General Mills 10-K 2007
Documents found in this filing:
Washington, D.C. 20549
AMENDMENT NO. 1
Commission File Number 1-1185
GENERAL MILLS, INC.
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(b) of the Act:
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 x 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 x
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 x 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 or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Aggregate market value of Common Stock held by non-affiliates of the registrant, based on the closing price of $48.10 per share as reported on the New York Stock Exchange on November 25, 2005 (the last business day of the registrants most recently completed second fiscal quarter): $17,078 million.
Number of shares of Common Stock outstanding as of July 14, 2006: 352,811,767 (excluding 149,494,897 shares held in the treasury).
In the Annual Report of General Mills, Inc. on Form 10-K for the fiscal year ended May 28, 2006 (the Initial Report), management provided a report that concluded that our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was effective as of May 28, 2006. We subsequently have determined that our policies and procedures requiring an annual impairment assessment of goodwill and other indefinite-lived intangible assets on a combined basis were ineffective for the separate annual impairment assessment of our brand intangibles, as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, we concluded that we had a material weakness in our internal control over financial reporting as of May 28, 2006. As of January 4, 2007, we believe we have remediated the material weakness by changing our policies and procedures to require the performance of a separate annual impairment assessment of the brand intangibles, and we have completed that assessment.
We have completed the required annual impairment assessment for fiscal years 2004, 2005 and 2006, and confirmed that the fair value of brand intangibles exceeded their carrying value in all years. Therefore, the material weakness identified above did not result in any changes to our consolidated financial statements presented in the Initial Report or to our consolidated financial statements for any other period.
We are filing this Amendment No. 1 on Form 10-K/A (Amendment No. 1) to:
Our consolidated financial statements and the notes thereto, the Report of Management Responsibilities and the Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Related Financial Statement Schedule included in Item 8 of this Amendment No. 1 are unchanged from the Initial Report, and no other information contained in the Initial Report is amended or updated by this Amendment No. 1.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Item 8 and Item 9A of Part II of the Initial Report are hereby deleted in their entirety and replaced with the Item 8 and Item 9A included herein. Item 15 of Part IV of the Initial Report is also hereby deleted in its entirety and replaced with the Item 15 included herein.
The information contained in this Amendment No. 1 does not reflect events occurring after the filing of the Initial Report and does not modify or update the disclosures therein, except as specifically identified above. Significant developments with respect to those disclosures, as well as other changes in our business, have occurred and are described in filings we have made with the Securities and Exchange Commission after filing the Initial Report.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (AS RESTATED)
The management of General Mills, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Companys internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of May 28, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework.
Based on our assessment using the criteria set forth by COSO in Internal ControlIntegrated Framework, management originally included a report in our Annual Report on Form 10-K for the fiscal year ended May 28, 2006, that concluded that our internal control over financial reporting was effective as of May 28, 2006. We subsequently have determined that our policies and procedures requiring an annual impairment assessment of goodwill and other indefinite-lived intangible assets on a combined basis were ineffective for the separate annual impairment assessment of our brand intangibles, as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, we concluded that we had a material weakness in our internal control over financial reporting as of May 28, 2006. As a result of the material weakness, there is more than a remote likelihood that a material misstatement in our annual or interim financial statements would not be prevented or detected. However, the material weakness did not result in a restatement of our consolidated financial statements presented in this Annual Report on Form 10-K/A.
Solely because of the material weakness in our internal control over financial reporting described above, management has, as of the date of this report, restated its assessment and has now concluded that our internal control over financial reporting was not effective as of May 28, 2006.
KPMG LLP, the independent registered public accounting firm that audited our consolidated financial statements included in the Annual Report on Form 10-K/A for the fiscal year ended May 28, 2006, has issued an audit report on managements restated assessment of the effectiveness of our internal control over financial reporting as of May 28, 2006.
January 5, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REGARDING INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors
We have audited managements restated assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting (as Restated), that General Mills, Inc. and subsidiaries did not maintain effective internal control over financial reporting as of May 28, 2006, because of the effect of the material weakness identified in managements assessment, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). General Mills management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in managements assessment:
The Companys policies and procedures requiring an annual impairment assessment of goodwill and other indefinite-lived intangible assets on a combined basis were ineffective for the separate annual impairment assessment of its brand intangibles, as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, the Company concluded that it had a material weakness in its internal control over financial reporting as of May 28, 2006. As a result of the material weakness, there is more than a remote likelihood that a material misstatement in the Companys annual or interim financial statements would not be prevented or detected.
As stated in the second and third paragraphs of Managements Report on Internal Control over Financial Reporting (as Restated), managements assessment of the effectiveness of the Companys internal control over financial reporting as of May 28, 2006 has been restated to reflect the impact of the aforementioned material weakness in internal control over financial reporting. Accordingly, we have restated our report on internal control over financial reporting to include this material weakness.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 28, 2006 and May 29, 2005 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 28, 2006. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements for the fiscal year ended May 28, 2006, and this report does not affect our report dated July 27, 2006, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, managements restated assessment that General Mills, Inc. and subsidiaries did not maintain effective internal control over financial reporting as of May 28, 2006, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, General Mills, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of May 28, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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 and recommended to the full Board of Directors that they be included in the Annual Report. The Audit Committee also recommended to the Board of Directors that the independent auditors be reappointed for fiscal 2007, subject to ratification by the stockholders at the annual meeting.
July 27, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 28, 2006 and May 29, 2005, 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 28, 2006. In connection with our audits of the consolidated financial statements we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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 28, 2006 and May 29, 2005, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended May 28, 2006 in conformity with U.S. generally accepted accounting principles. 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of General Mills internal control over financial reporting as of May 28, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 27, 2006 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.
GENERAL MILLS, INC. AND SUBSIDIARIES
GENERAL MILLS, INC. AND SUBSIDIARIES
GENERAL MILLS, INC. AND SUBSIDIARIES
GENERAL MILLS, INC. AND SUBSIDIARIES
GENERAL MILLS, INC. AND SUBSIDIARIES
1. Summary of Significant Accounting Policies
Basis of Presentation Our consolidated financial statements include the accounts of General Mills, Inc. and all subsidiaries in which it has a controlling financial interest. Intercompany transactions and accounts are eliminated in consolidation. Certain prior years amounts have been reclassified to conform to the current year presentation.
