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General Mills 10-K 2014
10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED May 25, 2014

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number: 001-01185

 

 

GENERAL MILLS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   41-0274440
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
Number One General Mills Boulevard  
Minneapolis, Minnesota   55426
(Address of principal executive offices)   (Zip Code)

(763) 764-7600

(Registrant’s telephone number, including area code)

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

 

Title of each class

 

Name of each exchange

on which registered

Common Stock, $.10 par value   New York Stock Exchange

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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 registrant’s 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. ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

Aggregate market value of Common Stock held by non-affiliates of the registrant, based on the closing price of $50.12 per share as reported on the New York Stock Exchange on November 22, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter): $31,396.8 million.

Number of shares of Common Stock outstanding as of June 13, 2014: 612,508,457 (excluding 142,104,871 shares held in the treasury).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2014 Annual Meeting of Stockholders are incorporated by reference into Part III.


Table of Contents

Table of Contents

 

          Page  
Part I      
Item 1    Business      3   
Item 1A    Risk Factors      8   
Item 1B    Unresolved Staff Comments      13   
Item 2    Properties      14   
Item 3    Legal Proceedings      14   
Item 4    Mine Safety Disclosures      14   
Part II      
Item 5    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      15   
Item 6    Selected Financial Data      16   
Item 7    Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   
Item 7A    Quantitative and Qualitative Disclosures About Market Risk      44   
Item 8    Financial Statements and Supplementary Data      46   
Item 9    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      99   
Item 9A    Controls and Procedures      99   
Item 9B    Other Information      100   
Part III      
Item 10    Directors, Executive Officers and Corporate Governance      100   
Item 11    Executive Compensation      100   
Item 12    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      101   
Item 13    Certain Relationships and Related Transactions, and Director Independence      101   
Item 14    Principal Accounting Fees and Services      101   
Part IV      
Item 15    Exhibits, Financial Statement Schedules      102   
Signatures         105   

 

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PART I

 

ITEM 1 Business

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

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

COMPANY OVERVIEW

We are a leading global manufacturer and marketer of branded consumer foods sold through retail stores. We also are a leading supplier of branded and unbranded food products to the foodservice and commercial baking industries. We manufacture our products in 16 countries and market them in more than 100 countries. In addition to our consolidated operations, we have 50 percent interests in two strategic joint ventures that manufacture and market food products sold in more than 130 countries worldwide.

We offer a variety of food products that provide great taste, nutrition, convenience and value for consumers around the world, with a focus on five large and growing global categories:

 

   

ready-to-eat cereal;

 

   

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

 

   

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

 

   

yogurt; and

 

   

super-premium ice cream.

Other significant product categories include:

 

   

baking mixes and ingredients;

 

   

refrigerated and frozen dough; and

 

   

frozen and shelf-stable vegetables.

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

We manage and review the financial results of our business under three operating segments: U.S. Retail; International; and Convenience Stores and Foodservice. See Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Item 7 of this report for a description of our segments. For financial information by segment and geographic area, see Note 16 to the Consolidated Financial Statements in Item 8 of this report.

 

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Customers. Our primary customers are grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, commercial and noncommercial foodservice distributors and operators, restaurants, and convenience stores. We generally sell to these customers through our direct sales force. We use broker and distribution arrangements for certain products or to serve certain types of customers. For further information on our customer credit and product return practices, please refer to Note 2 to the Consolidated Financial Statements in Item 8 of this report.

During fiscal 2014, Wal-Mart Stores, Inc. and its affiliates (Wal-Mart) accounted for 21 percent of our consolidated net sales and 30 percent of our net sales in the U.S. Retail segment. No other customer accounted for 10 percent or more of our consolidated net sales. Wal-Mart also represented 7 percent of our net sales in the International segment and 7 percent of our net sales in the Convenience Stores and Foodservice segment. As of May 25, 2014, Wal-Mart accounted for 31 percent of our U.S. Retail receivables, 5 percent of our International receivables, and 9 percent of our Convenience Stores and Foodservice receivables. The five largest customers in our U.S. Retail segment accounted for 53 percent of its fiscal 2014 net sales, the five largest customers in our International segment accounted for 25 percent of its fiscal 2014 net sales, and the five largest customers in our Convenience Stores and Foodservice segment accounted for 42 percent of its fiscal 2014 net sales.

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

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

RESEARCH AND DEVELOPMENT

Our principal research and development facilities are located in Minneapolis, Minnesota. Our research and development resources are focused on new product development, product improvement, process design and improvement, packaging, and exploratory research in new business and technology areas. Research and development expenditures were $244 million in fiscal 2014, $238 million in fiscal 2013, and $245 million in fiscal 2012.

 

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TRADEMARKS AND PATENTS

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

Some of our products are marketed under or in combination with trademarks that have been licensed from others, including Reese’s Puffs for cereal, Hershey’s for a variety of products, Weight Watchers as an endorsement for yogurt, soup, and vegetable products, and Cinnabon for refrigerated dough, frozen pastries, and baking products. Our fruit snacks business uses a variety of licensed trademarks, including Mott’s, Ocean Spray, Minions, Sunkist, Scooby Doo, Batman, Tom and Jerry, Hello Kitty, Thomas the Tank Engine, My Little Pony, and various Warner Bros. and Nickelodeon characters. Our yogurt business uses a variety of licensed trademarks, including various Disney, Warner Bros., and Nickelodeon characters.

Our cereal trademarks are licensed to CPW and may be used by CPW in association with the Nestlé trademark. Nestlé licenses certain of its trademarks to CPW, including the Nestlé and Uncle Tobys trademarks. The Häagen-Dazs trademark is licensed royalty-free exclusively to Nestlé for ice cream and other frozen dessert products in the United States and Canada. The Häagen-Dazs trademark is also licensed to HDJ. The J. M. Smucker Company holds an exclusive royalty-free license to use the Pillsbury brand and the Pillsbury Doughboy character in the dessert mix and baking mix categories in the United States and under limited circumstances in Canada and Mexico. The Green Giant trademark is licensed to a third party for use in connection with its sale of fresh produce in the United States and Europe.

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

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

SEASONALITY

In general, demand for our products is evenly balanced throughout the year. However, within our U.S. Retail segment demand for refrigerated dough, frozen baked goods, and baking products is stronger in the fourth calendar quarter. Demand for Progresso soup and Green Giant canned and frozen vegetables is higher during the fall and winter months. Internationally, demand for Häagen-Dazs ice cream is higher during the summer months and demand for baking mix and dough products increases during winter months. Due to the offsetting impact of these demand trends, as well as the different seasons in the northern and southern hemispheres, our International segment net sales are generally evenly balanced throughout the year.

BACKLOG

Orders are generally filled within a few days of receipt and are subject to cancellation at any time prior to shipment. The backlog of any unfilled orders as of May 25, 2014, was not material.

 

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WORKING CAPITAL

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

EMPLOYEES

As of May 25, 2014, we had approximately 43,000 full- and part-time employees.

FOOD QUALITY AND SAFETY REGULATION

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

ENVIRONMENTAL MATTERS

As of May 25, 2014, we were involved with three active cleanup sites associated with the alleged or threatened release of hazardous substances or wastes located in: Sauget, Illinois; Minneapolis, Minnesota; and Moonachie, New Jersey. These matters involve several different actions, including administrative proceedings commenced by regulatory agencies and demand letters by regulatory agencies and private parties.

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

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

EXECUTIVE OFFICERS

The section below provides information regarding our executive officers as of July 3, 2014:

Y. Marc Belton, age 55, is Executive Vice President, Global Strategy, Growth and Marketing Innovation. Mr. Belton joined General Mills in 1983 and has held various positions, including President of Snacks from 1994 to 1997, New Ventures from 1997 to 1999, and Big G cereals from 1999 to 2002. He had oversight responsibility for the Yoplait division, General Mills Canada, and New Business Development from 2002 to 2005, and has had oversight responsibility for Growth and Marketing Innovation since 2005 and Global Strategy since September 2010. Mr. Belton was elected a Vice President of General Mills in 1991, a Senior Vice President in 1994, and an Executive Vice President in 2006. He is a director of U.S. Bancorp.

John R. Church, age 48, is Executive Vice President, Supply Chain. Mr. Church joined General Mills in 1988 as a Product Developer in the Big G cereals division and held various positions before becoming Vice President, Engineering in 2003. In 2005, his role was expanded to include development of the company’s strategy for the global sourcing of raw materials and manufacturing capabilities. He was named Vice President, Supply Chain Operations in 2007, Senior Vice President, Supply Chain in 2008, and to his present position in July 2013.

 

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Michael L. Davis, age 58, is Executive Vice President, Human Resources. Mr. Davis joined General Mills in 1996 as Vice President, Compensation and Benefits, after spending 15 years in consulting with Towers Perrin. In 2002, his role was expanded to include staffing activities, and in 2005, he became Vice President, Human Resources for the U.S. Retail and Corporate groups. He was named Senior Vice President Global Human Resources in 2008, and he was appointed to his present position in October 2013. Mr. Davis is retiring in September 2014.

Peter C. Erickson, age 53, is Executive Vice President, Innovation, Technology and Quality. Mr. Erickson joined General Mills in 1994 as part of the Colombo yogurt acquisition. He has held various positions in Research & Development and became Vice President, Innovation, Technology and Quality in 2003 and Senior Vice President, Innovation, Technology and Quality in 2006. He was named to his present position in July 2013.

Jeffrey L. Harmening, age 47, is Executive Vice President, Chief Operating Officer, U. S. Retail. Mr. Harmening joined General Mills in 1994 and served in various marketing roles in the Betty Crocker, Yoplait, and Big G cereal divisions. He was promoted to Marketing Director in 2000 and held leadership roles in Big G New Enterprises and Foodservice New Business. He was named Vice President, Marketing for CPW in 2003 and a Vice President of the Big G cereal division in 2004. In 2011, he was promoted to Senior Vice President for the Big G cereal division. Mr. Harmening was appointed Senior Vice President, Chief Executive Officer of CPW in 2012, and he was named to his present position in May 2014.

Donal L. Mulligan, age 53, is Executive Vice President, Chief Financial Officer. Mr. Mulligan joined General Mills in 2001 from The Pillsbury Company. He served as Vice President, Financial Operations for our International division until 2004, when he was named Vice President, Financial Operations for Operations and Technology. Mr. Mulligan was appointed Treasurer of General Mills in 2006, Senior Vice President, Financial Operations in July 2007, and was elected to his present position in August 2007. From 1987 to 1998, he held several international positions at PepsiCo, Inc. and YUM! Brands, Inc. Mr. Mulligan is a director of Tennant Company.

Kimberly A. Nelson, age 51, is Senior Vice President, External Relations, and President of the General Mills Foundation. Ms. Nelson joined General Mills in 1988 and has held marketing leadership roles in the Big G cereal, Snacks, and Meals divisions. She was elected Vice President, President, Snacks in 2004, Senior Vice President, President, Snacks in 2008, and Senior Vice President, External Relations in September 2010. She was named President of the General Mills Foundation in May 2011.

Shawn P. O’Grady, age 50, is Senior Vice President, President, Sales & Channel Development. Mr. O’Grady joined General Mills in 1990 and held several marketing roles in the Snacks, Meals and Big G cereal divisions. He was promoted to Vice President in 1998 and held marketing positions in the Betty Crocker and Pillsbury USA divisions. In 2004, he moved into Consumer Foods Sales, becoming Vice President, President, U.S. Retail Sales in 2007, and Senior Vice President, President, Consumer Foods Sales Division in May 2010. He was promoted to his current position in June 2012.

Christopher D. O’Leary, age 54, is Executive Vice President and Chief Operating Officer, International. Mr. O’Leary joined General Mills in 1997 as Vice President, Corporate Growth. He was elected a Senior Vice President in 1999 and President of the Meals division in 2001. Mr. O’Leary was named to his present position in 2006. Prior to joining General Mills, he spent 17 years at PepsiCo, Inc., last serving as President and Chief Executive Officer of the Hostess Frito-Lay business in Canada. Mr. O’Leary is a director of Telephone and Data Systems, Inc.

Roderick A. Palmore, age 62, is Executive Vice President, General Counsel, Chief Compliance and Risk Management Officer, and Secretary. Mr. Palmore joined General Mills in this position in 2008 from the Sara Lee Corporation, a consumer foods and products company. He spent 12 years at Sara Lee, last serving as Executive Vice President and General Counsel since 2004. Mr. Palmore is a director of CBOE Holdings, Inc. and The Goodyear Tire & Rubber Company. Mr. Palmore is retiring in February 2015.

