Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations.
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INTRODUCTION
This Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the fiscal year ended May 29, 2016 for important background regarding, among other things, our key business drivers.
Significant trademarks and service marks used in our business are set forth in
italics
herein. Certain terms used throughout this report are defined in the Glossary section below.
CONSOLIDATED RESULTS OF OPERATIONS
In
the first quarter of fiscal 2017, our operating results were impacted by a difficult macro environment, comparisons to last years first quarter which had relatively high growth in several key measures, and challenging net sales performance in
certain U.S. businesses. Operating profit margin expanded 30 basis points compared to the first quarter of fiscal 2016, and adjusted operating profit margin expansion reflected good progress toward our fiscal 2017 full year goal of 18.3
percent, driven by our productivity and cost-savings initiatives.
A summary of our consolidated financial results for the first quarter of
fiscal 2017 follows:
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Quarter Ended Aug. 28, 2016
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In millions, except
per share
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Quarter Ended
Aug. 28, 2016 vs.
Aug. 30, 2015
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Percent of Net
Sales
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|
Constant-
Currency
Growth (a)
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Net sales
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$
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3,907.9
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(7
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)%
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Operating profit
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645.8
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(6
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)%
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16
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%
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Net earnings attributable to General Mills
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409.0
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(4
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)%
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Diluted earnings per share
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$
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0.67
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(3
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)%
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Organic net sales growth rate (a)
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(4
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)%
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|
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Total segment operating profit (a)
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787.1
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(5
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)%
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(4
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)%
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Adjusted operating profit margin (a)
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19
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%
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|
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|
|
Diluted earnings per share, excluding certain items affecting comparability
(a)
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$
|
0.78
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|
|
|
(1
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)%
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|
|
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|
(1
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)%
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(a)
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See the Non-GAAP Measures section below for our use of measures not defined by GAAP.
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Consolidated
net sales
were as follows:
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Quarter Ended
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Aug. 28,
2016
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Aug. 28, 2016 vs
Aug. 30, 2015
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Aug. 30,
2015
|
|
Net sales (in millions)
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|
$
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3,907.9
|
|
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(7) %
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|
$
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4,207.9
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|
|
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|
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|
|
|
|
|
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Contributions from volume growth (a)
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(8) pts
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|
Net price realization and mix
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2 pts
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Foreign currency exchange
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(1) pt
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(a)
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Measured in tons based on the stated weight of our product shipments.
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The 7 percent decline in net sales primarily reflected lower organic net sales, the divestiture of the North American Green Giant product lines (Green Giant), and the impact of foreign currency exchange.
Organic net sales declined 4 percent with increases in U.S. natural and organic brands and emerging markets more than offset by declines in
Foundation businesses and the U.S. yogurt business. To improve comparability of results
20
from period to period, organic net sales exclude the impacts of foreign currency exchange rate fluctuations, as well as acquisitions, divestitures, and a 53
rd
week of results, when applicable.
Components of organic net sales growth are shown in the following table:
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|
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|
|
Quarter Ended Aug. 28, 2016 vs.
Quarter Ended Aug. 30, 2015
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|
|
|
|
|
Contributions from organic volume growth (a)
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(6)
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|
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pts
|
Organic net price realization and mix
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2
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pts
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Organic net sales growth
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(4)
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pts
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Foreign currency exchange
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(1)
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pt
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Acquisitions and divestitures (b)
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(2)
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pts
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Net sales growth
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(7)
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pts
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(a)
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Measured in tons based on the stated weight of our product shipments.
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(b)
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Primarily the Green Giant divestiture in fiscal 2016.
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Cost of sales
decreased $162 million from the first quarter of fiscal 2016 to $2,491 million. The decrease included a $211 million decrease attributable to lower volume and a $36 million increase
attributable to product rate and mix. The impact from both volume and product rate and mix included the effects of the divestiture of Green Giant. We recorded a $17 million net increase in cost of sales related to the mark-to-market valuation of
certain commodity positions and grain inventories in the first quarter of fiscal 2017 compared to a net decrease of $3 million in the first quarter of fiscal 2016. We recorded $14 million of restructuring charges in cost of sales in the first
quarter of fiscal 2017 compared to $22 million in the same period last year. We also recorded $14 million of restructuring initiative project-related costs in the first quarter of fiscal 2017 compared to $13 million in the same period last year
(please refer to Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report).
Selling, general, and administrative
(SG&A) expenses
decreased $99 million to $712 million in the first quarter of fiscal 2017 compared to the same period in fiscal 2016. The decrease in SG&A expenses primarily reflects a 24 percentage point decrease in media and
advertising expense, and savings from Project Catalyst, Project Compass, and our other cost management initiatives. SG&A expenses as a percent of net sales in the first quarter of fiscal 2017 decreased 110 basis points compared with the first
quarter of fiscal 2016.
Restructuring, impairment, and other exit costs
totaled $59 million in the first quarter of fiscal 2017
compared to $60 million in the same period last year.