Our fiscal year ends on the last Sunday in May. Fiscal years 2006 and 2005 each consisted of 52 weeks, and fiscal 2004 consisted of 53 weeks. Our International segment, with the exception of Canada and our export operations, is reported for the 12 calendar months ended April 30.
Cash and Cash Equivalents We consider all investments purchased with an original maturity of three months or less to be cash equivalents.
Inventories Most U.S. inventories are valued at the lower of cost, using the last-in, first-out (LIFO) method, or market. Grain inventories are valued at market. The balance of the U.S. inventories and inventories of consolidated operations outside of the U.S. 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 selling, general and administrative expense and are recognized when the related finished product is shipped to the customer.
Land, Buildings, Equipment and Depreciation Land is recorded at historical cost. Buildings and equipment are recorded at historical cost and depreciated over estimated useful lives, primarily using the straight-line method. Ordinary maintenance and repairs are charged to operating costs. Buildings are usually depreciated over 40 to 50 years, and equipment is usually depreciated over three to 15 years. Accelerated depreciation methods generally are used for income tax purposes. 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.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount 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 are identifiable and 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 discounted cash flows or independent appraisals as appropriate.
Goodwill and Other Intangible Assets Goodwill represents the difference between the purchase prices of acquired companies and the related fair values of net assets acquired. Goodwill is not subject to amortization and is tested for impairment annually for each of our reporting units and whenever events or changes in circumstances indicate that an impairment may have occurred. Impairment testing compares the carrying amount of goodwill for a reporting unit with its fair value. Fair value is estimated based on discounted cash flows. When the carrying amount of goodwill exceeds its fair value, an impairment has occurred. We have completed our annual impairment testing and determined none of our goodwill is impaired.
The costs of patents, copyrights and other intangible assets with finite lives are amortized over their estimated useful lives. Intangibles with indefinite lives, principally brands, are carried at cost. Finite and 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. An impairment loss would be recognized when estimated undiscounted future cash flows are less than the carrying amount of the intangible. Measurement of an impairment loss would be based on the excess of the carrying amount of the intangible over its fair value. We have completed our annual impairment testing and determined none of our other intangible assets are impaired.
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 also 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.
Variable Interest Entities At May 28, 2006, we had invested in four variable interest entities (VIEs). We are the primary beneficiary (PB) of General Mills Capital, Inc. (GM Capital), a subsidiary that we consolidate as set forth in Note Eight. We also have an interest in a contract manufacturer at our former facility in Geneva, Illinois. Even though we are the PB, we have not consolidated this entity because it is not material to our results of operations, financial condition, or liquidity at May 28, 2006. This entity had property and equipment of $50 million and long-term debt of $50 million at May 28, 2006. We are not the PB of the remaining two VIEs. Our maximum exposure to loss from these VIEs is limited to the $150 million minority interest in GM Capital, the contract manufacturers debt and our $6 million equity investments in the remaining two VIEs.
Revenue Recognition We recognize sales revenue upon acceptance of the shipment by our customers. Sales are reported net of consumer coupon, trade promotion and other costs, including estimated returns. Coupons are
expensed when distributed based on estimated redemptions. Trade promotions are expensed based on estimated participation and performance levels for offered programs. 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 saleable condition for redistribution to other customers or outlets. Returns are expensed as reductions of net sales.
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 are charged against earnings in the year incurred.
Foreign Currency Translation Results of foreign operations are translated into U.S. dollars using the average exchange rates each month. Assets and liabilities of these operations are translated at the period-end exchange rates, and the differences from historical exchange rates are reflected within Accumulated Other Comprehensive Income in Stockholders Equity as cumulative translation adjustments.
Derivative Instruments We use derivatives primarily to hedge our exposure to changes in foreign exchange rates, interest rates and commodity prices. All derivatives are recognized on the Condolidated 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 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 other comprehensive income 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 other comprehensive income are reclassified to earnings at that time. Any ineffectiveness is recognized in earnings in the current period.
Stock-based Compensation We use the intrinsic value method for measuring the cost of compensation paid in our common stock. This method defines our cost as the excess of the stocks market value at the time of the grant over the amount that the employee is required to pay. Our stock option plans require that the employees payment (i.e., exercise price) be at least the market value as of the grant date.
Restricted share awards, including restricted stock and restricted stock units, are measured at the fair market value of our stock on the date of the award, and are initially recorded in Stockholders Equity as unearned compensation, net of estimated forfeitures. Unearned compensation is amortized to compensation expense on a straight-line basis over the requisite service period.
The following table illustrates the pro forma effect on net earnings and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, (SFAS 123) Accounting for Stock-Based Compensation, to all employee stock-based compensation, net of estimated forfeitures.
The weighted-average grant date fair values of the employee stock options granted were estimated as $8.04 in fiscal 2006, $8.32 in fiscal 2005, and $8.54 in fiscal 2004 using the Black-Scholes option-pricing model with the following assumptions:
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(Revised) Share-Based Payment (SFAS 123R), which generally requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value and to recognize this cost over the period during which the employee is required to provide service in exchange for the award. The standard is effective for public companies for annual periods beginning after June 15, 2005, with several transition options regarding prospective versus retrospective application. We will adopt SFAS 123R in the first quarter of fiscal 2007, using the modified prospective method. Accordingly, prior year results will not be restated, but fiscal 2007 results will
be presented as if we had applied the fair value method of accounting for stock-based compensation from the beginning of fiscal 1997. 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 currently required, thereby reducing net operating cash flows and increasing net financing cash flows in periods following adoption. While those amounts cannot be estimated for future periods, the amount of operating cash flows generated in prior periods for such excess tax deductions was $41 million for fiscal 2006, $62 million for fiscal 2005 and $63 million for fiscal 2004.
Certain equity-based compensation plans contain provisions that accelerate vesting of awards upon retirement, disability or death of eligible employees and directors. For the periods presented, 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. SFAS No. 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 will prospectively revise 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.
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.
