1
limited membership interests in GMC and the preferred stock of
General Mills Capital, Inc., net of proceeds from the sale of
additional Class A interests in GMC.
Retained earnings increased $765.4 million,
reflecting fiscal 2008 net earnings of
$1,294.7 million less dividends of $529.7 million.
Treasury stock decreased $4,539.6 million due to the
retirement of $5,080.8 million of treasury stock and a
$581.8 million decrease related to the settlement of a
forward purchase contract
with Lehman Brothers, offset by share repurchases of
$1,384.6 million. Additional paid in capital
decreased $4,692.2 million due to a
$5,068.3 million decrease from the treasury stock
retirement, offset by increases of $168.2 million related
to the Lehman Brothers contract and $133.2 million related
to stock compensation expense recognized in fiscal 2008
earnings. Accumulated other comprehensive income (loss)
increased by $296.4 million after-tax, driven by
favorable foreign exchange translation of $246.3 million.
FISCAL
2007 CONSOLIDATED RESULTS OF OPERATIONS
For fiscal 2007, we reported diluted EPS of $3.18, up
9.7 percent from $2.90 per share earned in fiscal 2006.
Earnings after tax were $1,143.9 million in fiscal 2007, up
4.9 percent from $1,090.3 million in fiscal 2006.
The components of net sales growth are shown in the following
table:
Components of
Net Sales Growth
|
|
|
|
|
|
Fiscal 2007
|
|
|
vs. 2006
|
|
Contributions
from volume
growth(a)
|
|
|
3.4 pts
|
Net price realization and product mix
|
|
|
2.2 pts
|
Foreign currency exchange
|
|
|
0.6 pts
|
|
Net sales growth
|
|
|
6.2 pts
|
|
|
|
|
|
(a)
|
|
Measured in tons based on the
stated weight of our product shipments.
|
Net sales for fiscal 2007 grew 6.2 percent to
$12.4 billion, driven by 3.4 percentage points from
volume growth, mainly in our U.S. Retail and International
segments, and 2.2 percentage points of growth from net
price realization and product mix across many of our businesses.
In addition, foreign currency exchange effects added
0.6 percentage points of growth.
Cost of sales was up $410.3 million in fiscal 2007
versus fiscal 2006. Higher volume drove $264.4 million of
this increase along with an increase of $145.9 million in
input costs and changes in mix. Cost of sales as a percent of
net sales decreased from 64.4 percent in fiscal 2006 to
63.9 percent in fiscal 2007 as $115.0 million of
higher ingredient (mostly grains and dairy) and energy costs
were more than offset by efficiency gains at our manufacturing
facilities.
SG&A expenses increased by $211.6 million in
fiscal 2007 versus fiscal 2006. SG&A expense as a percent
of net sales increased from 18.6 percent in fiscal 2006 to
19.2 percent in fiscal 2007. The increase in SG&A
expense from fiscal 2006 was largely the result of an
8.2 percent increase in media and brand-building consumer
marketing spending and $68.8 million of incremental stock
compensation expense resulting from our adoption of
SFAS No. 123 (Revised), Share-Based
Payment (SFAS 123R).
Net interest for fiscal 2007 totaled $426.5 million,
$26.9 million higher than net interest for fiscal 2006.
Higher interest rates caused nearly all of the increase. Net
interest includes preferred distributions paid on minority
interests. The average rate on our total outstanding debt and
minority interests was 6.3 percent in fiscal 2007, compared
to 5.8 percent in fiscal 2006.
Restructuring, impairment, and other exit costs totaled
$39.3 million in fiscal 2007 as follows:
|
|
|
|
|
Expense (Income), In Millions
|
|
|
|
|
Non-cash impairment charge for certain Bakeries and Foodservice
product lines
|
|
$
|
36.7
|
|
Gain from our previously closed plant in San Adrian, Spain
|
|
|
(7.3
|
)
|
Loss from divestitures of our par-baked bread and frozen pie
product lines
|
|
|
9.6
|
|
Charges associated with restructuring actions previously
announced
|
|
|
0.3
|
|
|
Total
|
|
$
|
39.3
|
|
|
|
In fiscal 2007, we concluded that the future cash flows
generated by certain product lines in our Bakeries and
Foodservice segment would not be sufficient to recover the net
book value of the related long-lived assets, and we recorded a
noncash impairment charge against these assets.
The effective income tax rate was 34.3 percent for
fiscal 2007, including an increase of $29.4 million in
benefits from our international tax structure and benefits from
the settlement of tax audits. In fiscal 2006, our effective
income tax rate was 34.5 percent, including the benefit of
$11.0 million of adjustments to deferred tax liabilities
associated with our International segments brand
intangibles.
After-tax earnings from joint ventures totaled
$72.7 million in fiscal 2007, compared to
$69.2 million in fiscal 2006. In fiscal 2007, net sales for
CPW grew 17.9 percent, including 5.5 points of incremental
sales from the Uncle Tobys cereal business it acquired in
Australia. In February 2006, CPW announced a restructuring of
its manufacturing plants in the United Kingdom. Our after-tax
earnings from joint ventures were reduced by
$8.2 million in both fiscal 2007 and 2006 for our share of
the restructuring costs, mainly accelerated depreciation and
severance. Net sales for our Häagen-Dazs joint ventures in
Asia declined 6.8 percent in fiscal 2007, reflecting a
change in our reporting period for these joint ventures. We
changed this reporting period to include results through
March 31. In previous years, we included results for the
twelve months ended April 30. Accordingly, fiscal 2007
included only 11 months of results from these joint
ventures, compared to 12 months in fiscal 2006. The impact
of this change was not material to our consolidated results of
operations, so we did not restate prior periods for
comparability.
Average diluted shares outstanding decreased by
18.6 million from fiscal 2006 due to our repurchase of
25.3 million shares of stock during fiscal 2007, partially
offset by increases in diluted shares outstanding from the
issuance of annual stock awards.
RESULTS
OF SEGMENT OPERATIONS
Our businesses are organized into three operating segments:
U.S. Retail; International; and Bakeries and Foodservice.
The following tables provide the dollar amount and percentage of
net sales and operating profit from each reportable segment for
fiscal years 2008, 2007, and 2006:
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
Net Sales
|
|
Net Sales
|
|
|
Net Sales
|
|
Net Sales
|
|
|
Net Sales
|
|
Net Sales
|
|
|
|
|
Fiscal Year
|
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. Retail
|
|
|
$
|
9,072.0
|
|
|
66.5
|
%
|
|
$
|
8,491.3
|
|
|
68.2
|
%
|
|
$
|
8,136.3
|
|
|
69.5
|
%
|
International
|
|
|
|
2,558.8
|
|
|
18.7
|
%
|
|
|
2,123.4
|
|
|
17.1
|
%
|
|
|
1,837.0
|
|
|
15.7
|
%
|
Bakeries and Foodservice
|
|
|
|
2,021.3
|
|
|
14.8
|
%
|
|
|
1,826.8
|
|
|
14.7
|
%
|
|
|
1,738.0
|
|
|
14.8
|
%
|
|
Total
|
|
|
$
|
13,652.1
|
|
|
100.0
|
%
|
|
$
|
12,441.5
|
|
|
100.0
|
%
|
|
$
|
11,711.3
|
|
|
100.0
|
%
|
|
|
Segment
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
Segment
|
|
Segment
|
|
|
Segment
|
|
Segment
|
|
|
Segment
|
|
Segment
|
|
|
|
|
Operating
|
|
Operating
|
|
|
Operating
|
|
Operating
|
|
|
Operating
|
|
Operating
|
|
|
|
|
Profit
|
|
Profit
|
|
|
Profit
|
|
Profit
|
|
|
Profit
|
|
Profit
|
|
|
|
|
Fiscal Year
|
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. Retail
|
|
|
$
|
1,971.2
|
|
|
81.9
|
%
|
|
$
|
1,896.6
|
|
|
84.0
|
%
|
|
$
|
1,801.4
|
|
|
85.3
|
%
|
International
|
|
|
|
268.9
|
|
|
11.2
|
%
|
|
|
215.7
|
|
|
9.5
|
%
|
|
|
193.9
|
|
|
9.2
|
%
|
Bakeries and Foodservice
|
|
|
|
165.4
|
|
|
6.9
|
%
|
|
|
147.8
|
|
|
6.5
|
%
|
|
|
116.3
|
|
|
5.5
|
%
|
|
Total
|
|
|
$
|
2,405.5
|
|
|
100.0
|
%
|
|
$
|
2,260.1
|
|
|
100.0
|
%
|
|
$
|
2,111.6
|
|
|
100.0
|
%
|
|
|
|
Segment operating profit excludes unallocated corporate items of
$156.7 million for fiscal 2008, $163.0 million for
fiscal 2007, and $122.8 million for fiscal 2006; and also
excludes restructuring, impairment, and other exit costs because
these items affecting operating profit are centrally managed at
the corporate level and are excluded from the measure of segment
profitability reviewed by our executive management.
U.S. Retail
Segment Our U.S. Retail segment
reflects business with a wide variety of grocery stores, mass
merchandisers, membership stores, natural food chains, and drug,
dollar and discount chains operating throughout the United
States. Our major product categories in this business segment
are ready-to-eat cereals, refrigerated yogurt, ready-to-serve
soup, dry dinners, shelf stable and frozen vegetables,
refrigerated and frozen dough products, dessert and baking
mixes, frozen pizza and pizza snacks, grain, fruit and savory
snacks, microwave popcorn, and a wide variety of organic
products including soup, granola bars, and cereal.
The components of the changes in net sales are shown in the
following table:
Components of
U.S. Retail Net Sales Growth
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
|
vs. 2007
|
|
vs. 2006
|
|
Contributions
from volume
growth(a)
|
|
|
3.3 pts
|
|
|
2.3 pts
|
Net price realization and product mix
|
|
|
3.5 pts
|
|
|
2.1 pts
|
|
Change in Net Sales
|
|
|
6.8 pts
|
|
|
4.4 pts
|
|
|
|
|
|
(a)
|
|
Measured in tons based on the
stated weight of our product shipments.
|
In fiscal 2008, net sales for our U.S. Retail segment were
$9.1 billion, up 6.8 percent from fiscal 2007. This
growth in net sales was the result of a 3.5 percentage
point benefit from net price realization and product mix as well
as a 3.3 percentage point increase in volume, led by strong
growth in our grain snacks and yogurt businesses.
Net sales for this segment totaled $8.5 billion in fiscal
2007 and $8.1 billion in fiscal 2006. Volume increased
2.3 percentage points in fiscal 2007 versus fiscal 2006,
led by strong growth in our grain snacks business as well as
volume increases in our Yoplait, Meals, and Pillsbury divisions.
The volume increase was largely driven by higher levels of
consumer marketing spending and new product innovation,
resulting in higher sales to key customers.
All of our U.S. Retail divisions experienced net sales
growth in fiscal 2008 as shown in the tables below:
U.S. Retail
Net Sales by Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
In Millions
|
|
|
2008
|
|
2007
|
|
2006
|
|
Big G
|
|
|
$
|
2,028.0
|
|
$
|
1,932.9
|
|
$
|
1,902.3
|
Meals
|
|
|
|
2,006.1
|
|
|
1,909.2
|
|
|
1,815.4
|
Pillsbury
|
|
|
|
1,673.4
|
|
|
1,591.4
|
|
|
1,549.8
|
Yoplait
|
|
|
|
1,293.1
|
|
|
1,170.7
|
|
|
1,099.4
|
Snacks
|
|
|
|
1,197.6
|
|
|
1,066.5
|
|
|
967.3
|
Baking Products
|
|
|
|
723.3
|
|
|
666.7
|
|
|
650.2
|
Small Planet Foods and Other
|
|
|
|
150.5
|
|
|
153.9
|
|
|
151.9
|
|
Total
|
|
|
$
|
9,072.0
|
|
$
|
8,491.3
|
|
$
|
8,136.3
|
|
|
U.S. Retail
Change in Net Sales by Division
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
Big G
|
|
|
4.9
|
%
|
|
|
1.6
|
%
|
Meals
|
|
|
5.1
|
|
|
|
5.2
|
|
Pillsbury
|
|
|
5.2
|
|
|
|
2.7
|
|
Yoplait
|
|
|
10.5
|
|
|
|
6.5
|
|
Snacks
|
|
|
12.3
|
|
|
|
10.3
|
|
Baking Products
|
|
|
8.5
|
|
|
|
2.5
|
|
Small Planet Foods
|
|
|
6.3
|
|
|
|
21.3
|
|
|
Total
|
|
|
6.8
|
%
|
|
|
4.4
|
%
|
|
|
In fiscal 2008, Big G cereals net sales grew 4.9 percent,
driven by strong performance in core brands including
Cheerios varieties and Fiber One cereals. Net
sales for Meals grew by 5.1 percent led by Progresso
ready-to-serve soups. Pillsbury net sales increased
5.2 percent led by Totinos frozen pizza and
hot snacks and Pillsbury refrigerated baked goods.
Yoplait net sales grew 10.5 percent due to strong
performance by Yoplait Light yogurt and new products
including Yo-Plus and Fiber One yogurt. Net sales
for Snacks grew 12.3 percent led by continued strong sales
for Nature Valley grain snacks and Fiber One bars.
Baking Products net sales grew 8.5 percent due to increases
in Betty Crocker cookie mixes, Gold Medal flour,
and the launch of Warm Delights Minis.
For fiscal 2007, Big G cereals net sales grew 1.6 percent
as a result of new product launches such as Fruity Cheerios
and Nature Valley cereals, and continued strong
performance of the Cheerios franchise. Net sales for
Meals grew 5.2 percent led by the introduction of
Progresso reduced sodium soups and Hamburger Helper
Microwave Singles and the continued strong performance of
our other Hamburger Helper and Progresso
offerings. Net sales for Pillsbury increased
2.7 percent as core refrigerated dough products,
Totinos Pizza Rolls pizza snacks, and Toaster
Strudel pastries all generated solid growth. Yoplait net
sales grew 6.5 percent due to strong performance by
Yoplait Light, Go-GURT, and Yoplait Kids yogurt.
Net sales for Snacks grew 10.3 percent led by continuing
growth for Nature Valley granola bars and the
introduction of Fiber One bars. Baking Products net sales
grew 2.5 percent reflecting greater focus on product lines
such as Bisquick baking mix and Warm Delights
microwaveable desserts.
Segment operating profit of $2.0 billion in fiscal 2008
improved $74.6 million, or 3.9 percent, over fiscal
2007. Net price realization increased segment operating profit
by $317.0 million and volume growth increased segment
operating profit by $95.4 million.
These were offset by increased supply chain input costs of
$181.0 million, higher administrative costs, and an
11.7 percent increase in consumer marketing expense
consistent with our brand-building strategy. Voluntary product
recalls reduced segment operating profit by $24.0 million.
Segment operating profit of $1.9 billion in fiscal 2007
improved $95.2 million, or 5.3 percent, over fiscal
2006. Unit volume increased segment operating profit by
$90.3 million, and inflation in ingredients (mostly grains
and dairy), energy, and labor costs was more than offset by
efficiency gains at our manufacturing facilities resulting from
cost-saving capital projects, changes to product formulations,
and continued actions to reduce low-turning products. These
increases in segment operating profit were partially offset by a
5.7 percent increase in brand-building consumer marketing
spending.
International
Segment In Canada, our major product
categories are ready-to-eat cereals, shelf stable and frozen
vegetables, dry dinners, refrigerated and frozen dough products,
dessert and baking mixes, frozen pizza snacks, and grain, fruit
and savory snacks. In markets outside North America, our product
categories include super-premium ice cream, grain snacks, shelf
stable and frozen vegetables, dough products, and dry dinners.
Our International 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 are reported in the region or country where the end
customer is located. These international businesses are managed
through 34 sales and marketing offices.
The components of net sales growth are shown in the following
table:
Components of
International Net Sales Growth
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
|
vs. 2007
|
|
vs. 2006
|
|
Contributions
from volume
growth(a)
|
|
|
5.9 pts
|
|
|
7.5 pts
|
Net price realization and product mix
|
|
|
5.6 pts
|
|
|
3.9 pts
|
Foreign currency exchange
|
|
|
9.0 pts
|
|
|
4.2 pts
|
|
Net sales growth
|
|
|
20.5 pts
|
|
|
15.6 pts
|
|
|
|
|
|
(a)
|
|
Measured in tons based on the
stated weight of our product shipments.
|
For fiscal 2008, net sales for our International segment were
$2.6 billion, up 20.5 percent from fiscal 2007. Net
sales totaled $2.1 billion in fiscal 2007, up
15.6 percent from $1.8 billion in fiscal 2006.
Net sales growth for our International segment by geographic
region is shown in the following tables:
International
Net Sales by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
In Millions
|
|
2008
|
|
2007
|
|
2006
|
|
Europe
|
|
$
|
898.5
|
|
$
|
756.3
|
|
$
|
628.3
|
Canada
|
|
|
697.0
|
|
|
610.4
|
|
|
565.9
|
Asia/Pacific
|
|
|
577.4
|
|
|
462.0
|
|
|
404.5
|
Latin America and South Africa
|
|
|
385.9
|
|
|
294.7
|
|
|
238.3
|
|
Total
|
|
$
|
2,558.8
|
|
$
|
2,123.4
|
|
$
|
1,837.0
|
|
|
International
Change in Net Sales by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
Europe
|
|
|
18.8
|
%
|
|
|
20.4
|
%
|
Canada
|
|
|
14.2
|
|
|
|
7.9
|
|
Asia/Pacific
|
|
|
25.0
|
|
|
|
14.2
|
|
Latin America and South Africa
|
|
|
30.9
|
|
|
|
23.7
|
|
|
Total
|
|
|
20.5
|
%
|
|
|
15.6
|
%
|
|
|
In fiscal 2008, net sales in Europe increased 18.8 percent
reflecting strong performance from Old El Paso and
Häagen-Dazs in the United Kingdom. Continued success
from the launch of Nature Valley granola bars in several
European markets and favorable foreign exchange also contributed
to the regions growth. Net sales in Canada increased
14.2 percent including favorable foreign exchange. In the
Asia/Pacific region, net sales increased 25.0 percent led
by double-digit growth for Häagen-Dazs ice cream and
Wanchai Ferry dumplings and meal kits in China. In Latin
America and South Africa, net sales increased 30.9 percent
led by Diablitos canned meat spread in Venezuela and
pricing actions taken in other countries.
In fiscal 2007, net sales in Europe grew 20.4 percent
reflecting 14.6 percent growth in net sales of
Häagen-Dazs ice cream and continued strong
performance from Old El Paso and Green Giant
across the region, and especially in the United Kingdom. The
acquisition of Saxby Bros. Limited, a chilled pastry company in
the
United Kingdom, contributed less than 1 point of net sales
growth. Net sales in Canada increased 7.9 percent, led by
34.8 percent net sales growth on Nature Valley snack
bars, 6.0 percent net sales growth in cereals, and
10.6 percent net sales growth on Old El Paso
products. Asia/Pacific net sales increased 14.2 percent
led by 16.5 percent net sales growth for
Häagen-Dazs in China. Latin America and South Africa
net sales increased 23.7 percent led by 19.6 percent
growth in our Diablitos product line and the re-launch of
Häagen-Dazs in Latin America.
Segment operating profit for fiscal 2008 grew to
$268.9 million, up 24.7 percent from fiscal 2007, with
foreign currency exchange contributing 9.1 points of that
growth. Segment operating profit increased by $37.5 million
mainly from higher volumes. Net price realization more than
offset higher supply chain input costs, a 21.7 percent
increase in consumer marketing expense, and administrative cost
increases.
Segment operating profit for fiscal 2007 grew to
$215.7 million, up 11.2 percent from fiscal 2006, with
foreign currency exchange contributing 4.5 points of that
growth. The growth was led by a $45.6 million increase from
higher volumes driven by increases in consumer marketing
spending. Net price realization offset supply chain and
administrative cost increases.
Bakeries and Foodservice
Segment In our Bakeries and Foodservice
segment we sell branded ready-to-eat cereals, snacks, dinner and
side dish products, refrigerated and soft-serve frozen yogurt,
frozen dough products, branded baking mixes, and custom food
items. Our customers include foodservice distributors and
operators, convenience stores, vending machine operators, quick
service and other restaurant operators, and business and school
cafeterias in the United States and Canada. In addition, we
market mixes and unbaked and fully baked frozen dough products
throughout the United States and Canada to retail, supermarket,
and wholesale bakeries.