21
Total charges associated with our current restructuring initiatives were as follows:
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As Reported
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Quarter Ended
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Fiscal 2016 and 2015
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Estimated
|
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Aug. 28, 2016
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|
Aug. 30, 2015
|
|
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Total
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Future
|
|
|
Total
|
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|
In Millions
|
|
Charge
|
|
|
Cash
|
|
|
Charge
|
|
|
Cash
|
|
|
Charge
|
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|
Cash
|
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|
Charge
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Cash
|
|
|
Charge
|
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Cash
|
|
|
Savings (b)
|
|
Restructuring of certain International product lines
|
|
$
|
36.4
|
|
|
$
|
3.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
43
|
|
|
$
|
8
|
|
|
|
|
|
Closure of Vineland, New Jersey plant
|
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|
20.9
|
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45
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|
23
|
|
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|
66
|
|
|
|
23
|
|
|
|
|
|
Project Compass
|
|
|
1.0
|
|
|
|
4.3
|
|
|
|
51.5
|
|
|
|
8.6
|
|
|
|
54.7
|
|
|
|
36.1
|
|
|
|
4
|
|
|
|
20
|
|
|
|
60
|
|
|
|
60
|
|
|
|
|
|
Project Century
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|
|
14.2
|
|
|
|
7.6
|
|
|
|
30.2
|
|
|
|
5.8
|
|
|
|
364.4
|
|
|
|
46.1
|
|
|
|
55
|
|
|
|
105
|
|
|
|
434
|
|
|
|
159
|
|
|
|
|
|
Project Catalyst
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
0.2
|
|
|
|
19.7
|
|
|
|
140.9
|
|
|
|
92.8
|
|
|
|
|
|
|
|
26
|
|
|
|
141
|
|
|
|
118
|
|
|
|
|
|
Combination of certain operational facilities
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
0.2
|
|
|
|
13.9
|
|
|
|
11.0
|
|
|
|
1
|
|
|
|
|
|
|
|
15
|
|
|
|
12
|
|
|
|
|
|
Total restructuring charges (a)
|
|
|
72.5
|
|
|
|
15.9
|
|
|
|
81.9
|
|
|
|
34.3
|
|
|
|
573.9
|
|
|
|
186.0
|
|
|
|
112
|
|
|
|
179
|
|
|
|
759
|
|
|
|
380
|
|
|
|
|
|
Project-related costs
|
|
|
13.8
|
|
|
|
16.7
|
|
|
|
13.1
|
|
|
|
12.2
|
|
|
|
70.7
|
|
|
|
64.2
|
|
|
|
38
|
|
|
|
41
|
|
|
|
122
|
|
|
|
122
|
|
|
|
|
|
Restructuring charges and project-related costs
|
|
$
|
86.3
|
|
|
$
|
32.6
|
|
|
$
|
95.0
|
|
|
$
|
46.5
|
|
|
$
|
644.6
|
|
|
$
|
250.2
|
|
|
$
|
150
|
|
|
$
|
220
|
|
|
$
|
881
|
|
|
$
|
502
|
|
|
$
|
620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(a)
|
Includes $13.6 million of restructuring charges recorded in cost of sales in fiscal 2017 and $21.8 million in fiscal 2016.
|
(b)
|
Cumulative annual savings targeted by fiscal 2018, including savings from restructuring initiatives approved in the first quarter of fiscal 2017. Also includes SG&A
cost reduction projects.
|
For further information on these restructuring initiatives, please refer to Note 3 to the Consolidated
Financial Statements in Part 1, Item 1 of this report.
Interest, net
for the first quarter of fiscal 2017 totaled $74 million, down $1
million from fiscal 2016, driven primarily by lower average debt balances, partially offset by changes in the mix of debt.
The
effective
tax rate
for the first quarter of fiscal 2017 was 30.9 percent compared to 32.7 percent for the first quarter of fiscal 2016. The 1.8 percentage point decrease was primarily due to discrete state tax benefits and favorable impacts of U.S.
federal legislation passed during the third quarter of fiscal 2016. Our effective tax rate excluding certain items affecting comparability was 31.4 percent in the first quarter of fiscal 2017 compared to 32.3 percent in the first quarter of fiscal
2016 (see the Non-GAAP Measures section below for a description of our use of measures not defined by GAAP).
After-tax
earnings from joint ventures
for the first quarter of fiscal 2017 decreased 6 percent to $24 million compared to $26 million in the same quarter last fiscal year. The decline was primarily driven by unfavorable cost of sales mix and net price
realization and mix at Cereal Partners Worldwide (CPW), partially offset by lower marketing spending for Häagen-Dazs Japan, Inc. (HDJ). On a constant-currency basis, after-tax earnings from joint ventures decreased 10 percent (see the
Non-GAAP Measures section below for a description of our use of measures not defined by GAAP). The change in net sales for each joint venture is set forth in the following table:
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|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended Aug. 28, 2016
|
|
|
|
Percentage Change in
Joint Venture
Net Sales
as Reported
|
|
|
Impact of Foreign
Currency
Exchange
|
|
|
Percentage Change in
Joint Venture
Net Sales on Constant-
Currency Basis
|
|
CPW
|
|
|
(5)%
|
|
|
|
(6) pts
|
|
|
|
1%
|
|
HDJ
|
|
|
19
|
|
|
|
19
|
|
|
|
Flat
|
|
Joint Ventures
|
|
|
(1)%
|
|
|
|
(2) pts
|
|
|
|
1%
|
|
|
|
|
|
|
|
|
|
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|
22
The components of our joint ventures net sales growth are shown in the following table:
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|
|
|
|
|
|
|
|
|
|
Quarter Ended Aug. 28, 2016 vs.