New Accounting Standards The FASB ratified in October 2004, Emerging Issues Task Force Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share (EITF 04-8). EITF 04-8 was effective for us in the third quarter of fiscal 2005. The adoption of EITF 04-8 increased diluted shares outstanding to give effect to shares that were contingently issuable related to our zero coupon convertible debentures issued in October 2002. Also, net earnings used for earnings per share calculations were adjusted, using the if-converted method. See Note Eleven.
In the second quarter of fiscal 2006, we adopted SFAS No. 153, Exchanges of Nonmonetary Assets An Amendment of APB Opinion No. 29. 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. 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 the fourth quarter of fiscal 2006 and it did not have a material impact on our results of operations or financial condition.
2. Acquisitions and Divestitures
On March 3, 2006, we acquired Elysèes Consult S.A., the franchise operator of a Häagen-Dazs shop in France. On November 21, 2005, we acquired Croissant King, a producer of frozen pastry products in Australia. On October 31, 2005, we 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 million. The pro forma effect of these acquisitions was not material.
On February 28, 2005, Snack Ventures Europe (SVE), our snacks joint venture with PepsiCo, Inc., was terminated and our 40.5 percent interest was redeemed. On April 4, 2005, we sold our Lloyds barbecue business to Hormel Foods Corporation. We received $799 million in cash proceeds from these dispositions and recorded $499 million in gains in fiscal 2005.
3. Restructuring and Other Exit Costs
In fiscal 2006, we recorded restructuring and other exit costs of $30 million pursuant to approved plans consisting of: $13 million related to the closure of our Swedesboro, New Jersey plant; $6 million related to the closure of a production line at our Montreal, Quebec plant; $4 million related to restructuring actions at our Allentown, Pennsylvania plant; $3 million of asset impairment charges for one of our plants; and $4 million related primarily to fiscal 2005 initiatives. The fiscal 2006 restructuring charges included $17 million to write down assets to fair value, $7 million of severance costs for 425 employees being terminated, and $6 million of other exit costs. The carrying value of the assets written down was $18 million.The fair values of the assets written down were determined using discounted cash flows.
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, to another facility, affecting 175 employees.
In fiscal 2005, we recorded restructuring and other exit costs of $84 million pursuant to approved plans, consisting of: $74 million of charges associated with fiscal 2005 supply chain initiatives; $3 million of charges associated with Bakeries and Foodservice severance charges resulting from fiscal 2004 decisions; and $7 million of charges associated with restructuring actions prior to fiscal 2005. The charges from the fiscal 2005 initiatives included severance and pension and postretirement curtailment costs of $14 million for 551 employees being terminated, $20 million to write off assets, $30 million for the write-down of assets to their net realizable value and $10 million of other exit costs. The carrying value of the assets written down was $36 million. Net realizable value was determined by independent market analysis.
The fiscal 2005 initiatives were undertaken to further increase asset utilization and reduce manufacturing and sourcing costs, resulting in decisions regarding plant closures and production realignment. The actions included decisions to: close our flour milling plant in Vallejo, California, affecting 43 employees; close our par-baked bread plant in Medley, Florida, affecting 42 employees; relocate bread production from our Swedesboro, New Jersey plant, affecting 110 employees; relocate a portion of our cereal production from Cincinnati, Ohio, affecting 45 employees; close our snacks foods plant in Iowa City, Iowa, affecting 83 employees; close our dry mix production at Trenton, Ontario, affecting 53 employees; and relocate our frozen baked goods line from our plant in Chelsea, Massachusetts to another facility.
These fiscal 2005 supply chain actions also resulted in certain associated expenses in fiscal 2005, primarily resulting from adjustments to the depreciable life of the assets necessary to reflect the shortened asset lives which coincided with the final production dates at the Cincinnati and Iowa City plants. These associated expenses were recorded as cost of sales and totaled $18 million.
In fiscal 2004, we recorded restructuring and other exit costs of $26 million pursuant to approved plans. These costs included: a severance charge for 142 employees being terminated as a result of a plant closure in the Netherlands; costs related to a plant closure in Brazil, including a severance charge for 201 employees; costs for the closure of our tomato canning facility in Atwater, California, including severance costs for 47 employees; adjustments of costs associated with previously announced closures of manufacturing facilities; and a severance charge for 132 employees, related primarily to actions in our Bakeries and Foodservice organization. The carrying value of the assets written down was $3 million.
The analysis of our restructuring and other exit costs is as follows:
4. Investments in Joint Ventures
We have a 50 percent equity interest in Cereal Partners Worldwide (CPW), a joint venture with Nestlé S.A. that manufactures and markets cereal products outside the United States and Canada. We have guaranteed a portion of CPWs debt. See Note Fifteen. We have a 50 percent equity interest in 8th Continent, LLC, a domestic joint venture with DuPont to develop and market soy-based products. We have 50 percent equity interests in the following joint ventures for the manufacture, distribution and marketing of Häagen-Dazs frozen ice cream products and novelties: Häagen-Dazs Japan K.K.; Häagen-Dazs Korea Company Limited; and Häagen-Dazs Marketing & Distribution (Philippines) Inc. We have a 49 percent equity interest in Häagen-Dazs Distributors (Thailand) Company Limited. We also have a 50 percent equity interest in Seretram, a joint venture with Co-op de Pau for the production of Green Giant canned corn in France. In May 2006, we acquired a controlling financial interest in our Häagen-Dazs joint venture in the Philippines for less than $1 million.
Fiscal 2005 and fiscal 2004 results of operations include our share of the after-tax earnings of SVE through the date of its termination on February 28, 2005.
On July 14, 2006, CPW acquired the Uncle Tobys cereal business in Australia for approximately $385 million. This business had revenues of approximately $100 million for the fiscal year ended June 30, 2006. We funded our 50 percent share of the purchase price by making an additional equity contribution in CPW from cash generated from our international operations, including our international joint ventures.
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 million for our share of the restructuring costs, primarily accelerated depreciation and severance, incurred in fiscal 2006.
Our cumulative investment in these joint ventures was $186 million at the end of fiscal 2006 and $211 million at the end of fiscal 2005. We made aggregate investments in the joint ventures of $7 million in fiscal 2006, $15 million in fiscal 2005 and $31 million in fiscal 2004. We received aggregate dividends from the joint ventures of $77 million in fiscal 2006, $83 million in fiscal 2005 and $60 million in fiscal 2004.