 

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Kendall J. Powell, age 60, is Chairman of the Board and Chief Executive Officer of General Mills. Mr. Powell joined General Mills in 1979 and served in a variety of positions before becoming a Vice President in 1990. He became President of the Yoplait division in 1996, President of the Big G cereal division in 1997, and Senior Vice President of General Mills in 1998. From 1999 to 2004, he served as Chief Executive Officer of CPW. He returned from CPW in 2004 and was elected Executive Vice President. Mr. Powell was elected President and Chief Operating Officer of General Mills with overall global operating responsibility for the company in 2006, Chief Executive Officer in 2007, and Chairman of the Board in 2008. He is a director of Medtronic, Inc.

Jerald A. Young, age 57, is Vice President, Controller. Mr. Young joined General Mills in 1992 and held several finance roles within the Pillsbury division before he was appointed Vice President of Finance for the Convenience Stores and Foodservice Division in 2000. Mr. Young was subsequently appointed Vice President Internal Audit in 2005 and Vice President, Supply Chain in 2008. He was named to his present position in August 2011.

WEBSITE ACCESS

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

 

ITEM 1A Risk Factors

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

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

The food categories in which we participate are very competitive. Our principal competitors in these categories all have substantial financial, marketing, and other resources. In most product categories, we compete not only with other widely advertised branded products, but also with generic and private label products that are generally sold at lower prices. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, and the ability to identify and satisfy consumer preferences. If our large competitors were to seek an advantage through pricing or promotional changes, we could choose to do the same, which could adversely affect our margins and profitability. If we did not do the same, our revenues and market share could be adversely affected. Our market share and revenue growth could also be adversely impacted if we are not successful in introducing innovative products in response to changing consumer demands or by new product introductions of our competitors. If we are unable to build and sustain brand equity by offering recognizably superior product quality, we may be unable to maintain premium pricing over generic and private label products.

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

There has been significant consolidation in the grocery industry, resulting in customers with increased purchasing power. In addition, large retail customers may seek to use their position to improve their profitability through improved efficiency, lower pricing, increased reliance on their own brand name products, increased emphasis on generic and other economy brands, and increased promotional programs. If we are unable to use our scale, marketing expertise, product innovation, knowledge of consumers’ needs, and category leadership positions to respond to these demands, our profitability and volume growth could be negatively impacted. In addition, the loss of any large customer for an extended length of time could adversely affect our sales and profits. For more information on significant customers, please see Company Overview in Item 1 of this report.

 

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

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

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

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

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

Our future success and earnings growth depend in part on our ability to be efficient in the production and manufacture of our products in highly competitive markets. Gaining additional efficiencies may become more difficult over time. Our failure to reduce costs through productivity gains or by eliminating redundant costs resulting from acquisitions could adversely affect our profitability and weaken our competitive position. Many productivity initiatives involve complex reorganization of manufacturing facilities and production lines. Such manufacturing realignment may result in the interruption of production, which may negatively impact product volume and margins.

Disruption of our supply chain could adversely affect our business.

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

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

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

 

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

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

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

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

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

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

Economic downturns could limit consumer demand for our products.

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

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

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

 

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Our international operations are subject to political and economic risks.

In fiscal 2014, 30 percent of our consolidated net sales were generated outside of the United States. We are accordingly subject to a number of risks relating to doing business internationally, any of which could significantly harm our business. These risks include:

 

 

political and economic instability;

 

exchange controls and currency exchange rates;

 

nationalization of operations;

 

compliance with anti-corruption regulations;

 

foreign tax treaties and policies; and

 

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

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

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

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

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

As of May 25, 2014, we had total debt, redeemable interests, and noncontrolling interests of $10.2 billion. The agreements under which we have issued indebtedness do not prevent us from incurring additional unsecured indebtedness in the future. Our level of indebtedness may limit our:

 

 

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

 

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

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

 

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

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

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

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

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

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

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, security breaches, telecommunications failures, computer viruses, hackers, and other security issues. Any such damage or interruption could have a material adverse effect on our business.

If other potentially responsible parties (PRPs) are unable to contribute to remediation costs at certain contaminated sites, our costs for remediation could be material.

We are subject to various federal, state, local, and foreign environmental and health and safety laws and regulations. Under certain of these laws, namely the Comprehensive Environmental Response, Compensation, and Liability Act and its state counterparts, liability for investigation and remediation of hazardous substance contamination at currently or formerly owned or operated facilities or at third-party waste disposal sites is joint and several. We currently are involved in active remediation efforts at certain sites where we have been named a PRP. If other PRPs at these sites are unable to contribute to remediation costs, we could be held responsible for their portion of the remediation costs, and those costs could be material. We cannot assure that our costs in relation to these environmental matters or compliance with environmental laws in general will not exceed our established liabilities or otherwise have an adverse effect on our business and results of operations.

 

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

Goodwill for each of our reporting units is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. We compare the carrying value of the net assets of a reporting unit, including goodwill, to the fair value of the unit. If the fair value of the net assets of the reporting unit is less than the net assets including goodwill, impairment has occurred. Our estimates of fair value are determined based on a discounted cash flow model. Growth rates for sales and profits are determined using inputs from our long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors. While we currently believe that our goodwill is not impaired, different assumptions regarding the future performance of our businesses could result in significant impairment losses.

We evaluate the useful lives of our intangible assets, primarily intangible assets associated with the Pillsbury, Totino’s, Progresso, Green Giant, Yoplait, Old El Paso, Yoki, and Häagen-Dazs brands, to determine if they are finite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.

Our indefinite-lived intangible assets are also tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Our estimate of the fair value of the brands is based on a discounted cash flow model using inputs including projected revenues from our long-range plan, assumed royalty rates which could be payable if we did not own the brands, and a discount rate.

As of May 25, 2014, we had $13.1 billion of goodwill and indefinite-lived intangible assets. Our Europe and Yoplait U.S. reporting units and Uncle Toby’s and Mountain High brands have experienced declining business performance and we will continue to monitor those businesses. While we currently believe that the fair value of each intangible exceeds its carrying value and that those intangibles so classified will contribute indefinitely to our cash flows, different assumptions regarding future performance of our businesses or a different weighted-average cost of capital could result in significant impairment losses and amortization expense. For further information on goodwill and intangible assets, please refer to Note 6 to the Consolidated Financial Statements in Item 8 of this report.

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

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

 

ITEM 1B Unresolved Staff Comments

None.

 

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ITEM 2 Properties

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

As of May 25, 2014, we operated 65 facilities for the production of a wide variety of food products. Of these facilities, 30 are located in the United States (2 of which are leased), 9 in the Asia/Pacific region (4 of which are leased), 5 in Canada (3 of which are leased), 8 in Europe (2 of which are leased), 12 in Latin America and Mexico (1 of which is leased), and 1 in South Africa. The following is a list of the locations of our principal production facilities, which primarily support the segment noted:

 

  U.S. Retail      
  • Carson, California    • Cedar Rapids, Iowa    • Vineland, New Jersey
  • Lodi, California    • Methuen, Massachusetts    • Albuquerque, New Mexico
  • Covington, Georgia    • Irapuato, Mexico    • Buffalo, New York
  • Belvidere, Illinois    • Reed City, Michigan    • Wellston, Ohio
  • West Chicago, Illinois    • Fridley, Minnesota    • Murfreesboro, Tennessee
  • New Albany, Indiana    • Hannibal, Missouri   
  International      
  • Mt. Waverly, Australia    • St. Hyacinthe, Canada    • Labatut, France
  • Rooty Hill, Australia    • Guangzhou, China    • Le Mans, France
  • Bernardo do Campo, Brazil    • Sanhe, China    • Moneteau, France
  • Cambara, Brazil    • Shanghai, China    • Vienne, France
  • Pouso Alegre, Brazil    • Arras, France    • San Adrian, Spain
  Convenience Stores and Foodservice      
  • Chanhassen, Minnesota    • Joplin, Missouri    • Martel, Ohio

We operate numerous grain elevators in the United States in support of our domestic manufacturing activities. We also utilize approximately 11 million square feet of warehouse and distribution space, nearly all of which is leased, that primarily supports our U.S. Retail segment. We own and lease a number of dedicated sales and administrative offices around the world, totaling approximately 3 million square feet. We have additional warehouse, distribution, and office space in our plant locations.

As part of our Häagen-Dazs business in our International segment, we operate 407 (all leased) and franchise 344 branded ice cream parlors in various countries around the world, all outside of the United States and Canada.

 

ITEM 3 Legal Proceedings

We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. In our opinion, there were no claims or litigation pending as of May 25, 2014, that were reasonably likely to have a material adverse effect on our consolidated financial position or results of operations. See the information contained under the section entitled “Environmental Matters” in Item 1 of this report for a discussion of environmental matters in which we are involved.

 

ITEM 4 Mine Safety Disclosures

None.

 

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PART II

 

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

Our common stock is listed on the New York Stock Exchange under the symbol “GIS.” On June 13, 2014, there were approximately 33,000 record holders of our common stock. Information regarding the market prices for our common stock and dividend payments for the two most recent fiscal years is set forth in Note 18 to the Consolidated Financial Statements in Item 8 of this report.

The following table sets forth information with respect to shares of our common stock that we purchased during the fiscal quarter ended May 25, 2014:

 

Period   

Total Number

of Shares
Purchased (a)

     Average
Price Paid
Per Share
    

Total Number of

Shares Purchased as
Part of a Publicly
Announced Program
(b)

     Maximum Number of
Shares that may yet be
Purchased Under the
Program (b)
 

February 24, 2014-

           

March 30, 2014

     3,196,747        $50.35        3,196,747        16,918,728  

March 31, 2014-

           

April 27, 2014

     3,319,820        52.19        3,319,820        13,598,908  

April 28, 2014

           

May 25, 2014

     150,235        52.30        150,235        100,000,000  

Total

     6,666,802        $51.31        6,666,802        100,000,000  
                                     
(a) The total number of shares purchased includes shares of common stock withheld for the payment of withholding taxes upon the distribution of deferred option units.
(b) On June 28, 2010, our Board of Directors approved an authorization for the repurchase of up to 100,000,000 shares of our common stock. On May 6, 2014, our Board of Directors approved a new authorization for the repurchase of up to 100,000,000 shares of our common stock and terminated the June 2010 authorization. Purchases can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans, and accelerated repurchase programs. The Board did not specify an expiration date for the authorization.

 

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ITEM 6 Selected Financial Data

The following table sets forth selected financial data for each of the fiscal years in the five-year period ended May 25, 2014:

 

     Fiscal Year  
In Millions, Except Per Share Data, Percentages and Ratios    2014     2013     2012     2011     2010  

Operating data:

          

Net sales

   $ 17,909.6     $ 17,774.1     $ 16,657.9     $ 14,880.2     $ 14,635.6  

Gross margin (a)

     6,369.8       6,423.9       6,044.7       5,953.5       5,800.2  

Selling, general, and administrative expenses

     3,474.3       3,552.3       3,380.7       3,192.0       3,162.7  
Total segment operating profit excluding Venezuela currency devaluation (b)      3,153.9       3,222.9       3,011.6       2,945.6       2,854.5  

Net earnings attributable to General Mills

     1,824.4       1,855.2       1,567.3       1,798.3       1,530.5  

Advertising and media expense

     869.5       895.0       913.7       843.7       908.5  

Research and development expense

     243.6       237.9       245.4       235.0       218.3  

Average shares outstanding:

          

Diluted

     645.7       665.6       666.7       664.8       683.3  

Earnings per share:

          

Diluted

   $ 2.83     $ 2.79     $ 2.35     $ 2.70     $ 2.24  

Diluted, excluding certain items affecting comparability (b)

   $ 2.82     $ 2.72     $ 2.56     $ 2.48     $ 2.31  

Operating ratios:

          

Gross margin as a percentage of net sales

     35.6     36.1     36.3     40.0     39.6

Selling, general, and administrative expenses as a

percentage of net sales

     19.4     20.0     20.3     21.5     21.6
Total segment operating profit excluding Venezuela currency devaluation as a percentage of net sales (b)      17.6     18.1     18.1     19.8     19.5

Effective income tax rate

     33.3     29.2     32.1     29.7     35.0

Return on average total capital (a) (b)

     11.6     12.0     12.7     13.7     13.9

Balance sheet data:

          

Land, buildings, and equipment

   $ 3,941.9     $ 3,878.1     $ 3,652.7     $ 3,345.9     $ 3,127.7  

Total assets

     23,145.7       22,658.0       21,096.8       18,674.5       17,678.9  

Long-term debt, excluding current portion

     6,423.5       5,926.1       6,161.9       5,542.5       5,268.5  

Total debt (a)

     8,785.8       7,969.1       7,429.6       6,885.1       6,425.9  

Cash flow data:

          

Net cash provided by operating activities

   $ 2,541.0     $ 2,926.0     $ 2,407.2     $ 1,531.1     $ 2,185.1  

Capital expenditures

     663.5       613.9       675.9       648.8       649.9  

Fixed charge coverage ratio (a)

     8.04       7.62       6.26       7.03       6.42  

Operating cash flow to debt ratio (a)

     28.9     36.7     32.4     22.2     34.0

Share data:

          

Low stock price

   $ 46.86     $ 37.55     $ 34.95     $ 33.57     $ 25.59  

High stock price

     54.40       50.93       41.05       39.95       36.96  

Closing stock price

     53.81       48.98       39.08       39.29       35.62  

Cash dividends per common share

     1.55       1.32       1.22       1.12       0.96  
                                          
(a) See Glossary in Item 8 of this report for definition.
(b) See Non-GAAP Measures in Item 7 of this report for our discussion of this measure not defined by generally accepted accounting principles.