Quarter Ended Aug. 30, 2015
|
|
CPW
|
|
HDJ
|
Contributions from volume growth (a)
|
|
|
2
|
|
|
pts
|
|
|
(1)
|
|
|
pt
|
Net price realization and mix
|
|
|
(1)
|
|
|
pt
|
|
|
1
|
|
|
pt
|
Foreign currency exchange
|
|
|
(6)
|
|
|
pts
|
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|
19
|
|
|
pts
|
Net sales growth
|
|
|
(5)
|
|
|
pts
|
|
|
19
|
|
|
pts
|
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|
|
|
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|
|
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|
|
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(a)
|
Measured in tons based on the stated weight of our product shipments.
|
Average diluted shares outstanding
decreased by 3 million in the first quarter of fiscal 2017 from the same period a year ago due to the impact of share repurchases, partially offset by option
exercises.
SEGMENT OPERATING RESULTS
Our businesses are organized into three operating segments: U.S. Retail; International; and Convenience Stores and Foodservice.
U.S. Retail Segment Results
U.S. Retail net sales were as follows:
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|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Aug. 28,
2016
|
|
|
Aug. 28, 2016 vs
Aug. 30, 2015
|
|
|
Aug. 30,
2015
|
|
Net sales (in millions)
|
|
$
|
2,331.8
|
|
|
|
(8) %
|
|
|
$
|
2,531.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from volume growth (a)
|
|
|
|
|
|
|
(12) pts
|
|
|
|
|
|
Net price realization and mix
|
|
|
|
|
|
|
4 pts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Measured in tons based on the stated weight of our product shipments.
|
The 8 percent decrease in U.S. Retail net sales was driven by declines in the Meals, Yogurt, Cereal and Baking Products operating units, partially offset by growth in the Snacks operating unit. The
decline in net sales also includes the impact of the Green Giant divestiture from the Meals operating unit in fiscal 2016.
The components of
U.S. Retail organic net sales growth are shown in the following table:
|
|
|
|
|
Quarter Ended Aug. 28, 2016 vs.
Quarter Ended Aug. 30, 2015
|
|
|
|
Contributions from organic volume growth (a)
|
|
|
(7)pts
|
|
Organic net price realization and mix
|
|
|
2pts
|
|
|
|
|
|
|
Organic net sales growth
|
|
|
(5)pts
|
|
Acquisitions and divestitures (b)
|
|
|
(3)pts
|
|
Net sales growth
|
|
|
(8)pts
|
|
|
|
|
|
|
(a)
|
Measured in tons based on the stated weight of our product shipments.
|
(b)
|
Primarily the Green Giant divestiture in fiscal 2016.
|
23
U.S. Retail net sales percentage change by operating unit are shown in the following table:
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Aug. 28, 2016
|
|
Meals
|
|
|
(19
|
)%
|
Yogurt
|
|
|
(15
|
)
|
Cereal
|
|
|
(4
|
)
|
Baking Products
|
|
|
(4
|
)
|
Snacks
|
|
|
2
|
|
Total
|
|
|
(8
|
)%
|
|
|
|
|
|
Segment operating profit decreased 6 percent to $594 million in the first quarter of fiscal 2017 compared to $630 million
in the same period of fiscal 2016, primarily driven by higher input costs and the impact of the Green Giant divestiture, partially offset by a decrease in SG&A expenses, including a decrease in media and advertising expense.
International Segment Results
International net sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Aug. 28,
2016
|
|
|
Aug. 28, 2016 vs.
Aug. 30, 2015
|
|
|
Aug. 30,
2015
|
|
Net sales (in millions)
|
|
$
|
1,129.8
|
|
|
|
(6) %
|
|
|
$
|
1,199.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from volume growth (a)
|
|
|
|
|
|
|
(4) pts
|
|
|
|
|
|
Net price realization and mix
|
|
|
|
|
|
|
2 pts
|
|
|
|
|
|
Foreign currency exchange
|
|
|
|
|
|
|
(4) pts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Measured in tons based on the stated weight of our product shipments.
|
The 6 percent decline in International net sales was driven by declines in all regions, including the impact of foreign currency exchange. On a constant-currency basis, net sales declines in the
Europe and Canada regions were partially offset by increases in the Latin America and Asia/Pacific regions. The decline in net sales also includes the impact of the Green Giant divestiture from the Canada region in fiscal 2016.