Results from our CPW joint venture are reported as of and for the twelve months ended March 31. The Häagen-Dazs and Seretram joint venture results are reported as of and for the twelve months ended April 30. 8th Continents results are presented on the same basis as our fiscal year.
Summary combined financial information for the joint ventures (including SVE through the date of its termination on February 28, 2005) on a 100 percent basis follows:
5. Goodwill and Intangible Assets
The components of goodwill and other intangible assets are as follows:
Brand intangibles increased by $79 million, as a result of foreign currency translation.
The changes in the carrying amount of goodwill for fiscal 2004, 2005 and 2006 are as follows:
Future purchase price adjustments to goodwill may occur upon the resolution of certain income tax accounting matters. See Note Fourteen.
6. Financial Instruments and Risk Management Activities
Financial Instruments The carrying values of cash and cash equivalents, receivables, accounts payable, other current liabilities and notes payable approximate fair value. Marketable securities are carried at fair value. As of May 28, 2006, a comparison of cost and market values of our marketable debt and equity securities is as follows:
Earnings include realized gains from sales of available-for-sale marketable securities of less than $1 million in fiscal 2006, $2 million in fiscal 2005 and $20 million in fiscal 2004. Gains and losses are determined by specific identification. The aggregate unrealized gains and losses on available-for-sale securities, net of tax effects, are classified in Accumulated Other Comprehensive Income within Stockholders Equity. At May 28, 2006, we owned twenty marketable securities with a fair market value less than cost. The fair market value of these securities was $0.3 million below their cost.
Scheduled maturities of our marketable securities are as follows:
Cash, cash equivalents and marketable securities totaling $48 million as of May 28, 2006, and $63 million as of May 29, 2005, were pledged as collateral. These assets are primarily pledged as collateral for certain derivative contracts.
The fair values and carrying amounts of long-term debt, including the current portion, were $4,566 million and $4,546 million at May 28, 2006, and $6,074 million and $5,893 million at May 29, 2005. 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 business 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 existing variable-rate debt and planned future issuances of fixed-rate debt. We use a combination of interest rate swaps and forward-starting swaps to reduce interest rate volatility and to achieve a desired proportion of variable versus fixed-rate debt, based on current and projected market conditions.
Variable Interest Rate Exposures Except as discussed below, variable-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 are reclassified into earnings over the life of the associated debt. The amount of hedge ineffectiveness was less than $1 million in fiscal 2006, 2005 and 2004.
Fixed Interest Rate Exposures Fixed-to-variable 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 interest expense. The amount of hedge ineffectiveness was less than $1 million in fiscal 2006, 2005 and 2004.
In anticipation of the Pillsbury acquisition and other financing needs, we entered into pay-fixed interest rate swap contracts during fiscal 2001 and fiscal 2002 totaling $7.1 billion to lock in our interest payments on the associated debt. During fiscal 2004, $750 million of these swaps matured. In fiscal 2005, $2 billion of these swaps matured. At May 28, 2006, we still owned $3.15 billion of Pillsbury-related pay-fixed swaps that were previously neutralized with offsetting pay-floating swaps in fiscal 2002. At May 28, 2006, $500 million of our pay-floating interest rate swaps were designated as a fair value hedge of our 2.625 percent notes due October 2006.
In May 2006, we entered into a $100 million pay-fixed, forward-starting interest rate swap with a fixed rate of 5.7 percent in anticipation of fixed-rate debt refinancing probable of occurring in fiscal 2007. Subsequent to May 28, 2006, we entered into an additional $600 million of pay-fixed, forward-starting interest rate swaps with an average fixed rate of 5.7 percent.
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 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 variable rates are based on rates as of the end of the reporting period.
The swap contracts mature at various dates from 2007 to 2015, as follows:
Foreign Exchange Transaction Risk We are exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany product shipments and intercompany loans. Our primary U.S. dollar exchange rate exposures are with the Canadian dollar, the euro, the Australian dollar, the Mexican peso and the British pound. Forward contracts of generally less than 12 months duration are used to hedge some of these risks. Hedge effectiveness is assessed based on changes in forward rates. The amount of hedge ineffectiveness was $1 million or less in fiscal 2006, 2005 and 2004.
Commodity Price Risk We are exposed to price fluctuations primarily as a result of anticipated purchases of ingredient and packaging materials. The principal raw materials that we use are cereal grains, sugar, dairy products, vegetables, fruits, meats, vegetable oils, and other agricultural products as well as paper and plastic packaging materials, operating supplies and energy. We use a combination of long cash positions with suppliers, exchange-traded futures and option contracts and over-the-counter hedging mechanisms to reduce price fluctuations in a desired percentage of forecasted purchases over a period of less than two years. Except as discussed below, commodity derivatives are accounted for as cash flow hedges, with effectiveness assessed based on changes in futures prices. The amount of hedge ineffectiveness was a gain of $3 million in fiscal 2006, and were losses of $1 million or less in fiscal 2005 and 2004.
Other Risk Management Activities We enter into certain derivative contracts in accordance with our risk management strategy that do not meet the criteria for hedge accounting, including those in our grain merchandising operation, certain foreign currency derivatives and offsetting interest rate swaps as discussed above. Even though they may not qualify as hedges, these derivatives have the economic impact of largely mitigating the associated risks. These derivatives were not acquired for trading purposes and are recorded at fair value with changes in fair value recognized in earnings each period.
Our grain merchandising operation provides us efficient access to and more informed knowledge of various commodities markets. This operation uses futures and options to hedge its net inventory position to minimize market exposure. As of May 28, 2006, our grain merchandising operation had futures and options contracts that essentially hedged its net inventory position. None of the contracts extended beyond May 2007. All futures contracts and options are exchange-based instruments with ready liquidity and determinable market values. Neither the results of operations nor the year-end positions of our grain merchandising operation were material.