 

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ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

We are a global consumer foods company. We develop distinctive value-added food products and market them under unique brand names. We work continuously to improve our established products and to create new products that meet consumers’ evolving needs and preferences. In addition, we build the equity of our brands over time with strong consumer-directed marketing, innovative new products, and effective merchandising. We believe our brand-building strategy is the key to winning and sustaining leading share positions in markets around the globe.

Our fundamental financial goal is to generate superior returns for our stockholders over the long term. We believe that increases in net sales, segment operating profit, earnings per share (EPS), and return on average total capital are the key drivers of financial performance for our business.

Our specific growth objectives are to consistently deliver:

 

 

low single-digit annual growth in net sales;

 

 

mid single-digit annual growth in total segment operating profit excluding Venezuela currency devaluation;

 

 

high single-digit annual growth in diluted EPS excluding certain items affecting comparability; and

 

 

improvement in return on average total capital.

We believe that this financial performance, coupled with an attractive dividend yield, should result in long-term value creation for stockholders. We return a substantial amount of cash to stockholders through share repurchases and dividends.

Fiscal 2014 was a challenging year, as developed markets continued to experience weak consumer trends and quite low category growth. The cereal category in developed markets was soft and the global yogurt category was impacted by significant dairy inflation. For the fiscal year ended May 25, 2014, our net sales grew 1 percent and total segment operating profit excluding Venezuela currency devaluation of $3,154 million declined 2 percent from $3,223 million last year. Our return on average total capital declined by 40 basis points, as fiscal 2014 earnings did not grow in line with our capital base. Diluted EPS grew 1 percent and diluted EPS excluding certain items affecting comparability increased 4 percent (See the “Non-GAAP Measures” section below for discussion of total segment operating profit excluding Venezuela currency devaluation, diluted EPS excluding certain items affecting comparability and return on average total capital, which are not defined by generally accepted accounting principles (GAAP)). Net cash provided by operations totaled $2.5 billion in fiscal 2014, enabling us to increase our annual dividend payments per share by 17 percent from fiscal 2013. We also made significant capital investments totaling $664 million in fiscal 2014 and repurchased $1.7 billion of shares of common stock.

We achieved the following related to our key operating objectives for fiscal 2014:

 

 

We delivered a strong line-up of consumer marketing, merchandising, and innovation to support our leading brands and continued to build our global platforms in markets around the world.

 

 

We returned $2.7 billion to stockholders in fiscal 2014, including a 17 percent dividend increase and 47 percent more shares of common stock repurchased that resulted in a 3 percent net reduction in average shares outstanding.

 

 

While we exercised good administrative cost control, executed strong holistic margin management (HMM) efforts, increased share repurchases and had favorable interest expense, net sales and segment operating profit excluding Venezuela currency devaluation performance were below our targets. We achieved 1 percent growth in net sales, primarily contributions from new businesses added in fiscal 2013. Total segment operating profit excluding Venezuela currency devaluation declined 2 percent and diluted EPS excluding certain items affecting comparability increased 4 percent.

Details of our financial results are provided in the “Fiscal 2014 Consolidated Results of Operations” section below.

 

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In fiscal 2015, we expect to generate constant currency growth consistent with our long-term model, including the effects of a 53 week year:

 

 

We are targeting mid single-digit growth in constant currency net sales, primarily driven by volume growth and a 53rd week, with double-digit growth in emerging markets and low single-digit growth in developed markets.

 

 

We expect to grow share in the U.S. cereal category through significant product innovation, build on our improving performance in the U.S. yogurt category, and continue our strong growth in the snack category around the world.

 

 

We are targeting mid single-digit growth in total constant currency segment operating profit in fiscal 2015. We continue to view our HMM discipline of cost savings and mix management as a competitive advantage. Cost of sales HMM is expected to offset anticipated input cost inflation of 3 percent.

 

 

We are targeting high single-digit growth in constant currency diluted EPS excluding certain items affecting comparability.

 

 

We expect to deliver strong cash returns to stockholders in fiscal 2015, including annualized dividends per share of $1.64 and share repurchases that are expected to result in a net reduction in shares outstanding of at least 3 percent.

 

 

Our businesses generate strong levels of cash flows, and we will use some of this cash to reinvest in our business. Our fiscal 2015 plans call for approximately $730 million of expenditures for capital projects.

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

FISCAL 2014 CONSOLIDATED RESULTS OF OPERATIONS

Our consolidated results for fiscal 2014 include one additional quarter of operating activity from the acquisition of Yoki Alimentos S.A. (Yoki) in Brazil, one additional quarter of operating activity from the assumption of the Canadian Yoplait franchise license, and three additional quarters of operating activity from the acquisition of Immaculate Baking Company in the United States. Collectively, these items are referred to as “new businesses” in comparing our fiscal 2014 results to fiscal 2013.

Fiscal 2014 net sales grew 1 percent to $17,910 million including 1 percentage point of growth contributed by new businesses. Excluding new businesses, net sales grew 1 percent, offset by 1 percentage point of unfavorable foreign currency exchange. In fiscal 2014, net earnings attributable to General Mills were $1,824 million, down 2 percent from $1,855 million in fiscal 2013, and we reported diluted EPS of $2.83 in fiscal 2014, up 1 percent from $2.79 in fiscal 2013. Fiscal 2014 results include a gain on the divestiture of certain grain elevators, the impact of Venezuela currency devaluation, gains from the mark-to-market valuation of certain commodity positions and grain inventories, and restructuring charges related to our fiscal 2012 productivity and cost savings plan. Fiscal 2013 results include the effects from various discrete tax items, the impact of Venezuela currency devaluation, restructuring charges related to our fiscal 2012 productivity and cost savings plan, integration costs resulting from the acquisition of Yoki, and gains from the mark-to-market valuation of certain commodity positions and grain inventories. Diluted EPS excluding these items affecting comparability totaled $2.82 in fiscal 2014, up 4 percent from $2.72 in fiscal 2013 (see the “Non-GAAP Measures” section below for a description of our use of this measure and our discussion of the items affecting comparability).

 

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

Components of Net Sales Growth

 

      Fiscal 2014
vs. 2013
 

Contributions from volume growth (a)

     1  pt   

Net price realization and mix

     1  pt   

Foreign currency exchange

     (1) pt   

Net sales growth

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

Net sales grew 1 percent in fiscal 2014 driven by an 1 percentage point increase in contributions from volume growth, including 2 percentage points of contribution from volume growth due to new businesses. Favorable net price realization and mix contributed 1 percentage point of growth, and unfavorable foreign currency exchange decreased net sales growth by 1 percentage point.

Cost of sales increased $190 million in fiscal 2014 to $11,540 million. Higher volume drove an $115 million increase in cost of sales. Product mix also drove an $130 million increase in cost of sales. In fiscal 2014, we recorded a $49 million net decrease in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories as described in Note 7 to the Consolidated Financial Statements in Item 8 of this report, compared to a net decrease of $4 million in fiscal 2013. We also recorded a $23 million foreign exchange loss in fiscal 2014 related to the Venezuela currency devaluation compared to a $16 million loss in fiscal 2013. In fiscal 2013, we also recorded a $17 million non-recurring expense related to the assumption of the Canadian Yoplait franchise license.

Gross margin declined 1 percent in fiscal 2014 versus fiscal 2013. Gross margin as a percent of net sales of 36 percent was relatively flat compared to fiscal 2013.

Selling, general and administrative (SG&A) expenses decreased $78 million in fiscal 2014 versus fiscal 2013. The decrease in SG&A expenses was primarily driven by a 3 percent decrease in advertising and media expense, a smaller contribution to the General Mills Foundation, a decrease in incentive compensation expense and lower pension expense compared to fiscal 2013. In fiscal 2014, we recorded a $39 million charge related to Venezuela currency devaluation compared to a $9 million charge in fiscal 2013. In addition, we recorded $12 million of integration costs in fiscal 2013 related to our acquisition of Yoki. SG&A expenses as a percent of net sales decreased 1 percent compared to fiscal 2013.

Restructuring, impairment, and other exit costs totaled $4 million in fiscal 2014. The restructuring charge related to a productivity and cost savings plan approved in the fourth quarter of fiscal 2012. These restructuring actions were completed in fiscal 2014. In fiscal 2014, we paid $22 million in cash related to restructuring actions.

During fiscal 2014, we recorded a divestiture gain of $66 million related to the sale of certain grain elevators in our U.S. Retail segment. There were no divestitures in fiscal 2013.

Interest, net for fiscal 2014 totaled $302 million, $15 million lower than fiscal 2013. The average interest rate decreased 41 basis points, including the effect of the mix of debt, generating a $31 million decrease in net interest. Average interest bearing instruments increased $367 million, generating a $16 million increase in net interest.

 

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Our consolidated effective tax rate for fiscal 2014 was 33.3 percent compared to 29.2 percent in fiscal 2013. The 4.1 percentage point increase was primarily related to the restructuring of our General Mills Cereals, LLC (GMC) subsidiary during the first quarter of 2013 which resulted in a $63 million decrease to deferred income tax liabilities related to the tax basis of the investment in GMC and certain distributed assets, with a corresponding non-cash reduction to income taxes. During fiscal 2013, we also recorded a $34 million discrete decrease in income tax expense and an increase in our deferred tax assets related to certain actions taken to restore part of the tax benefits associated with Medicare Part D subsidies which had previously been reduced in fiscal 2010 with the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. Our fiscal 2013 tax expense also includes a $12 million charge associated with the liquidation of a corporate investment.

After-tax earnings from joint ventures for fiscal 2014 decreased to $90 million compared to $99 million in fiscal 2013 primarily driven by increased consumer spending at Cereal Partners Worldwide (CPW) and unfavorable foreign currency exchange from Häagen-Dazs Japan, Inc. (HDJ).

The change in net sales for each joint venture is set forth in the following table:

Joint Venture Change in Net Sales

 

     As Reported     Constant Currency Basis  
      Fiscal 2014
vs. 2013
   

Fiscal 2014

vs. 2013

 

CPW

     (1 )%      Flat   

HDJ

     (8    

Joint Ventures

     (2 )%     
                  

In fiscal 2014, CPW net sales declined by 1 percentage point due to unfavorable foreign currency exchange. Contribution from volume growth was flat compared to fiscal 2013. In fiscal 2014, net sales for HDJ decreased 8 percentage points from fiscal 2013 as 11 percentage points of contributions from volume growth was offset by 17 percentage points of net sales decline from unfavorable foreign currency exchange and 2 percentage points of net sales decline attributable to unfavorable net price realization and mix.

Average diluted shares outstanding decreased by 20 million in fiscal 2014 from fiscal 2013 due primarily to the repurchase of 36 million shares, partially offset by the issuance of 7 million shares related to stock compensation plans.

FISCAL 2014 CONSOLIDATED BALANCE SHEET ANALYSIS

Cash and cash equivalents increased $126 million from fiscal 2013.