The components of International organic net sales growth are shown in the following table:
|
|
|
|
|
|
|
Quarter Ended Aug. 28, 2016 vs.
|
|
|
|
|
|
Quarter Ended Aug. 30, 2015
|
|
|
|
|
|
Contributions from organic volume growth (a)
|
|
|
(4)
|
|
|
pts
|
Organic net price realization and mix
|
|
|
3
|
|
|
pts
|
|
|
|
|
Organic net sales growth
|
|
|
(1)
|
|
|
pt
|
Foreign currency exchange
|
|
|
(4)
|
|
|
pts
|
Acquisitions and divestitures (b)
|
|
|
(1)
|
|
|
pt
|
Net sales growth
|
|
|
(6)
|
|
|
pts
|
|
|
|
|
|
|
|
(a)
|
Measured in tons based on the stated weight of our product shipments.
|
(b)
|
Primarily the Green Giant divestiture in fiscal 2016.
|
24
International net sales percentage change by region are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended Aug. 28, 2016
|
|
|
|
Percentage Change in
Net
Sales
as Reported
|
|
|
Percentage Change in
Net Sales on Constant-
Currency Basis
(a)
|
|
Europe
|
|
|
(9
|
)%
|
|
|
(6
|
)%
|
Canada
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Latin America
|
|
|
(4
|
)
|
|
|
3
|
|
Asia/Pacific
|
|
|
(3
|
)
|
|
|
1
|
|
Total
|
|
|
(6
|
)%
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
(a)
|
See the Non-GAAP Measures section below for our use of this measure.
|
Segment operating profit decreased 14 percent to $100 million in the first quarter of fiscal 2017 compared to $117 million in the same period of fiscal 2016, primarily driven by currency-driven inflation
on imported products in certain markets and the impact of the Green Giant divestiture, partially offset by a decrease in SG&A expenses, including a decrease in media and advertising expense. International segment operating profit decreased 11
percent on a constant-currency basis in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 (see the Non-GAAP Measures section below for our use of this measure).
Convenience Stores and Foodservice Segment Results
Convenience Stores and Foodservice net sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Aug. 28,
2016
|
|
|
Aug. 28, 2016 vs
Aug. 30, 2015
|
|
|
Aug. 30,
2015
|
|
Net sales (in millions)
|
|
$
|
446.3
|
|
|
|
(7) %
|
|
|
$
|
477.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from volume growth (a)
|
|
|
|
|
|
|
(2) pts
|
|
|
|
|
|
Net price realization and mix
|
|
|
|
|
|
|
(5) pts
|
|
|
|
|
|
Foreign currency exchange
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Measured in tons based on the stated weight of our product shipments.
|
The 7 percent decline in Convenience Stores and Foodservice net sales was primarily due to market index pricing on bakery flour.
The components of Convenience Stores and Foodservice organic net sales growth are shown in the following table:
|
|
|
|
|
Quarter Ended Aug. 28, 2016 vs.
|
|
|
|
Quarter Ended Aug. 30, 2015
|
|
|
|
Contributions from organic volume growth (a)
|
|
|
(2)pts
|
|
Organic net price realization and mix
|
|
|
(5)pts
|
|
|
|
|
|
|
Organic net sales growth
|
|
|
(7)pts
|
|
Foreign currency exchange
|
|
|
NM
|
|
Acquisitions and divestitures
|
|
|
NM
|
|
Net sales growth
|
|
|
(7)pts
|
|
|
|
|
|
|
(a)
|
Measured in tons based on the stated weight of our product shipments.
|
25
Segment operating profit increased 16 percent to $93 million in the first quarter of fiscal 2017 compared to
$80 million in the first quarter of fiscal 2016, primarily driven by lower input costs, including higher grain merchandising earnings.
UNALLOCATED CORPORATE ITEMS
Unallocated corporate expense totaled $82 million in the first quarter of fiscal 2017 compared to $83 million in the same period in fiscal 2016. In the
first quarter of fiscal 2017, we recorded $14 million of restructuring charges and $14 million of restructuring initiative project-related costs in cost of sales compared to $22 million of restructuring charges and $13 million of restructuring
initiative project-related costs in cost of sales in the same period last year. In addition, we recorded a $17 million net increase in expense related to the mark-to-market valuation of certain commodity positions and grain inventories in the first
quarter of fiscal 2017 compared to a $3 million net decrease in expense in the same period last year.
LIQUIDITY
During the three-month period ended August 28, 2016, cash provided by operations was $288 million compared to $431 million in the same period last year.
The $143 million decrease is primarily due to a $157 million change in current assets and current liabilities. The $157 million change in current assets and liabilities is primarily due to changes in timing of accounts payable and changes in other
current liabilities, which was largely driven by changes in trade and advertising accruals and income taxes payable. These decreases in operating cash flow were partially offset by lower levels of inventory build in the first quarter of fiscal
2017 compared to the same period last year.
Cash used by investing activities during the three-month period ended August 28, 2016, was $127
million, compared to a cash use of $139 million in the same period in fiscal 2016. Investments of $154 million in land, buildings, and equipment in the first three months of fiscal 2016 were $6 million higher than the same period a year ago. In
addition, we received the final payment of $13 million from Sodiaal International (Sodiaal) in the first quarter of 2017 to fully repay the exchangeable note we purchased in fiscal 2012.
Cash used by financing activities during the three-month period ended August 28, 2016, was $156 million compared to $157 million in the same period last year. We had $420 million of net debt payments in
the first three months of fiscal 2017 compared to $212 million of net debt payments in the same period a year ago. We paid $400 million in cash to repurchase common stock and paid $291 million of dividends in the first three months of fiscal 2017
compared to $152 million and $266 million, respectively, in the same period last year.
As of August 28, 2016, we had $735 million of cash and
cash equivalents held in foreign jurisdictions which will be used to fund foreign operations and potential acquisitions. There is currently no need to repatriate these funds in order to meet domestic funding obligations or scheduled cash
distributions. If we choose to repatriate historical earnings from foreign jurisdictions, we intend to do so only in a tax-neutral manner.