Unrealized losses from cash flow hedges recorded in Accumulated Other Comprehensive Income as of May 28, 2006, totaled $92 million, primarily related to interest rate swaps we entered into in contemplation of future borrowings and other financing requirements (primarily related to the Pillsbury acquisition), which are being reclassified into interest expense over the lives of the hedged forecasted transactions. The majority of the remaining gains and losses from cash flow hedges recorded in Accumulated Other Comprehensive Income as of May 28, 2006, were related to foreign currency contracts. The net amount of the gains and losses in Accumulated Other Comprehensive Income as of May 28, 2006, that is expected to be reclassified into earnings within the next twelve months is $39 million in expense. See Note Seven for the impact of these reclassifications on interest 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 nor are losses anticipated. We also enter into commodity futures transactions through various regulated exchanges.
Our top five customers in the U.S. Retail segment account for 47 percent of the segments net sales. Payment terms vary depending on product categories and markets. We establish and monitor credit limits to manage our credit risk. We have not incurred a material loss nor are any such losses anticipated.
Notes Payable The components of notes payable and their respective weighted average interest rates at the end of the periods were as follows:
To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding short-term borrowings. As of May 28, 2006, we had $2.95 billion in committed lines and $335 million in uncommitted lines. Our committed lines consist of a $750 million five-year credit facility expiring in January 2009, a $1.1 billion 364-day credit facility expiring in October 2006 and a new $1.1 billion five-year credit facility expiring in October 2010.
Long-term Debt On October 28, 2005, we repurchased a significant portion of our zero coupon convertible debentures pursuant to the put rights of the holders for an aggregate purchase price of $1.33 billion, including $77 million of accreted original issue discount classified within financing cash flows in the Consolidated Statement of Cash Flows. These debentures had an aggregate principal amount at maturity of $1.86 billion. We incurred no gain or loss from this repurchase. As of May 28, 2006, there were $371 million in aggregate principal amount at maturity of the debentures outstanding, or $268 million of accreted value. We used proceeds from the issuance of commercial paper to fund our repurchase of the debentures. We have also reclassified the remaining zero coupon convertible debentures to long-term debt based on the put rights of the holders.
Our credit facilities, certain of our long-term debt agreements and our minority interests contain restrictive debt covenants. At May 28, 2006, we were in compliance with all of these covenants.
On March 23, 2005, we commenced a cash tender offer for our outstanding 6 percent notes due in 2012. The tender offer resulted in the purchase of $500 million principal amount of the notes. Subsequent to the expiration of the tender offer, we purchased an additional $260 million principal amount of the notes in the open market. The aggregate purchases resulted in debt repurchase costs of $137 million, consisting of $73 million of noncash interest rate swap losses reclassified from Accumulated Other Comprehensive Income, $59 million of purchase premium and $5 million of noncash unamortized cost of issuance expense.
As of May 28, 2006, the $86 million recorded in Accumulated Other Comprehensive Income associated with our previously designated interest rate swaps will be reclassified to interest expense over the remaining lives of the hedged forecasted transaction. The amount expected to be reclassified from Accumulated Other Comprehensive Income to interest expense in fiscal 2007 is $33 million. The amount reclassified from Accumulated Other Comprehensive Income in fiscal 2006 was $33 million.
A summary of our long-term debt is as follows:
See Note Six for a description of related interest-rate derivative instruments.
We have guaranteed the debt of our Employee Stock Ownership Plan; therefore, the loan is reflected on our consolidated balance sheets as long-term debt with a related offset in Unearned Compensation in Stockholders Equity.
Principal payments due on long-term debt in the next five years based on stated contractual maturities or put rights of certain note holders are (in millions) $2,131 in fiscal 2007, $854 in fiscal 2008, $117 in fiscal 2009, $55 in fiscal 2010 and $0 in fiscal 2011.
8. Minority Interests
In April 2002, we and certain of our wholly owned subsidiaries contributed assets with an aggregate fair market value of approximately $4 billion to another wholly owned subsidiary, General Mills Cereals, LLC (GMC), a limited liability company. GMC is a separate and distinct legal entity from the Company and its subsidiaries, and has separate assets, liabilities, businesses and operations. The contributed assets consist primarily of manufacturing assets and intellectual property associated with the production and retail sale of Big G ready-to-eat cereals, Progresso soups and Old El Paso products. In exchange for the contribution of these assets, GMC issued the managing membership interest and preferred membership interests to our wholly owned subsidiaries. The managing member directs the business activities and operations of GMC and has fiduciary responsibilities to GMC and its members. Other than rights to vote on certain matters, holders of the preferred membership interests have no right to direct the management of GMC.
In May 2002, one of our wholly owned subsidiaries sold 150,000 Class A preferred membership interests in GMC to an unrelated third-party investor in exchange for $150 million. On October 8, 2004, another of our wholly owned subsidiaries sold 835,000 Series B-1 preferred membership interests in GMC in exchange for $835 million. In connection with the sale of the Series B-1 interests, GMC and its existing members entered into a Third Amended and Restated Limited Liability Company Agreement of GMC (the LLC Agreement), setting forth, among other things, the terms of the Series B-1 and Class A interests held by the third-party investors and the rights of those investors. Currently, all interests in GMC, other than the 150,000 Class A interests and 835,000 Series B-1 interests, but including all managing member interests, are held by our wholly owned subsidiaries.
The Class A interests receive quarterly preferred distributions at a floating rate equal to (i) the sum of three-month LIBOR plus 90 basis points, divided by (ii) 0.965. The LLC Agreement requires that the rate of the distributions on the Class A interests be adjusted by agreement between the third-party investor holding the Class A interests and GMC every five years, beginning in June 2007. If GMC and the investor fail to mutually agree on a new rate of preferred distributions, GMC must remarket the Class A interests to set a new distribution rate. Upon a failed remarketing, the rate over LIBOR will be increased by 75 basis points until the next scheduled remarketing date. GMC, through its managing member, may elect to repurchase all of the Class A interests at any time for an amount equal to the holders capital account, plus any applicable make-whole amount. Under certain circumstances, GMC also may be required to be dissolved and liquidated, including, without limitation, the bankruptcy of GMC or its subsidiaries, failure to deliver the preferred distributions, failure to comply with portfolio requirements, breaches of certain covenants, lowering of our senior debt rating below either Baa3 by Moodys or BBB by Standard & Poors, and a failed attempt to remarket the Class A interests as a result of a breach of GMCs obligations to assist in such remarketing. In the event of a liquidation of GMC, each member of GMC would receive the amount of its then capital account balance. The managing member may avoid liquidation in most circumstances by exercising an option
to purchase the Class A interests. An election to purchase the preferred membership interests could impact our liquidity by requiring us to refinance the purchase price.