The components of the change in net sales are shown in the
following table:
Components of
Bakeries and Foodservice Net Sales Growth
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
|
vs. 2007
|
|
vs. 2006
|
|
Contributions
from volume growth on continuing
businesses(a)
|
|
|
(1
|
.3) pts
|
|
|
3
|
.9 pts
|
Net price realization and product mix
|
|
|
15
|
.8 pts
|
|
|
3
|
.1 pts
|
Divested product lines
|
|
|
(3
|
.9) pts
|
|
|
(1
|
.9) pts
|
|
Net sales growth
|
|
|
10
|
.6 pts
|
|
|
5
|
.1 pts
|
|
|
|
|
|
(a)
|
|
Measured in tons based on the
stated weight of our product shipments.
|
For fiscal 2008, net sales for our Bakeries and Foodservice
segment increased 10.6 percent to $2.0 billion. The
growth in fiscal 2008 net sales was driven mainly by
15.8 percentage points of benefit from net price
realization and product mix, as we took price increases to
offset higher supply chain input costs. This was partially
offset by a 1.3 percentage point decline in volume on
continuing businesses, mainly in the distributors and
restaurants customer channel, and a 3.9 percentage point
decline due to the effects of divested product lines.
Net sales increased 5.1 percent from fiscal 2006 to fiscal
2007. Fiscal 2007 volume grew 3.9 percentage points
compared to fiscal 2006, driven by: increased sales of higher
margin, branded products and the introduction of new products to
customers such as schools, hotels, restaurants, and convenience
stores; improved innovation in foodservice products; and
favorable net price realization.
Net sales growth for our Bakeries and Foodservice segment by
customer segment is shown in the following tables:
Bakeries and
Foodservice Net Sales by Customer Segment
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
In Millions
|
|
2008
|
|
2007
|
|
2006
|
|
Distributors and restaurants
|
|
$
|
902.0
|
|
$
|
864.8
|
|
$
|
887.0
|
Bakery channels
|
|
|
927.8
|
|
|
780.5
|
|
|
688.1
|
Convenience stores and vending
|
|
|
191.5
|
|
|
181.5
|
|
|
162.9
|
|
Total
|
|
$
|
2,021.3
|
|
$
|
1,826.8
|
|
$
|
1,738.0
|
|
|
Bakeries and
Foodservice Change in Net Sales by Customer
Segment
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
Distributors and restaurants
|
|
|
4.3
|
%
|
|
|
(2.5
|
)%
|
Bakery channels
|
|
|
18.9
|
|
|
|
13.4
|
|
Convenience stores and vending
|
|
|
5.5
|
|
|
|
11.4
|
|
|
Total
|
|
|
10.6
|
%
|
|
|
5.1
|
%
|
|
|
In fiscal 2008, segment operating profits were
$165.4 million, up 11.9 percent from
$147.8 million in fiscal 2007. The increase for the year
was driven by grain merchandising activities and benefits from
prior restructuring activities. Net price realization offset
higher supply chain input costs and a decrease in volume.
Segment operating profits were $147.8 million in fiscal
2007, up 27.1 percent from $116.3 million in fiscal
2006. The business was able to offset high levels of input cost
inflation with a combination of pricing actions, sourcing
productivity, and manufacturing improvements.
Unallocated Corporate
Items Unallocated corporate items include
variances to planned corporate overhead expenses, variances to
planned domestic employee benefits and incentives, all stock
compensation costs, annual contributions to the General Mills
Foundation, and other items that are not part of our measurement
of segment operating performance. This includes restructuring,
impairment, and other exit costs, as well as gains and losses
from mark-to-market valuation of certain commodity positions
until passed back to our operating segments in accordance with
our internal hedge documentation as discussed in Note 7 of
the Consolidated Financial Statements in Item 8 of this
report.
For fiscal 2008, unallocated corporate items totaled
$156.7 million of expense compared to $163.0 million
for the same period last year. During fiscal 2008, we recognized
a net gain of $59.6 million related to the mark-to-market
valuation of certain commodity positions and a previously
deferred gain of $10.8 million on the sale of a corporate
investment. These gains were offset by $25.6 million of
unfavorable foreign exchange, $18.5 million of charges to
cost of sales, primarily accelerated depreciation on long-lived
assets associated with previously announced restructuring
actions, and $9.2 million of expense related to the
remarketing of minority interests in our GMC subsidiary.
Unallocated corporate items were $163.0 million in fiscal
2007 compared to $122.8 million in fiscal 2006. Fiscal 2007
included $68.8 million of incremental expense relating to
the impact of the adoption of SFAS 123R, and fiscal 2006
included $32.7 million of charges related to increases in
environmental reserves and a write-down of the asset value of a
low-income housing investment. Excluding these items,
unallocated corporate items were essentially unchanged from
fiscal 2006.
Joint
Ventures In addition to our consolidated
operations, we participate in several joint ventures.
International Joint Ventures We have a
50 percent equity interest in CPW, which manufactures and
markets ready-to-eat cereal products in more than 130 countries
and republics outside the United States and Canada. CPW also
markets cereal bars in several European countries and
manufactures private label cereals for customers in the United
Kingdom. Results from our CPW joint venture are reported for the
12 months ended March 31. On July 14, 2006, CPW
acquired the Uncle Tobys cereal business in Australia for
$385.6 million. We funded our 50 percent share of the
purchase price by making additional advances to and equity
contributions in CPW totaling $135.1 million (classified as
investments in affiliates, net on the Consolidated Statements of
Cash Flows) and by acquiring a 50 percent undivided
interest in certain intellectual property for $57.7 million
(classified as acquisitions on the Consolidated Statements of
Cash Flows). We funded the advances to and our equity
contribution in CPW from cash generated by our international
operations, including our international joint ventures.
We have 50 percent equity interests in Häagen-Dazs
Japan, Inc. and Häagen-Dazs Korea Company. These joint
ventures manufacture, distribute, and market Häagen-Dazs
ice cream products and frozen novelties. In fiscal 2007, we
changed the reporting period for the Häagen-Dazs joint
ventures. Accordingly, fiscal 2007 includes only 11 months
of results from these joint ventures compared to 12 months
in fiscal 2008 and fiscal 2006.
Domestic Joint Venture During fiscal 2008,
the 8th Continent soy milk business was sold, and our
50 percent share of the after-tax gain on the sale was
$2.2 million, of which $1.7 million was recorded in
fiscal 2008. We will record an additional gain in
the first quarter of fiscal 2010 if certain conditions related
to the sale are satisfied.
Our share of after-tax joint venture earnings increased from
$72.7 million in fiscal 2007 to $110.8 million in
fiscal 2008. This growth was largely driven by strong sales
growth, favorable foreign exchange, and our share of the gain
from the sale of a property.
Our after-tax share of CPW restructuring, impairment, and other
exit costs pursuant to approved plans during fiscal 2008 and
prior years was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
Expense (Income), In Millions
|
|
2008
|
|
|
2007
|
|
2006
|
|
Gain on sale of property
|
|
$
|
(15.9
|
)
|
|
$
|
|
|
$
|
|
Accelerated depreciation charges and severance associated with
previously announced restructuring actions
|
|
|
4.5
|
|
|
|
8.2
|
|
|
8.0
|
Other charges resulting from fiscal 2008 restructuring actions
|
|
|
3.2
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(8.2
|
)
|
|
$
|
8.2
|
|
$
|
8.0
|
|
|
Our share of after-tax joint venture earnings increased from
$69.2 million in fiscal 2006 to $72.7 million in
fiscal 2007. This growth was largely driven by strong core brand
volume and organic net sales growth, new product innovation, and
increases in brand-building consumer marketing spending,
partially offset by a $2.0 million impact of the change in
reporting period for the Häagen-Dazs joint ventures and a
$8.2 million restructuring charge in 2007.
The change in net sales for each joint venture is set forth in
the following table:
Joint Ventures
Change in Net Sales
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
CPW
|
|
|
23.3
|
%
|
|
|
17.9
|
%
|
Häagen-Dazs (11 months in fiscal 2007 and
12 months in fiscal 2008 and fiscal 2006)
|
|
|
15.7
|
|
|
|
(6.8
|
)
|
8th Continent
|
|
|
NM
|
|
|
|
2.5
|
|
|
Joint Ventures
|
|
|
20.6
|
%
|
|
|
12.6
|
%
|
|
|
For fiscal 2008, CPW net sales grew by 23.3 percent
reflecting higher volume, key new product introductions
including Oats & More in the United Kingdom and
Nesquik Duo across a number of regions, favorable foreign
currency effects, and the benefit of a full year of sales from
the fiscal 2007 Uncle Tobys acquisition. Net sales for our
Häagen-Dazs joint ventures increased 15.7 percent from
fiscal 2007, as a result of favorable foreign exchange and
introductory product shipments.
For fiscal 2007, CPW net sales grew by 17.9 percent
reflecting the introduction of new products and favorable
currency translation. The acquisition of Uncle Tobys in
Australia also contributed 5.5 points of CPWs net sales
growth. Net sales for our Häagen-Dazs joint ventures
declined 6.8 percent from fiscal 2006, reflecting the
change in our reporting period for these joint ventures.
Selected cash flows from our joint ventures are set forth in the
following table:
Selected Cash
Flows from Joint Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Inflow (Outflow), In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Advances to joint ventures
|
|
|
$
|
(20.6
|
)
|
|
$
|
(141.4
|
)
|
|
$
|
(7.0
|
)
|
Repayments of advances
|
|
|
|
95.8
|
|
|
|
38.0
|
|
|
|
|
|
Dividends received
|
|
|
|
108.7
|
|
|
|
45.2
|
|
|
|
77.4
|
|
|
|
IMPACT
OF INFLATION
We have experienced strong levels of input cost inflation since
fiscal 2006. Our gross margin performance in fiscal 2008
reflects the impact of significant input cost inflation,
primarily from commodities and energy inputs.
For fiscal 2009, we expect inflationary trends to accelerate,
with input costs (fuel, energy, commodities, and employee
benefits) forecasted to be 9 percent higher than fiscal
2008 levels. We expect to mitigate this inflationary pressure
through cost saving initiatives and pricing.
We attempt to minimize the effects of inflation through
appropriate planning and operating practices. Our risk
management practices are discussed in Item 7A of this
report.
LIQUIDITY
The primary source of our liquidity is cash flow from
operations. Over the most recent three-year period, our
operations have generated $5.3 billion in cash. A
substantial portion of this operating cash flow has been
returned to stockholders annually through share repurchases and
dividends. We also use this source of liquidity to fund our
annual capital expenditures. We typically
use a combination of available cash, notes payable, and
long-term debt to finance acquisitions and major capital
expansions.
Cash Flows
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net earnings
|
|
|
$
|
1,294.7
|
|
|
$
|
1,143.9
|
|
|
$
|
1,090.3
|
|
Depreciation and amortization
|
|
|
|
459.2
|
|
|
|
417.8
|
|
|
|
423.9
|
|
After-tax earnings from joint ventures
|
|
|
|
(110.8
|
)
|
|
|
(72.7
|
)
|
|
|
(69.2
|
)
|
Stock-based compensation
|
|
|
|
133.2
|
|
|
|
127.1
|
|
|
|
44.6
|
|
Deferred income taxes
|
|
|
|
98.1
|
|
|
|
26.0
|
|
|
|
25.9
|
|
Distributions of earnings from joint ventures
|
|
|
|
108.7
|
|
|
|
45.2
|
|
|
|
77.4
|
|
Tax benefit on exercised options
|
|
|
|
(55.7
|
)
|
|
|
(73.1
|
)
|
|
|
40.9
|
|
Pension, other postretirement, and postemployment benefit costs
|
|
|
|
(24.8
|
)
|
|
|
(53.6
|
)
|
|
|
(74.2
|
)
|
Restructuring, impairment, and other exit costs (income)
|
|
|
|
(1.7
|
)
|
|
|
39.1
|
|
|
|
29.8
|
|
Changes in current assets and liabilities
|
|
|
|
(126.7
|
)
|
|
|
149.1
|
|
|
|
183.9
|
|
Other, net
|
|
|
|
(44.3
|
)
|
|
|
2.4
|
|
|
|
70.2
|
|
|
Net cash provided by operating activities
|
|
|
$
|
1,729.9
|
|
|
$
|
1,751.2
|
|
|
$
|
1,843.5
|
|
|
|
Our cash flow from operations decreased $21.3 million from
fiscal 2007 to fiscal 2008 as a $150.8 million increase in
net earnings and the $72.1 million effect of changes in
deferred income taxes were more than offset by an increase of
$275.8 million in working capital compared to the prior
year. Accounts receivable was a $69.9 million increased use
of cash, partially offset by a $37.3 million increase in
cash from accounts payable, and inventory was a
$49.1 million increased use of cash in fiscal 2008. Working
capital also includes $59.6 million of mark-to-market gains
on our commodity derivatives. In addition, other current
liabilities had a $173.1 million reduction to the source of
cash driven by cash taxes paid in fiscal 2008.
We strive to grow a key measure, core working capital, at or
below our growth in net sales. For fiscal 2008, core working
capital grew 12.1 percent, more than our net sales growth
of 9.7 percent, largely driven by the effect of increases
in commodity prices on inventories and an increase in accounts
receivable. In fiscal 2007, core working capital grew
4.2 percent, less than net sales growth of
6.2 percent, and in fiscal 2006, core working capital grew
5.0 percent and net sales grew 3.6 percent.
The $92.3 million decrease in cash flows from operations
from fiscal 2006 to fiscal 2007 was the result of a reduction in
our cash flows from working capital and a decrease in
distributions of earnings from joint ventures, offset by an
increase in net earnings.
Cash Flows
from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Purchases of land, buildings, and equipment
|
|
|
$
|
(522.0
|
)
|
|
$
|
(460.2
|
)
|
|
$
|
(360.0
|
)
|
Acquisitions
|
|
|
|
0.6
|
|
|
|
(83.4
|
)
|
|
|
(26.5
|
)
|
Investments in affiliates, net
|
|
|
|
64.6
|
|
|
|
(100.5
|
)
|
|
|
0.3
|
|
Proceeds from disposal of land, buildings, and equipment
|
|
|
|
25.9
|
|
|
|
13.8
|
|
|
|
11.3
|
|
Proceeds from disposal of product lines
|
|
|
|
|
|
|
|
13.5
|
|
|
|
|
|
Other, net
|
|
|
|
(11.5
|
)
|
|
|
19.7
|
|
|
|
4.9
|
|
|
Net cash used by investing activities
|
|
|
$
|
(442.4
|
)
|
|
$
|
(597.1
|
)
|
|
$
|
(370.0
|
)
|
|
|
In fiscal 2008, cash used by investing activities decreased by
$154.7 million from fiscal 2007 when we funded our share of
CPWs acquisition of the Uncle Tobys cereal business in
Australia (reflected in acquisitions and investments in
affiliates, net), acquired Saxby Bros. Limited, and acquired our
master franchisee of Häagen-Dazs shops in Greece.
During fiscal 2008, we sold our former production facilities in
Vallejo, California and Allentown, Pennsylvania, while in fiscal
2007 we sold our frozen pie product line, including a plant in
Rochester, New York, and our par-baked bread product line,
including plants in Chelsea, Massachusetts and Tempe, Arizona.
Capital investment for land, buildings, and equipment increased
by $61.8 million, as we continued to increase manufacturing
capacity for our snack bars and yogurt products and began
consolidating manufacturing for our Old El Paso
business. We expect capital expenditures to increase to
approximately $550 million in fiscal 2009, including
initiatives that will: increase manufacturing capacity for
Yoplait yogurt, Nature Valley bars, and
Progresso soup; increase productivity throughout the
supply chain; and continue upgrades to our International
segments information technology systems.
Cash Flows
from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change in notes payable
|
|
|
$
|
946.6
|
|
|
$
|
(280.4
|
)
|
|
$
|
1,197.4
|
|
Issuance of long-term debt
|
|
|
|
1,450.0
|
|
|
|
2,650.0
|
|
|
|
|
|
Payment of long-term debt
|
|
|
|
(1,623.4
|
)
|
|
|
(2,323.2
|
)
|
|
|
(1,386.0
|
)
|
Settlement of Lehman Brothers forward purchase contract
|
|
|
|
750.0
|
|
|
|
|
|
|
|
|
|
Repurchase of
Series B-1
limited membership interests in GMC
|
|
|
|
(843.0
|
)
|
|
|
|
|
|
|
|
|
Repurchase of General Mills Capital, Inc. preferred stock
|
|
|
|
(150.0
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of Class A limited membership interests
in GMC
|
|
|
|
92.3
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
191.4
|
|
|
|
317.4
|
|
|
|
157.1
|
|
Tax benefit on exercised options
|
|
|
|
55.7
|
|
|
|
73.1
|
|
|
|
|
|
Purchases of common stock for treasury
|
|
|
|
(1,432.4
|
)
|
|
|
(1,320.7
|
)
|
|
|
(884.8
|
)
|
Dividends paid
|
|
|
|
(529.7
|
)
|
|
|
(505.2
|
)
|
|
|
(484.9
|
)
|
Other, net
|
|
|
|
(0.5
|
)
|
|
|
(9.1
|
)
|
|
|
(3.1
|
)
|
|
Net cash used by financing activities
|
|
|
$
|
(1,093.0
|
)
|
|
$
|
(1,398.1
|
)
|
|
$
|
(1,404.3
|
)
|
|
|
Net cash used by financing activities decreased by
$305.1 million in fiscal 2008. Further details for fiscal
2008 and fiscal 2007 financing actions are described in
Note 8 to the Consolidated Financial Statements in
Item 8 of this report.
On April 11, 2007, we issued $1.15 billion aggregate
principal amount of floating-rate convertible senior notes. On
April 11, 2008, the holders of those notes put
$1.14 billion of the aggregate principal amount to us for
repurchase. We issued commercial paper to fund the repurchase.
On March 17, 2008, we sold $750.0 million of
5.2 percent fixed-rate notes due March 17, 2015 and on
August 29, 2007, we sold $700.0 million of
5.65 percent fixed-rate notes due September 10, 2012.
The proceeds of the notes were used to repay outstanding
commercial paper. Interest on the notes is payable semi-annually
in arrears. The notes may be redeemed at our option at any time
for a specified make-whole amount. The notes are senior
unsecured, unsubordinated obligations and contain a change of
control provision, as defined in the instruments governing the
notes.
On October 15, 2007, we settled the forward contract
established with Lehman Brothers in October 2004 in conjunction
with the issuance by Lehman Brothers of $750.0 million of
notes that were mandatorily exchangeable for shares of our
common stock. In settlement of that forward contract, we issued
14.3 million shares of our common stock and received
$750.0 million in cash from Lehman Brothers. We used the
cash received to reduce outstanding commercial paper balances.
On August 7, 2007, we repurchased for a net amount of
$843.0 million all of the outstanding
Series B-1
Interests in GMC as part of a required remarketing of those
interests. The purchase price reflected the
Series B-1
Interests original capital account balance of
$835.0 million and $8.0 million of capital account
appreciation attributable and paid to the third party holder of
the
Series B-1
Interests. The capital appreciation paid to the third party
holder of the
Series B-1
Interests was recorded as a reduction to retained earnings, a
component of stockholders equity, on the Consolidated
Balance Sheets, and reduced net earnings available to common
stockholders in our basic and diluted EPS calculations.
We and the third party holder of all of GMCs outstanding
Class A limited membership interests (Class A
Interests) agreed to reset, effective on June 28, 2007, the
preferred rate of return applicable to the Class A
Interests to the sum of three- month LIBOR plus 65 basis
points. On June 28, 2007, we sold $92.3 million of
additional Class A Interests to the same third party. There
was no gain or loss associated with these transactions. As of
May 25, 2008, the carrying value of all outstanding
Class A Interests on our Consolidated Balance Sheets was
$242.3 million, and the capital account balance of the
Class A Interests upon which preferred distributions are
calculated was $248.1 million.
On June 28, 2007, we repurchased for $150.0 million
all of the outstanding Series A preferred stock of our
subsidiary General Mills Capital, Inc. using proceeds from the
sale of the Class A Interests and commercial paper. There
was no gain or loss associated with this repurchase.
During fiscal 2008, we repurchased 23.6 million shares of
our common stock for an aggregate purchase price of
$1,368.0 million, of which $0.1 million settled after
the end of our fiscal year. In fiscal 2007, our Board of
Directors authorized the repurchase of up to 75 million
shares of our common stock. Purchases under the authorization
can be made in the open market or in privately negotiated
transactions, including the use of call options and other
derivative instruments,
Rule 10b5-1
trading plans, and accelerated repurchase programs. The
authorization has no specified termination date. During fiscal
2007, we repurchased 25.3 million shares for an aggregate
purchase price of $1,385.2 million, of
which $64.5 million settled after the end of our fiscal
year. In fiscal 2006, we repurchased 18.8 million shares of
common stock for an aggregate purchase price of
$892.3 million.
Dividends paid in fiscal 2008 totaled $529.7 million, or
$1.57 per share, a 9.0 percent per share increase from
fiscal 2007. Dividends paid in fiscal 2007 totaled
$505.2 million, or $1.44 per share, a 7.5 percent per
share increase from fiscal 2006 dividends of $1.34 per share.
Our Board of Directors approved a quarterly dividend increase
from $0.40 per share to $0.43 per share effective with the
dividend payable on August 1, 2008.