26
CAPITAL RESOURCES
Our capital structure was as follows:
|
|
|
|
|
|
|
|
|
In Millions
|
|
Aug. 28,
2016
|
|
|
May 29,
2016
|
|
Notes payable
|
|
$
|
690.5
|
|
|
$
|
269.8
|
|
Current portion of long-term debt
|
|
|
1,103.4
|
|
|
|
1,103.4
|
|
Long-term debt
|
|
|
7,078.0
|
|
|
|
7,057.7
|
|
Total debt
|
|
|
8,871.9
|
|
|
|
8,430.9
|
|
Redeemable interest
|
|
|
841.0
|
|
|
|
845.6
|
|
Noncontrolling interests
|
|
|
380.3
|
|
|
|
376.9
|
|
Stockholders equity
|
|
|
4,908.3
|
|
|
|
4,930.2
|
|
Total capital
|
|
$
|
15,001.5
|
|
|
$
|
14,583.6
|
|
|
|
|
|
|
|
|
|
|
To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding notes payable.
Commercial paper is a continuing source of short-term financing. We have commercial paper programs available to us in the United States and Europe. We also have committed, uncommitted, and asset-backed credit lines that support our foreign
operations.
The following table details the fee-paid committed and uncommitted credit lines we had available as of August 28, 2016:
|
|
|
|
|
|
|
|
|
In Billions
|
|
Facility
Amount
|
|
|
Borrowed
Amount
|
|
Credit facility expiring:
|
|
|
|
|
|
|
|
|
May 2021
|
|
$
|
2.7
|
|
|
|
|
|
June 2019
|
|
|
0.2
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total committed credit facilities
|
|
|
2.9
|
|
|
|
0.1
|
|
Uncommitted credit facilities
|
|
|
0.4
|
|
|
|
0.1
|
|
Total committed and uncommitted credit facilities
|
|
$
|
3.3
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
The third-party holder of the General Mills Cereals, LLC (GMC) Class A Interests receives quarterly preferred
distributions from available net income based on the application of a floating preferred return rate to the holders capital account balance established in the most recent mark-to-market valuation (currently $252 million). On June 1, 2015,
the floating preferred return rate on GMCs Class A Interests was reset to the sum of three-month LIBOR plus 125 basis points. The preferred return rate is adjusted every three years through a negotiated agreement with the Class A
Interest holder or through a remarketing auction.
We have an option to purchase the Class A Interests for consideration equal to the
then current capital account value, plus any unpaid preferred return and the prescribed make-whole amount. If we purchase these interests, any change in the third-party holders 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.
We have a 51 percent controlling
interest in Yoplait SAS and a 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl. Sodiaal holds the remaining interests in each of these entities. We consolidate these entities into our consolidated financial
statements. As of August 28, 2016, we recorded Sodiaals 50 percent interests in Yoplait Marques SNC and Liberté Marques Sàrl as noncontrolling interests, and the redemption value of its 49 percent interest in Yoplait SAS as a
redeemable interest on our Consolidated Balance Sheets. These euro- and Canadian dollar-denominated interests are reported in U.S. dollars on our Consolidated Balance Sheets. Sodiaal has the ability to put all or a portion of its redeemable interest
to us at fair value once per year, up to three times before
27
December 2024. As of August 28, 2016, the redemption value of the redeemable interest was $841 million, which approximates its fair value.
Certain of our long-term debt agreements, our credit facilities, and our noncontrolling interests contain restrictive covenants. As of August 28, 2016,
we were in compliance with all of these covenants.
We have $1,103 million of long-term debt maturing in the next 12 months that is classified
as current, including $1,000 million of 5.7 percent fixed rate notes due February 2017. We believe that cash flows from operations, together with available short- and long-term debt financing, will be adequate to meet our liquidity and capital needs
for at least the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There were no material changes outside the ordinary course of our business in our contractual obligations or off-balance sheet arrangements during the
first quarter of fiscal 2017.
SIGNIFICANT ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 29, 2016. The accounting
policies used in preparing our interim fiscal 2017 Consolidated Financial Statements are the same as those described in our Form 10-K.
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, valuation of long-lived assets,
intangible assets, redeemable interest, stock-based compensation, income taxes, and defined benefit pension, other postretirement benefit, and postemployment benefit plans. The assumptions and methodologies used in the determination of those
estimates as of August 28, 2016, are the same as those described in our Annual Report on Form 10-K for the fiscal year ended May 29, 2016, except as described in Note 14 to the Consolidated Financial Statements in Part I, Item 1 of this report.
We tested our goodwill and brand intangible assets for impairment on our annual assessment date in the second quarter of fiscal 2016. As of
our annual impairment assessment date, there was no impairment of any of our intangible assets as their related fair values were substantially in excess of the carrying values, except for the
Mountain High
and
Uncle Tobys
brands.