The Series B-1 interests are entitled to receive quarterly preferred distributions at a fixed rate of 4.5 percent per year, which is scheduled to be reset to a new fixed rate through a remarketing in October 2007. Beginning in October 2007, the managing member of GMC may elect to repurchase the Series B-1 interests for an amount equal to the holders then current capital account balance plus any applicable make-whole amount. GMC is not required to purchase the Series B-1 interests nor may these investors put these interests to us.
Upon the occurrence of certain exchange events (as described below), the Series B-1 interests will be exchanged for shares of our perpetual preferred stock. An exchange will occur upon our senior unsecured debt rating falling below either Ba3 as rated by Moodys Investors Service, Inc. or BB- as rated by Standard & Poors or Fitch, Inc., our bankruptcy or liquidation, a default on any of our senior indebtedness resulting in an acceleration of indebtedness having an outstanding principal balance in excess of $50 million, failing to pay a dividend on our common stock in any fiscal quarter, or certain liquidating events as set forth in the LLC Agreement.
If GMC fails to make a required distribution to the holders of Series B-1 interests when due, we will be restricted from paying any dividend (other than dividends in the form of shares of common stock) or other distributions on shares of our common or preferred stock, and may not repurchase or redeem shares of our common or preferred stock, until all such accrued and undistributed distributions are paid to the holders of the Series B-1 interests. If the required distributions on the Series B-1 interests remain undistributed for six quarterly distribution periods, the managing member will form a nine-member board of directors to manage GMC. Under these circumstances, the holder of the Series B-1 interests will have the right to appoint one director. Upon the payment of the required distributions, the GMC board of directors will be dissolved. At May 28, 2006, we have made all required distributions to the Series B-1 interests. Upon the occurrence of certain events the Series B-1 interests will be included in our computation of diluted earnings per share as a participating security.
For financial reporting purposes, the assets, liabilities, results of operations and cash flows of GMC are included in our consolidated financial statements. The third-party investors Class A and Series B-1 interests in GMC are reflected as minority interests on our Consolidated Balance Sheets, and the return to the third party investors is reflected as interest expense, net, in the Consolidated Statements of Earnings.
In fiscal 2003, General Mills Capital, Inc. (GM Capital), a subsidiary, sold $150 million of its Series A preferred stock to an unrelated third-party investor. GM Capital regularly purchases our receivables. These receivables are included in the Consolidated Balance Sheets and the $150 million purchase price for the Series A preferred stock is reflected as minority interest on the Consolidated Balance Sheets. The proceeds from the issuance of the preferred stock were used to reduce short-term debt. The return to the third-party investor is reflected as interest expense, net, in the Consolidated Statements of Earnings.
At May 28, 2006, our cash and cash equivalents included $11 million in GMC and $21 million in GM Capital that are restricted from use for our general corporate purposes pursuant to the terms of our agreements with third-party minority interest investors.
9. Stockholders Equity
Cumulative preference stock of 5 million shares, without par value, is authorized but unissued.
We had a stockholder rights plan that expired on February 1, 2006.
The Board of Directors has authorized the repurchase, from time to time, of common stock for our treasury, provided that the number of treasury shares shall not exceed 170 million.
In October 2004, we purchased 17 million shares of our common stock from Diageo plc (Diageo) for $750 million, or $45.20 per share. This share repurchase was made in conjunction with Diageos sale of 33 million additional shares of our common stock in an underwritten public offering.
Concurrently in October 2004, Lehman Brothers Holdings Inc. issued $750 million of notes, which are mandatorily exchangeable for shares of our common stock. In connection with the issuance of those notes, an affiliate of Lehman Brothers entered into a forward purchase contract with us, under which we are obligated to deliver to such affiliate between 14 million and 17 million shares of our common stock, subject to adjustment under certain circumstances. These shares will generally be deliverable by us in October 2007, in exchange for $750 million in cash or, in certain circumstances, securities of an affiliate of Lehman Brothers. We recorded a $43 million fee for this forward purchase contract as an adjustment to Stockholders Equity.
The following table provides details of Other Comprehensive Income:
Except for reclassifications to earnings, changes in Other Comprehensive Income are primarily noncash items.
Accumulated Other Comprehensive Income balances, net of tax effects, were as follows:
10. Stock Plans
We use broad-based stock plans to help ensure managements alignment with our stockholders interests. As of May 28, 2006, a total of 15,021,864 shares were available for grant in the form of stock options, restricted shares, restricted stock units and shares of common stock under the 2005 Stock Compensation Plan (2005 Plan) through December 31, 2007, and the 2001 Compensation Plan for Nonemployee Directors (2001 Director Plan) through September 30, 2006. Restricted shares and restricted stock units may also be granted under the Executive Incentive Plan (EIP) through September 25, 2010. Stock-based awards now outstanding include some granted under the 1990, 1993, 1995, 1996, 1998 (senior management), 1998 (employee) and 2003 stock plans, under which no further awards may be granted. The stock plans provide for full vesting of options, restricted shares and restricted stock units upon completion of specified service periods or in the event of a change of control. On May 28, 2006, a total of 3,606,659 restricted shares and restricted stock units were outstanding under all plans.
Stock Options Options may be priced at 100 percent or more of the fair market value on the date of grant, and generally vest four years after the date of grant. Options generally expire within 10 years and one month after the date of grant. The 2001 Director Plan allows each nonemployee director to receive upon election and re-election to the Board of Directors options to purchase 10,000 shares of common stock that generally vest one year, and expire within 10 years, after the date of grant.
Information on stock option activity follows:
Restricted Stock Awards Stock and units settled in stock subject to a restricted period and a purchase price, if any (as determined by the Compensation Committee of the Board of Directors), may be granted to key employees under the 2005 Plan. Restricted shares and restricted stock units, up to 50 percent of the value of an individuals cash incentive award, may also be granted through the EIP. Certain restricted share and restricted stock unit awards require the employee to deposit personally owned shares (on a one-for-one basis) with us during the restricted period. Restricted shares and restricted stock units generally vest and become unrestricted four years after the date of grant. Participants are entitled to cash dividends on such awarded shares and units, but the sale or transfer of these shares and units is restricted during the vesting period. Participants holding restricted shares, but not restricted stock units, are also entitled to vote on matters submitted to holders of common stock for a vote. The 2001 Director Plan allows each nonemployee director to receive upon election and re-election to the Board 1,000 restricted stock units that generally vest one year after the date of grant.