Receivables increased $37 million from fiscal 2013 primarily driven by timing of sales.

Inventories increased $14 million from fiscal 2013.

Prepaid expenses and other current assets decreased $29 million from fiscal 2013, mainly due to a decrease in other receivables related to the liquidation of a corporate investment.

Land, buildings, and equipment increased $64 million from fiscal 2013, as $664 million of capital expenditures were partially offset by depreciation expense of $585 million.

Goodwill and other intangible assets increased $27 million from fiscal 2013, primarily due to foreign exchange.

Other assets increased $302 million from fiscal 2013, primarily related to favorable investment returns on pension plan assets.

 

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Accounts payable increased $188 million from fiscal 2013, primarily due to the extension of payment terms.

Notes payable and long-term debt, including current portion, increased $817 million from fiscal 2013 primarily due to $228 million of net long-term debt issuances and $573 million of net commercial paper issuances.

The current and noncurrent portions of net deferred income taxes liability increased $331 million from fiscal 2013 primarily as a result of changes in the funded status of our defined benefit postretirement plans which were recognized through accumulated other comprehensive income (AOCI).

Other current liabilities decreased $378 million from fiscal 2013, primarily driven by dividends declared in the fourth quarter of fiscal 2013 that were paid in the first quarter of fiscal 2014.

Other liabilities decreased $310 million from fiscal 2013, primarily driven by a decrease in pension, postemployment, and postretirement liabilities.

Redeemable interest increased $17 million from fiscal 2013.

Retained earnings increased $1,085 million from fiscal 2013, reflecting fiscal 2014 net earnings of $1,824 million less dividends declared of $740 million. Treasury stock increased $1,532 million from fiscal 2013, due to $1,775 million of share repurchases, partially offset by $243 million related to stock-based compensation plans. Additional paid in capital increased $65 million from fiscal 2013, including $30 million related to the settlement of an accelerated share repurchase agreement. AOCI decreased by $245 million from fiscal 2013.

Noncontrolling interests increased $14 million in fiscal 2014.

FISCAL 2013 CONSOLIDATED RESULTS OF OPERATIONS

Our consolidated results for fiscal 2013 include three quarters of operating activity from the acquisitions of Yoki in Brazil and Food Should Taste Good in the United States, and the assumption of the Canadian Yoplait franchise license (Yoplait Canada), four quarters of results for Yoplait Ireland and Parampara Foods in India, and two quarters of results for Immaculate Baking Company in the United States. Also included in the first quarter of fiscal 2013 are two additional months of results from the acquisition of Yoplait S.A.S. Collectively, these items are referred to as “new businesses” in comparing our fiscal 2013 results to fiscal 2012.

Fiscal 2013 net sales grew 7 percent to $17,774 million. In fiscal 2013, net earnings attributable to General Mills were $1,855 million, up 18 percent from $1,567 million in fiscal 2012, and we reported diluted EPS of $2.79 in fiscal 2013, up 19 percent from $2.35 in fiscal 2012. Fiscal 2013 results include the effects from various discrete tax items, the impact of Venezuela currency devaluation, restructuring charges related to our fiscal 2012 productivity and cost savings plan, integration costs resulting from the acquisition of Yoki, and gains from the mark-to-market valuation of certain commodity positions and grain inventories. Fiscal 2012 results include losses from the mark-to-market valuation of certain commodity positions and grain inventories, restructuring charges related to our 2012 productivity and cost savings plan, and integration costs resulting from the acquisitions of Yoplait S.A.S. and Yoplait Marques S.A.S. Diluted EPS excluding these items affecting comparability totaled $2.72 in fiscal 2013, up 6 percent from $2.56 in fiscal 2012 (see the “Non-GAAP Measures” section below for a description of our use of this measure and our discussion of the items affecting comparability).

 

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

Components of Net Sales Growth

 

     

Fiscal 2013

vs. 2012

 

Contributions from volume growth (a)

     9 pts   

Net price realization and mix

     (1) pt   

Foreign currency exchange

     (1) pt   

Net sales growth

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

Net sales grew 7 percent in fiscal 2013, including 6 percentage points of growth contributed by new businesses, primarily Yoki, Yoplait S.A.S., and Yoplait Canada. Excluding the impact of new businesses, net sales grew 2 percent, partially offset by 1 percentage point of unfavorable foreign currency exchange. Contributions from volume growth increased net sales by 9 percentage points, including 8 percentage points of contribution from volume growth due to new businesses. Unfavorable net price realization and mix decreased net sales growth by 1 percentage point and unfavorable foreign currency exchange decreased net sales growth by 1 percentage point.

Cost of sales increased $737 million in fiscal 2013 to $11,350 million. Higher volume drove a $982 million increase in cost of sales. We also recorded a $17 million non-recurring expense related to the assumption of the Canadian Yoplait franchise license and a $16 million charge related to Venezuela currency devaluation in fiscal 2013. These increases were partially offset by a $170 million decrease in cost of sales attributable to product mix. In fiscal 2013, we recorded a $4 million net decrease in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories as described in Note 7 to the Consolidated Financial Statements in Item 8 of this report, compared to a net increase of $104 million in fiscal 2012.

Gross margin grew 6 percent in fiscal 2013 versus fiscal 2012. Gross margin as a percent of net sales of 36 percent was relatively flat compared to fiscal 2012.

SG&A expenses were up $172 million in fiscal 2013 versus fiscal 2012. The increase in SG&A expenses was primarily driven by the addition of new businesses and an increase in pension expense. In addition, we recorded a $9 million foreign exchange loss resulting from the remeasurement of assets and liabilities of our Venezuelan subsidiary following the devaluation of the bolivar in fiscal 2013. Excluding these items, SG&A expenses decreased compared to fiscal 2012, including a 2 percent decrease in advertising and media expense. SG&A expenses as a percent of net sales were flat compared to fiscal 2012.

Restructuring, impairment, and other exit costs totaled $20 million in fiscal 2013. In fiscal 2013, we recorded a $19 million restructuring charge related to a productivity and cost savings plan approved in the fourth quarter of fiscal 2012, consisting of $11 million of employee severance expense and other exit costs of $8 million. All of our operating segments were affected by these actions including $16 million related to our International segment, $2 million related to our U.S. Retail segment, and $1 million related to our Convenience Stores and Foodservice segment. In addition, we recorded $1 million of charges associated with other previously announced restructuring actions. In fiscal 2013, we paid $80 million in cash related to restructuring actions. In fiscal 2012, we recorded a $102 million restructuring charge related to the productivity and cost savings plan approved in the fourth quarter of fiscal 2012.

Interest, net for fiscal 2013 totaled $317 million, $35 million lower than fiscal 2012. The average interest rate decreased 60 basis points, including the effect of the mix of debt, generating a $43 million decrease in net interest. Average interest bearing instruments increased $167 million, primarily from an increase in incremental borrowing to fund the acquisition of Yoki, generating an $8 million increase in net interest.

 

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Our consolidated effective tax rate for fiscal 2013 was 29.2 percent compared to 32.1 percent in fiscal 2012. The 2.9 percentage point decrease was primarily related to the restructuring of our GMC subsidiary during the first quarter of fiscal 2013 which resulted in a $63 million decrease to deferred income tax liabilities related to the tax basis of the investment in GMC and certain distributed assets, with a corresponding discrete non-cash reduction to income taxes. During fiscal 2013, we also recorded a $34 million discrete decrease in income tax expense and an increase in our deferred tax assets related to certain actions taken to restore part of the tax benefits associated with Medicare Part D subsidies which had previously been reduced in fiscal 2010 with the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. Our fiscal 2013 tax expense also includes a $12 million charge associated with the liquidation of a corporate investment.

After-tax earnings from joint ventures for fiscal 2013 increased to $99 million compared to $88 million in fiscal 2012 primarily due to higher tax rates in fiscal 2012 as a result of discrete tax items and higher operating profit offset by unfavorable foreign currency exchange in fiscal 2013.

The change in net sales for each joint venture is set forth in the following table:

Joint Venture Change in Net Sales

 

     As Reported     Constant Currency Basis  
     

Fiscal 2013

vs. 2012

   

Fiscal 2013

vs. 2012

 

CPW

     (1 )%     

HDJ

     (2      

Joint Ventures

     (1 )%     
   

In fiscal 2013, CPW net sales declined by 1 percentage point as 2 percentage points of net sales growth from favorable net price realization and mix were offset by 3 percentage points of net sales decline from unfavorable foreign currency exchange. Contribution from volume growth was flat compared to fiscal 2012. In fiscal 2013, net sales for HDJ decreased 2 percentage points from fiscal 2012 as 6 percentage points of net sales growth from volume contribution was offset by 7 percentage points of net sales decline from unfavorable foreign currency exchange and 1 percentage point of net sales decline attributable to unfavorable net price realization and mix.

Average diluted shares outstanding decreased by 1 million in fiscal 2013 from fiscal 2012, due primarily to the repurchase of 24 million shares.

RESULTS OF SEGMENT OPERATIONS

Our businesses are organized into three operating segments: U.S. Retail; International; and Convenience Stores and Foodservice.

 

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The following tables provide the dollar amount and percentage of net sales and operating profit from each segment for fiscal years 2014, 2013, and 2012:

 

     Fiscal Year  
     2014     2013     2012  
In Millions    Dollars     

Percent of

Total

    Dollars     

Percent of

Total

    Dollars     

Percent of

Total

 

Net Sales

               

U.S. Retail

   $ 10,604.9        59   $ 10,614.9        60   $ 10,480.2        63

International

     5,385.9        30       5,200.2        29       4,194.3        25  

Convenience Stores and Foodservice

     1,918.8        11       1,959.0        11       1,983.4        12  

Total

   $ 17,909.6        100   $ 17,774.1        100   $ 16,657.9        100
   

Segment Operating Profit

               

U.S. Retail

   $ 2,311.5        75   $ 2,392.9        75   $ 2,295.3        76

International

     472.9        15       490.2        15       429.6        14  

Convenience Stores and Foodservice

     307.3        10       314.6        10       286.7        10  

Total

   $ 3,091.7        100   $ 3,197.7        100   $ 3,011.6        100
   

Segment operating profit excludes unallocated corporate items, gain on divestitures, and restructuring, impairment, and other exit costs because these items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by our executive management.

U.S. RETAIL SEGMENT

Our U.S. Retail segment reflects business with a wide variety of grocery stores, mass merchandisers, membership stores, natural food chains, and drug, dollar and discount chains operating throughout the United States. Our product categories in this business segment include ready-to-eat cereals, refrigerated yogurt, soup, meal kits, shelf stable and frozen vegetables, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, and a wide variety of organic products including granola bars, cereal, and soup.

In fiscal 2014, net sales for our U.S. Retail segment were $10.6 billion, flat compared to fiscal 2013. Contributions from volume growth and net price realization and mix were flat compared to fiscal 2013.

In fiscal 2013, net sales for this segment totaled $10.6 billion, up 1 percent from fiscal 2012 due to contributions from volume growth. Net price realization and mix was flat compared to fiscal 2012.

Components of U.S. Retail Net Sales Growth

 

     

Fiscal 2014

vs. 2013

    

Fiscal 2013

vs. 2012

 

Contributions from volume growth (a)

     Flat         1 pt   

Net price realization and mix

     Flat         Flat   

Net sales growth

     Flat         1 pt   
                   
(a) Measured in tons based on the stated weight of our product shipments.

 

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Net sales for our U.S. retail divisions are shown in the tables below:

U.S. Retail Net Sales by Division

 

     Fiscal Year  
       2014        2013        2012  

Big G

   $ 2,345.4      $ 2,340.8      $ 2,387.9  

Baking Products

     1,831.7        1,845.7        1,792.8  

Snacks

     1,823.8        1,717.2        1,578.6  

Frozen Foods

     1,525.5        1,549.6        1,601.0  

Meals

     1,418.8        1,481.0        1,452.8  

Yoplait

     1,311.9        1,352.6        1,418.5  

Small Planet Foods and other

     347.8        328.0        248.6  

Total

   $ 10,604.9      $ 10,614.9      $ 10,480.2  
                            

U.S. Retail Net Sales Percentage Change by Division

 

     

Fiscal 2014

vs. 2013

   

Fiscal 2013

vs. 2012

 

Big G

     Flat        (2 )% 

Baking Products

     (1 )%      3  

Snacks

     6       9  

Frozen Foods

     (2     (3

Meals

     (4     2  

Yoplait

     (3     (5

Small Planet Foods

     6       35  

Total

     Flat        1
                  

Fiscal 2014 U.S. Retail segment net sales were flat compared to fiscal 2013 as net sales growth in Snacks and Small Planet Foods was offset by declines in Meals, Yoplait, Frozen Foods, and Baking Products divisions. Big G division net sales growth was flat compared to fiscal 2013.