The excess fair value above the carrying value of these brand assets is as follows:
|
|
|
|
|
|
|
|
|
In Millions
|
|
Carrying
Value
|
|
|
Excess Fair Value
Above Carrying
Value
|
|
Mountain High
|
|
$
|
35.4
|
|
|
|
20
|
%
|
Uncle Tobys
|
|
$
|
52.2
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
Our strategies for fiscal 2017 and fiscal 2018 will focus our investments on our brands and platforms with the strongest
profitable growth potential. As a result, certain parts of our U.S. Retail segment could experience reduced future sales projections. We performed a sensitivity analysis for certain brand intangible assets and determined that, while not impaired as
of May 29, 2016, the
Progresso
and
Food Should Taste Good
brands had risk of decreasing coverage. We will continue to monitor these businesses for potential impairment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2016, the Financial Accounting Standards Board (FASB) issued new accounting requirements for the accounting and presentation of stock-based payments. This will result in realized windfall and
shortfall tax benefits upon exercise or vesting of stock-based awards being recorded in our Consolidated Statements of Earnings in addition to other presentation changes. The requirements of the new standard are effective for annual reporting
28
periods beginning after December 15, 2016, and interim periods within those annual periods, which for us is the first quarter of fiscal 2018. Early adoption is permitted. We are in the
process of analyzing the impact on our results of operations and financial position.
In February 2016, the FASB issued new accounting
requirements for accounting, presentation and classification of leases. This will result in most leases being capitalized as a right of use asset with a related liability on our Consolidated Balance Sheets. The requirements of the new standard are
effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, which for us is the first quarter of fiscal 2020. We are in the process of analyzing the impact on our results of
operations and financial position.
In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts
with customers. The requirements of the new standard and its subsequent amendments are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods, which for us is the first quarter
of fiscal 2019. We do not expect this guidance to have a material impact on our results of operations or financial position.
NON-GAAP
MEASURES
We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures
provide useful information to investors and include these measures in other communications to investors.
For each of these non-GAAP financial
measures, we are providing below a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why we believe the non-GAAP measure provides useful information to investors and any
additional purposes for which we use the non-GAAP measure. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure.
Organic Net Sales Growth Rates
This 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. We provide organic net sales growth rates for our consolidated net sales and segment net
sales. We believe that organic net sales growth rates provide useful information to investors because they provide transparency to underlying performance in our net sales by excluding the effect that foreign currency exchange rate fluctuations, as
well as acquisitions, divestitures, and a 53
rd
week, when
applicable, have on year-to-year comparability. A reconciliation of these measures to reported net sales growth rates, the relevant GAAP measures, are included in our Consolidated Results of Operations and Segment Operating Results discussions in
the MD&A above.
29
Total Segment Operating Profit and Related Constant-Currency Growth Rate
This 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. We 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 15 to the Consolidated Financial Statements in Part I, Item 1 of this report.
Constant-currency total
segment operating profit growth is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change in Total
Segment Operating Profit
as
Reported
|
|
|
Impact of Foreign
Currency
Exchange
|
|
|
Percentage Change in Total
Segment Operating Profit on
a Constant-Currency
Basis
|
|
Quarter Ended Aug. 28, 2016
|
|
|
(5
|
)%
|
|
|
(1
|
)pt
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Profit as a Percent of Net Sales (Adjusted Operating Profit Margin) Excluding Certain Items
Affecting Comparability
We believe this measure provides useful information to investors because it is important for assessing our
operating profit margin on a comparable basis. The adjustments are either items resulting from infrequently occurring events or items that, in managements judgment, significantly affect the year-over-year assessment of operating results.
|
|
|
|
|
|
|
|
|
Quarter Ended Aug. 28, 2016
|
|
|
|
|
Percent of Net
Sales
|
|
Operating profit as reported
|
|
$
|
645.8
|
|
|
|
16.5
|
%
|
Mark-to-market effects (a)
|
|
|
16.6
|
|
|
|
0.4
|
%
|
Restructuring charges (b)
|
|
|
72.5
|
|
|
|
1.9
|
%
|
Project-related costs (b)
|
|
|
13.8
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
Adjusted operating profit
|
|
$
|
748.7
|
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
(a)
|
See Note 6 to the Consolidated Financial Statements in Part I, Item 1 of this report.
|
(b)
|
See Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report.
|
30
Diluted EPS Excluding Certain Items Affecting Comparability and Related Constant-Currency Growth Rate
This 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. We believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate earnings performance on a comparable year-over-year basis. The
adjustments are either items resulting from infrequently occurring events or items that, in managements judgment, significantly affect the year-over-year assessment of operating results.
The reconciliation of our GAAP measure, diluted EPS, to diluted EPS excluding certain items affecting comparability and the related constant-currency
growth rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Per Share Data
|
|
Aug. 28,
2016
|
|
|
Aug. 30,
2015
|
|
|
Change
|
|
Diluted earnings per share, as reported
|
|
$
|
0.67
|
|
|
$
|
0.69
|
|
|
|
(3
|
)%
|
Mark-to-market effects (a)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
Restructuring costs (b)
|
|
|
0.08
|
|
|
|
0.09
|
|
|
|
|
|
Project-related costs (b)
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, excluding certain items affecting comparability
|
|
$
|
0.78
|
|
|
$
|
0.79
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
Foreign currency exchange impact
|
|
|
|
|
|
|
|
|
|
|
Flat
|
|
Diluted earnings per share growth, excluding certain items affecting comparability, on
a constant-currency basis
|
|
|
|
|
|
|
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
See Note 6 to the Consolidated Financial Statements in Part I, Item 1 of this report.
|
(b)
|
See Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report.
|
See our reconciliation below of the effective income tax rate as reported to the effective income tax rate excluding certain items affecting comparability for the tax impact of each item affecting
comparability.