CAPITAL
RESOURCES
|
|
|
|
|
|
|
|
|
May 25,
|
|
May 27,
|
In Millions
|
|
2008
|
|
2007
|
|
Notes payable
|
|
$
|
2,208.8
|
|
$
|
1,254.4
|
Current portion of long-term debt
|
|
|
442.0
|
|
|
1,734.0
|
Long-term debt
|
|
|
4,348.7
|
|
|
3,217.7
|
|
Total debt
|
|
|
6,999.5
|
|
|
6,206.1
|
Minority interests
|
|
|
242.3
|
|
|
1,138.8
|
Stockholders equity
|
|
|
6,215.8
|
|
|
5,319.1
|
|
Total capital
|
|
$
|
13,457.6
|
|
$
|
12,664.0
|
|
|
The following table details the fee-paid committed credit lines
we had available as of May 25, 2008:
|
|
|
|
In Billions
|
|
Amount
|
|
Credit facility expiring:
|
|
|
|
October 2010
|
|
$
|
1.1
|
October 2012
|
|
|
1.9
|
|
Total committed credit facilities
|
|
$
|
3.0
|
|
|
Commercial paper is a continuing source of short-term financing.
We can issue commercial paper in the United States, Canada, and
Europe. Our commercial paper borrowings are supported by
$3.0 billion of fee-paid committed credit lines and
$403.8 million in uncommitted lines. As of May 25,
2008, there were no amounts outstanding on the fee-paid
committed credit lines and $133.8 million was drawn on the
uncommitted lines, all by our international operations.
In October 2007, we entered into a new five-year credit
agreement with an initial aggregate revolving commitment of
$1.9 billion which is scheduled to expire in October 2012.
Concurrent with the execution of the new credit agreement, we
terminated our five-year credit agreement dated January 20,
2004, which provided $750.0 million of revolving credit and
was scheduled to expire in January 2009, and our amended and
restated credit agreement dated October 17, 2006, which
provided $1.1 billion of revolving credit and was scheduled
to expire in October 2007. We then terminated our credit
agreement dated August 3, 2007, which provided an aggregate
revolving commitment of $750.0 million and was scheduled to
expire on December 6, 2007.
Our credit facilities, certain of our long-term debt agreements,
and our minority interests contain restrictive covenants. As of
May 25, 2008, we were in compliance with all of these
covenants.
We have $442.0 million of long-term debt maturing in the
next 12 months that is classified as current, including
$109.5 million of notes that may mature based on the put
rights of the note holders. We also have classified
$150.6 million of long-term debt as current based on our
intention to redeem the debt within the next 12 months. We
believe that cash flows from operations, together with available
short- and long-term debt financing, will be adequate to meet
our liquidity and capital needs for at least the next
12 months.
As of May 25, 2008, our total debt, including the impact of
derivative instruments designated as hedges, was
65.7 percent in fixed-rate and 34.3 percent in
floating-rate instruments compared to 50.0 percent each in
fixed-rate and floating-rate instruments as of May 27,
2007. The change in the fixed-rate and floating-rate percentages
were driven by the refinancing of $1.5 billion of
commercial paper and minority interests with fixed-rate notes,
and the new swap of $500.0 million of floating-rate debt to
fixed-rate during fiscal 2008.
The Board of Directors approved the retirement of
125.0 million shares of common stock in treasury effective
December 10, 2007. This action reduced common stock by
$12.5 million, reduced additional paid-in capital by
$5,068.3 million, and reduced common stock in treasury by
$5,080.8 million on our Consolidated Balance Sheets.
We have an effective shelf registration statement on file with
the Securities and Exchange Commission (SEC) covering the sale
of debt securities, common stock, preference stock, depository
shares, securities warrants, purchase contracts, purchase units,
and units. As of May 25, 2008, $2.2 billion remained
available under the shelf registration for future use.
We believe that growth in return on average total capital is a
key performance measure. Return on average total capital
improved from 11.1 percent in fiscal 2007 to
12.1 percent in fiscal
2008 due to higher operating results, the impact of net
mark-to-market gains on certain commodity positions, and the
effect of a discrete tax item. We also believe important
measures of financial strength are the ratio of fixed charge
coverage and the ratio of operating cash flow to debt. Our fixed
charge coverage ratio in fiscal 2008 was 4.87 compared to 4.37
in fiscal 2007. The measure increased from fiscal 2007 as
earnings before income taxes and after-tax earnings from joint
ventures increased by $174.8 million and fixed charges
decreased by $2.2 million. Our operating cash flow to debt
ratio decreased 3.5 percent to 24.7 percent in fiscal
2008, driven by a slight decrease in cash flows from operations
and an increase in our year end debt balance.
Currently, Standard and Poors (S&P) has ratings of
BBB+ on our publicly held long-term debt and
A-2 on our
commercial paper. Moodys Investors Services (Moodys)
has ratings of Baa1 for our long-term debt and
P-2 for our
commercial paper. Fitch Ratings (Fitch) rates our long-term debt
BBB+ and our commercial paper
F-2. These
ratings are not a recommendation to buy, sell or hold
securities, are subject to revision or withdrawal at any time by
the rating organization, and should be evaluated independently
of any other rating. We intend to manage our financial condition
and ratios to maintain these ratings levels for the foreseeable
future.
In April 2002, we contributed assets with an aggregate fair
market value of $4.2 billion to our subsidiary GMC. The
contributed assets consist primarily of manufacturing assets and
intellectual property associated with the production and retail
sale of Big G cereals, Progresso soups, and Old
El Paso products in the United States. In exchange for
the contribution of these assets, GMC issued its managing
membership interest and its limited preferred membership
interests to certain of our wholly owned subsidiaries. We
continue to hold the entire managing membership interest, and
therefore direct the operations of GMC. Other than the right to
consent to certain actions, holders of the limited preferred
membership interests do not participate in the management of
GMC. We currently hold all interests in GMC other than the
Class A Interests.
The terms of the Class A Interests are described in the
Fifth Amended and Restated Limited Liability Company Agreement
of GMC (the LLC Agreement). The holder of the Class A
Interests receives quarterly preferred distributions from
available net income based on the application of a floating
preferred return rate, currently equal to the sum of three-month
LIBOR plus 65 basis points, to the holders capital
account balance established in the most recent mark-to-market
valuation (currently $248.1 million). The LLC Agreement
requires that the preferred return rate of the Class A
Interests be adjusted every five years through a negotiated
agreement between the Class A Interest holder and GMC, or
through a remarketing auction. The next remarketing is scheduled
to occur in June 2012 and thereafter in five year intervals.
Upon a failed remarketing, the preferred return rate over
three-month LIBOR will be increased by 75 basis points
until the next remarketing, which will occur in 3 month
intervals until a successful remarketing occurs or the managing
member purchases the Class A Interests. The managing member
may at any time elect to purchase all of the Class A
Interests for an amount equal to the holders capital
account balance (as adjusted in a mark-to-market valuation),
plus any accrued but unpaid preferred returns and the prescribed
make-whole amount.
Holders of the Class A Interests may initiate a liquidation
of GMC under certain circumstances, including, without
limitation, the bankruptcy of GMC or its subsidiaries,
GMCs failure to deliver the preferred distributions on the
Class A Interests, GMCs failure to comply with
portfolio requirements, breaches of certain covenants, lowering
of our senior debt rating below either Baa3 by Moodys or
BBB- by S&P, and a failed attempt to remarket the
Class A Interests as a result of GMCs failure to
assist in such remarketing. In the event of a liquidation of
GMC, each member of GMC will receive the amount of its then
current capital account balance. The managing member may avoid
liquidation by exercising its option to purchase the
Class A Interests.
For financial reporting purposes, the assets, liabilities,
results of operations, and cash flows of GMC are included in our
Consolidated Financial Statements. The return to the third party
investor is reflected in net interest in the Consolidated
Statements of Earnings. The third party investors
interests in GMC are classified as minority interests on our
Consolidated Balance Sheets. As discussed above, we may exercise
our 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
unrelated third party investors capital account from its
original value will be charged directly to retained earnings and
will increase or decrease the net earnings used to calculate EPS
in that period.
OFF-BALANCE
SHEET ARRANGEMENTS AND
CONTRACTUAL OBLIGATIONS
As of May 25, 2008, we have issued guarantees and comfort
letters of $670.1 million for the debt and other
obligations of consolidated subsidiaries, and guarantees and
comfort letters of $340.3 million for the debt and other
obligations of non-consolidated affiliates, mainly CPW. In
addition, off-balance sheet arrangements are generally limited
to the future payments under noncancelable operating leases,
which totaled $315.3 million as of May 25, 2008.
As of May 25, 2008, we had invested in 3 variable interest
entities (VIEs). We have an interest in a contract manufacturer
at our former facility in Geneva, Illinois. We are the primary
beneficiary (PB) and have consolidated this entity as of
May 25, 2008. This entity had property and equipment with a
carrying value of $31.0 million and long-term debt of
$31.8 million as of May 25, 2008. We also have an
interest in a contract manufacturer in Greece that is a VIE.
Although we are the PB, we have not consolidated this entity
because it is not material to our results of operations,
financial condition, or liquidity as of and for the year ended
May 25, 2008. This entity had assets of $4.2 million
and liabilities of $0.9 million as of May 25, 2008. We
are not the PB of the remaining VIE. Our maximum exposure to
loss from the 3 VIEs is limited to the $31.8 million of
long-term debt of the contract manufacturer in Geneva, Illinois
and our $1.1 million equity investment in the VIE of which
we are not the PB.
On August 17, 2006, the Pension Protection Act (PPA) became
law in the United States. The PPA revised the basis and
methodology for determining defined benefit plan minimum funding
requirements as well as maximum contributions to and benefits
paid from tax-qualified plans. Most of these provisions are
first applicable to our domestic defined benefit pension plans
in fiscal 2009 on a phased-in basis. The PPA may ultimately
require us to make additional contributions to our domestic
plans. However, due to our historical funding practices and
current funded status, we do not expect to have significant
statutory or contractual funding requirements for our major
defined benefit plans during the next several years. No fiscal
2009 domestic plan contributions are currently expected. Actual
fiscal 2009 contributions could exceed our current projections,
and may be influenced by our decision to undertake discretionary
funding of our benefit trusts versus other competing investment
priorities, or by future changes in government requirements.
Additionally, our projections concerning timing of the PPA
funding requirements are subject to change and may be influenced
by factors such as general market conditions affecting trust
asset performance, interest rates, and our future decisions
regarding certain elective provisions of the PPA.
The following table summarizes our future estimated cash
payments under existing contractual obligations, including
payments due by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and
|
In Millions
|
|
Total
|
|
2009
|
|
201011
|
|
201213
|
|
Thereafter
|
|
Long-term
debt(a)
|
|
$
|
4,789.8
|
|
$
|
437.6
|
|
$
|
511.4
|
|
$
|
2,058.3
|
|
$
|
1,782.5
|
Accrued interest
|
|
|
146.8
|
|
|
146.8
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
315.3
|
|
|
94.3
|
|
|
120.7
|
|
|
80.7
|
|
|
19.6
|
Capital leases
|
|
|
23.7
|
|
|
5.7
|
|
|
8.0
|
|
|
7.0
|
|
|
3.0
|
Purchase
obligations(b)
|
|
|
2,770.9
|
|
|
2,324.1
|
|
|
279.8
|
|
|
112.7
|
|
|
54.3
|
|
Total
|
|
$
|
8,046.5
|
|
$
|
3,008.5
|
|
$
|
919.9
|
|
$
|
2,258.7
|
|
$
|
1,859.4
|
|
|
|
|
|
(a)
|
|
Excludes $19.8 million related
to capital leases and $18.9 million of bond premium and
original issue discount.
|
|
(b)
|
|
Subsequent to May 25, 2008, we
entered into sourcing contracts with contractual obligations of
$391.1 million in 2009, $782.2 million in
2010-11, and
$22.8 million in
2012-13.
|
Principal payments due on long-term debt are based on stated
contractual maturities or put rights of certain note holders.
The majority of the purchase obligations represent commitments
for raw material and packaging to be utilized in the normal
course of business and for consumer marketing spending
commitments that support our brands. The fair value of our
interest rate and equity swaps with a payable position to the
counterparty was $220.1 million as of May 25, 2008,
based on fair market values as of that date. Future changes in
market values will impact the amount of cash ultimately paid or
received to settle those instruments in the future. Other
long-term obligations mainly consist of liabilities for
uncertain income tax positions, accrued compensation and
benefits, including the underfunded status of certain of our
defined benefit pension, other postretirement benefit, and
postemployment benefit plans, and miscellaneous liabilities. We
expect to pay $16.6 million of benefits from our unfunded
postemployment benefit plans in fiscal 2009. Further information
on
all of these plans is included in Note 13 to the
Consolidated Financial Statements in Item 8 of this report.
SIGNIFICANT
ACCOUNTING ESTIMATES
For a complete description of our significant accounting
policies, see Note 2 to the Consolidated Financial
Statements in Item 8 of this report. 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
promotional expenditures, intangible assets, stock compensation,
income taxes, and defined benefit pension, other postretirement
and postemployment benefits.
Promotional
Expenditures Our promotional activities are
conducted through our customers and directly or indirectly with
end consumers. These activities include: payments to customers
to perform merchandising activities on our behalf, such as
advertising or in-store displays; discounts to our list prices
to lower retail shelf prices and payments to gain distribution
of new products; coupons, contests, and other incentives; and
media and advertising expenditures. The media and advertising
expenditures are recognized as expense when the advertisement
airs. The cost of payments to customers and other consumer
activities are recognized as the related revenue is recorded,
which generally precedes the actual cash expenditure. The
recognition of these costs requires estimation of customer
participation and performance levels. These estimates are made
based on the forecasted customer sales, the timing and
forecasted costs of promotional activities, and other factors.
Differences between estimated expenses and actual costs are
normally insignificant and are recognized as a change in
management estimate in a subsequent period. Our accrued trade,
coupon, and consumer marketing liabilities were
$446.0 million as of May 25, 2008, and
$410.1 million as of May 27, 2007. Because our total
promotional expenditures (including amounts classified as a
reduction of revenues) are significant, if our estimates are
inaccurate we would have to make adjustments that could have a
material effect on our results of operations.
Valuation of Long-Lived
Assets Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset (or asset group) may not be
recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows from the operation and
disposition of the asset group are less than the carrying amount
of the asset group. Asset groups have identifiable cash flows
independent of other asset groups. Measurement of an impairment
loss would be based on the excess of the carrying amount of the
asset group over its fair value. Fair value is measured using
discounted cash flows or independent appraisals, as appropriate.
Intangible
Assets Goodwill is not subject to
amortization and is tested for impairment annually and whenever
events or changes in circumstances indicate that impairment may
have occurred. Impairment testing is performed for each of our
reporting units. We compare the carrying value of a reporting
unit, including goodwill, to the fair value of the unit.
Carrying value is based on the assets and liabilities associated
with the operations of that reporting unit, which often requires
allocation of shared or corporate items among reporting units.
If the carrying amount of a reporting unit exceeds its fair
value, we revalue all assets and liabilities of the reporting
unit, excluding goodwill, to determine if the fair value of the
net assets is greater than the net assets including goodwill. If
the fair value of the net assets is less than the net assets
including goodwill, impairment has occurred. Our estimates of
fair value are determined based on a discounted cash flow model.
Growth rates for sales and profits are determined using inputs
from our annual long-range planning process. We also make
estimates of discount rates, perpetuity growth assumptions,
market comparables, and other factors.
We evaluate the useful lives of our other intangible assets,
mainly intangible assets associated with the Pillsbury,
Totinos, Progresso, Green Giant, Old El Paso,
Häagen-Dazs and Uncle Tobys brands, to determine
if they are finite or indefinite-lived. Reaching a determination
on useful life requires significant judgments and assumptions
regarding the future effects of obsolescence, demand,
competition, other economic factors (such as the stability of
the industry, known technological advances, legislative action
that results in an uncertain or changing regulatory environment,
and expected changes in distribution channels), the level of
required maintenance expenditures, and the expected lives of
other related groups of assets.
Our indefinite-lived intangible assets, mainly brands, are also
tested for impairment annually and whenever events or changes in
circumstances indicate that their carrying value may not be
recoverable. We performed our fiscal 2008 assessment of our
brand intangibles as of December 1, 2007. Our estimate of
the fair value of the brands was based on a discounted cash flow
model using inputs which included: projected revenues from our
annual long-range plan; assumed royalty rates that could be
payable if we did not own the brands; and a discount rate. All
brand intangibles had fair values in excess of their carrying
values by at least 20 percent, except for the Pillsbury
brand, which we estimated had a fair value 3 percent
higher than its carrying value. This brand comprises nearly
one-half of our total indefinite-lived intangible assets.
If the growth rate for the global revenue from all uses of the
Pillsbury brand decreases 50 basis points from the
current planned growth rate, fair value would be reduced by
approximately $150 million, assuming all other components
of the fair value estimate remain unchanged. If the assumed
royalty rate for all uses of the Pillsbury brand
decreases by 50 basis points, fair value would be reduced
by approximately $130 million, assuming all other
components of the fair value estimate remain unchanged. If the
applicable discount rate increases by 50 basis points, fair
value of the Pillsbury brand would be reduced by
approximately $170 million, assuming all other components
of the fair value estimate remain unchanged. As of May 25,
2008, we reviewed each of the assumptions used in the annual
impairment assessment performed as of December 1, 2007, and
found them to still be appropriate.
As of May 25, 2008, we had $10.6 billion of goodwill
and indefinite-lived intangible assets. While we currently
believe that the fair value of each intangible exceeds its
carrying value and that those intangibles so classified will
contribute indefinitely to our cash flows, materially different
assumptions regarding future performance of our businesses could
result in significant impairment losses and amortization expense.
Stock
Compensation Effective May 29, 2006, we
adopted SFAS 123R, which changed the accounting for
compensation expense associated with stock options, restricted
stock awards, and other forms of equity compensation. We elected
the modified prospective transition method as permitted by
SFAS 123R; accordingly, results from prior periods were not
restated. Under this method, stock-based compensation expense
for fiscal 2007 was $127.1 million, which included
amortization related to the remaining unvested portion of all
equity compensation awards granted prior to May 29, 2006,
based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123), and amortization related to all equity
compensation awards granted on or subsequent to May 29,
2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. The incremental effect on
net earnings in fiscal 2007 of our adoption of SFAS 123R
was $68.8 million of expense ($42.9 million
after-tax). All our stock compensation expense is recorded in
SG&A expense in the Consolidated Statements of Earnings.
Prior to May 29, 2006, we used the intrinsic value method
for measuring the cost of compensation paid in our common stock.
No compensation expense for stock options was recognized in our
Consolidated Statements of Earnings prior to fiscal 2007, as the
exercise price was equal to the market price of our stock at the
date of grant. Expense attributable to other types of
share-based awards was recognized in our results under
SFAS 123. The estimated weighted-average fair values of
stock options granted and the assumptions used for the
Black-Scholes option-pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Estimated fair values of stock options granted
|
|
|
|
$10.55
|
|
|
|
$10.74
|
|
|
|
$8.04
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
5.1
|
%
|
|
|
5.3
|
%
|
|
|
4.3
|
%
|
Expected term
|
|
|
|
8.5 years
|
|
|
|
8.0 years
|
|
|
|
7.0 years
|
|
Expected volatility
|
|
|
|
15.6
|
%
|
|
|
19.7
|
%
|
|
|
20.0
|
%
|
Dividend yield
|
|
|
|
2.7
|
%
|
|
|
2.8
|
%
|
|
|
2.9
|
%
|
|
|
The valuation of stock options is a significant accounting
estimate which requires us to use judgments and assumptions that
are likely to have a material impact on our financial
statements. Annually, we make predictive assumptions regarding
future stock price volatility, employee exercise behavior, 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. For the fiscal 2008 grants, we have excluded
historical volatility for fiscal 2002 and prior, primarily
because volatility driven by our acquisition of The
Pillsbury Company in fiscal 2002 does not reflect what we
believe to be expected future 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. If all
other assumptions are held constant, a one percentage point
increase in our fiscal 2008 volatility assumption would increase
the grant-date fair value of our fiscal 2008 option awards by
4.3 percent.
For fiscal 2007 and all prior periods, our estimate of expected
stock price volatility is based on historical volatility
determined on a daily basis over the expected term of the
options. We considered but did not use implied volatility
because we believed historical volatility provided an
appropriate expectation for our volatility in the future.
Our expected term represents the period of time that options
granted are expected to be outstanding based on historical data
to estimate option exercise and employee termination within the
valuation model. Separate groups of employees have similar
historical exercise behavior and therefore were aggregated into
a single pool for valuation purposes. The weighted-average
expected term for all employee groups is presented in the table
above. An increase in the expected term by 1 year, leaving
all other assumptions constant, would change the grant date fair
value by significantly less than 1 percent. Our valuation
model assumes that dividends and our share price increase in
line with earnings, resulting in a constant dividend yield. The
risk-free interest rate for periods during the expected term of
the options is based on the U.S. Treasury zero-coupon yield
curve in effect at the time of grant.