The 1 percentage point increase in the fiscal 2013 U.S. Retail segment net sales was driven by the Snacks, Small Planet Foods, Baking Products, and Meals divisions, partially offset by declines in the Yoplait, Frozen Foods, and Big G divisions.

Segment operating profit of $2.3 billion in fiscal 2014 declined $81 million, or 3 percent, from fiscal 2013. The decrease reflects higher trade spending, partially offset by a 1 percent reduction in advertising and media expense.

Segment operating profit of $2.4 billion in fiscal 2013 improved $98 million, or 4 percent, from fiscal 2012. The increase was primarily driven by a 5 percent reduction in advertising and media expense, favorable net price realization and mix, and higher volume, partially offset by an increase in input costs.

 

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INTERNATIONAL SEGMENT

Our International segment consists of retail and foodservice businesses outside of the United States. Our product categories include ready-to-eat cereals, shelf stable and frozen vegetables, meal kits, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza snacks, refrigerated yogurt, grain and fruit snacks, and super-premium ice cream and frozen desserts. We also sell super-premium ice cream and frozen desserts directly to consumers through owned retail shops. Our International segment also includes products manufactured in the United States for export, mainly to Caribbean and Latin American markets, as well as products we manufacture for sale to our international joint ventures. Revenues from export activities and franchise fees are reported in the region or country where the end customer is located.

As part of a long-term plan to conform the fiscal year ends of all our operations, we have changed the reporting period of certain countries within our International segment from an April fiscal year end to a May fiscal year end to match our fiscal calendar. Accordingly, in the year of change, our results include 13 months of results from the affected operations compared to 12 months in previous and future fiscal years. In fiscal 2013, we changed the reporting period for our operations in Europe and Australia. In fiscal 2012, we changed the reporting period for our operations in China. The impact of these changes was not material to the fiscal 2013 or fiscal 2012 International segment results of operations.

Net sales for our International segment were up 4 percent in fiscal 2014 compared to fiscal 2013, to $5,386 million, including 5 percentage points of growth from new businesses, primarily Yoki and Yoplait Canada. The growth in fiscal 2014 included 5 percentage points of contributions from volume growth, including 7 percentage points resulting from new businesses, and 3 percentage points of favorable net price realization and mix, partially offset by 4 percentage points of unfavorable foreign currency exchange.

Net sales totaled $5,200 million in fiscal 2013, up 24 percent from $4,194 million in fiscal 2012. The growth in fiscal 2013 was driven by 21 percentage points from new businesses, primarily Yoki, Yoplait S.A.S., and Yoplait Canada. Excluding the impact of new businesses, net sales growth was up 3 percent. Volume contributed 34 percentage points of net sales growth, including 32 percentage points resulting from new businesses, partially offset by 6 percentage points of unfavorable net price realization and mix and 4 percentage points of unfavorable foreign currency exchange.

Components of International Net Sales Growth

 

     

Fiscal 2014

vs. 2013

    

Fiscal 2013

vs. 2012

 

Contributions from volume growth (a)

     5 pts         34 pts 

Net price realization and mix

     3 pts         (6) pts 

Foreign currency exchange

     (4)pts         (4) pt 

Net sales growth

     4 pts         24 pts 
   
(a) Measured in tons based on the stated weight of our product shipments.

Net sales for our International segment by geographic region are shown in the following tables:

International Net Sales by Geographic Region

 

     Fiscal Year  
      2014      2013      2012  

Europe (a)

   $ 2,188.8      $ 2,214.6      $ 1,988.5  

Canada

     1,195.3        1,210.5        990.9  

Asia/Pacific (b)

     981.8        899.1        810.1  

Latin America

     1,020.0        876.0        404.8  

Total

   $ 5,385.9      $ 5,200.2      $ 4,194.3  
                            
(a) Fiscal 2013 net sales for the Europe region include an additional month of results.
(b) Fiscal 2012 net sales for the Asia/Pacific region include an additional month of results.

 

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International Change in Net Sales by Geographic Region

 

     Percentage Change in  Net
Sales as Reported
    Percentage Change in  Net
Sales on Constant
Currency Basis (a)
 
     

Fiscal 2014

vs. 2013

   

Fiscal 2013

vs. 2012

   

Fiscal 2014

vs. 2013

   

Fiscal 2013

vs. 2012

 

Europe (b)

     (1)      11      (4)      15 

Canada

     (1)         22        5         22   

Asia/Pacific

     9         11        9         11   

Latin America

     16         116        38         139   

Total (b)

     4       24      8       28 
                                  
(a) See the “Non-GAAP Measures” section below for our use of this measure.
(b) Fiscal 2013 percentage change in net sales as reported for the Europe region includes 4 percentage points of growth due to an additional month of results. The impact to fiscal 2013 net sales growth for the International segment was not material.

The 4 percentage point increase in the International segment fiscal 2014 net sales was driven by growth in the Latin America and Asia/Pacific regions, partially offset by declines in the Europe and Canada regions. On a constant currency basis, International segment net sales grew 8 percent, with 38 percent growth in the Latin America region, 9 percent growth in the Asia/Pacific region, and 5 percent growth in the Canada region, partially offset by 4 percent decline in the Europe region.

The 24 percentage point increase in the International segment fiscal 2013 net sales was driven by growth across all regions. On a constant currency basis, International segment net sales grew 28 percent, with 139 percent growth in the Latin America region, 15 percent growth in the Europe region, 22 percent growth in the Canada region, and 11 percent growth in the Asia/Pacific region.

Segment operating profit for fiscal 2014 declined 4 percent to $473 million from $490 million in fiscal 2013, primarily driven by unfavorable foreign currency exchange including a $62 million charge related to Venezuela currency devaluation in fiscal 2014 and higher input costs, partially offset by volume growth, favorable net price realization and mix, and an additional quarter of results from the Yoki acquisition. In addition we recorded a $17 million non-recurring expense related to the assumption of the Canadian Yoplait franchise license and a $25 million charge related to Venezuela currency devaluation in fiscal 2013. International segment operating profit excluding the impact of Venezuela currency devaluation was $535 million in fiscal 2014, an increase of 4 percent compared to $515 million in fiscal 2013 (see the “Non-GAAP Measure” section below for our use of this measure).

Segment operating profit for fiscal 2013 grew 14 percent to $490 million from $430 million in fiscal 2012, primarily driven by volume growth, the Yoki acquisition, and a full year of activity from Yoplait S.A.S., partially offset by unfavorable foreign currency exchange, including a $25 million charge related to Venezuela currency devaluation. International segment operating profit excluding the impact of Venezuela currency devaluation was $515 million in fiscal 2013, a 20 percent increase compared to $430 million in fiscal 2012 (see the “Non-GAAP Measure” section below for our use of this measure).

 

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Venezuela is a highly inflationary economy and as such, we remeasure the value of the assets and liabilities of our Venezuelan subsidiary based on the exchange rate at which we expect to remit dividends in U.S. dollars. In February 2013, the Venezuelan government devalued the bolivar by resetting the official exchange rate. The effect of the devaluation in fiscal 2013 was a $25 million foreign exchange loss in segment operating profit resulting from the remeasurement of assets and liabilities of our Venezuelan subsidiary. On February 19, 2014, the Venezuelan government established a new foreign exchange market mechanism (“SICAD 2”) and has indicated that this will be the market through which U.S. dollars will be obtained for the remittance of dividends. This market has significantly higher foreign exchange rates than those available through the other foreign exchange mechanisms. In the fourth quarter of fiscal 2014, we recorded a $62 million foreign exchange loss in the International segment operating profit resulting from the remeasurement of assets and liabilities of our Venezuelan subsidiary at the SICAD 2 rate of 50.0 bolivars per U.S. dollar. We have been able to access U.S. dollars through the SICAD 2 market. Our Venezuela operations represent less than 1 percent of our consolidated assets, liabilities, net sales, and segment operating profit. As of May 25, 2014, we had $3 million of non-U.S. dollar cash balances in Venezuela.

CONVENIENCE STORES AND FOODSERVICE SEGMENT

In the first quarter of fiscal 2014, we changed the name of our Bakeries and Foodservice operating segment to Convenience Stores and Foodservice. The businesses in this segment were unchanged. Our major product categories are ready-to-eat cereals, snacks, refrigerated yogurt, unbaked and fully baked frozen dough products, baking mixes, and flour. Many products we sell are branded to the consumer and nearly all are branded to our customers. We sell to distributors and operators in many customer channels including foodservice, convenience stores, vending, and supermarket bakeries. Substantially all of this segment’s operations are located in the United States.

For fiscal 2014, net sales for our Convenience Stores and Foodservice segment decreased 2 percent to $1,919 million primarily driven by an 1 percentage point decrease in contributions from volume growth and 1 percentage point of unfavorable net price realization and mix. Volume declines were driven by the loss of business with a major customer as well as the impact of inclement weather, as fiscal 2014 had a sharp increase in weather-related events such as school and business closings. Unfavorable net price realization and mix were driven by commodity index priced items.

For fiscal 2013, net sales for our Convenience Stores and Foodservice segment decreased 1 percent to $1,959 million due to an 1 percentage point decrease in contributions from volume growth. Net price realization and mix was flat compared to fiscal 2012 as gains from favorable product mix were offset by declines in commodity index priced items.

Components of Convenience Stores and Foodservice Net Sales Growth

 

     

Fiscal 2014

vs. 2013

    

Fiscal 2013

vs. 2012

 

Contributions from volume growth (a)

     (1)  pt         (1)pt   

Net price realization and mix

     (1)  pt         Flat   

Foreign currency exchange

     NM         NM   

Net sales growth

     (2)pts         (1)pt   
                   
(a) Measured in tons based on the stated weight of our product shipments.

Net sales for our Convenience Stores and Foodservice segment are shown in the following table:

Convenience Stores and Foodservice Net Sales

 

     Fiscal Year  
      2014      2013      2012  

Total

   $ 1,918.8      $ 1,959.0      $ 1,983.4  
                            

 

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In fiscal 2014, segment operating profit was $307 million, down 2 percent from $315 million in fiscal 2013. The decrease was primarily driven by volume declines, unfavorable net price realization, and investments to protect and grow the business.

In fiscal 2013, segment operating profit was $315 million, up 10 percent from $287 million in fiscal 2012. The increase was primarily driven by favorable product mix, lower manufacturing and input costs, and reduced administrative costs.

UNALLOCATED CORPORATE ITEMS

Unallocated corporate items include corporate overhead expenses, variances to planned domestic employee benefits and incentives, contributions to the General Mills Foundation, and other items that are not part of our measurement of segment operating performance. This includes gains and losses from mark-to-market valuation of certain commodity positions until passed back to our operating segments in accordance with our policy as discussed in Note 2 of the Consolidated Financial Statements in Item 8 of this report.

For fiscal 2014, unallocated corporate expense totaled $196 million compared to $326 million last year. In fiscal 2014 we recorded a $49 million net decrease in expense related to mark-to-market valuation of certain commodity positions and grain inventories, compared to a $4 million net decrease in expense last year. Compensation and benefit expenses decreased $59 million and the contribution to the General Mills Foundation decreased in fiscal 2014 compared to fiscal 2013. In fiscal 2013, we also recorded $12 million of integration costs related to the acquisition of Yoki.

Unallocated corporate expense totaled $326 million in fiscal 2013 compared to $348 million in fiscal 2012. In fiscal 2013, we recorded a $4 million net decrease in expense related to mark-to-market valuation of certain commodity positions and grain inventories, compared to a $104 million net increase in expense in fiscal 2012. Pension expense increased $40 million in fiscal 2013 compared to fiscal 2012. In fiscal 2013, we also recorded $12 million of integration costs related to the acquisition of Yoki.