Constant-Currency After-tax Earnings from Joint Ventures Growth Rates
We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our joint ventures by
excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.
After-tax earnings from joint ventures growth rate on a constant-currency basis is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change in After-
tax Earnings from Joint
Ventures as Reported
|
|
|
Impact of Foreign
Currency
Exchange
|
|
|
Percentage Change in After-
tax Earnings from Joint
Ventures on Constant-
Currency Basis
|
|
Quarter Ended Aug. 28, 2016
|
|
|
(6
|
)%
|
|
|
4pts
|
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Net Sales Growth Rates for Our International Segment on Constant-Currency Basis
We believe that this measure of our International segment and region net sales provides useful information to investors because it provides transparency
to the underlying performance in markets outside the United States by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.
Net sales growth rates for our International segment on a constant-currency basis are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended Aug. 28, 2016
|
|
|
|
Percentage Change in
Net Sales
as Reported
|
|
|
Impact of Foreign
Currency
Exchange
|
|
|
Percentage Change in
Net Sales on Constant-
Currency Basis
|
|
Europe
|
|
|
(9
|
)%
|
|
|
(3
|
)pts
|
|
|
(6
|
)%
|
Canada
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Latin America
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
3
|
|
Asia/Pacific
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
1
|
|
Total International
|
|
|
(6
|
)%
|
|
|
(4
|
)pts
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant-Currency International Segment Operating Profit Growth Rates
We believe that this measure provides useful information to investors because it provides transparency to underlying performance of the International
segment by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.
International segment operating profit growth rate on a constant-currency basis is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change in
International Segment
Operating Profit as
Reported
|
|
|
Impact of Foreign
Currency
Exchange
|
|
|
Percentage Change in
International Segment Operating
Profit on Constant-Currency Basis
|
|
Quarter Ended Aug. 28, 2016
|
|
|
(14
|
)%
|
|
|
(3
|
)pts
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Effective Income Tax Rate Excluding Certain Items Affecting Comparability
We believe this measure provides useful information to investors because it is important for assessing the effective tax rate excluding certain items
affecting comparability and presents the income tax effects of certain items affecting comparability.
Effective income tax rates excluding
certain items affecting comparability are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Aug. 28, 2016
|
|
|
Aug. 30, 2015
|
|
In Millions
|
|
Pretax
Earnings (a)
|
|
|
Income
Taxes
|
|
|
Pretax
Earnings (a)
|
|
|
Income
Taxes
|
|
As reported
|
|
$
|
571.9
|
|
|
$
|
176.6
|
|
|
$
|
608.0
|
|
|
$
|
198.6
|
|
Mark-to-market effects (b)
|
|
|
16.6
|
|
|
|
6.1
|
|
|
|
(2.7
|
)
|
|
|
(1.0
|
)
|
Restructuring charges (c)
|
|
|
72.5
|
|
|
|
24.2
|
|
|
|
81.9
|
|
|
|
23.6
|
|
Project-related costs (c)
|
|
|
13.8
|
|
|
|
5.0
|
|
|
|
13.1
|
|
|
|
4.9
|
|
As adjusted
|
|
$
|
674.8
|
|
|
$
|
211.9
|
|
|
$
|
700.3
|
|
|
$
|
226.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
|
|
|
|
30.9
|
%
|
|
|
|
|
|
|
32.7
|
%
|
As adjusted
|
|
|
|
|
|
|
31.4
|
%
|
|
|
|
|
|
|
32.3
|
%
|
Sum of adjustment to income taxes
|
|
|
|
|
|
|
35.3
|
|
|
|
|
|
|
|
27.5
|
|
Average number of common shares - diluted EPS
|
|
|
|
|
|
|
612.4
|
|
|
|
|
|
|
|
615.5
|
|
Impact of income tax adjustments on diluted EPS excluding certain items affecting
comparability
|
|
|
|
|
|
$
|
0.06
|
|
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings before income taxes and after-tax earnings from joint ventures.
|
(b)
|
See Note 6 to the Consolidated Financial Statements in Part I, Item 1 of this report.
|
(c)
|
See Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report.
|
GLOSSARY
Accelerated depreciation associated with restructured assets.
The
increase in depreciation expense caused by updating the salvage value and shortening the useful life of depreciable fixed assets to coincide with the end of production under an approved restructuring plan, but only if impairment is not present.
Adjusted operating profit margin.
Operating profit adjusted for certain items affecting year-over-year comparability, divided by net
sales.
AOCI
. Accumulated other comprehensive income (loss).
Constant currency.
Financial results translated to U.S. dollars using constant foreign currency exchange rates based on the rates in effect for the comparable prior-year period. To present this
information, current period results for entities reporting in currencies other than United States dollars are translated into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year,
rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange
rate between the current fiscal period and the corresponding period of the prior fiscal year.
33
Derivatives.
Financial instruments such as futures, swaps, options, and forward contracts that we use
to manage our risk arising from changes in commodity prices, interest rates, foreign exchange rates, and stock prices.