To the extent that actual outcomes differ from our assumptions,
we are not required to true up grant-date fair value-based
expense to final intrinsic values. However, these differences
can impact the classification of cash tax benefits realized upon
exercise of stock options, as explained in the following two
paragraphs. Furthermore, historical data has a significant
bearing on our forward-looking assumptions. Significant
variances between actual and predicted experience could lead to
prospective revisions in our assumptions, which could then
significantly impact the year-over-year comparability of
stock-based compensation expense.
SFAS 123R also provides that any corporate income tax
benefit realized upon exercise or vesting of an award in excess
of that previously recognized in earnings (referred to as a
windfall tax benefit) is presented in the
Consolidated Statements of Cash Flows as a financing (rather
than an operating) cash flow. For fiscal 2008 and fiscal 2007,
the windfall tax benefits classified as financing cash flow were
$55.7 million and $73.1 million. The actual impact on
future years financing cash flow will depend, in part, on
the volume of employee stock option exercises during a
particular year and the relationship between the exercise-date
market value of the underlying stock and the original grant-date
fair value previously determined for financial reporting
purposes.
Realized windfall tax benefits are credited to additional
paid-in capital within the Consolidated Balance Sheet. Realized
shortfall tax benefits (amounts which are less than that
previously recognized in earnings) are first offset against the
cumulative balance of windfall tax benefits, if any, and then
charged directly to income tax expense, potentially resulting in
volatility in our consolidated effective income tax rate. We
calculated a cumulative amount of windfall tax benefits from
post-1995 fiscal years for the purpose of accounting for future
shortfall tax benefits and currently have sufficient cumulative
windfall tax benefits to absorb projected arising shortfalls,
such that we do not currently expect future earnings to be
affected by this provision. However, as employee stock option
exercise behavior is not within our control, it is possible that
materially different reported results could occur if different
assumptions or conditions were to prevail.
Income
Taxes We adopted the provisions of
FIN 48 as of the beginning of fiscal 2008. Prior to
adoption, our policy was to establish reserves that reflected
the probable outcome of known tax contingencies. The effects of
final resolution, if any, were recognized as changes to the
effective income tax rate in the period of resolution.
FIN 48 requires application of a more likely than not
threshold to the recognition and derecognition of uncertain tax
positions. FIN 48 permits us to recognize the amount of tax
benefit that has a greater than 50 percent likelihood of
being ultimately realized upon settlement. It further requires
that a change in judgment related to the expected ultimate
resolution of uncertain tax positions be recognized in earnings
in the quarter of such change.
Annually we file more than 350 income tax returns in
approximately 100 global taxing jurisdictions. A number of years
may elapse before an uncertain tax position is audited and
finally resolved. While it is often difficult to predict the
final outcome or
the timing of resolution of any particular uncertain tax
position, we believe that our reserves for income taxes reflect
the most likely outcome. We adjust these reserves, as well as
the related interest, in light of changing facts and
circumstances. Settlement of any particular position would
usually require the use of cash.
The number of years with open tax audits varies depending on the
tax jurisdiction. Our major taxing jurisdictions include the
United States (federal and state) and Canada. We are no longer
subject to United States federal examinations by the IRS for
fiscal years before 2002. During fiscal 2008, we received a
favorable District Court decision on an uncertain tax matter
related to the fiscal years prior to 2002 and reduced our
liability for uncertain tax positions by $21.0 million and
related accrued interest by $9.7 million. The IRS has
appealed the District Court decision, and accordingly, its
ultimate resolution is subject to change. During the fiscal
2008, we also concluded various matters for fiscal years
1998-2001
which included a payment of $31.7 million. The IRS recently
concluded field examinations for our 2002 and 2003 fiscal years.
A payment of $24.8 million was made to cover the additional
tax liability plus interest related to all agreed adjustments
for this audit cycle. The IRS also proposed additional
adjustments for the
2002-2003
audit cycle including several adjustments to the tax benefits
associated with the sale of minority interests in our GMC
subsidiary. We believe we have meritorious defenses and intend
to vigorously defend our position. Our potential liability for
this matter is significant and, notwithstanding our reserves
against this potential liability, an unfavorable resolution
could have a material adverse impact on our results of
operations and cash flows from operations. We do not expect the
amount of our tax reserves for these issues to materially change
in the next 12 months. The IRS initiated its audit of our
fiscal 2004 through 2006 tax years during fiscal 2008.
Various tax examinations by United States state taxing
authorities could be conducted for any open tax year, which vary
by jurisdiction, but are generally from 3 to 5 years.
Currently, several state examinations are in progress. The
Canada Revenue Agency is conducting an audit of our income tax
returns in Canada for fiscal years 2003 (which is our earliest
tax year still open for examination) through 2005. We do not
anticipate that any United States state tax or Canadian tax
adjustments will have a significant impact on our financial
position or results of operations.
Defined Benefit Pension,
Other Postretirement, and Postemployment Benefit
Plans We have defined benefit pension plans
covering most domestic, Canadian, and United Kingdom employees.
Benefits for salaried employees are based on length of service
and final average compensation. Benefits for hourly employees
include various monthly amounts for each year of credited
service. Our funding policy is consistent with the requirements
of applicable laws. We made $14.2 million of voluntary
contributions to these plans in fiscal 2008. Our principal
domestic retirement plan covering salaried employees has a
provision that any excess pension assets would vest if the plan
is terminated within five years of a change in control.
We also sponsor plans that provide health care benefits to the
majority of our domestic and Canadian retirees. The salaried
health care benefit plan is contributory, with retiree
contributions based on years of service. We fund related trusts
for certain employees and retirees on an annual basis. We did
not make voluntary contributions to these plans in fiscal 2008.
Under certain circumstances, we also provide accruable benefits
to former or inactive employees in the United States, Canada,
and Mexico, and members of our Board of Directors, including
severance and certain other benefits payable upon death. We
recognize an obligation for any of these benefits that vest or
accumulate with service. Postemployment benefits that do not
vest or accumulate with service (such as severance based solely
on annual pay rather than years of service) are charged to
expense when incurred. Our postemployment benefit plans are
unfunded.
We recognize benefits provided during retirement or following
employment over the plan participants active working life.
Accordingly, we make various assumptions to predict and measure
costs and obligations many years prior to the settlement of our
obligations. Assumptions that require significant management
judgment and have a material impact on the measurement of our
net periodic benefit expense or income and accumulated benefit
obligations include the long-term rates of return on plan
assets, the interest rates used to discount the obligations for
our benefit plans, and the health care cost trend rates.
Expected Rate of Return on Plan Assets Our
expected rate of return on plan assets is determined by our
asset allocation, our historical long-term investment
performance, our estimate of future long-term returns by asset
class (using input from our
actuaries, investment services, and investment managers), and
long-term inflation assumptions. We review this assumption
annually for each plan, however, our annual investment
performance for one particular year does not, by itself,
significantly influence our evaluation.
The investment objective for our defined benefit pension and
other postretirement benefit plans is to secure the benefit
obligations to participants at a reasonable cost to us. Our goal
is to optimize the long-term return on plan assets at a moderate
level of risk. The defined benefit pension and other
postretirement portfolios are broadly diversified across asset
classes. Within asset classes, the portfolios are further
diversified across investment styles and investment
organizations. For the defined benefit pension and other
postretirement benefit plans, the long-term investment policy
allocations are: 30 percent to equities in the United
States; 20 percent to international equities;
10 percent to private equities; 30 percent to fixed
income; and 10 percent to real assets (real estate, energy
and timber). The actual allocations to these asset classes may
vary tactically around the long-term policy allocations based on
relative market valuations.
Our historical investment returns (compound annual growth rates)
for our United States defined benefit pension and other
postretirement plan assets were 4 percent, 15 percent,
10 percent, 11 percent, and 12 percent for the 1,
5, 10, 15, and 20 year periods ended May 25, 2008.
For fiscal 2008, we assumed, on a weighted-average basis for all
defined benefit plans, a rate of return of 9.4 percent. For
fiscal 2007, we assumed, on a weighted-average basis for all
defined benefit plans, a rate of return of 9.4 percent. For
fiscal 2006, we assumed, on a weighted-average basis for all
defined benefit plan assets, a rate of return of
9.6 percent. Our principal defined benefit pension and
other postretirement plans in the United States have an expected
return on plan assets of 9.6 percent. During fiscal 2007,
we lowered the expected rate of return on one of our other
postretirement plans in the United States based on costs
associated with insurance contracts owned by that plan.
Lowering the expected long-term rate of return on assets by
50 basis points would increase our net pension and
postretirement expense by $21 million for fiscal 2009. A
50 basis point shortfall between the assumed and actual
rate of return on plan assets for fiscal 2009 would result in a
similar amount of arising asset-experience loss. Any arising
asset-experience loss is recognized on a market-related
valuation basis, which reduces year-to-year volatility. This
market-related valuation recognizes investment gains or losses
over a five-year period from the year in which they occur.
Investment gains or losses for this purpose are the difference
between the expected return calculated using the market-related
value of assets and the actual return based on the
market-related value of assets. Since the market-related value
of assets recognizes gains or losses over a five-year period,
the future value of assets will be impacted as previously
deferred gains or losses are recorded. Our outside actuaries
perform these calculations as part of our determination of
annual expense or income.
Discount Rates Our discount rate assumptions
are determined annually as of the last day of our fiscal year
for all of our defined benefit pension, other postretirement,
and postemployment benefit plan obligations. Those same discount
rates also are used to determine defined benefit pension, other
postretirement, and postemployment benefit plan income and
expense for the following fiscal year. We work with our
actuaries to determine the timing and amount of expected future
cash outflows to plan participants and, using the top quartile
of AA-rated corporate bond yields, to develop a forward interest
rate curve, including a margin to that index based on our credit
risk. This forward interest rate curve is applied to our
expected future cash outflows to determine our discount rate
assumptions.
Our weighted-average discount rates were as follows:
Weighted-Average
Discount Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Other
|
|
|
|
|
|
|
Benefit
|
|
|
Postretirement
|
|
|
Postemployment
|
|
|
|
Pension
|
|
|
Benefit
|
|
|
Benefit
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Obligation as of May 25, 2008, and fiscal 2009 expense
|
|
|
6.88
|
%
|
|
|
6.90
|
%
|
|
|
6.64
|
%
|
Obligation as of May 27, 2007, and fiscal 2008 expense
|
|
|
6.18
|
%
|
|
|
6.15
|
%
|
|
|
6.05
|
%
|
Fiscal 2007 expense
|
|
|
6.45
|
%
|
|
|
6.50
|
%
|
|
|
6.44
|
%
|
|
|
Lowering the discount rates by 50 basis points would
increase our net defined benefit pension, other postretirement,
and postemployment benefit plan expense for fiscal 2009 by
approximately $18 million. All obligation-related
experience gains and losses are amortized using a straight-line
method over the average remaining service period of active plan
participants.
Health Care Cost Trend Rates We review our
health care trend rates annually. Our review is based on data we
collect about our health care claims experience and information
provided by our actuaries. This information includes recent plan
experience, plan design, overall industry experience and
projections, and assumptions used by other similar
organizations. Our initial health care cost trend rate is
adjusted as necessary to remain consistent with this review,
recent experiences, and short-term expectations. Our initial
health care cost trend rate assumption is 10.25 percent for
retirees age 65 and over and 9.25 percent for retirees
under age 65. These rates are graded down annually until
the ultimate trend rate of 5.2 percent is reached in 2016
for all retirees. The trend rates are applicable for
calculations only if the retirees benefits increase as a
result of health care inflation. The ultimate trend rate is
adjusted annually, as necessary, to approximate the current
economic view on the rate of long-term inflation plus an
appropriate health care cost premium. Assumed trend rates for
health care costs have an important effect on the amounts
reported for the other postretirement benefit plans.
A one percentage point change in the health care cost trend rate
would have the following effects:
|
|
|
|
|
|
|
|
|
|
One
|
|
One
|
|
|
|
Percentage
|
|
Percentage
|
|
|
|
Point
|
|
Point
|
|
In Millions
|
|
Increase
|
|
Decrease
|
|
|
Effect on the aggregate of the service and interest cost
components in fiscal 2009
|
|
$
|
7.6
|
|
$
|
(6.6
|
)
|
Effect on the other postretirement accumulated benefit
obligation as of May 25, 2008
|
|
|
84.2
|
|
|
(74.3
|
)
|
|
|
Any arising health care claims cost-related experience gain or
loss is recognized in the calculation of expected future claims.
Once recognized, experience gains and losses are amortized using
a straight-line method over 15 years, resulting in at least
the minimum amortization required being recorded.
Financial Statement Impact In fiscal 2008, we
recorded net defined benefit pension, other postretirement, and
postemployment benefit plan expense of $18.9 million
compared to $36.2 million in fiscal 2007 and
$29.7 million in fiscal 2006. As of May 25, 2008, we
had cumulative unrecognized actuarial net losses of
$276.8 million on our defined benefit pension plans,
$115.6 million on our other postretirement benefit plans,
and $8.0 million on our postemployment benefit plans,
mainly as the result of decreases in our discount rate
assumptions. These unrecognized actuarial net losses will result
in decreases in our future pension income and increases in
postretirement expense since they currently exceed the corridors
defined by GAAP.
We use the Retirement Plans (RP) 2000 Mortality Table projected
forward to our plans measurement dates for calculating the
year end defined benefit pension, other postretirement, and
postemployment benefit obligations and annual expense.
Actual future net defined benefit pension, other postretirement,
and postemployment benefit plan income or expense will depend on
investment performance, changes in future discount rates,
changes in health care trend rates, and various other factors
related to the populations participating in these plans.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2008, the FASB finalized Staff Position
No. 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
This position amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets.
FSP 142-3
applies to intangible assets that are acquired individually or
with a group of other assets and both intangible assets acquired
in business combinations and asset acquisitions. This position
is effective for fiscal years beginning after December 15,
2008, which for us is the first quarter of fiscal 2010. We are
evaluating the impact of
FSP 142-3
on our results of operations and financial condition.
In March 2008, the FASB approved the issuance of Emerging Issues
Task Force Issue
No. 07-5,
Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entitys Own Stock
(EITF 07-5).
EITF 07-5
defines when adjustment features within contracts are considered
to be equity-indexed and will be effective for us in the first
quarter of fiscal 2010. We are evaluating the impact of
EITF 07-5
on our results of operations and financial condition.
In December 2007, the FASB approved the issuance of Statement of
Financial Accounting Standards (SFAS) No. 141 (revised
2007), Business Combinations (SFAS 141R).
SFAS 141R establishes principles and requirements for how
the acquirer in a business combination recognizes and measures
in its financial statements the identifiable assets acquired,
the liabilities assumed, and any controlling interest;
recognizes and measures the goodwill acquired in the business
combination or a gain from
a bargain purchase; and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
SFAS 141R applies to business combinations for which the
acquisition date is on or after December 15, 2008.
SFAS 141R also changes the accounting for
acquisition-related tax contingencies, requiring all such
changes in these contingency reserves to be recorded in earnings
after the effective date. We have significant unrecognized tax
positions related to our acquisition of Pillsbury. Adjustments
to these liabilities after the adoption of SFAS 141R could
be material to our net earnings.
In December 2007, the FASB approved the issuance of
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment to
ARB No. 51 (SFAS 160). SFAS 160 establishes
accounting and reporting standards that require the ownership
interest in subsidiaries held by parties other than the parent
be clearly identified and presented in the Consolidated Balance
Sheets within equity, but separate from the parents
equity; the amount of consolidated net income attributable to
the parent and the noncontrolling interest be clearly identified
and presented on the face of the Consolidated Statement of
Earnings; and changes in a parents ownership interest
while the parent retains its controlling financial interest in
its subsidiary be accounted for consistently. This statement is
effective for fiscal years beginning on or after
December 15, 2008, which for us is the first quarter of
fiscal 2010. We are evaluating the impact of SFAS 160 on
our results of operations and financial condition.
In June 2007, the FASB approved the issuance of Emerging Issues
Task Force Issue
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards
(EITF 06-11).
EITF 06-11
requires that tax benefits from dividends paid on unvested
restricted shares be charged directly to stockholders
equity instead of benefiting income tax expense.
EITF 06-11,
which will be effective for us in the first quarter of fiscal
2009, is expected to increase our effective income tax rate by
20 basis points, or from 34.4 percent to
34.6 percent based on our actual 2008 effective tax rate.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS No. 115 (SFAS 159). This statement
provides companies with an option to measure, at specified
election dates, many financial instruments and certain other
items at fair value that are not currently measured at fair
value. A company that adopts SFAS 159 will report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. This statement also establishes presentation and
disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes
for similar types of assets and liabilities. This statement is
effective for fiscal years beginning after November 15,
2007, which for us is the first quarter of fiscal 2009. We do
not believe that the adoption of SFAS 159 will have a
material impact on our results of operations or financial
condition.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). This
statement provides a single definition of fair value, a
framework for measuring fair value, and expanded disclosures
concerning fair value. Previously, different definitions of fair
value were contained in various accounting pronouncements
creating inconsistencies in measurement and disclosures.
SFAS 157 applies under those previously issued
pronouncements that prescribe fair value as the relevant measure
of value, except SFAS 123R and related interpretations and
pronouncements that require or permit measurement similar to
fair value but are not intended to measure fair value. This
pronouncement is effective for fiscal years beginning after
November 15, 2007, which for us is the first quarter of
fiscal 2009. However, SFAS 157 as it relates to fair value
measurement requirements for non-financial assets and
liabilities that are not remeasured at fair value on a recurring
basis is effective for fiscal years beginning after
November 15, 2008, which for us is the first quarter of
fiscal 2010. We are evaluating the impact of SFAS 157 on
our results of operations and financial condition.
NON-GAAP
MEASURES
We have included in this report measures of financial
performance that are not defined by GAAP. 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 our management or the Board of Directors believes the
non-GAAP measure provides useful information to investors, and
any additional 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.
Total Segment Operating
Profit This non-GAAP measure is used in
reporting to our executive management and as a component of the
Board of Directors measurement of our performance for
incentive compensation purposes. Management and the Board of
Directors believe that this measure provides useful information
to investors because it is the profitability measure we use to
evaluate segment performance. A reconciliation of this measure
to operating profit, the relevant GAAP measure, is included in
Note 16 to the Consolidated Financial Statements in
Item 8 of this report.
Return on Average Total
Capital This ratio is not defined by GAAP,
and is used in internal management reporting and as a component
of the Board of Directors rating of our performance for
incentive compensation purposes. Management and the Board of
Directors believe that this measure provides useful information
to investors because it is important for assessing the
utilization of capital.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net earnings
|
|
|
$
|
1,294.7
|
|
|
$
|
1,143.9
|
|
|
$
|
1,090.3
|
|
|
$
|
1,240.0
|
|
|
$
|
1,055.2
|
|
|
|
|
|
Interest, net, after-tax
|
|
|
|
276.4
|
|
|
|
280.1
|
|
|
|
261.7
|
|
|
|
288.3
|
|
|
|
330.2
|
|
|
|
|
|
|
|
|
|
|
Earnings before interest, after-tax
|
|
|
$
|
1,571.1
|
|
|
$
|
1,424.0
|
|
|
$
|
1,352.0
|
|
|
$
|
1,528.3
|
|
|
$
|
1,385.4
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
$
|
442.0
|
|
|
$
|
1,734.0
|
|
|
$
|
2,131.5
|
|
|
$
|
1,638.7
|
|
|
$
|
233.5
|
|
|
$
|
105.4
|
|
Notes payable
|
|
|
|
2,208.8
|
|
|
|
1,254.4
|
|
|
|
1,503.2
|
|
|
|
299.2
|
|
|
|
582.6
|
|
|
|
1,235.8
|
|
Long-term debt
|
|
|
|
4,348.7
|
|
|
|
3,217.7
|
|
|
|
2,414.7
|
|
|
|
4,255.2
|
|
|
|
7,409.9
|
|
|
|
7,515.9
|
|
|
Total debt
|
|
|
|
6,999.5
|
|
|
|
6,206.1
|
|
|
|
6,049.4
|
|
|
|
6,193.1
|
|
|
|
8,226.0
|
|
|
|
8,857.1
|
|
Minority interests
|
|
|
|
242.3
|
|
|
|
1,138.8
|
|
|
|
1,136.2
|
|
|
|
1,133.2
|
|
|
|
299.0
|
|
|
|
299.9
|
|
Stockholders equity
|
|
|
|
6,215.8
|
|
|
|
5,319.1
|
|
|
|
5,772.3
|
|
|
|
5,676.4
|
|
|
|
5,247.6
|
|
|
|
4,175.3
|
|
|
Total capital
|
|
|
|
13,457.6
|
|
|
|
12,664.0
|
|
|
|
12,957.9
|
|
|
|
13,002.7
|
|
|
|
13,772.6
|
|
|
|
13,332.3
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
176.7
|
|
|
|
(119.7
|
)
|
|
|
125.4
|
|
|
|
8.1
|
|
|
|
(144.2
|
)
|
|
|
(342.3
|
)
|
|
Adjusted total capital
|
|
|
$
|
13,280.9
|
|
|
$
|
12,783.7
|
|
|
$
|
12,832.5
|
|
|
$
|
12,994.6
|
|
|
$
|
13,916.8
|
|
|
$
|
13,674.6
|
|
|
Adjusted average total capital
|
|
|
$
|
13,032.3
|
|
|
$
|
12,808.1
|
|
|
$
|
12,913.6
|
|
|
$
|
13,455.7
|
|
|
$
|
13,795.7
|
|
|
|
|
|
|
|
|
|
|
Return on average total capital
|
|
|
|
12.1
|
%
|
|
|
11.1
|
%
|
|
|
10.5
|
%
|
|
|
11.4
|
%
|
|
|
10.0
|
%
|
|
|
|
|
|
|
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 SEC 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: 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, or tax
rates; 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
laws and regulations, including labeling and advertising
regulations; 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; disruptions or inefficiencies in the
supply chain; volatility in the market value of derivatives used
to hedge price risk for certain commodities; benefit plan
expenses due to changes in plan asset values and discount rates
used to determine plan liabilities; failure of our information
technology systems; resolution of uncertain income tax matters;
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 this report, 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 7A
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risk stemming from changes in interest
rates, foreign exchange rates, commodity prices, and equity
prices. Changes in these factors could cause fluctuations in our
earnings and cash flows. In the normal course of business, we
actively manage our exposure to these market risks by entering
into various hedging transactions, authorized under established
policies that place clear controls on these activities. The
counterparties in these transactions are generally highly rated
institutions. We establish credit limits for each counterparty.