IMPACT OF INFLATION

We have experienced significant input cost volatility for several years. Our gross margin performance in fiscal 2014 reflects the impact of 4 percent input cost inflation, primarily on commodities inputs. We expect input cost inflation of 3 percent in fiscal 2015. We attempt to minimize the effects of inflation through HMM, planning, and operating practices. Our risk management practices are discussed in Item 7A of this report.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the Act) was signed into law in March 2010. The Act codifies health care reforms with staggered effective dates from 2010 to 2018. Many provisions in the Act require the issuance of additional guidance from various government agencies. Because the Act does not take effect fully until future years, the Act did not have a material impact on our fiscal 2014, 2013, or 2012 results of operations. Estimates of the future impacts of several of the Act’s provisions are incorporated into our postretirement benefit liability. The Act may also impact our future health care benefit related expenses. Given the complexity of the Act, the extended time period over which the reforms will be implemented, and the unknown impact of future regulatory guidance, the full impact of the Act on future periods will not be known until those regulations are adopted.

LIQUIDITY

The primary source of our liquidity is cash flow from operations. Over the most recent three-year period, our operations have generated $7.9 billion in cash. A substantial portion of this operating cash flow has been returned to stockholders through share repurchases and dividends. We also use cash from operations to fund our capital expenditures and acquisitions. We typically use a combination of cash, notes payable, and long-term debt to finance significant acquisitions and major capital expansions.

 

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As of May 25, 2014, we had $840 million of cash and cash equivalents held in foreign jurisdictions which will be used to fund foreign operations and 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 cash held in foreign jurisdictions, we intend to do so only in a tax-neutral manner.

Cash Flows from Operations

 

     Fiscal Year  
In Millions    2014     2013     2012  

Net earnings, including earnings attributable to redeemable and noncontrolling interests

   $ 1,861.3     $ 1,892.5     $ 1,589.1  

Depreciation and amortization

     585.4       588.0       541.5  

After-tax earnings from joint ventures

     (89.6     (98.8     (88.2

Distributions of earnings from joint ventures

     90.5       115.7       68.0  

Stock-based compensation

     108.5       100.4       108.3  

Deferred income taxes

     172.5       81.8       149.4  

Tax benefit on exercised options

     (69.3     (103.0     (63.1

Pension and other postretirement benefit plan contributions

     (49.7     (223.2     (222.2

Pension and other postretirement benefit plan costs

     124.1       131.2       77.8  

Divestiture (gain)

     (65.5            

Restructuring, impairment, and other exit costs

     (18.8     (60.2     97.8  

Changes in current assets and liabilities, excluding the effects of acquisitions

     (32.2     471.1       243.8  

Other, net

     (76.2     30.5       (95.0

Net cash provided by operating activities

   $ 2,541.0     $ 2,926.0     $ 2,407.2  
                          

In fiscal 2014, our operations generated $2.5 billion of cash compared to $2.9 billion in fiscal 2013. The $385 million decrease is primarily due a $503 million change in current assets and liabilities. The change in current assets and liabilities is primarily driven by a $403 million change in other current liabilities largely due to changes in trade promotion and income tax accruals, and a $107 million change in inventory. In addition, in fiscal 2013 we made a $200 million voluntary contribution to our principal domestic pension plans.

We strive to grow core working capital at or below the rate of growth in our net sales. For fiscal 2014, core working capital decreased 9 percent, compared to net sales growth of 1 percent, primarily due to an increase in accounts payable. In fiscal 2013, core working capital decreased 5 percent, compared to net sales growth of 7 percent, and in fiscal 2012, core working capital decreased 7 percent, compared to net sales growth of 12 percent.

In fiscal 2013, our operations generated $2.9 billion of cash compared to $2.4 billion in fiscal 2012. The $519 million increase is primarily due to a $303 million increase in net earnings and $227 million from changes in current assets and liabilities. Other current liabilities accounted for $336 million of the increase in current assets and liabilities due to trade and tax accruals, and accounts payable accounted for $252 million of the increase partly as the result of the extension of payment terms. These were partially offset by a $214 million change in prepaid expenses and other current assets primarily due to changes in derivative receivables and changes in other receivables related to the liquidation of a corporate investment, and a $126 million change in inventory largely driven by a lower level of inventory reduction activity compared to fiscal 2012. In both fiscal 2013 and fiscal 2012, we made a $200 million voluntary contribution to our principal domestic pension plans. In addition, we paid $80 million in cash related to restructuring actions in fiscal 2013.

 

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Cash Flows from Investing Activities

 

     Fiscal Year  
In Millions    2014     2013     2012  

Purchases of land, buildings, and equipment

   $ (663.5   $ (613.9   $ (675.9

Acquisitions, net of cash acquired

           (898.0     (1,050.1

Investments in affiliates, net

     (54.9     (40.4     (22.2

Proceeds from disposal of land, buildings, and equipment

     6.6       24.2       2.2  

Proceeds from divestiture

     121.6              

Exchangeable note

     29.3       16.2       (131.6

Other, net

     (0.9     (3.5     6.8  

Net cash used by investing activities

   $ (561.8   $ (1,515.4   $ (1,870.8
                          

In fiscal 2014, cash used by investing activities decreased by $954 million from fiscal 2013. We invested $664 million in land, buildings, and equipment in fiscal 2014, $50 million more than the same period last year. We made $55 million of investments in affiliates, primarily CPW, in fiscal 2014. In the fourth quarter of fiscal 2014 we sold certain grain elevators for approximately $122 million in cash, subject to a working capital adjustment. In addition we received $29 million in payments from Sodiaal International (Sodiaal) in fiscal 2014 against the $132 million exchangeable note we purchased in 2012.

In fiscal 2013, cash used by investing activities decreased by $355 million from fiscal 2012. In fiscal 2013, we acquired Yoki, a privately held food company headquartered in Sao Bernardo do Campo, Brazil, for an aggregate purchase price of $940 million, comprised of $820 million of cash, net of $31 million of cash acquired, and $120 million of non-cash consideration for debt assumed. We invested $614 million in land, buildings, and equipment in fiscal 2013, $62 million less than the same period in fiscal 2012. In addition, we received $16 million in payments from Sodiaal in fiscal 2013 against the $132 million exchangeable note.

We expect capital expenditures to be approximately $730 million in fiscal 2015. These expenditures will support initiatives that are expected to fuel International growth, increase manufacturing capacity for Snacks, and continue HMM initiatives throughout the supply chain.

Cash Flows from Financing Activities

 

     Fiscal Year  
In Millions    2014     2013     2012  

Change in notes payable

   $ 572.9     $ (44.5   $ 227.9  

Issuance of long-term debt

     1,673.0       1,001.1       1,390.5  

Payment of long-term debt

     (1,444.8     (542.3     (1,450.1

Proceeds from common stock issued on exercised options

     108.1       300.8       233.5  

Tax benefit on exercised options

     69.3       103.0       63.1  

Purchases of common stock for treasury

     (1,745.3     (1,044.9     (313.0

Dividends paid

     (983.3     (867.6     (800.1

Addition of noncontrolling interest

     17.6              

Distributions to noncontrolling and redeemable interest holders

     (77.4     (39.2     (5.2

Other, net

     (14.2     (6.6     (13.2

Net cash used by financing activities

   $ (1,824.1   $ (1,140.2   $ (666.6
                          

 

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Net cash used by financing activities increased by $684 million in fiscal 2014. We had $387 million more net debt issuances in fiscal 2014 than the same period a year ago. For more information on our debt issuances, please refer to Note 8 to the Consolidated Financial Statements in Item 8 of this report.

During fiscal 2014, we received $108 million in proceeds from common stock issued on exercised options compared to $301 million in fiscal 2013, a decrease of $193 million. During fiscal 2012, we received $234 million in proceeds from common stock issued on exercised options.

In June 2010, our Board of Directors authorized the repurchase of up to 100 million shares of our common stock. The Board terminated this authorization in May 2014 and approved a new authorization for the repurchase of up to 100 million shares of our common stock. Purchases under the authorization can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans, and accelerated repurchase programs. The authorization has no specified termination date.

During fiscal 2014, we paid $1,745 million to repurchase 36 million shares of our common stock. During fiscal 2013, we repurchased 24 million shares of our common stock for an aggregate purchase price of $1,015 million, including 6 million shares with a fair value of $270 million purchased as part of an accelerated share repurchase (ASR) agreement. Under the terms of this agreement, we also paid an additional $30 million to the unrelated financial institution for shares which were settled in the first quarter of fiscal 2014. During fiscal 2012, we repurchased 8 million shares of our common stock for an aggregate purchase price of $313 million.

Dividends paid in fiscal 2014 totaled $983 million, or $1.55 per share, a 17 percent per share increase from fiscal 2013. Dividends paid in fiscal 2013 totaled $868 million, or $1.32 per share, an 8 percent per share increase from fiscal 2012 dividends of $1.22 per share. On March 11, 2014, our Board of Directors approved a dividend increase, effective with the May 1, 2014 payment, to an annual rate of $1.64 per share, a 6 percent increase from the rate paid in fiscal 2014.

Selected Cash Flows from Joint Ventures

Selected cash flows from our joint ventures are set forth in the following table:

 

     Fiscal Year  
Inflow (Outflow), in Millions    2014     2013     2012  

Advances to joint ventures, net

   $ (54.9   $ (36.7   $ (22.2

Dividends received

     90.5       115.7       68.0  
                          

CAPITAL RESOURCES

Total capital consisted of the following:

 

In Millions   

May 25,

2014

    

May 26,

2013

 

Notes payable

   $ 1,111.7      $ 599.7  

Current portion of long-term debt

     1,250.6        1,443.3  

Long-term debt

     6,423.5        5,926.1  

Total debt

     8,785.8        7,969.1  

Redeemable interest

     984.1        967.5  

Noncontrolling interests

     470.6        456.3  

Stockholders’ equity

     6,534.8        6,672.2  

Total capital

   $ 16,775.3      $ 16,065.1  
                   

 

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The following table details the fee-paid committed and uncommitted credit lines we had available as of May 25, 2014:

 

In Billions   

Facility

Amount

    

Borrowed

Amount

 

Credit facility expiring:

     

April 2017

     $1.7        $—  

May 2019

     1.0         

Total committed credit facilities

     2.7         

Uncommitted credit facilities

     0.4        0.1  

Total committed and uncommitted credit facilities

     $3.1        $0.1  
   

To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding short-term borrowings. Commercial paper is a continuing source of short-term financing. We have commercial paper programs available to us in the United States and Europe. We also have uncommitted and asset-backed credit lines that support our foreign operations. The credit facilities contain several covenants, including a requirement to maintain a fixed charge coverage ratio of at least 2.5 times.

Certain of our long-term debt agreements, our credit facilities, and our noncontrolling interests contain restrictive covenants. As of May 25, 2014, we were in compliance with all of these covenants.

We have $1,251 million of long-term debt maturing in the next 12 months that is classified as current. We believe that cash flows from operations, together with available short- and long-term debt financing, will be adequate to meet our liquidity and capital needs for at least the next 12 months.

As of May 25, 2014, our total debt, including the impact of derivative instruments designated as hedges, was 71 percent in fixed-rate and 29 percent in floating-rate instruments, compared to 73 percent in fixed-rate and 27 percent in floating-rate instruments on May 26, 2013. The change in the fixed-rate and floating-rate percentages was driven by increased commercial paper issuances.

Growth in return on average total capital is one of our key performance measures (see the “Non-GAAP Measures” section below for our discussion of this measure, which is not defined by GAAP). Return on average total capital decreased from 12.0 percent in fiscal 2013 to 11.6 percent in fiscal 2014, as fiscal 2014 earnings did not grow in line with our capital base. We also believe that our fixed charge coverage ratio and the ratio of operating cash flow to debt are important measures of our financial strength. Our fixed charge coverage ratio in fiscal 2014 was 8.04 compared to 7.62 in fiscal 2013. The measure increased from fiscal 2013 as earnings before income taxes and after-tax earnings from joint ventures increased by $120 million and fixed charges decreased by $10 million, driven primarily by lower interest. Our operating cash flow to debt ratio decreased 7.8 percentage points to 28.9 percent in fiscal 2014, driven by an increase in total debt.

We have a 51 percent controlling interest in Yoplait S.A.S. and a 50 percent interest in Yoplait Marques S.A.S. and Liberté Marques S.a.r.l. Sodiaal holds the remaining interests in each of these entities. We consolidate these entities into our consolidated financial statements. We record Sodiaal’s 50 percent interest in Yoplait Marques S.A.S. and Liberté Marques S.a.r.l. as noncontrolling interests, and their 49 percent interest in Yoplait S.A.S. 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 a limited portion of its redeemable interest to us at fair value once per year up to a maximum remaining term of 6 years. As of May 25, 2014, the redemption value of the redeemable interest was $984 million which approximates its fair value.