Euribor.
Euro
Interbank Offered Rate.
Fair value hierarchy.
For purposes of fair value measurement, we categorize assets and liabilities into one of
three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as
follows:
|
|
|
Level 1:
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2:
|
|
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or
liabilities in inactive markets.
|
|
|
Level 3:
|
|
Unobservable inputs reflecting managements assumptions about the inputs used in pricing the asset or liability.
|
Fixed charge coverage ratio.
The sum of earnings before income taxes and fixed charges (before tax),
divided by the sum of the fixed charges (before tax) and interest.
Foundation businesses.
Foundation businesses consist primarily of
refrigerated dough, desserts, and soup in our U.S. Retail segment and bakery flour and frozen dough products in our Convenience Stores and Foodservice segment, as well as other product lines not included in Growth businesses.
Generally Accepted Accounting Principles (GAAP).
Guidelines, procedures, and practices that we are required to use in recording and reporting
accounting information in our financial statements.
Goodwill.
The difference between the purchase price of acquired companies plus the
fair value of any noncontrolling and redeemable interests and the related fair values of net assets acquired.
Growth
businesses.
Growth businesses include cereal, snack bars, the natural and organic portfolio, hot snacks, Mexican products, and yogurt in our U.S. Retail segment; our International segment; and cereal, yogurt, snacks, frozen meals, biscuits,
and baking mixes in our Convenience Stores and Foodservice segment.
Hedge accounting.
Accounting for qualifying hedges that allows
changes in a hedging instruments fair value to offset corresponding changes in the hedged item in the same reporting period. Hedge accounting is permitted for certain hedging instruments and hedged items only if the hedging relationship is
highly effective, and only prospectively from the date a hedging relationship is formally documented.
Interest bearing instruments.
Notes payable, long-term debt, including current portion, cash and cash equivalents, and certain interest bearing investments classified within prepaid expenses and other current assets and other assets.
LIBOR.
London Interbank Offered Rate.
Mark-to-market.
The act of determining a value for financial instruments, commodity contracts, and related assets or liabilities based on the
current market price for that item.
Net mark-to-market valuation of certain commodity positions.
Realized and unrealized gains and
losses on derivative contracts that will be allocated to segment operating profit when the exposure we are hedging affects earnings.
Net
price realization.
The impact of list and promoted price changes, net of trade and other price promotion costs.
Noncontrolling
interests.
Interests of subsidiaries held by third parties.
34
Notional principal amount.
The principal amount on which fixed-rate or floating-rate interest
payments are calculated.
OCI.
Other Comprehensive Income.
Organic net sales growth
. Net sales growth adjusted for foreign currency translation, as well as acquisitions,
divestitures, and a 53
rd
week impact, when applicable.
Project-related costs.
Costs incurred related to our restructuring initiatives not included in restructuring charges.
Redeemable interest.
Interest of subsidiaries held by a third party that can be redeemed outside of our control and therefore cannot be classified
as a noncontrolling interest in equity.
Total debt.
Notes payable and long-term debt, including current portion.
Translation adjustments.
The impact of the conversion of our foreign affiliates financial statements to U.S. dollars for the purpose of
consolidating our financial statements.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and assumptions. We also may make written or oral forward-looking statements, including statements
contained in our filings with the Securities and Exchange Commission and in our reports to stockholders.
The words or phrases will
likely result, are expected to, will continue, is anticipated, estimate, plan, project, or similar expressions identify forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those currently anticipated or
projected. We wish to caution you not to place undue reliance on any such forward-looking statements.
In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that could affect our financial performance and could cause our actual results in future periods to differ materially from any
current opinions or statements.
Our future results could be affected by a variety of factors, such as: competitive dynamics in the consumer
foods industry and the markets for our products, including new product introductions, advertising activities, pricing actions, and promotional activities of our competitors; economic conditions, including changes in inflation rates, interest rates,
tax rates, or the availability of capital; product development and innovation; consumer acceptance of new products and product improvements; consumer reaction to pricing actions and changes in promotion levels; acquisitions or dispositions of
businesses or assets; changes in capital structure; changes in the legal and regulatory environment, including labeling and advertising regulations and litigation; impairments in the carrying value of goodwill, other intangible assets, or other
long-lived assets, or changes in the useful lives of other intangible assets; changes in accounting standards and the impact of significant accounting estimates; product quality and safety issues, including recalls and product liability; changes in
consumer demand for our products; effectiveness of advertising, marketing, and promotional programs; changes in consumer behavior, trends, and preferences, including weight loss trends; consumer perception of health-related issues, including
obesity; consolidation in the retail environment; changes in purchasing and inventory levels of significant customers; fluctuations in the cost and availability of supply chain resources, including raw materials, packaging, and energy; disruptions
or inefficiencies in the supply chain; effectiveness of restructuring and cost saving initiatives; volatility in the market value of derivatives used to manage price risk for certain commodities; benefit plan expenses due to changes in plan asset
values and discount rates used to determine plan liabilities; failure or breach of our information technology systems; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic
uncertainty due to terrorism or war.
35
You should also consider the risk factors that we identify in Item 1A of Part I of our Annual Report on Form
10-K for the fiscal year ended May 29, 2016, 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.