Information on restricted stock activity follows:
Stock-based compensation expense related to restricted stock awards was $45 million for fiscal 2006, $38 million for fiscal 2005 and $27 million for fiscal 2004.
11. Earnings Per Share
Basic and diluted earnings per share were calculated using the following:
The diluted EPS calculation does not include stock options for 8 million shares in fiscal 2006, 9 million shares in fiscal 2005 and 12 million shares in fiscal 2004 that were considered anti-dilutive because their exercise price was greater than the average market price of our stock during the period.
12. Interest, Net
The components of interest, including distributions to minority interest holders, net are as follows:
We made cash interest payments of $378 million in fiscal 2006, $450 million in fiscal 2005 and $497 million in fiscal 2004.
13. Retirement Benefits
Pension Plans We have defined-benefit retirement plans covering most U.S., Canadian and United Kingdom employees. Benefits for salaried employees are based on length of service and final average compensation. The hourly plans include various monthly amounts for each year of credited service. Our funding policy is consistent with the requirements of applicable laws. Our principal domestic retirement plan covering salaried employees has a provision that any excess pension assets would vest in plan participants if the plan is terminated within five years of a change in control.
Other Postretirement Benefit Plans We sponsor plans that provide health-care benefits to the majority of our U.S. 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 and made $95 million of voluntary contributions to these plans in fiscal 2006. Assumed health care cost trend rates are as follows:
We use our fiscal year-end as a measurement date for all our pension and postretirement benefit plans.
Summarized financial information about pension and other postretirement benefit plans is presented below. For
fiscal 2006, the impact of plan amendments on the projected benefit obligation is primarily related to incremental benefits under agreements with the unions representing the hourly workers at certain of our U.S. cereal, dough and foodservice plants covering the four-year period ending April 25, 2010.
The accumulated benefit obligation for all defined-benefit plans was $2,689 million at May 28, 2006, and $2,868 million at May 29, 2005.
Plans with accumulated benefit obligations in excess of plan assets are as follows:
Components of net periodic benefit (income) costs are as follows:
Assumptions Weighted-average assumptions used to determine benefit obligations are as follows:
Weighted-average assumptions used to determine net periodic benefit (income) costs are as follows:
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.
Weighted-average asset allocations for the past two fiscal years for our pension and other postretirement benefit plans are as follows:
The investment objective for the U.S. pension and other postretirement benefit plans is to secure the benefit obligations to participants at a reasonable cost to us. The goal is to optimize the long-term return on plan assets at a moderate level of risk. The pension and postretirement portfolios are broadly diversified across asset classes. Within asset classes, the portfolios are further diversified across investment styles and investment organizations. For the pension and other postretirement plans, the long-term investment policy allocations are: 30 percent to U.S. equities, 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.
Contributions and Future Benefit Payments We expect to contribute $15 million to our pension plans and other postretirement benefit plans in fiscal 2007. Estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
Certain international operations have defined-benefit pension plans that are not presented in the tables above. These international operations had prepaid pension assets of less than $1 million at the end of fiscal 2006 and 2005, and they had accrued pension plan liabilities of $4 million at the end of fiscal 2006 and $7 million at the end of fiscal 2005. Pension expense associated with these plans was $3 million for fiscal 2006, $6 million for fiscal 2005 and $3 million for fiscal 2004.
Defined Contribution Plans The General Mills Savings Plan is a defined contribution plan that covers salaried and nonunion employees. It had net assets of $2,031 million as of May 28, 2006, and $1,797 million as of May 29, 2005. This plan is a 401(k) savings plan that includes a number of investment funds and an Employee Stock Ownership Plan (ESOP). Our total expense related to defined-contribution plans recognized was $46 million in fiscal 2006, $17 million in fiscal 2005 and $20 million in fiscal 2004.
The ESOPs only assets are our common stock and temporary cash balances. The ESOPs share of the total defined contribution expense was $38 million in fiscal 2006, $11 million in fiscal 2005 and $15 million in fiscal 2004. The ESOPs expense is calculated by the shares allocated method.
The ESOP uses our common stock to convey benefits to employees and, through increased stock ownership, to further align employee interests with those of stockholders. We match a percentage of employee contributions to the General Mills Savings Plan with a base match plus a variable year-end match that depends on annual results. Employees receive our match in the form of common stock.
The ESOP originally purchased our common stock principally with funds borrowed from third parties and guaranteed by us. The ESOP shares are included in net shares outstanding for the purposes of calculating earnings per share. The ESOPs third-party debt is described in Note Seven.
We treat cash dividends paid to the ESOP the same as other dividends. Dividends received on leveraged shares (i.e., all shares originally purchased with the debt proceeds) are used for debt service, while dividends received on unleveraged shares are passed through to participants.
Our cash contribution to the ESOP is calculated so as to pay off enough debt to release sufficient shares to make our match. The ESOP uses our cash contributions to the plan, plus the dividends received on the ESOPs leveraged shares, to make principal and interest payments on the ESOPs debt. As loan payments are made, shares become unencumbered by debt and are committed to be allocated. The ESOP allocates shares to individual employee accounts on the basis of the match of employee payroll savings (contributions), plus reinvested dividends received on previously allocated shares. The ESOP incurred interest expense of less than $1 million in fiscal 2006, 2005 and 2004. The ESOP used dividends of $4 million in fiscal 2006, $4 million in fiscal 2005 and $5 million in fiscal 2004, along with our contributions of less than $1 million in fiscal 2006, 2005 and 2004 to make interest and principal payments.
The number of shares of our common stock in the ESOP is summarized as follows:
Executive Incentive Plan Our Executive Incentive Plan provides incentives to key employees who have the greatest potential to contribute to current earnings and successful future operations. All employees at the level of vice president and above participate in the plan. These awards are approved by the Compensation Committee of the Board of Directors, which consists solely of independent, outside directors. Awards are based on performance against pre-established goals approved by the Committee. Profit-sharing expense was $23 million, $17 million and $16 million in fiscal 2006, 2005 and 2004, respectively.