During the first quarter of fiscal 2013, in conjunction with the consent of the Class A investor, we restructured General Mills Cereals, LLC (GMC) through the distribution of its manufacturing assets, stock, inventory, cash and certain intellectual property to a wholly owned subsidiary. GMC retained the remaining intellectual property. Immediately following the restructuring, the Class A Interests of GMC were sold by the then current holder to another unrelated third-party investor.

 

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The third-party holder of the GMC Class A Interests receives quarterly preferred distributions from available net income based on the application of a floating preferred return rate, currently equal to the sum of three-month LIBOR plus 110 basis points, to the holder’s capital account balance established in the most recent mark-to-market valuation (currently $252 million). The preferred return rate is adjusted every three years through a negotiated agreement with the Class A Interest holder or through a remarketing auction.

The holder of the Class A Interests may initiate a liquidation of GMC under certain circumstances, including, without limitation, the bankruptcy of GMC or its subsidiaries, GMC’s failure to deliver the preferred distributions on the Class A Interests, GMC’s failure to comply with portfolio requirements, breaches of certain covenants, lowering of our senior debt rating below either Baa3 by Moody’s or BBB- by Standard & Poor’s, and a failed attempt to remarket the Class A Interests. In the event of a liquidation of GMC, each member of GMC will receive the amount of its then current capital account balance. We may avoid liquidation by exercising our option to purchase the Class A Interests.

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

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of May 25, 2014, we have issued guarantees and comfort letters of $341 million for the debt and other obligations of consolidated subsidiaries, and guarantees and comfort letters of $284 million for the debt and other obligations of non-consolidated affiliates, mainly CPW. In addition, off-balance sheet arrangements are generally limited to the future payments under non-cancelable operating leases, which totaled $388 million as of May 25, 2014.

As of May 25, 2014, we had invested in five variable interest entities (VIEs). None of our VIEs are material to our results of operations, financial condition, or liquidity as of and for the year ended May 25, 2014.

Our defined benefit plans in the United States are subject to the requirements of the Pension Protection Act (PPA). The PPA revised the basis and methodology for determining defined benefit plan minimum funding requirements as well as maximum contributions to and benefits paid from tax-qualified plans. The PPA may ultimately require us to make additional contributions to our domestic plans. We do not expect to be required to make any contributions in fiscal 2015.

 

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

 

     Payments Due by Fiscal Year  
In Millions    Total      2015      2016 - 17      2018 - 19     

2020 and

Thereafter

 

Long-term debt (a)

   $ 7,681.0      $ 1,249.5      $ 2,000.0      $ 1,250.0        $3,181.5  

Accrued interest

     92.5        92.5                       

Operating leases (b)

     388.5        93.9        130.2        76.1        88.3  

Capital leases

     2.5        1.5        1.0                

Purchase obligations (c)

     2,830.4        2,203.6        446.8        95.2        84.8  

Total contractual obligations

     10,994.9        3,641.0        2,578.0        1,421.3        3,354.6  

Other long-term obligations (d)

     1,520.9                              

Total long-term obligations

   $ 12,515.8      $ 3,641.0      $ 2,578.0      $ 1,421.3        $3,354.6  
                                              
(a) Amounts represent the expected cash payments of our long-term debt and do not include $2 million for capital leases or $9 million for net unamortized bond premiums and discounts and fair value adjustments.
(b) Operating leases represents the minimum rental commitments under non-cancelable operating leases.
(c) The majority of the purchase obligations represent commitments for raw material and packaging to be utilized in the normal course of business and for consumer marketing spending commitments that support our brands. For purposes of this table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities are excluded from the table above.
(d) The fair value of our foreign exchange, equity, commodity, and grain derivative contracts with a payable position to the counterparty was $28 million as of May 25, 2014, based on fair market values as of that date. Future changes in market values will impact the amount of cash ultimately paid or received to settle those instruments in the future. Other long-term obligations mainly consist of liabilities for accrued compensation and benefits, including the underfunded status of certain of our defined benefit pension, other postretirement benefit, and postemployment plans, and miscellaneous liabilities. We expect to pay $21 million of benefits from our unfunded postemployment benefit plans and $14 million of deferred compensation in fiscal 2015. We are unable to reliably estimate the amount of these payments beyond fiscal 2015. As of May 25, 2014, our total liability for uncertain tax positions and accrued interest and penalties was $193 million.

SIGNIFICANT ACCOUNTING ESTIMATES

For a complete description of our significant accounting policies, see Note 2 to the Consolidated Financial Statements in Item 8 of this report. Our significant accounting estimates are those that have a meaningful impact on the reporting of our financial condition and results of operations. These estimates include our accounting for promotional expenditures, valuation of long-lived assets, intangible assets, redeemable interest, stock-based compensation, income taxes, and defined benefit pension, other postretirement, and postemployment benefits.

Promotional Expenditures

Our promotional activities are conducted through our customers and directly or indirectly with end consumers. These activities include: payments to customers to perform merchandising activities on our behalf, such as advertising or in-store displays; discounts to our list prices to lower retail shelf prices; payments to gain distribution of new products; coupons, contests, and other incentives; and media and advertising expenditures. The recognition of these costs requires estimation of customer participation and performance levels. These estimates are made based on the forecasted customer sales, the timing and forecasted costs of promotional activities, and other factors. Differences between estimated expenses and actual costs are recognized as a change in management estimate in a subsequent period. Our accrued trade, coupon, and consumer marketing liabilities were $578 million as of May 25, 2014, and $635 million as of May 26, 2013. Because our total promotional expenditures (including amounts classified as a reduction of revenues) are significant, if our estimates are inaccurate we would have to make adjustments in subsequent periods that could have a material effect on our results of operations.

 

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Valuation of Long-Lived Assets

We estimate the useful lives of long-lived assets and make estimates concerning undiscounted cash flows to review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Fair value is measured using discounted cash flows or independent appraisals, as appropriate.

Intangible Assets

Goodwill and other indefinite lived intangible assets are not subject to amortization and are tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Our estimates of fair value for goodwill impairment testing are determined based on a discounted cash flow model. We use inputs from our long-range planning process to determine growth rates for sales and profits. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors.

We evaluate the useful lives of our other intangible assets, mainly brands, to determine if they are finite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets. Intangible assets that are deemed to have definite lives are amortized on a straight-line basis, over their useful lives, generally ranging from 4 to 30 years. Our estimate of the fair value of our brand assets is based on a discounted cash flow model using inputs which include projected revenues from our long-range plan, assumed royalty rates that could be payable if we did not own the brands, and a discount rate.

As of May 25, 2014, we had $13.1 billion of goodwill and indefinite-lived intangible assets. Our Europe and Yoplait U.S. reporting units and Uncle Toby’s and Mountain High brands have experienced declining business performance and we will continue to monitor these businesses. While we currently believe that the fair value of each intangible exceeds its carrying value and that those intangibles so classified will contribute indefinitely to our cash flows, materially different assumptions regarding future performance of our businesses or a different weighted-average cost of capital could result in significant impairment losses and amortization expense. We performed our fiscal 2014 assessment of our intangible assets as of November 25, 2013. As of our annual 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 Uncle Toby’s brand, which had a fair value 8 percent greater than its carrying value of $63 million. In addition, our Mountain High brand had a fair value 23 percent greater than its carrying value of $35 million.

Redeemable Interest

During the third quarter of fiscal 2014, we adjusted the redemption value of Sodiaal’s redeemable interest in Yoplait S.A.S. based on a discounted cash flow model. The significant assumptions used to estimate the redemption value include projected revenue growth and profitability from our long-range plan, capital spending, depreciation and taxes, foreign currency rates, and a discount rate. As of May 25, 2014, the redemption value of the redeemable interest was $984 million.

Stock-based Compensation

The valuation of stock options is a significant accounting estimate that requires us to use judgments and assumptions that are likely to have a material impact on our financial statements. Annually, we make predictive assumptions regarding future stock price volatility, employee exercise behavior, dividend yield, and the forfeiture rate. For more information on these assumptions, please refer to Note 11 to the Consolidated Financial Statements in Item 8 of this report.

 

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

 

     Fiscal Year  
      2014      2013      2012  

Estimated fair values of stock options granted

     $6.03           $3.65          $5.88    

Assumptions:

        

Risk-free interest rate

     2.6 %        1.6 %        2.9 %  

Expected term

     9.0 years          9.0 years        8.5 years  

Expected volatility

     17.4 %        17.3 %        17.6 %  

Dividend yield

     3.1 %        3.5 %        3.3 %  
                            

The risk-free interest rate for periods during the expected term of the options is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant. An increase in the expected term by 1 year, leaving all other assumptions constant, would increase the grant date fair value by 2 percent. If all other assumptions are held constant, a one percentage point increase in our fiscal 2014 volatility assumption would increase the grant date fair value of our fiscal 2014 option awards by 7 percent.

To the extent that actual outcomes differ from our assumptions, we are not required to true up grant-date fair value-based expense to final intrinsic values. However, these differences can impact the classification of cash tax benefits realized upon exercise of stock options, as explained in the following two paragraphs. Furthermore, historical data has a significant bearing on our forward-looking assumptions. Significant variances between actual and predicted experience could lead to prospective revisions in our assumptions, which could then significantly impact the year-over-year comparability of stock-based compensation expense.

Any corporate income tax benefit realized upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a windfall tax benefit) is presented in the Consolidated Statements of Cash Flows as a financing cash flow. The actual impact on future years’ financing cash flows will depend, in part, on the volume of employee stock option exercises during a particular year and the relationship between the exercise-date market value of the underlying stock and the original grant-date fair value previously determined for financial reporting purposes.

Realized windfall tax benefits are credited to additional paid-in capital within the Consolidated Balance Sheets. Realized shortfall tax benefits (amounts which are less than that previously recognized in earnings) are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense, potentially resulting in volatility in our consolidated effective income tax rate. We calculated a cumulative amount of windfall tax benefits for the purpose of accounting for future shortfall tax benefits and currently have sufficient cumulative windfall tax benefits to absorb projected arising shortfalls, such that we do not currently expect future earnings to be affected by this provision. However, as employee stock option exercise behavior is not within our control, it is possible that materially different reported results could occur if different assumptions or conditions were to prevail.

Income Taxes

We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the quarter of such change. For more information on income taxes, please refer to Note 14 to the Consolidated Financial Statements in Item 8 of this report.

Defined Benefit Pension, Other Postretirement Benefit, and Postemployment Benefit Plans

We have defined benefit pension plans covering most employees in the United States, Canada, France, and the United Kingdom. We also sponsor plans that provide health care benefits to the majority of our retirees in the United States, Canada, and Brazil. Under certain circumstances, we also provide accruable benefits to former or inactive employees in the United States, Canada, and Mexico, and members of our Board of Directors, including severance and certain other benefits payable upon death. Please refer to Note 13 to the Consolidated Financial Statements in

 

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Item 8 to this report for a description of our defined benefit pension, other postretirement benefit, and postemployment benefit plans.

We recognize benefits provided during retirement or following employment over the plan participants’ active working lives. Accordingly, we make various assumptions to predict and measure costs and obligations many years prior to the settlement of our obligations. Assumptions that require significant management judgment and have a material impact on the measurement of our net periodic benefit expense or income and accumulated benefit obligations include the long-term rates of return on plan assets, the interest rates used to discount the obligations for our benefit plans, and the health care cost trend rates.

Expected Rate of Return on Plan Assets

Our expected rate of return on plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment services, and investment managers), and long-term inflation assumptions. We review this assumption annually for each plan, however, our annual investment performance for one particular year does not, by itself, significantly influence our evaluation.

Our historical investment returns (compound annual growth rates) for our United States defined benefit pension and other postretirement benefit plan assets were 15.3 percent, 13.9 percent, 9.2 percent, 8.4 percent, and 9.9 percent for the 1, 5, 10, 15, and 20 year periods ended May 25, 2014.

On a weighted-average basis, the expected rate of return for all defined benefit plans was 8.53 percent for fiscal 2014, 8.53 percent for fiscal 2013, and 9.52 percent for fiscal 2012.

Lowering the expected long-term rate of return on assets by 100 basis points would increase our net pension and postretirement expense by $59 million for fiscal 2015. A market-related valuation basis is used to reduce year-to-year expense volatility. The market-related valuation recognizes certain investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Our outside actuaries perform these calculations as part of our determination of annual expense or income.