Our hedging transactions include but are not limited to a
variety of derivative financial instruments.
INTEREST
RATE RISK
We are exposed to interest rate volatility with regard to future
issuances of fixed-rate debt, and existing and future issuances
of floating-rate debt. Primary exposures include
U.S. Treasury rates, LIBOR, and commercial paper rates in
the United States and Europe. We use interest rate swaps and
forward-starting interest rate swaps to hedge our exposure to
interest rate changes, to reduce the volatility of our financing
costs, and to achieve a desired proportion of fixed- versus
floating-rate debt, based on current and projected market
conditions. Generally under these swaps, we agree with a
counterparty to exchange the difference between fixed-rate and
floating-rate interest amounts based on an agreed notional
principal amount. As of May 25, 2008, we had
$4.1 billion of aggregate notional principal amount
outstanding, with a net notional amount of $425.4 million
that converts floating-rate notes to fixed-rates. This includes
notional amounts of offsetting swaps that neutralize our
exposure to interest rates on other interest rate swaps.
FOREIGN
EXCHANGE RISK
Foreign currency fluctuations affect our net investments in
foreign subsidiaries and foreign currency cash flows related to
third party purchases, intercompany loans, and product
shipments. We are also exposed to the translation of foreign
currency earnings to the U.S. dollar. Our principal
exposures are to the Australian dollar, British pound sterling,
Canadian dollar, Chinese renminbi, euro, Japanese yen, and
Mexican peso. We mainly use foreign currency forward contracts
to selectively hedge our foreign currency cash flow exposures.
We generally do not hedge more than 12 months forward and
generally do not hedge intercompany transactions. We also have
many net investments in foreign subsidiaries that are
denominated in euros. We hedge a portion of these net
investments by issuing euro-denominated commercial paper. As of
May 25, 2008, we had issued $472.9 million of
euro-denominated commercial paper and foreign exchange forward
contracts that we have designated as a net investment hedge and
thus deferred net foreign currency transaction losses of
$69.6 million to accumulated other comprehensive income
(loss).
COMMODITY
PRICE RISK
Many commodities we use in the production and distribution of
our products are exposed to market price risks. We utilize
derivatives to hedge price risk for our principal ingredient and
energy costs, including grains (oats, wheat, and corn), oils
(principally soybean), non-fat dry milk, natural gas, and diesel
fuel. 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. As of May 25, 2008, the
net notional value of commodity derivatives was
$784.8 million, of which $524.8 million relates to
agricultural positions and $260.0 million relates to energy
positions. These hedges relate to inputs that generally will be
utilized within the next 12 months.
EQUITY
INSTRUMENTS
Equity price movements affect our compensation expense as
certain investments owned by our employees related to our
deferred compensation plan are revalued. We use equity swaps to
manage this market risk.
VALUE
AT RISK
The estimates in the table below are intended to measure the
maximum potential fair value we could lose in one day from
adverse changes in market interest rates, foreign exchange
rates, commodity prices, and equity prices under normal market
conditions. A Monte Carlo
value-at-risk
(VAR) methodology was used to quantify the market risk for our
exposures. The models assumed normal market conditions and used
a 95 percent confidence level.
The VAR calculation used historical interest rates, foreign
exchange rates, and commodity and equity prices from the past
year to estimate the potential volatility and correlation of
these rates in the future. The market data were drawn from the
RiskMetricstm
data set. The calculations are not intended to represent actual
losses in fair value that we expect to incur. Further, since the
hedging instrument (the derivative) inversely correlates with
the underlying exposure, we would expect that any loss or gain
in the fair value of our derivatives would be generally offset
by an increase or decrease in the fair value of the underlying
exposures. The positions included in the calculations were:
debt; investments; interest rate swaps; foreign exchange
forwards; commodity swaps, futures and options; and equity
instruments. The calculations do not include the underlying
foreign exchange and commodities-related positions that are
hedged by these market-risk-sensitive instruments.
The table below presents the estimated maximum potential VAR
arising from a
one-day loss
in fair value for our interest rate, foreign currency,
commodity, and equity market-risk-sensitive instruments
outstanding as of May 25, 2008, and May 27, 2007, and
the average fair value impact during the year ended May 25,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Impact
|
|
|
|
|
|
Average
|
|
|
|
|
|
May 25,
|
|
During
|
|
May 27,
|
In Millions
|
|
|
2008
|
|
Fiscal 2008
|
|
2007
|
|
Interest rate instruments
|
|
|
$
|
18.9
|
|
$
|
14.0
|
|
$
|
10.1
|
Foreign currency instruments
|
|
|
|
5.0
|
|
|
4.1
|
|
|
3.5
|
Commodity instruments
|
|
|
|
6.3
|
|
|
4.7
|
|
|
4.0
|
Equity instruments
|
|
|
|
1.2
|
|
|
1.0
|
|
|
0.9
|
|
|
|
|
ITEM 8
|
Financial
Statements and Supplementary Data
|
REPORT
OF MANAGEMENT RESPONSIBILITIES
The management of General Mills, Inc. is responsible for the
fairness and accuracy of the consolidated financial statements.
The statements have been prepared in accordance with accounting
principles that are generally accepted in the United States,
using managements best estimates and judgments where
appropriate. The financial information throughout this Annual
Report on
Form 10-K
is consistent with our consolidated financial statements.
Management has established a system of internal controls that
provides reasonable assurance that assets are adequately
safeguarded and transactions are recorded accurately in all
material respects, in accordance with managements
authorization. We maintain a strong audit program that
independently evaluates the adequacy and effectiveness of
internal controls. Our internal controls provide for appropriate
separation of duties and responsibilities, and there are
documented policies regarding use of our assets and proper
financial reporting. These formally stated and regularly
communicated policies demand highly ethical conduct from all
employees.
The Audit Committee of the Board of Directors meets regularly
with management, internal auditors, and our independent auditors
to review internal control, auditing, and financial reporting
matters. The independent auditors, internal auditors, and
employees have full and free access to the Audit Committee at
any time.
The Audit Committee reviewed and approved the Companys
annual financial statements. The Audit Committee recommended,
and the Board of Directors approved, that the consolidated
financial statements be included in the Annual Report. The Audit
Committee also appointed KPMG LLP to serve as the Companys
independent registered public accounting firm for fiscal 2009,
subject to ratification by the stockholders at the annual
meeting.
|
|
|
|
|
|
K. J. Powell
Chairman of the Board
and Chief Executive Officer
|
|
D. L. Mulligan
Executive Vice President
and Chief Financial Officer
|
July 10, 2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
General Mills, Inc.:
We have audited the accompanying consolidated balance sheets of
General Mills, Inc. and subsidiaries as of May 25, 2008,
and May 27, 2007, and the related consolidated statements
of earnings, stockholders equity and comprehensive income,
and cash flows for each of the fiscal years in the three-year
period ended May 25, 2008. In connection with our audits of
the consolidated financial statements, we also have audited the
accompanying financial statement schedule. We also have audited
General Mills Inc.s internal control over financial
reporting as of May 25, 2008, based on criteria established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). General Mills, Inc.s
management is responsible for these consolidated financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on these consolidated financial statements
and financial statement schedule and an opinion on the
Companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of General Mills, Inc. and subsidiaries as of
May 25, 2008, and May 27, 2007, and the results of
their operations and their cash flows for each of the fiscal
years in the three-year period ended May 25, 2008, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the accompanying
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein. Also in our opinion, General Mills, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of May 25, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In fiscal 2008, as disclosed in Note 14 to the consolidated
financial statements, the Company adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109 on May 28, 2007. In fiscal 2007, as
disclosed in Notes 1 and 2 to the consolidated financial
statements, the Company changed its classification of shipping
costs, changed its annual goodwill impairment assessment date to
December 1, and adopted SFAS No. 123 (Revised),
Share-Based Payment, and SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Benefit Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R).
Minneapolis, Minnesota
July 10, 2008
Consolidated
Statements of Earnings
GENERAL MILLS, INC.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
In Millions, Except per Share Data
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
$
|
13,652.1
|
|
|
$
|
12,441.5
|
|
|
$
|
11,711.3
|
|
Cost of sales
|
|
|
|
8,778.3
|
|
|
|
7,955.1
|
|
|
|
7,544.8
|
|
Selling, general, and administrative expenses
|
|
|
|
2,625.0
|
|
|
|
2,389.3
|
|
|
|
2,177.7
|
|
Restructuring, impairment, and other exit costs
|
|
|
|
21.0
|
|
|
|
39.3
|
|
|
|
29.8
|
|
|
Operating profit
|
|
|
|
2,227.8
|
|
|
|
2,057.8
|
|
|
|
1,959.0
|
|
Interest, net
|
|
|
|
421.7
|
|
|
|
426.5
|
|
|
|
399.6
|
|
|
Earnings before income taxes and after-tax earnings from joint
ventures
|
|
|
|
1,806.1
|
|
|
|
1,631.3
|
|
|
|
1,559.4
|
|
Income taxes
|
|
|
|
622.2
|
|
|
|
560.1
|
|
|
|
538.3
|
|
After-tax earnings from joint ventures
|
|
|
|
110.8
|
|
|
|
72.7
|
|
|
|
69.2
|
|
|
Net earnings
|
|
|
$
|
1,294.7
|
|
|
$
|
1,143.9
|
|
|
$
|
1,090.3
|
|
|
|
Earnings per share basic
|
|
|
$
|
3.86
|
|
|
$
|
3.30
|
|
|
$
|
3.05
|
|
|
|
Earnings per share diluted
|
|
|
$
|
3.71
|
|
|
$
|
3.18
|
|
|
$
|
2.90
|
|
|
|
Dividends per share
|
|
|
$
|
1.57
|
|
|
$
|
1.44
|
|
|
$
|
1.34
|
|
|
|
See accompanying notes to
consolidated financial statements.
Consolidated
Balance Sheets
GENERAL MILLS, INC.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
May 25,
|
|
|
May 27,
|
|
In Millions
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
661.0
|
|
|
$
|
417.1
|
|
Receivables
|
|
|
1,081.6
|
|
|
|
952.9
|
|
Inventories
|
|
|
1,366.8
|
|
|
|
1,173.4
|
|
Prepaid expenses and other current assets
|
|
|
510.6
|
|
|
|
443.1
|
|
Deferred income taxes
|
|
|
|
|
|
|
67.2
|
|
|
Total current assets
|
|
|
3,620.0
|
|
|
|
3,053.7
|
|
Land, buildings, and equipment
|
|
|
3,108.1
|
|
|
|
3,013.9
|
|
Goodwill
|
|
|
6,786.1
|
|
|
|
6,835.4
|
|
Other intangible assets
|
|
|
3,777.2
|
|
|
|
3,694.0
|
|
Other assets
|
|
|
1,750.2
|
|
|
|
1,586.7
|
|
|
Total assets
|
|
$
|
19,041.6
|
|
|
$
|
18,183.7
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
937.3
|
|
|
$
|
777.9
|
|
Current portion of long-term debt
|
|
|
442.0
|
|
|
|
1,734.0
|
|
Notes payable
|
|
|
2,208.8
|
|
|
|
1,254.4
|
|
Other current liabilities
|
|
|
1,239.8
|
|
|
|
2,078.8
|
|
Deferred income taxes
|
|
|
28.4
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,856.3
|
|
|
|
5,845.1
|
|
Long-term debt
|
|
|
4,348.7
|
|
|
|
3,217.7
|
|
Deferred income taxes
|
|
|
1,454.6
|
|
|
|
1,433.1
|
|
Other liabilities
|
|
|
1,923.9
|
|
|
|
1,229.9
|
|
|
Total liabilities
|
|
|
12,583.5
|
|
|
|
11,725.8
|
|
|
Minority interests
|
|
|
242.3
|
|
|
|
1,138.8
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, 377.3 and 502.3 shares issued, $0.10 par
value
|
|
|
37.7
|
|
|
|
50.2
|
|
Additional paid-in capital
|
|
|
1,149.1
|
|
|
|
5,841.3
|
|
Retained earnings
|
|
|
6,510.7
|
|
|
|
5,745.3
|
|
Common stock in treasury, at cost, shares of 39.8 and 161.7
|
|
|
(1,658.4
|
)
|
|
|
(6,198.0
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
176.7
|
|
|
|
(119.7
|
)
|
|
Total stockholders equity
|
|
|
6,215.8
|
|
|
|
5,319.1
|
|
|
Total liabilities and equity
|
|
$
|
19,041.6
|
|
|
$
|
18,183.7
|
|
|
|
See accompanying notes to
consolidated financial statements.
Consolidated
Statements of Stockholders Equity and Comprehensive Income
GENERAL MILLS, INC.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$.10 Par Value Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(One Billion Shares Authorized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Paid-In
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
|
|
In Millions, Except per Share Data
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Retained Earnings
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance as of May 29, 2005
|
|
|
502.3
|
|
|
$
|
50.2
|
|
|
$
|
5,690.3
|
|
|
|
(132.6
|
)
|
|
$
|
(4,459.9
|
)
|
|
$
|
4,501.2
|
|
|
$
|
(113.5
|
)
|
|
$
|
8.1
|
|
|
$
|
5,676.4
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,090.3
|
|
|
|
|
|
|
|
|
|
|
|
1,090.3
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change on hedge derivatives and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.4
|
|
|
|
20.4
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72.9
|
|
|
|
72.9
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.0
|
|
|
|
24.0
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117.3
|
|
|
|
117.3
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207.6
|
|
|
Cash dividends declared ($1.34 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(484.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(484.9
|
)
|
Stock compensation plans (includes income tax benefits of $40.9)
|
|
|
|
|
|
|
|
|
|
|
46.3
|
|
|
|
5.5
|
|
|
|
189.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235.6
|
|
Shares purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.8
|
)
|
|
|
(892.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(892.4
|
)
|
Unearned compensation related to restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.0
|
)
|
|
|
|
|
|
|
(17.0
|
)
|
Earned compensation and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47.0
|
|
|
|
|
|
|
|
47.0
|
|
|
Balance as of May 28, 2006
|
|
|
502.3
|
|
|
|
50.2
|
|
|
|
5,736.6
|
|
|
|
(145.9
|
)
|
|
|
(5,163.0
|
)
|
|
|
5,106.6
|
|
|
|
(83.5
|
)
|
|
|
125.4
|
|
|
|
5,772.3
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,143.9
|
|
|
|
|
|
|
|
|
|
|
|
1,143.9
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change on hedge derivatives and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.3
|
|
|
|
22.3
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193.8
|
|
|
|
193.8
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.8
|
)
|
|
|
(20.8
|
)
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195.3
|
|
|
|
195.3
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,339.2
|
|
|
Adoption of SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
(83.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83.5
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(440.4
|
)
|
|
|
(440.4
|
)
|
Cash dividends declared ($1.44 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(505.2
|
)
|
Stock compensation plans (includes income tax benefits of $73.1)
|
|
|
|
|
|
|
|
|
|
|
164.6
|
|
|
|
9.2
|
|
|
|
339.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504.0
|
|
Shares purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.3
|
)
|
|
|
(1,385.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,385.1
|
)
|
Unearned compensation related to restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
(95.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95.0
|
)
|
Issuance of shares to settle conversion of zero coupon
debentures, net of tax
|
|
|
|
|
|
|
|
|
|
|
(10.7
|
)
|
|
|
0.3
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned compensation and other
|
|
|
|
|
|
|
|
|
|
|
129.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129.3
|
|
|
Balance as of May 27, 2007
|
|
|
502.3
|
|
|
|
50.2
|
|
|
|
5,841.3
|
|
|
|
(161.7
|
)
|
|
|
(6,198.0
|
)
|
|
|
5,745.3
|
|
|
|
|
|
|
|
(119.7
|
)
|
|
|
5,319.1
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,294.7
|
|
|
|
|
|
|
|
|
|
|
|
1,294.7
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change on hedge derivatives and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
(1.8
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246.3
|
|
|
|
246.3
|
|
Amortization of losses and prior service costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5
|
|
|
|
12.5
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.4
|
|
|
|
39.4
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296.4
|
|
|
|
296.4
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591.1
|
|
|
Cash dividends declared ($1.57 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(529.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(529.7
|
)
|
Stock compensation plans (includes income tax benefits of $55.7)
|
|
|
|
|
|
|
|
|
|
|
121.0
|
|
|
|
6.5
|
|
|
|
261.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382.6
|
|
Shares purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23.9
|
)
|
|
|
(1,384.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,384.6
|
)
|
Retirement of treasury shares
|
|
|
(125.0
|
)
|
|
|
(12.5
|
)
|
|
|
(5,068.3
|
)
|
|
|
125.0
|
|
|
|
5,080.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under forward purchase contract
|
|
|
|
|
|
|
|
|
|
|
168.2
|
|
|
|
14.3
|
|
|
|
581.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750.0
|
|
Unearned compensation related to restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
(104.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104.1
|
)
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
57.8
|
|
|
|
|
|
|
|
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
66.2
|
|
Capital appreciation paid to holders of
Series B-1
limited membership interests in General Mills Cereals, LLC (GMC)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(8.0
|
)
|
Earned compensation
|
|
|
|
|
|
|
|
|
|
|
133.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133.2
|
|
|
Balance as of May 25, 2008
|
|
|
377.3
|
|
|
$
|
37.7
|
|
|
$
|
1,149.1
|
|
|
|
(39.8
|
)
|
|
$
|
(1,658.4
|
)
|
|
$
|
6,510.7
|
|
|
$
|
|
|
|
$
|
176.7
|
|
|
$
|
6,215.8
|
|
|
|
See accompanying notes to
consolidated financial statements.
Consolidated
Statements of Cash Flows
GENERAL MILLS, INC.
AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
$
|
1,294.7
|
|
|
$
|
1,143.9
|
|
|
$
|
1,090.3
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
459.2
|
|
|
|
417.8
|
|
|
|
423.9
|
|
After-tax earnings from joint ventures
|
|
|
|
(110.8
|
)
|
|
|
(72.7
|
)
|
|
|
(69.2
|
)
|
Stock-based compensation
|
|
|
|
133.2
|
|
|
|
127.1
|
|
|
|
44.6
|
|
Deferred income taxes
|
|
|
|
98.1
|
|
|
|
26.0
|
|
|
|
25.9
|
|
Distributions of earnings from joint ventures
|
|
|
|
108.7
|
|
|
|
45.2
|
|
|
|
77.4
|
|
Tax benefit on exercised options
|
|
|
|
(55.7
|
)
|
|
|
(73.1
|
)
|
|
|
40.9
|
|
Pension, other postretirement, and postemployment benefit costs
|
|
|
|
(24.8
|
)
|
|
|
(53.6
|
)
|
|
|
(74.2
|
)
|
Restructuring, impairment, and other exit costs (income)
|
|
|
|
(1.7
|
)
|
|
|
39.1
|
|
|
|
29.8
|
|
Changes in current assets and liabilities
|
|
|
|
(126.7
|
)
|
|
|
149.1
|
|
|
|
183.9
|
|
Other, net
|
|
|
|
(44.3
|
)
|
|
|
2.4
|
|
|
|
70.2
|
|
|
Net cash provided by operating activities
|
|
|
|
1,729.9
|
|
|
|
1,751.2
|
|
|
|
1,843.5
|
|
|
Cash Flows Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of land, buildings, and equipment
|
|
|
|
(522.0
|
)
|
|
|
(460.2
|
)
|
|
|
(360.0
|
)
|
Acquisitions
|
|
|
|
0.6
|
|
|
|
(83.4
|
)
|
|
|
(26.5
|
)
|
Investments in affiliates, net
|
|
|
|
64.6
|
|
|
|
(100.5
|
)
|
|
|
0.3
|
|
Proceeds from disposal of land, buildings, and equipment
|
|
|
|
25.9
|
|
|
|
13.8
|
|
|
|
11.3
|
|
Proceeds from disposal of product lines
|
|
|
|
|
|
|
|
13.5
|
|
|
|
|
|
Other, net
|
|
|
|
(11.5
|
)
|
|
|
19.7
|
|
|
|
4.9
|
|
|
Net cash used by investing activities
|
|
|
|
(442.4
|
)
|
|
|
(597.1
|
)
|
|
|
(370.0
|
)
|
|
Cash Flows Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in notes payable
|
|
|
|
946.6
|
|
|
|
(280.4
|
)
|
|
|
1,197.4
|
|
Issuance of long-term debt
|
|
|
|
1,450.0
|
|
|
|
2,650.0
|
|
|
|
|
|
Payment of long-term debt
|
|
|
|
(1,623.4
|
)
|
|
|
(2,323.2
|
)
|
|
|
(1,386.0
|
)
|
Settlement of Lehman Brothers forward purchase contract
|
|
|
|
750.0
|
|
|
|
|
|
|
|
|
|
Repurchase of
Series B-1
limited membership interests in GMC
|
|
|
|
(843.0
|
)
|
|
|
|
|
|
|
|
|
Repurchase of General Mills Capital, Inc. preferred stock
|
|
|
|
(150.0
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of Class A limited membership interests
in GMC
|
|
|
|
92.3
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
191.4
|
|
|
|
317.4
|
|
|
|
157.1
|
|
Tax benefit on exercised options
|
|
|
|
55.7
|
|
|
|
73.1
|
|
|
|
|
|
Purchases of common stock for treasury
|
|
|
|
(1,432.4
|
)
|
|
|
(1,320.7
|
)
|
|
|
(884.8
|
)
|
Dividends paid
|
|
|
|
(529.7
|
)
|
|
|
(505.2
|
)
|
|
|
(484.9
|
)
|
Other, net
|
|
|
|
(0.5
|
)
|
|
|
(9.1
|
)
|
|
|
(3.1
|
)
|
|
Net cash used by financing activities
|
|
|
|
(1,093.0
|
)
|
|
|
(1,398.1
|
)
|
|
|
(1,404.3
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
49.4
|
|
|
|
13.7
|
|
|
|
4.9
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
243.9
|
|
|
|
(230.3
|
)
|
|
|
74.1
|
|
Cash and cash equivalents beginning of year
|
|
|
|
417.1
|
|
|
|
647.4
|
|
|
|
573.3
|
|
|
Cash and cash equivalents end of year
|
|
|
$
|
661.0
|
|
|
$
|
417.1
|
|
|
$
|
647.4
|
|
|
|
Cash Flow from Changes in Current Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
$
|
(94.1
|
)
|
|
$
|
(24.2
|
)
|
|
$
|
8.9
|
|
Inventories
|
|
|
|
(165.1
|
)
|
|
|
(116.0
|
)
|
|
|
(5.6
|
)
|
Prepaid expenses and other current assets
|
|
|
|
(65.9
|
)
|
|
|
(44.9
|
)
|
|
|
(35.7
|
)
|
Accounts payable
|
|
|
|
125.1
|
|
|
|
87.8
|
|
|
|
(27.5
|
)
|
Other current liabilities
|
|
|
|
73.3
|
|
|
|
246.4
|
|
|
|
243.8
|
|
|
Changes in current assets and liabilities
|
|
|
$
|
(126.7
|
)
|
|
$
|
149.1
|
|
|
$
|
183.9
|
|
|
|
See accompanying notes to
consolidated financial statements.
Notes
to Consolidated Financial Statements
GENERAL MILLS, INC.
AND SUBSIDIARIES
NOTE 1. BASIS
OF PRESENTATION AND RECLASSIFICATIONS
Basis of
Presentation Our Consolidated Financial
Statements include the accounts of General Mills, Inc. and all
subsidiaries in which we have a controlling financial interest.
Intercompany transactions and accounts are eliminated in
consolidation.
Our fiscal year ends on the last Sunday in May. Fiscal years
2008, 2007, and 2006 each consisted of 52 weeks. Financial
results for our International segment, with the exception of
Canada, its export operations, and its United States and Latin
American headquarters are reported as of and for the 12 calendar
months ended April 30.
Reclassifications During
fiscal 2007, we made certain changes in our reporting of
financial information. The effects of these reclassifications on
our historical Consolidated Financial Statements are reflected
herein and had no impact on our consolidated net earnings or
earnings per share (EPS).
We made a change in accounting principle to classify shipping
costs associated with the distribution of finished products to
our customers as cost of sales. We previously recorded these
costs in selling, general, and administrative (SG&A)
expense. We made this change in principle because we believe the
classification of these shipping costs in cost of sales better
reflects the cost of producing and distributing our products and
aligns our external financial reporting with the results we use
internally to evaluate segment operating performance. The impact
of this change in principle was an increase to cost of sales of
$474.4 million in fiscal 2006, and a corresponding decrease
to SG&A expense in the same period.
We shifted sales responsibility for several customers from our
Bakeries and Foodservice segment to our U.S. Retail
segment. Net sales and segment operating profit for these two
segments have been adjusted to report the results from shifted
businesses within the appropriate segment. The impact of this
shift was a decrease in net sales of our Bakeries and
Foodservice segment and an increase in net sales of our
U.S. Retail segment of $55.0 million in fiscal 2006.
The impact of this shift was a decrease of Bakeries and
Foodservice segment operating profit and an increase of
U.S. Retail segment operating profit of $22.1 million
in fiscal 2006.
We also reclassified (i) certain trade-related costs and
customer allowances as cost of sales or SG&A expense
(previously recorded as reductions of net sales),
(ii) certain liabilities, including trade and consumer
promotion accruals, from accounts payable to other current
liabilities, (iii) certain distributions from joint
ventures as operating cash flows (previously reported as
investing cash flows), (iv) royalties from a joint venture
to after-tax earnings from joint ventures (previously recorded
as a reduction of SG&A expense), (v) certain
receivables, including accrued interest, derivatives, and other
miscellaneous receivables that were historically included in
receivables, to other current assets, and (vi) valuation
allowances related to deferred income tax assets between current
and noncurrent classification. These reclassifications were not
material individually or in the aggregate. We have reclassified
previously reported Consolidated Balance Sheets, Consolidated
Statements of Earnings, and Consolidated Statements of Cash
Flows to conform to the fiscal 2007 presentation.
In addition, certain reclassifications to our previously
reported financial information have been made to conform to the
current period presentation.
Change in Reporting
Period In fiscal 2007, we changed the
reporting period for our Häagen-Dazs joint ventures in Asia
to include results through March 31. In previous years, we
included results for the twelve months ended April 30.
Accordingly, fiscal 2007 results include only 11 months of
results from these joint ventures compared to 12 months in
fiscal 2008 and fiscal 2006. The impact of this change was not
material to our results of operations, thus we did not restate
prior period financial statements for comparability.
NOTE 2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash
Equivalents We consider all investments
purchased with an original maturity of three months or less to
be cash equivalents.
Inventories All
inventories in the United States other than grain and certain
organic products are valued at the lower of cost, using the
last-in,
first-out (LIFO) method, or market. Grain inventories and all
related cash contracts and derivatives are valued at market with
all net changes in value recorded in earnings currently.
Inventories outside of the United States are valued at the
lower of cost, using the
first-in,
first-out (FIFO) method, or market.
Shipping costs associated with the distribution of finished
product to our customers are recorded as cost of sales and are
recognized when the related finished product is shipped to and
accepted by the customer.
Land, Buildings, Equipment,
and Depreciation Land is recorded at
historical cost. Buildings and equipment, including capitalized
interest and internal engineering costs, are recorded at cost
and depreciated over estimated useful lives, primarily using the
straight-line method. Ordinary maintenance and repairs are
charged to cost of sales. Buildings are usually depreciated over
40 to 50 years, and equipment, furniture, and software are
usually depreciated over 3 to 15 years. Fully depreciated
assets are retained in buildings and equipment until disposal.
When an item is sold or retired, the accounts are relieved of
its cost and related accumulated depreciation; the resulting
gains and losses, if any, are recognized in earnings. As of
May 25, 2008, assets held for sale were insignificant.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset (or asset group) may not be recoverable. An impairment
loss would be recognized when estimated undiscounted future cash
flows from the operation and disposition of the asset group are
less than the carrying amount of the asset group. Asset groups
have identifiable cash flows and are largely independent of
other asset groups. Measurement of an impairment loss would be
based on the excess of the carrying amount of the asset group
over its fair value. Fair value is measured using a discounted
cash flow model or independent appraisals, as appropriate.
Goodwill and Other Intangible
Assets Goodwill is not amortized, and is
tested for impairment annually and whenever events or changes in
circumstances indicate that impairment may have occurred.
Impairment testing is performed for each of our reporting units.
We compare the carrying value of a reporting unit, including
goodwill, to the fair value of the unit. Carrying value is based
on the assets and liabilities associated with the operations of
that reporting unit, which often requires allocation of shared
or corporate items among reporting units. If the carrying amount
of a reporting unit exceeds its fair value, we revalue all
assets and liabilities of the reporting unit, excluding
goodwill, to determine if the fair value of the net assets is
greater than the net assets including goodwill. If the fair
value of the net assets is less than the net assets including
goodwill, impairment has occurred. Our estimates of fair value
are determined based on a discounted cash flow model. Growth
rates for sales and profits are determined using inputs from our
annual long-range planning process. We also make estimates of
discount rates, perpetuity growth assumptions, market
comparables, and other factors.
We evaluate the useful lives of our other intangible assets,
primarily intangible assets associated with the
Pillsbury, Totinos, Progresso,
Green Giant, Old El Paso, Häagen-Dazs,
and Uncle Tobys brands, to determine if they are
finite or indefinite-lived. We determine useful lives by
considering future effects of obsolescence, demand, competition,
other economic factors (such as the stability of the industry,
known technological advances, legislative action that results in
an uncertain or changing regulatory environment, and expected
changes in distribution channels), the level of required
maintenance expenditures, and the expected lives of other
related groups of assets.
Our indefinite-lived intangible assets, primarily brands, also
are tested for impairment annually, and whenever events or
changes in circumstances indicate that their carrying value may
not be recoverable. We performed our fiscal 2008 assessment of
our brand intangibles as of December 1, 2007. Our estimate
of the fair value of the brands was based on a discounted cash
flow model using inputs which included: projected revenues from
our annual long-range plan; assumed royalty rates that could be
payable if we did not own the brands; and a discount rate.
Investments in Joint
Ventures Our investments in companies over
which we have the ability to exercise significant influence are
stated at cost plus our share of undistributed earnings or
losses. We receive royalty income from certain joint ventures,
incur various expenses (primarily research and development), and
record the tax impact of certain joint venture operations that
are structured as partnerships. In addition, we make advances to
our joint ventures in the form of loans or capital investments.
We also sell certain raw materials, semi-finished goods, and
finished goods to the joint ventures, generally at market prices.
Variable Interest
Entities As of May 25, 2008, we
invested in 3 variable interest entities (VIEs). We have an
interest in a contract
manufacturer at our former facility in Geneva, Illinois. We are
the primary beneficiary (PB) and have consolidated this entity
as of May 25, 2008. This entity had property and equipment
with a carrying value of $31.0 million and long-term debt
of $31.8 million as of May 25, 2008. We also have an
interest in a contract manufacturer in Greece that is a VIE.
Although we are the PB, we have not consolidated this entity
because it is not material to our results of operations,
financial condition, or liquidity as of and for the year ended
May 25, 2008. This entity had assets of $4.2 million
and liabilities of $0.9 million as of May 25, 2008. We
are not the PB of the remaining VIE. Our maximum exposure to
loss from the 3 VIEs is limited to the $31.8 million of
long-term debt of the contract manufacturer in Geneva, Illinois
and our $1.1 million equity investment in the VIE of which
we are not the PB.
Revenue
Recognition We recognize sales revenue when
the shipment is accepted by our customer. Sales include shipping
and handling charges billed to the customer and are reported net
of consumer coupon redemption, trade promotion and other costs,
including estimated allowances for returns, unsalable product,
and prompt pay discounts. Sales, use, value-added, and other
excise taxes are not recognized in revenue. Coupons are recorded
when distributed, based on estimated redemption rates. Trade
promotions are recorded based on estimated participation and
performance levels for offered programs at the time of sale. We
generally do not allow a right of return. However, on a limited
case-by-case
basis with prior approval, we may allow customers to return
product. In limited circumstances, product returned in saleable
condition is resold to other customers or outlets. Receivables
from customers generally do not bear interest. Terms and
collection patterns vary around the world and by channel. The
allowance for doubtful accounts represents our estimate of
probable non-payments and credit losses in our existing
receivables, as determined based on a review of past due
balances and other specific account data. Account balances are
written off against the allowance when we deem the amount is
uncollectible.
Environmental Environmental
costs relating to existing conditions caused by past operations
that do not contribute to current or future revenues are
expensed. Reserves for liabilities for anticipated remediation
costs are recorded on an undiscounted basis when they are
probable and reasonably estimable, generally no later than the
completion of feasibility studies or our commitment to a plan of
action.
Advertising Production
Costs We expense the production costs of
advertising the first time that the advertising takes place.
Research and
Development All expenditures for research
and development (R&D) are charged against earnings in the
year incurred. R&D includes expenditures for new product
and manufacturing process innovation, and the annual
expenditures are comprised primarily of internal salaries,
wages, consulting, and other supplies attributable to time spent
on R&D activities. Other costs include depreciation and
maintenance of research facilities, including assets at
facilities that are engaged in pilot plant activities.
Foreign Currency
Translation For all significant foreign
operations, the functional currency is the local currency.
Assets and liabilities of these operations are translated at the
period-end exchange rates. Income statement accounts are
translated using the average exchange rates prevailing during
the year. Translation adjustments are reflected within
accumulated other comprehensive income (loss) in
stockholders equity. Gains and losses from foreign
currency transactions are included in net earnings for the
period except for gains and losses on investments in
subsidiaries for which settlement is not planned for the
foreseeable future and foreign exchange gains and losses on
instruments designated as net investment hedges. These gains and
losses are recorded in accumulated other comprehensive income
(loss).
Derivative
Instruments Application of hedge accounting
under Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended (SFAS 133), requires
significant resources, recordkeeping, and analytical systems. As
a result of the rising compliance costs and the complexity
associated with the application of hedge accounting, we elected
to discontinue the use of hedge accounting for all commodity
derivative positions entered into after the beginning of fiscal
2008. Accordingly, the changes in the values of these
derivatives are recorded currently in cost of sales in our
Consolidated Statements of Earnings.
Regardless of designation for accounting purposes, we believe
all our commodity derivatives are economic hedges of our risk
exposures, and as a result we consider these derivatives to be
hedges for purposes of measuring segment operating performance.
Thus, these gains and losses are reported in unallocated
corporate items outside of segment operating results until such
time that the exposure we are hedging affects earnings. At that
time we reclassify the hedge gain or loss from unallocated
corporate items to segment operating profit, allowing our
operating segments to realize the economic effects of the hedge
without experiencing any resulting
mark-to-market
volatility, which remains in unallocated corporate items.
We also use derivatives to hedge our exposure to changes in
foreign exchange rates and interest rates. All derivatives are
recognized on the Consolidated Balance Sheets at fair value
based on quoted market prices or managements estimate of
their fair value and are recorded in either current or
noncurrent assets or liabilities based on their maturity.
Changes in the fair values of derivatives are recorded in net
earnings or other comprehensive income, based on whether the
instrument is designated as a hedge transaction and, if so, the
type of hedge transaction. Gains or losses on derivative
instruments reported in accumulated other comprehensive income
(loss) are reclassified to earnings in the period the hedged
item affects earnings. If the underlying hedged transaction
ceases to exist, any associated amounts reported in accumulated
other comprehensive income (loss) are reclassified to earnings
at that time. Any ineffectiveness is recognized in earnings in
the current period.
Stock-Based
Compensation Effective May 29, 2006, we
adopted SFAS No. 123 (Revised), Share-Based
Payment (SFAS 123R), which changed the accounting for
compensation expense associated with stock options, restricted
stock awards, and other forms of equity compensation. We elected
the modified prospective transition method as permitted by
SFAS 123R; accordingly, results from prior periods have not
been restated. Under this method, stock-based compensation
expense for fiscal 2007 was $127.1 million, which included
amortization related to the remaining unvested portion of all
equity compensation awards granted prior to May 29, 2006,
based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123), and amortization related to all equity
compensation awards granted on or subsequent to May 29,
2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. The incremental effect on
net earnings in fiscal 2007 of our adoption of SFAS 123R
was $68.8 million of expense ($42.9 million
after-tax). All of our stock compensation expense is recorded in
SG&A expense in the Consolidated Statements of Earnings and
in unallocated corporate items in our segment results.
SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
previously required, thereby reducing net operating cash flows
and increasing net financing cash flows in periods following
adoption.
Certain equity-based compensation plans contain provisions that
accelerate vesting of awards upon retirement, disability, or
death of eligible employees and directors. SFAS 123R
specifies that a stock-based award is vested when the
employees retention of the award is no longer contingent
on providing subsequent service. Accordingly, beginning in
fiscal 2007, we prospectively revised our expense attribution
method so that the related compensation cost is recognized
immediately for awards granted to retirement-eligible
individuals or over the period from the grant date to the date
retirement eligibility is achieved, if less than the stated
vesting period. For fiscal 2006, we generally recognized stock
compensation expense over the stated vesting period of the
award, with any unamortized expense recognized immediately if an
acceleration event occurred.
Prior to May 29, 2006, we used the intrinsic value method
for measuring the cost of compensation paid in our common stock.
No compensation expense for stock options was recognized in our
Consolidated Statements of Earnings prior to fiscal 2007, as the
exercise price was equal to the market price of our stock at the
date of grant. Expense attributable to other types of
share-based awards was recognized in our results under
SFAS 123.
The following table illustrates the pro forma effect on net
earnings and EPS for fiscal 2006 if we had applied the fair
value
recognition provisions of SFAS 123 to all employee
stock-based compensation, net of estimated forfeitures:
|
|
|
|
|
In Millions, Except per Share Data
|
|
|
|
|
Net earnings, as reported
|
|
$
|
1,090.3
|
|
Add: After-tax stock-based employee compensation expense
included in reported net earnings
|
|
|
28.5
|
|
Deduct: After-tax stock-based employee compensation expense
determined under fair value requirements of SFAS 123
|
|
|
(48.1
|
)
|
|
Pro forma net earnings
|
|
$
|
1,070.7
|
|
|
Earnings per share:
|
|
|
|
|
Basic as reported
|
|
$
|
3.05
|
|
Basic pro forma
|
|
$
|
2.99
|
|
Diluted as reported
|
|
$
|
2.90
|
|
Diluted pro forma
|
|
$
|
2.84
|
|
|
|
Defined Benefit Pension,
Other Postretirement, and Postemployment Benefit
Plans We sponsor several domestic and
foreign defined benefit plans to provide pension, health care,
and other welfare benefits to retired employees. Under certain
circumstances, we also provide accruable benefits to former or
inactive employees in the United States and Canada and members
of our Board of Directors, including severance and certain other
benefits payable upon death. We recognize an obligation for any
of these benefits that vest or accumulate with service.
Postemployment benefits that do not vest or accumulate with
service (such as severance based solely on annual pay rather
than years of service) are charged to expense when incurred. Our
postemployment benefit plans are unfunded.
We recognize the underfunded or overfunded status of a defined
benefit postretirement plan as an asset or liability and
recognize changes in the funded status in the year in which the
changes occur through accumulated other comprehensive income
(loss), which is a component of stockholders equity.
Use of
Estimates Preparing our Consolidated
Financial Statements in conformity with accounting principles
generally accepted in the United States requires us to make
estimates and assumptions that affect reported amounts of assets
and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from our estimates.
Other New Accounting
Standards In fiscal 2008, we adopted Staff
Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
(SAB 108). SAB 108 provides interpretive guidance on
the process and diversity in practice of quantifying financial
statement misstatements resulting in the potential carryover of
improper amounts on the balance sheet. The SEC believes that
registrants should quantify errors using both a balance sheet
and income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all
relevant quantitative and qualitative factors are considered, is
material. The adoption of SAB 108 did not have a material
impact on our results of operations or financial condition.
Also in fiscal 2008, we adopted SFAS No. 155,
Hybrid Instruments (SFAS 155). SFAS 155
amends SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities and
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 is effective for all financial
instruments acquired or issued after May 27, 2007. The
adoption of SFAS 155 did not have any impact on our results
of operations or financial condition.