14. Income Taxes
The components of Earnings before Income Taxes and After-tax Earnings from Joint Ventures and the corresponding income taxes thereon are as follows:
We paid income taxes of $321 million in fiscal 2006, $227 million in fiscal 2005 and $225 million in fiscal 2004.
The following table reconciles the U.S. statutory income tax rate with our effective income tax rate:
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
Of the total valuation allowance of $858 million, $768 million relates to a deferred tax asset for losses recorded as part of the Pillsbury acquisition. In the future, when tax benefits related to these losses are finalized, the reduction in the valuation allowance will be allocated to reduce goodwill. Of the remaining valuation allowance, $66 million relates to state and foreign operating loss carry forwards. In the future, if tax benefits are realized related to the operating losses, the reduction in the valuation allowance will reduce tax expense. At May 28, 2006, we believe it is more likely than not that the remainder of our deferred tax asset is realizable.
The carry forward period on the net tax benefited amounts of our foreign loss carry forwards are as follows: $20 million do not expire; $5 million will expire in 2007 and 2008; $21 million will expire between 2009 and 2014; and $16 million will expire in 2018.
We have not recognized a deferred tax liability for unremitted earnings of $1.03 billion from our foreign operations because we do not expect those earnings to become taxable to us in the foreseeable future.
15. Leases and Other Commitments
An analysis of rent expense by property leased follows:
Some leases require payment of property taxes, insurance and maintenance costs in addition to the rent payments. Contingent and escalation rent in excess of minimum rent payments and sublease income netted in rent expense were insignificant.
Noncancelable future lease commitments (in millions) are: $92 in fiscal 2007; $75 in fiscal 2008; $67 in fiscal 2009; $52 in fiscal 2010; $37 in fiscal 2011; and $85 after fiscal 2011, with a cumulative total of $408. These future lease commitments will be partially offset by estimated future sublease receipts of $55 million.
We are contingently liable under guarantees and comfort letters for $171 million. The guarantees and comfort letters are principally issued to support borrowing arrangements, primarily for our joint ventures.
We are involved in various claims, including environmental matters, arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters, either individually or in aggregate, will not have a material adverse effect on our financial position or results of operations.
16. Business Segment and Geographic Information
We operate exclusively in the consumer foods industry, with multiple operating segments organized generally by product categories. We aggregate our operating segments into three reportable segments by type of customer and geographic region as follows: U.S. Retail, 69 percent of our fiscal 2006 consolidated net sales; International, 16 percent of our fiscal 2006 consolidated net sales; and Bakeries and Foodservice, 15 percent of our fiscal 2006 consolidated net sales.
U.S. Retail reflects business with a wide variety of grocery stores, mass merchandisers, club stores, specialty stores and drug, dollar and discount chains operating throughout the United States. Our major product categories in this business segment are ready-to-eat cereals, meals, refrigerated and frozen dough products, baking products, snacks, yogurt and organic foods. Our International segment is made up of retail businesses outside of the United States, including a retail business in Canada that largely mirrors our U.S. Retail product mix, and foodservice businesses outside of the United States and Canada. Our Bakeries and Foodservice segment consists of products marketed throughout the United States and Canada to retail and wholesale bakeries, commercial and noncommercial foodservice distributors and operators, restaurants, and convenience stores.
During fiscal 2006, one customer, Wal-Mart Stores, Inc. (Wal-Mart), accounted for approximately 18 percent of our consolidated net sales and 24 percent of our sales in the U.S. Retail segment. No other customer accounted for 10 percent or more of our consolidated net sales. At May 28,
2006, Wal-Mart accounted for 17 percent of our trade receivables invoiced in the U.S. Retail segment. The top five customers in our U.S. Retail segment accounted for approximately 47 percent of its fiscal 2006 net sales, and the top five customers in our Bakeries and Foodservice segment accounted for approximately 36 percent of its fiscal 2006 net sales.
Our management reviews operating results to evaluate segment performance. Operating profit for the reportable segments excludes unallocated corporate items (including a foreign currency transaction gain of $2 million in fiscal 2006 and foreign currency transaction losses of $6 million and $2 million in fiscal 2005 and 2004, respectively); net interest; restructuring and other exit costs; gain on divestitures; debt repurchase costs; income taxes; and after-tax earnings from joint ventures, as these items are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by management. Under our supply chain organization, our manufacturing, warehouse and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. As a result, fixed assets, capital expenditures for long-lived assets, and depreciation and amortization expenses are neither maintained nor available by operating segment. Transactions between reportable segments were not material in the periods presented.
The following table provides net sales information for our reportable segments:
The following table provides financial information identified by geographic area:
17. Supplemental Information
The components of certain balance sheet accounts are as follows:
Inventories of $739 million at May 28, 2006, and $758 million at May 29, 2005, were valued at LIFO.
Certain statement of earnings amounts are as follows:
18. Quarterly Data (Unaudited)
Summarized quarterly data for fiscal 2006 and 2005 follows:
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of May 28, 2006. Based on our initial evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of May 28, 2006. We subsequently have determined that our policies and procedures requiring an annual impairment assessment of goodwill and other indefinite-lived intangible assets on a combined basis were ineffective for the separate annual impairment assessment of our brand intangibles, as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, we concluded that we had a material weakness in our internal control over financial reporting as of May 28, 2006. Solely as a result of the aforementioned material weakness, our Chief Executive Officer and Chief Financial Officer have now concluded that our disclosure controls and procedures were not effective as of May 28, 2006. As of January 4, 2007, we believe we have remediated the material weakness by changing our policies and procedures to require the performance of a separate annual impairment assessment of the brand intangibles, and we have completed that assessment. Our assessments for fiscal years 2004, 2005 and 2006 have confirmed that the fair value of brand intangibles exceeded their carrying value in all years. Therefore, there were no changes to our consolidated financial statements presented in this report.
There were no changes in our internal control over financial reporting during our fiscal quarter ended May 28, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of our long-term debt are not filed and, in lieu thereof, we agree to furnish copies to the SEC upon request.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.