In September 2006, the Financial Accounting Standards Board
(FASB) ratified the consensus of Emerging Issues Task Force
Issue
No. 06-5,
Accounting for Purchases of Life Insurance-Determining the
Amount That Could Be Realized in Accordance with FASB Technical
Bulletin No. 85-4
(EITF 06-5).
EITF 06-5
requires that a policyholder consider any additional amounts
included in the contractual terms of the policy in determining
the amount that could be realized under the insurance contract
on a policy by policy basis. We adopted
EITF 06-5
in fiscal 2008, and it did not have any impact on our results of
operations or financial condition.
In June 2006, the FASB ratified the consensus of Emerging Issues
Task Force Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)
(EITF 06-3).
EITF 06-3
concluded that the presentation of taxes imposed on
revenue-producing transactions (sales, use, value added, and
excise taxes) on either a gross (included in revenues and costs)
or a net (excluded from revenues) basis is an accounting policy
that should be disclosed. We adopted
EITF 06-3
in fiscal 2007, and it did not have any impact on our results of
operations or financial condition.
In fiscal 2007, we adopted SFAS No. 151,
Inventory Costs An Amendment of ARB
No. 43, Chapter 4 (SFAS 151). SFAS 151
clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage). The adoption of SFAS 151 did not have any
impact on our results of operations or financial condition.
In fiscal 2006, we adopted SFAS No. 153,
Exchanges of Nonmonetary Assets An Amendment
of APB Opinion No. 29 (SFAS 153). SFAS 153
eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces
it with an exception for exchanges that do not have commercial
substance. The adoption of SFAS 153 did not have any impact
on our results of operations or financial condition.
In March 2005, the FASB issued FASB Interpretation No. (FIN) 47,
Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 requires that
liabilities be recognized for the fair value of a legal
obligation to perform asset retirement activities that are
conditional on a future event if the amount can be reasonably
estimated. We adopted FIN 47 in fiscal 2006, and it did not
have a material impact on our results of operations or financial
condition.
NOTE 3. ACQUISITIONS
AND DIVESTITURES
Subsequent to our fiscal 2008 year-end, we acquired Humm Foods,
Inc. (Humm), the maker of Lärabar
fruit-and-nut
energy bars. We issued 0.9 million shares of our common
stock to the shareholders of Humm as consideration for the
acquisition.
During fiscal 2008, the 8th Continent soymilk business was sold.
Our 50 percent share of the after-tax gain on the sale was
$2.2 million, of which we recognized $1.7 million in
after-tax earnings from joint ventures in fiscal 2008. We will
record an additional after-tax gain of up to $0.5 million
in the first quarter of fiscal 2010 if certain conditions are
satisfied. Also during fiscal 2008, we acquired a controlling
interest in HD Distributors (Thailand) Company Limited. Prior to
acquiring the controlling interest, we accounted for our
investment as a joint venture. The purchase price, net of cash
acquired, resulted in a $1.3 million cash inflow classified
in acquisitions on the Consolidated Statements of Cash Flows.
During fiscal 2007, we sold our Bakeries and Foodservice frozen
pie product line, including a plant in Rochester, New York. We
received $1.2 million in proceeds and recorded a
$3.6 million loss on the sale. We also sold our Bakeries
and Foodservice par-baked bread product line, including plants
in Chelsea, Massachusetts and Tempe, Arizona. We received
$12.5 million in proceeds and recorded a $6.0 million
loss on the sale in fiscal 2007, including the write off of
$6.2 million of goodwill.
During fiscal 2007, we completed the acquisition of Saxby Bros.
Limited, a chilled pastry company in the United Kingdom, for
approximately $24.1 million. This business, which had sales
of $23.8 million in calendar 2006, complements our existing
frozen pastry business in the United Kingdom. In addition, we
completed an acquisition in Greece for $2.8 million.
During fiscal 2007, our 50 percent joint venture Cereal
Partners Worldwide (CPW) completed the acquisition of the Uncle
Tobys cereal business in Australia for $385.6 million. We
funded our 50 percent share of the purchase price by making
additional advances to and equity contributions in CPW totaling
$135.1 million (classified as investments in affiliates,
net, on the Consolidated Statements of Cash Flows) and by
acquiring a 50 percent undivided interest in certain
intellectual property for $57.7 million (classified as
acquisitions on the Consolidated Statements of Cash Flows).
During fiscal 2008, we completed the allocation of our purchase
price and reclassified $16.3 million from goodwill to other
intangible assets on our Consolidated Balance Sheets.
During fiscal 2006, we acquired Elysées Consult SAS, the
franchise operator of a Häagen-Dazs shop in France,
and Croissant King, a producer of frozen pastry products in
Australia. We also acquired a controlling financial interest in
Pinedale Holdings Pte. Limited, an operator of
Häagen-Dazs cafes in Singapore and Malaysia. The
aggregate purchase price of our fiscal 2006 acquisitions was
$26.5 million.
NOTE 4. RESTRUCTURING,
IMPAIRMENT, AND OTHER EXIT COSTS
We view our restructuring activities as a way to meet our
long-term growth targets. Activities we undertake must meet
internal rate of return and net present value targets. Each
restructuring action normally takes one to two years to
complete. At completion (or as each major stage is completed in
the case of multi-year programs), the project begins to deliver
cash savings
and/or
reduced depreciation. These activities result in various
restructuring costs, including asset write offs, exit charges
including severance, contract termination fees, and
decommissioning and other costs.
In fiscal 2008, we recorded restructuring, impairment, and other
exit costs pursuant to approved plans as follows:
|
|
|
|
|
Expense (Income), in Millions
|
|
|
|
|
Closure of Poplar, Wisconsin plant
|
|
$
|
2.7
|
|
Closure and sale of Allentown, Pennsylvania frozen waffle plant
|
|
|
9.4
|
|
Closure of leased Trenton, Ontario frozen dough plant
|
|
|
10.9
|
|
Restructuring of production scheduling and discontinuation of
cake product line at Chanhassen, Minnesota plant
|
|
|
1.6
|
|
Gain on sale of previously closed Vallejo, California plant
|
|
|
(7.1
|
)
|
Charges associated with restructuring actions previously
announced
|
|
|
3.5
|
|
|
Total
|
|
$
|
21.0
|
|
|
|
We approved a plan to transfer Old El Paso
production from our Poplar, Wisconsin facility to other
plants and close the Poplar facility to improve capacity
utilization and reduce costs. This action affects
113 employees at the Poplar facility and resulted in a
charge of $2.7 million consisting entirely of employee
severance. Due to declining financial results, we decided to
exit our frozen waffle product line (retail and foodservice) and
to close our frozen waffle plant in Allentown, Pennsylvania,
affecting 111 employees. We recorded a charge consisting of
$3.5 million of employee severance and a $5.9 million
non-cash impairment charge against long-lived assets at the
plant. We also completed an analysis of the viability of our
Bakeries and Foodservice frozen dough facility in Trenton,
Ontario, and decided to close the facility, affecting
470 employees. We recorded a charge consisting of
$8.4 million for employee severance and $2.5 million
in charges for shutdown and decommissioning costs. We lease the
Trenton plant under an agreement expiring in fiscal 2013. We
expect to make limited use of the plant during fiscal 2009 while
we evaluate sublease or lease termination options. These
actions, including the anticipated timing of the disposition of
the plants we will close, are expected to be completed by the
end of the third quarter of fiscal 2009. We also restructured
our production scheduling and discontinued our cake production
line at our Chanhassen, Minnesota Bakeries and Foodservice
plant. These actions affected 125 employees, and we
recorded a $3.0 million charge for employee severance that
was partially offset by a $1.4 million gain from the sale
of long-lived assets during the fourth quarter of fiscal 2008.
This action is expected to be completed by the end of the first
quarter of fiscal 2009. Finally, we recorded additional charges
of $3.5 million primarily related to previously announced
Bakeries and Foodservice segment restructuring actions including
employee severance for 38 employees.
Collectively, the charges we expect to incur with respect to
these fiscal 2008 restructuring actions total $65 million,
of which $43.3 million has been recognized in fiscal 2008.
This includes a $17.7 million non-cash charge related to
accelerated depreciation on long-lived assets at our plant in
Trenton, Ontario and $0.8 million of inventory write offs
at our plants in Chanhassen, Minnesota and Allentown,
Pennsylvania. The accelerated depreciation charge is recorded in
cost of sales in our Consolidated Statements of Earnings and in
unallocated corporate items in our segment results.
During fiscal 2008, we received $16.2 million in proceeds
from the sale of our Allentown, Pennsylvania plant and our
previously closed Vallejo, California plant.
In fiscal 2007, we recorded restructuring, impairment, and other
exit costs pursuant to approved plans as follows:
|
|
|
|
|
Expense (Income), in Millions
|
|
|
|
|
Non-cash impairment charge for certain Bakeries and Foodservice
product lines
|
|
$
|
36.7
|
|
Gain from our previously closed plant in San Adrian, Spain
|
|
|
(7.3
|
)
|
Loss from divestitures of our par-baked bread and frozen pie
product lines
|
|
|
9.6
|
|
Charges associated with restructuring actions previously
announced
|
|
|
0.3
|
|
|
Total
|
|
$
|
39.3
|
|
|
|
As part of our long-range planning process, we determined that
certain product lines in our Bakeries and Foodservice segment
were underperforming. In late May 2007, we concluded that the
future cash flows generated by these product lines will be
insufficient to recover the net book value of the related
long-lived assets. Accordingly, we recorded a non-cash
impairment charge of $36.7 million against these assets in
the fourth quarter of fiscal 2007.
In fiscal 2006, we recorded restructuring, impairment, and other
exit costs pursuant to approved plans as follows:
|
|
|
|
Expense, in Millions
|
|
|
|
Closure of our Swedesboro, New Jersey plant
|
|
$
|
12.9
|
Closure of a production line at our Montreal, Quebec plant
|
|
|
6.3
|
Restructuring actions at our Allentown, Pennsylvania plant
|
|
|
3.5
|
Asset impairment charge at our Rochester, New York plant
|
|
|
3.2
|
Charges associated with restructuring actions previously
announced
|
|
|
3.9
|
|
Total
|
|
$
|
29.8
|
|
|
The fiscal 2006 initiatives were undertaken to increase asset
utilization and reduce manufacturing costs. The actions included
decisions to: close our leased frozen dough foodservice plant in
Swedesboro, New Jersey, affecting 101 employees; shut down
a portion of our frozen dough foodservice plant in Montreal,
Quebec, affecting 77 employees; realign and modify product
and manufacturing capabilities at our frozen waffle plant in
Allentown, Pennsylvania, affecting 72 employees; and
complete the fiscal 2005 initiative to relocate our frozen baked
goods line from our plant in Chelsea, Massachusetts, affecting
175 employees.
The roll forward of our restructuring and other exit cost
reserves, included in other current liabilities, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
In Millions
|
|
Severance
|
|
|
Exit Costs
|
|
|
Total
|
|
|
Reserve balance as of May 29, 2005
|
|
$
|
8.9
|
|
|
$
|
8.9
|
|
|
$
|
17.8
|
|
2006 charges
|
|
|
6.9
|
|
|
|
2.7
|
|
|
|
9.6
|
|
Utilized in 2006
|
|
|
(7.7
|
)
|
|
|
(5.0
|
)
|
|
|
(12.7
|
)
|
|
Reserve balance as of May 28, 2006
|
|
|
8.1
|
|
|
|
6.6
|
|
|
|
14.7
|
|
2007 charges
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
Utilized in 2007
|
|
|
(4.7
|
)
|
|
|
(4.8
|
)
|
|
|
(9.5
|
)
|
|
Reserve balance as of May 27, 2007
|
|
|
3.4
|
|
|
|
0.9
|
|
|
|
4.3
|
|
2008 charges
|
|
|
20.9
|
|
|
|
|
|
|
|
20.9
|
|
Utilized in 2008
|
|
|
(16.7
|
)
|
|
|
(0.6
|
)
|
|
|
(17.3
|
)
|
|
Reserve balance as of May 25, 2008
|
|
$
|
7.6
|
|
|
$
|
0.3
|
|
|
$
|
7.9
|
|
|
|
NOTE 5. INVESTMENTS
IN JOINT VENTURES
We have a 50 percent equity interest in CPW which
manufactures and markets
ready-to-eat
cereal products in more than 130 countries and republics outside
the United States and Canada. CPW also markets cereal bars in
several European countries and manufactures private label
cereals for customers in the United Kingdom. We have guaranteed
a portion of CPWs debt and its pension obligation in the
United Kingdom. Results from our CPW joint venture are reported
as of and for the 12 months ended March 31.
We have 50 percent equity interests in Häagen-Dazs
Japan, Inc. and Häagen-Dazs Korea Company Limited. These
joint ventures manufacture, distribute, and market
Häagen-Dazs ice cream products and frozen novelties.
In fiscal 2007, we changed their reporting period to include
results through March 31. In previous years, we included
results for the twelve months ended April 30. Accordingly,
fiscal 2007 results include only 11 months of results from
these joint ventures compared to 12 months in fiscal 2008
and fiscal 2006. The impact of this change was not material to
our consolidated results of operations, so we did not restate
prior periods for comparability.
During the third quarter of fiscal 2008, the 8th Continent
soymilk business was sold. Our 50 percent share of the
after-tax gain on the sale was $2.2 million, of which we
recognized $1.7 million in after-tax earnings from joint
ventures in fiscal 2008. We will record an additional after-tax
gain of up to $0.5 million in the first quarter of fiscal
2010 if certain conditions are satisfied.
In February 2006, CPW announced a restructuring of its
manufacturing plants in the United Kingdom. Our after-tax share
of CPW restructuring, impairment, and other exit costs pursuant
to approved plans during fiscal 2008 and prior years was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Expense (Income), in Millions
|
|
|
2008
|
|
|
2007
|
|
2006
|
|
Gain on sale of property
|
|
|
$
|
(15.9
|
)
|
|
$
|
|
|
$
|
|
Accelerated depreciation charges and severance associated with
previously announced restructuring actions
|
|
|
|
4.5
|
|
|
|
8.2
|
|
|
8.0
|
Other charges resulting from fiscal 2008 restructuring actions
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
(8.2
|
)
|
|
$
|
8.2
|
|
$
|
8.0
|
|
|
During the first quarter of fiscal 2007, CPW acquired the Uncle
Tobys cereal business in Australia for $385.6 million. We
funded advances and an equity contribution to CPW from cash
generated from our international operations, including our
international joint ventures.
Our cumulative investment in these joint ventures was
$278.6 million at the end of fiscal 2008 and
$294.6 million at the end of fiscal 2007. We also have
goodwill of $577.0 million associated with our joint
ventures. Our investments in these joint ventures include
aggregate advances of $124.4 million as of May 25,
2008 and $157.1 million as of May 27, 2007. Our sales
to these joint ventures were $12.8 million in fiscal 2008,
$31.8 million in fiscal 2007, and $34.8 million in
fiscal 2006. We had a net return of capital from the joint
ventures of $75.2 million in fiscal 2008 and made net
investments of $103.4 million in fiscal 2007 and
$7.0 million in fiscal 2006. We received dividends from the
joint ventures of $108.7 million in fiscal 2008,
$45.2 million in fiscal 2007, and $77.4 million in
fiscal 2006.
Summary combined financial information for the joint ventures on
a 100 percent basis follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
In Millions
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales
|
|
$
|
2,404.2
|
|
$
|
2,016.3
|
|
$
|
1,795.2
|
Gross margin
|
|
|
1,008.4
|
|
|
835.4
|
|
|
770.3
|
Earnings before income taxes
|
|
|
231.7
|
|
|
167.3
|
|
|
157.4
|
Earnings after income taxes
|
|
|
190.4
|
|
|
132.0
|
|
|
120.9
|
|
|
|
|
|
|
|
|
|
In Millions
|
|
|
May 25,
2008
|
|
|
May 27,
2007
|
|
Current assets
|
|
$
|
1,021.5
|
|
$
|
815.3
|
Noncurrent assets
|
|
|
1,002.0
|
|
|
898.1
|
Current liabilities
|
|
|
1,592.6
|
|
|
1,227.8
|
Noncurrent liabilities
|
|
|
75.9
|
|
|
81.7
|
|
|
NOTE 6. GOODWILL
AND OTHER INTANGIBLE ASSETS
The components of goodwill and other intangible assets are as
follows:
|
|
|
|
|
|
|
|
|
|
|
May 25,
|
|
|
May 27,
|
|
In Millions
|
|
2008
|
|
|
2007
|
|
|
Goodwill
|
|
$
|
6,786.1
|
|
|
$
|
6,835.4
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
Brands
|
|
|
3,745.6
|
|
|
|
3,681.9
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Patents, trademarks, and other finite-lived intangibles
|
|
|
44.0
|
|
|
|
19.2
|
|
Less accumulated amortization
|
|
|
(12.4
|
)
|
|
|
(7.1
|
)
|
|
Total intangible assets subject to amortization
|
|
|
31.6
|
|
|
|
12.1
|
|
|
Total other intangible assets
|
|
|
3,777.2
|
|
|
|
3,694.0
|
|
|
Total goodwill and other intangible assets
|
|
$
|
10,563.3
|
|
|
$
|
10,529.4
|
|
|
|
The changes in the carrying amount of goodwill for fiscal 2006,
2007, and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bakeries
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
and
|
|
|
Joint
|
|
|
|
|
In Millions
|
|
Retail
|
|
|
International
|
|
|
Foodservice
|
|
|
Ventures
|
|
|
Total
|
|
|
Balance as of May 29, 2005
|
|
$
|
5,001.8
|
|
|
$
|
152.2
|
|
|
$
|
1,201.1
|
|
|
$
|
329.2
|
|
|
$
|
6,684.3
|
|
Acquisitions
|
|
|
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
15.3
|
|
Deferred tax adjustment related to Pillsbury acquisition
|
|
|
(41.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41.8
|
)
|
Other activity, primarily foreign currency translation
|
|
|
|
|
|
|
(29.9
|
)
|
|
|
|
|
|
|
24.1
|
|
|
|
(5.8
|
)
|
|
Balance as of May 28, 2006
|
|
|
4,960.0
|
|
|
|
137.6
|
|
|
|
1,201.1
|
|
|
|
353.3
|
|
|
|
6,652.0
|
|
Reclassification for customer shift
|
|
|
216.0
|
|
|
|
|
|
|
|
(216.0
|
)
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
|
23.4
|
|
|
|
|
|
|
|
15.0
|
|
|
|
38.4
|
|
Deferred tax adjustment resulting from tax audit settlement
|
|
|
13.1
|
|
|
|
0.2
|
|
|
|
3.6
|
|
|
|
1.1
|
|
|
|
18.0
|
|
Divestitures
|
|
|
|
|
|
|
|
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
(6.9
|
)
|
Other activity, primarily foreign currency translation
|
|
|
13.8
|
|
|
|
(19.0
|
)
|
|
|
|
|
|
|
139.1
|
|
|
|
133.9
|
|
|
Balance as of May 27, 2007
|
|
|
5,202.9
|
|
|
|
142.2
|
|
|
|
981.8
|
|
|
|
508.5
|
|
|
|
6,835.4
|
|
Finalization of purchase accounting
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(16.3
|
)
|
|
|
(16.6
|
)
|
Adoption of FIN 48
|
|
|
(110.9
|
)
|
|
|
(10.6
|
)
|
|
|
(30.4
|
)
|
|
|
|
|
|
|
(151.9
|
)
|
Other activity, primarily foreign currency translation
|
|
|
15.0
|
|
|
|
15.1
|
|
|
|
4.3
|
|
|
|
84.8
|
|
|
|
119.2
|
|
|
Balance as of May 25, 2008
|
|
$
|
5,107.0
|
|
|
$
|
146.4
|
|
|
$
|
955.7
|
|
|
$
|
577.0
|
|
|
$
|
6,786.1
|
|
|
|
During fiscal 2007 as part of our annual goodwill and brand
intangible impairment assessments, we reviewed our goodwill and
other intangible asset allocations by country within the
International segment and our joint ventures. The resulting
reallocation of these balances across the countries within this
segment and to our joint ventures caused changes in the foreign
currency translation of the balances. As a result of these
changes in foreign currency translation, we increased goodwill
by
$136.2 million, other intangible assets by
$18.1 million, deferred income taxes by $9.2 million,
and accumulated other comprehensive income (loss) by the net of
these amounts.
At the beginning of fiscal 2007, we shifted selling
responsibility for several customers from our Bakeries and
Foodservice segment to our U.S. Retail segment. Goodwill of
$216.0 million previously reported in our Bakeries and
Foodservice segment as of May 28, 2006 has now been
recorded in the U.S. Retail segment.
Future purchase price adjustments to goodwill may occur upon the
resolution of certain income tax accounting matters.
The changes in the carrying amount of other intangible assets
for fiscal 2006, 2007, and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions
|
|
U.S. Retail
|
|
|
International
|
|
Joint Ventures
|
|
|
Total
|
|
Balance as of May 29, 2005
|
|
$
|
3,178.5
|
|
|
$
|
341.2
|
|
$
|
12.4
|
|
|
$
|
3,532.1
|
Other activity, primarily foreign currency translation
|
|
|
(3.0
|
)
|
|
|
79.0
|
|
|
(1.0
|
)
|
|
|
75.0
|
|
Balance as of May 28, 2006
|
|
|
3,175.5
|
|
|
|
420.2
|
|
|
11.4
|
|
|
|
3,607.1
|
Other intangibles acquired
|
|
|
|
|
|
|
1.3
|
|
|
44.5
|
|
|
|
45.8
|
Other activity, primarily foreign currency translation
|
|
|
(0.3
|
)
|
|
|
39.4
|
|
|
2.0
|
|
|
|
41.1
|
|
Balance as of May 27, 2007
|
|
|
3,175.2
|
|
|
|
460.9
|
|
|
57.9
|
|
|
|
3,694.0
|
Finalization of purchase accounting
|
|
|
|
|
|
|
15.6
|
|
|
16.3
|
|
|
|
31.9
|
Other activity, primarily foreign currency translation
|
|
|
|
|
|
|
42.3
|
|
|
9.0
|
|
|
|
51.3
|
|
Balance as of May 25, 2008
|
|
$
|
3,175.2
|
|
|
$
|
518.8
|
|
$
|
83.2
|
|
|
$
|
3,777.2
|
|
|
NOTE 7. FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
Financial
Instruments The carrying values of cash and
cash equivalents, receivables, accounts payable, other current
liabilities, derivative instruments, and notes payable
approximate fair value. Marketable securities are carried at
fair value. As of May 25, 2008 and May 27, 2007, a
comparison of cost and market values of our marketable debt and
equity securities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Market
Value
|
|
Gross
Gains
|
|
Gross
Losses
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
Fiscal Year
|
|
Fiscal Year
|
In Millions
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
20.5
|
|
$
|
17.6
|
|
$
|
20.7
|
|
$
|
17.9
|
|
$
|
0.2
|
|
$
|
0.3
|
|
|
$
|
|
|
$
|
Equity securities
|
|
|
6.1
|
|
|
4.5
|
|
|
14.0
|
|
|
10.4
|
|
|
7.9
|
|
|
5.8
|
|
|
|
|
|
|
|
Total
|
|
$
|
26.6
|
|
$
|
22.1
|
|
$
|
34.7
|
|
$
|
28.3
|
|
$
|
8.1
|
|
$
|
6.1
|
|
|
$
|
|
|
$
|
|
|
Earnings include insignificant realized gains from sales of
available-for-sale
marketable securities. Gains and losses are determined by
specific identification. Classification of marketable securities
as current or noncurrent is dependent upon managements
intended holding period, the securitys maturity date, or
both. The aggregate unrealized gains and losses on
available-for-sale
securities, net of tax effects, are classified in accumulated
other comprehensive income (loss) within stockholders
equity. Scheduled maturities of our marketable securities are as
follows:
|
|
|
|
|
|
|
|
|
Available for Sale
|
In Millions
|
|
|
Cost
|
|
|
Market
Value
|
|
Under 1 year (current)
|
|
$
|
13.0
|
|
$
|
13.3
|
From 1 to 3 years
|
|
|
0.3
|
|
|
0.3
|
From 4 to 7 years
|
|
|
1.6
|
|
|
1.5
|
Over 7 years
|
|
|
5.6
|
|
|
5.6
|
Equity securities
|
|
|
6.1
|
|
|
14.0
|
|
Total
|
|
$
|
26.6
|
|
$
|
34.7
|
|
|
Marketable securities with a market value of $12.6 million
as of May 25, 2008 were pledged as collateral for certain
derivative contracts.
The fair values and carrying amounts of long-term debt,
including the current portion, were $4,926.3 million and
$4,790.7 million as of May 25, 2008, and
$4,977.8 million and $4,951.7 million as of
May 27, 2007. The fair value of long-term debt was
estimated using discounted cash flows based on our current
incremental borrowing rates for similar types of instruments.
Risk Management
Activities As a part of our ongoing
operations, we are exposed to market risks such as changes in
interest rates,
foreign currency exchange rates, and commodity prices. To manage
these risks, we may enter into various derivative transactions
(e.g., futures, options, and swaps) pursuant to our established
policies.
Interest Rate Risk We are exposed to interest
rate volatility with regard to future issuances of fixed-rate
debt, and existing and future issuances of floating-rate debt.
Primary exposures include U.S. Treasury rates, London
Interbank Offered Rates (LIBOR), and commercial paper rates in
the United States and Europe. We use interest rate swaps and
forward-starting interest rate swaps to hedge our exposure to
interest rate changes, to reduce the volatility of our financing
costs, and to achieve a desired proportion of fixed-rate versus
floating-rate debt, based on current and projected market
conditions. Generally under these swaps, we agree with a
counterparty to exchange the difference between fixed-rate and
floating-rate interest amounts based on an agreed notional
principal amount.
Floating Interest Rate Exposures Except as discussed
below,
floating-to-fixed
interest rate swaps are accounted for as cash flow hedges, as
are all hedges of forecasted issuances of debt. Effectiveness is
assessed based on either the perfectly effective hypothetical
derivative method or changes in the present value of interest
payments on the underlying debt. Amounts deferred to accumulated
other comprehensive income (loss) are reclassified into earnings
over the life of the associated debt. The amount of hedge
ineffectiveness was less than $1 million in each of fiscal
2008, 2007, and 2006.
Fixed Interest Rate Exposures
Fixed-to-floating
interest rate swaps are accounted for as fair value hedges with
effectiveness assessed based on changes in the fair value of the
underlying debt, using incremental borrowing rates currently
available on loans with similar terms and maturities. Effective
gains and losses on these derivatives and the underlying hedged
items are recorded as net interest. The amount of hedge
ineffectiveness was less than $1 million in each of fiscal
2008, 2007, and 2006.
In anticipation of the Pillsbury acquisition and other financing
needs, we entered into pay-fixed interest rate swap contracts
during fiscal 2001 and 2002 totaling $7.1 billion to lock
in our interest payments on the associated debt. As of
May 25, 2008, we still owned $1.75 billion of
Pillsbury-related pay-fixed swaps that were previously
neutralized with offsetting pay-floating swaps in fiscal 2002.
In advance of a planned debt financing in fiscal 2007, we
entered into $700.0 million pay-fixed, forward-starting
interest rate swaps with an average fixed rate of
5.7 percent. All of these forward-starting interest rate
swaps were cash settled for $22.5 million coincident with
our $1.0 billion
10-year
fixed-rate note debt offering on January 17, 2007. As of
May 25, 2008, $19.4 million pre-tax loss remained in
accumulated other comprehensive income (loss), which will be
reclassified to earnings over the term of the underlying debt.
The following table summarizes the notional amounts and
weighted-average interest rates of our interest rate swaps. As
discussed above, we have neutralized all of our
Pillsbury-related pay-fixed swaps with pay-floating swaps;
however, we cannot present them on a net basis in the following
table because the offsetting occurred with different
counterparties. Average floating rates are based on rates as of
the end of the reporting period.
|
|
|
|
|
|
|
|
|
|
|
May 25,
|
|
|
May 27,
|
|
In Millions
|
|
2008
|
|
|
2007
|
|
|
Pay-floating swaps notional amount
|
|
$
|
1,879.5
|
|
|
$
|
1,914.5
|
|
Average receive rate
|
|
|
5.8
|
%
|
|
|
5.8
|
%
|
Average pay rate
|
|
|
2.5
|
%
|
|
|
5.3
|
%
|
Pay-fixed swaps notional amount
|
|
$
|
2,250.0
|
|
|
$
|
1,762.3
|
|
Average receive rate
|
|
|
2.6
|
%
|
|
|
5.3
|
%
|
Average pay rate
|
|
|
6.4
|
%
|
|
|
7.3
|
%
|
|
|
The swap contracts mature at various dates from 2009 to 2016 as
follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Maturity Date
|
|
|
|
|
|
|
|
Pay
|
In Millions
|
|
Pay Floating
|
|
Fixed
|
|
2009
|
|
$
|
20.2
|
|
$
|
|
2010
|
|
|
18.9
|
|
|
500.0
|
2011
|
|
|
17.6
|
|
|
|
2012
|
|
|
1,753.3
|
|
|
1,000.0
|
2013
|
|
|
14.6
|
|
|
750.0
|
Beyond 2013
|
|
|
54.9
|
|
|
|
|
Total
|
|
$
|
1,879.5
|
|
$
|
2,250.0
|
|
|
Foreign Exchange Risk Foreign currency
fluctuations affect our net investments in foreign subsidiaries
and foreign currency cash flows related primarily to third-party
purchases, intercompany loans, and product shipments. We are
also exposed to the translation of foreign currency earnings to
the U.S. dollar. Our principal
exposures are to the Australian dollar, British pound sterling,
Canadian dollar, Chinese renminbi, euro, Japanese yen and
Mexican peso. We primarily use foreign currency forward
contracts to selectively hedge our foreign currency cash flow
exposures. We generally do not hedge more than 12 months
forward. The amount of hedge ineffectiveness was $1 million
or less in each of fiscal 2008, 2007, and 2006. We also have
many net investments in foreign subsidiaries that are
denominated in euros. We hedge a portion of these net
investments by issuing euro-denominated commercial paper and
foreign exchange forward contracts. As of May 25, 2008, we
have issued $472.9 million of euro-denominated commercial
paper and foreign exchange forward contracts that we have
designated as a net investment hedge and thus deferred net
foreign currency transaction losses of $69.6 million to
accumulated other comprehensive income (loss).
Commodity Price Risk Many commodities we use
in the production and distribution of our products are exposed
to market price risks. We use derivatives to hedge price risk
for our principal raw materials and energy input costs including
grains (wheat, oats, and corn), oils (principally soybean),
non-fat dry milk, natural gas, and diesel fuel. We also operate
a grain merchandising operation, primarily for wheat and oats.
This operation uses futures and options to hedge its net
inventory position to minimize market exposure. 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. As discussed
in Note 2, beginning in fiscal 2008 we do not document our
commodity derivatives as accounting hedges and accordingly we
record all volatility in unallocated corporate items until we
take delivery of the underlying input, when we then transfer the
gain or loss on the hedge to segment operating profit. Pursuant
to this policy, unallocated corporate items for fiscal 2008
included:
|
|
|
|
|
In Millions
|
|
|
|
|
Mark-to-market
net gains on commodity derivative positions, primarily from
agricultural derivatives
|
|
$
|
115.3
|
|
Net realized gains on hedge positions reclassified to segment
operating profit, primarily agricultural derivatives
|
|
|
(55.7
|
)
|
|
Net gain recognized in unallocated corporate items
|
|
$
|
59.6
|
|
|
|
As of May 25, 2008, the net notional value of commodity
derivatives was $784.8 million, of which
$524.8 million relates to agricultural positions and
$260.0 million relates to energy positions. These hedges
relate to inputs that generally will be utilized within the next
12 months.
Amounts Recorded in Accumulated Other Comprehensive Income
(Loss) Unrealized losses from interest rate cash
flow hedges recorded in accumulated other comprehensive income
(loss) as of May 25, 2008, totaled $39.2 million after
tax. These deferred losses are primarily related to interest
rate swaps we entered into in contemplation of future borrowings
and other financing requirements and are being reclassified into
net interest over the lives of the hedged forecasted
transactions. As of May 25, 2008, we had no amounts from
commodity derivatives recorded in accumulated other
comprehensive income (loss). Unrealized losses from foreign
currency cash flow hedges recorded in accumulated other
comprehensive income (loss) as of May 25, 2008, were less
than $1.0 million after-tax. The net amount of pre-tax
gains and losses in accumulated other comprehensive income
(loss) as of May 25, 2008, that is expected to be
reclassified into net earnings within the next 12 months is
$16.1 million of expense.
Concentrations of Credit
Risk We enter into interest rate, foreign
exchange, and certain commodity and equity derivatives,
primarily with a diversified group of highly rated
counterparties. We continually monitor our positions and the
credit ratings of the counterparties involved and, by policy,
limit the amount of credit exposure to any one party. These
transactions may expose us to potential losses due to the credit
risk of nonperformance by these counterparties; however, we have
not incurred a material loss and do not anticipate incurring any
such material losses. We also enter into commodity futures
transactions through various regulated exchanges.
During fiscal 2008, Wal-Mart Stores, Inc. and its affiliates
(Wal-Mart), accounted for 19 percent of our consolidated
net sales and 27 percent of our sales in the
U.S. Retail segment. No other customer accounted for
10 percent or more of our consolidated net sales. Wal-Mart
also represented 5 percent of our sales in the
International segment and 5 percent of our sales in the
Bakeries and Foodservice segment. As of May 25, 2008,
Wal-Mart accounted for 23 percent of our U.S. Retail
receivables, 4 percent of our International receivables,
and 2 percent of our
Bakeries and Foodservice receivables. The 5 largest customers in
our U.S. Retail segment accounted for 57 percent of
its fiscal 2008 net sales, the 5 largest customers in our
International segment accounted for 26 percent of its
fiscal 2008 net sales, and the 5 largest customers in our
Bakeries and Foodservice segment accounted for 39 percent
of its fiscal 2008 net sales.
NOTE 8.
DEBT
Notes Payable The
components of notes payable and their respective
weighted-average interest rates at the end of the periods were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 25, 2008
|
|
|
May 27, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
Notes
|
|
Interest
|
|
|
Notes
|
|
Interest
|
|
In Millions
|
|
Payable
|
|
Rate
|
|
|
Payable
|
|
Rate
|
|
|
U.S. commercial paper
|
|
$
|
687.5
|
|
|
2.9
|
%
|
|
$
|
476.9
|
|
|
5.4
|
%
|
Euro commercial paper
|
|
|
1,386.3
|
|
|
3.4
|
|
|
|
639.0
|
|
|
5.4
|
|
Financial institutions
|
|
|
135.0
|
|
|
9.6
|
|
|
|
138.5
|
|
|
9.8
|
|
|
Total notes payable
|
|
$
|
2,208.8
|
|
|
3.6
|
%
|
|
$
|
1,254.4
|
|
|
5.8
|
%
|
|
|
To ensure availability of funds, we maintain bank credit lines
sufficient to cover our outstanding short-term borrowings. Our
commercial paper borrowings are supported by $3.0 billion
of fee-paid committed credit lines and $403.8 million in
uncommitted lines. As of May 25, 2008, there were no
amounts outstanding on the fee-paid committed credit lines and
$133.8 million was drawn on the uncommitted lines, all by
our international operations. Our committed lines consist of a
$1.9 billion credit facility expiring in October 2012 and a
$1.1 billion credit facility expiring in October 2010.
On October 9, 2007, we entered into a new five-year credit
agreement with an initial aggregate revolving commitment of
$1.9 billion which is scheduled to expire in October 2012.
Concurrent with the execution of the new credit agreement, we
terminated our five-year credit agreement dated January 20,
2004, which provided $750.0 million of revolving credit and
was scheduled to expire in January 2009, and our amended and
restated credit agreement dated October 17, 2006, which
provided $1.1 billion of revolving credit and was scheduled
to expire in October 2007. We then terminated our credit
agreement dated August 3, 2007, which provided an aggregate
revolving commitment of $750.0 million and was scheduled to
expire on December 6, 2007.
Long-Term
Debt On April 11, 2007, we issued
$1.15 billion aggregate principal amount of floating-rate
convertible senior notes. On April 11, 2008, the holders of
those notes put $1.14 billion of the aggregate principal
amount to us for repurchase. We issued commercial paper to fund
the repurchase.
On March 17, 2008, we sold $750.0 million of
5.2 percent fixed-rate notes due March 17, 2015 and on
August 29, 2007, we sold $700.0 million of
5.65 percent fixed-rate notes due September 10, 2012.
The proceeds of the notes were used to repay outstanding
commercial paper. Interest on the notes is payable semi-annually
in arrears. The notes may be redeemed at our option at any time
for a specified make-whole amount. The notes are senior
unsecured, unsubordinated obligations and contain a change of
control provision, as defined in the instruments governing the
notes.
On April 25, 2007, we redeemed or converted all of our zero
coupon convertible debentures due 2022 for a redemption price
equal to the accreted value of the debentures, which was $734.45
per $1,000 principal amount of the debentures at maturity. The
redemption price was settled in cash. For the debentures that
were converted, we delivered cash equal to the accreted value of
the debentures, including $23.3 million of accreted
original issue discount, and issued 284,000 shares of our
common stock worth $17.0 million to settle the conversion
value in excess of the accreted value. This premium was recorded
as a reduction to stockholders equity, net of the
applicable tax benefit. There was no gain or loss associated
with the redemption or conversions. We used proceeds from the
issuance of commercial paper to fund the redemption and
conversions of the debentures.
In January 24, 2007, we issued $1.0 billion of
5.7 percent fixed-rate notes due February 15, 2017 and
$500.0 million of floating-rate notes due January 22,
2010. The proceeds of these notes were used to retire
$1.5 billion of fixed-rate notes that matured in February
2007. The floating-rate notes bear interest equal to three-month
LIBOR plus 0.13 percent, subject to quarterly reset.
Interest on the floating-rate notes is payable quarterly in
arrears. The floating-rate notes cannot be called by us prior to
maturity. Interest on the fixed-rate notes is payable
semi-annually in arrears. The fixed-rate notes may be called by
us at any time for cash equal to the greater of the principal
amounts of the notes and a specified make-whole amount, plus, in
each case, accrued
and unpaid interest. The notes are senior unsecured,
unsubordinated obligations. We had previously entered into
$700.0 million of pay-fixed, forward-starting interest rate
swaps with an average fixed rate of 5.7 percent in
anticipation of the fixed-rate note offering.
Our credit facilities and certain of our long-term debt
agreements contain restrictive covenants. As of May 25,
2008, we were in compliance with all of these covenants.
As of May 25, 2008, the $61.7 million pre-tax loss
recorded in accumulated other comprehensive income (loss)
associated with our previously designated interest rate swaps
will be reclassified to net interest over the remaining lives of
the hedged transactions. The amount expected to be reclassified
from accumulated other comprehensive income (loss) to net
interest in fiscal 2009 is $16.1 million pre-tax.
A summary of our long-term debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
May 25,
|
|
|
May 27,
|
|
In Millions
|
|
2008
|
|
|
2007
|
|
|
6% notes due February 15, 2012
|
|
$
|
1,240.3
|
|
|
$
|
1,240.3
|
|
5.7% notes due February 15, 2017
|
|
|
1,000.0
|
|
|
|
1,000.0
|
|
5.2% notes due March 17, 2015
|
|
|
750.0
|
|
|
|
|
|
5.65% notes due September 10, 2012
|
|
|
700.0
|
|
|
|
|
|
Floating-rate notes due January 22, 2010
|
|
|
500.0
|
|
|
|
500.0
|
|
Medium-term notes, 4.8% to 9.1%, due 2008 to
2078(a)
|
|
|
327.3
|
|
|
|
327.3
|
|
Zero coupon notes, yield
11.1%(b)
|
|
|
150.6
|
|
|
|
134.8
|
|
Debt of contract manufacturer consolidated under FIN 46R
|
|
|
31.8
|
|
|
|
36.8
|
|
Floating-rate convertible senior notes due April 11, 2037
|
|
|
9.5
|
|
|
|
1,150.0
|
|
3.875% notes due November 30, 2007
|
|
|
|
|
|
|
336.3
|
|
3.901% notes due November 30, 2007
|
|
|
|
|
|
|
135.0
|
|
8.2% ESOP loan guaranty, due June 30, 2007
|
|
|
|
|
|
|
1.4
|
|
Other, including capital leases
|
|
|
81.2
|
|
|
|
89.8
|
|
|
|
|
|
4,790.7
|
|
|
|
4,951.7
|
|
Less amount due within one year
|
|
|
(442.0
|
)
|
|
|
(1,734.0
|
)
|
|
Total long-term debt
|
|
$
|
4,348.7
|
|
|
$
|
3,217.7
|
|
|
|
|
|
|
(a) |
|
$100.0 million of our
medium-term notes may mature in fiscal 2009 based on the put
rights of the note holders.
|
|
(b) |
|
We are redeeming these notes on
August 15, 2008. The final payment on that date will be
$154.3 million.
|
We guaranteed the debt of our Employee Stock Ownership Plan.
Therefore, the guaranteed debt was reflected on our Consolidated
Balance Sheets as long-term debt, with a related offset in
additional paid-in capital in stockholders equity. The
debt underlying the guarantee was repaid on June 30, 2007.
Principal payments due on long-term debt in the next five years
based on stated contractual maturities, our intent to redeem, or
put rights of certain note holders are $442.0 million in
fiscal 2009, $508.7 million in fiscal 2010,
$9.0 million in fiscal 2011, $1,249.5 million in
fiscal 2012, and $815.0 million in fiscal 2013.