Discount Rates

Our discount rate assumptions are determined annually as of the last day of our fiscal year for our defined benefit pension, other postretirement benefit, and postemployment benefit plan obligations. We work with our outside actuaries to determine the timing and amount of expected future cash outflows to plan participants and, using the Aa Above Median corporate bond yield, to develop a forward interest rate curve, including a margin to that index based on our credit risk. This forward interest rate curve is applied to our expected future cash outflows to determine our discount rate assumptions.

Our weighted-average discount rates were as follows:

 

     

Defined Benefit

Pension Plans

   

Other

Postretirement

Benefit Plans

   

Postemployment

Benefit Plans

 

Obligations as of May 25, 2014, and fiscal 2015 expense

     4.54     4.51     3.82

Obligations as of May 26, 2013, and fiscal 2014 expense

     4.54     4.50     3.70

Fiscal 2013 expense

     4.85     4.70     3.86
                          

Lowering the discount rates by 100 basis points would increase our net defined benefit pension, other postretirement benefit, and postemployment benefit plan expense for fiscal 2015 by approximately $96 million. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.

 

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Health Care Cost Trend Rates

We review our health care cost trend rates annually. Our review is based on data we collect about our health care claims experience and information provided by our actuaries. This information includes recent plan experience, plan design, overall industry experience and projections, and assumptions used by other similar organizations. Our initial health care cost trend rate is adjusted as necessary to remain consistent with this review, recent experiences, and short-term expectations. Our initial health care cost trend rate assumption is 7.3 percent for retirees age 65 and over and 6.5 percent for retirees under age 65 at the end of fiscal 2014. Rates are graded down annually until the ultimate trend rate of 5.0 percent is reached in 2025 for all retirees. The trend rates are applicable for calculations only if the retirees’ benefits increase as a result of health care inflation. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Assumed trend rates for health care costs have an important effect on the amounts reported for the other postretirement benefit plans.

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

 

In Millions   

One

Percentage

Point

Increase

    

One

Percentage

Point

Decrease

 

Effect on the aggregate of the service and interest cost components in fiscal 2015

     $  4.7        $  (3.9

Effect on the other postretirement accumulated benefit obligation as of May 25, 2014

     82.7        (73.2
                   

Any arising health care claims cost-related experience gain or loss is recognized in the calculation of expected future claims. Once recognized, experience gains and losses are amortized using a straight-line method over 15 years, resulting in at least the minimum amortization required being recorded.

Financial Statement Impact

In fiscal 2014, we recorded net defined benefit pension, other postretirement benefit, and postemployment benefit plan expense of $140 million compared to $159 million of expense in fiscal 2013 and $106 million of expense in fiscal 2012. As of May 25, 2014, we had cumulative unrecognized actuarial net losses of $1.4 billion on our defined benefit pension plans and $80 million on our postretirement and postemployment benefit plans, mainly as the result of liability increases from lower interest rates, partially offset by recent increases in the values of plan assets. These unrecognized actuarial net losses will result in increases in our future pension expense and increases in postretirement expense since they currently exceed the corridors defined by GAAP.

We use the 2014 IRS Static Mortality Table projected forward to our plans’ measurement dates to calculate the year-end defined benefit pension, other postretirement benefit, and postemployment benefit obligations and annual expense.

Actual future net defined benefit pension, other postretirement benefit, and postemployment benefit plan income or expense will depend on investment performance, changes in future discount rates, changes in health care cost trend rates, and other factors related to the populations participating in these plans.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board issued new accounting requirements for the recognition of revenue from contracts with customers. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, which for us is the first quarter of fiscal 2018. We do not expect this guidance to have a material impact on our results of operations or financial position.

 

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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 our management or the Board of Directors believes the non-GAAP measure provides useful information to investors, and any additional purposes for which our management or Board of Directors uses the non-GAAP measure. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure.

International Segment Operating Profit Excluding the Impact of Venezuela Currency Devaluation

This measure is used in reporting to our executive management and as a component of the Board of Director’s measurement of our performance for incentive compensation purposes. We believe that this measure provides useful information to investors because it provides transparency to the underlying performance of the International segment by excluding the volatility related to the remeasurement of our Venezuelan subsidiary’s balance sheet. A reconciliation of this measure to International segment operating profit follows:

 

     Fiscal Year  
      2014      2013      2012      2011      2010  

International segment operating profit

   $ 472.9      $ 490.2      $ 429.6      $ 291.4      $ 192.1  

Impact of Venezuela currency devaluation

     62.2        25.2                      14.0  

International segment operating profit excluding Venezuela currency devaluation

   $ 535.1      $ 515.4      $ 429.6      $ 291.4      $ 206.1  
                                              

Total Segment Operating Profit Excluding the Impact of Venezuela Currency Devaluation

This measure is used in reporting to our executive management and as a component of the Board of Director’s measurement of our performance for incentive compensation purposes. We believe that this measure provides useful information to investors because it provides transparency to underlying segment performance by excluding the volatility related to the remeasurement of our Venezuelan subsidiary’s balance sheet. A reconciliation of this measure to operating profit, the relevant GAAP measure, follows:

 

     Fiscal Year  
      2014     2013      2012      2011     2010  

Operating profit:

            

U.S. Retail

   $ 2,311.5     $ 2,392.9      $ 2,295.3      $ 2,348.0     $ 2,385.1  

International, excluding Venezuela currency devaluation

     535.1       515.4        429.6        291.4       206.1  

Convenience Stores and Foodservice

     307.3       314.6        286.7        306.3       263.3  

Total segment operating profit excluding Venezuela currency devaluation

     3,153.9       3,222.9        3,011.6        2,945.7       2,854.5  

Unallocated corporate items

     196.2       326.1        347.6        184.1       202.9  

Divestiture (gain)

     (65.5                   (17.4 )      

Restructuring, impairment, and other exit costs

     3.6       19.8        101.6        4.4       31.4  

Venezuela currency devaluation

     62.2       25.2                     14.0  

Operating profit

   $ 2,957.4     $ 2,851.8      $ 2,562.4      $ 2,774.6     $ 2,606.2  
                                            

 

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Diluted EPS Excluding Certain Items Affecting Comparability

This measure is used in reporting to our executive management and as a component of the Board of Director’s 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 management’s judgment, significantly affect the year-over-year assessment of operating results.

The reconciliation of diluted EPS excluding certain items affecting comparability to diluted EPS, the relevant GAAP measure, follows:

 

     Fiscal Year  
Per Share Data    2014     2013     2012      2011     2010  

Diluted earnings per share, as reported

   $ 2.83     $ 2.79     $ 2.35      $ 2.70     $ 2.24  

Mark-to-market effects (a)

     (0.05 )           0.10        (0.09 )     0.01  

Divestiture gain, net (b)

     (0.06 )                         

Tax items (c)

           (0.13            (0.13     0.05  

Acquisition integration costs (d)

           0.01       0.01               

Venezuela currency devaluation (e)

     0.09       0.03                    0.01  

Restructuring costs (f)

     0.01       0.02       0.10               

Diluted earnings per share, excluding certain items affecting comparability

   $ 2.82     $ 2.72     $ 2.56      $ 2.48     $ 2.31  
                                           
(a) See Note 7 to the Consolidated Financial Statements in Item 8 of this report.
(b) See Note 3 to the Consolidated Financial Statements in Item 8 of this report.
(c) The fiscal 2013 tax items consist of a reduction to income taxes related to the restructuring of our GMC subsidiary and an increase to income taxes related to the liquidation of a corporate investment. Additionally, fiscal 2013 and fiscal 2010 include changes in deferred taxes associated with the Medicare Part D subsidies related to the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. The fiscal 2011 tax item represents the effects of court decisions and audit settlements on uncertain tax matters.
(d) Integration costs resulting from the acquisitions of Yoki in fiscal 2013 and Yoplait S.A.S. and Yoplait Marques S.A.S. in fiscal 2012.
(e) Impact of remeasuring the assets and liabilities of our Venezuelan subsidiary following currency devaluation in fiscal 2014, fiscal 2013, and fiscal 2010.
(f) See Note 4 to the Consolidated Financial Statements in Item 8 of this report.

 

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Return on Average Total Capital

This measure is used in reporting to our executive management and as a component of the Board of Director’s measurement of our performance for incentive compensation purposes. We believe that this measure provides useful information to investors because it is important for assessing the utilization of capital and it eliminates certain items which affect year-to-year comparability.

 

     Fiscal Year  
In Millions    2014     2013     2012     2011     2010      2009  

 

 

Net earnings, including earnings attributable to redeemable and noncontrolling interests

   $ 1,861.3     $ 1,892.5     $ 1,589.1     $ 1,803.5     $ 1,535.0        

Interest, net, after-tax

     190.9       201.2       238.9       243.5       261.1        

 

 

Earnings before interest, after-tax

     2,052.2       2,093.7       1,828.0       2,047.0       1,796.1        

Mark-to-market effects

     (30.5     (2.8     65.6       (60.0     4.5        

Tax items

           (85.4           (88.9     35.0        

Restructuring costs

     3.6       15.9       64.3             —        

Acquisition integration costs

           8.8       9.7             —        

Divestiture gain, net

     (36.0                       —        

Venezuela currency devaluation

     57.8       20.8                   9.4        

 

    

Earnings before interest, after-tax for return on capital calculation

   $ 2,047.1     $ 2,051.0     $ 1,967.6     $ 1,898.1     $ 1,845.0        

 

    

Current portion of long-term debt

   $ 1,250.6     $ 1,443.3     $ 741.2     $ 1,031.3     $ 107.3         $ 508.5   

Notes payable

     1,111.7       599.7       526.5       311.3       1,050.1           812.2   

Long-term debt

     6,423.5       5,926.1       6,161.9       5,542.5       5,268.5           5,754.8   

 

 

Total debt

     8,785.8       7,969.1       7,429.6       6,885.1       6,425.9           7,075.5   

Redeemable interest

     984.1       967.5       847.8             —           —   

Noncontrolling interests

     470.6       456.3       461.0       246.7       245.1           244.2   

Stockholders’ equity

     6,534.8       6,672.2       6,421.7       6,365.5       5,402.9           5,172.3   

 

 

Total capital

     16,775.3       16,065.1       15,160.1       13,497.3       12,073.9           12,492.0   

Accumulated other comprehensive loss

     1,340.3       1,585.3       1,743.7       1,010.8       1,486.9           877.8   

After-tax earnings adjustments (a)

     (209.3     (204.2     (161.5     (301.1     (152.2)           (201.1)   

 

 

Adjusted total capital

   $ 17,906.3     $ 17,446.2     $ 16,742.3     $ 14,207.0     $ 13,408.6         $ 13,168.7   

 

 

Adjusted average total capital

   $ 17,676.2     $ 17,094.2     $ 15,474.6     $ 13,807.8     $ 13,288.6        

 

    

Return on average total capital

     11.6     12.0     12.7     13.7     13.9%      

 

    
(a) Sum of current year and previous year after-tax adjustments.

 

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Net Sales Growth Rates for Our International Segment Excluding the Impact of Changes in Foreign Currency Exchange

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.

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.

 

     Fiscal 2014  
     

Percentage
Change in Net
Sales

as Reported

    Impact of
Foreign
Currency
Exchange
    Percentage Change in
Net Sales on Constant
Currency Basis
 

  Europe

     (1 )%      3 pts      (4 )% 

  Canada

     (1     (6     5  

  Asia/Pacific

     9              9  

  Latin America

     16       (22     38  

  Total International

     4     (4 )pts      8
                          
     Fiscal 2013  
     

Percentage
Change in Net
Sales

as Reported

    Impact of
Foreign
Currency
Exchange
    Percentage Change in
Net Sales on Constant
Currency Basis
 

  Europe

     11     (4 )pts      15

  Canada

     22              22  

  Asia/Pacific

     11              11  

  Latin America

     116       (23 )pts      139  

  Total International

     24     (4 )pts      28
                          

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

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

 

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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; volatility in the market value of derivatives used to manage price risk for certain commodities; benefit plan expenses due to changes in plan asset values and discount rates used to determine plan liabilities; failure or breach of our information technology systems; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic uncertainty due to terrorism or war.

You should also consider the risk factors that we identify in Item 1A of this report, which could also affect our future results.

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

 

ITEM 7A Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk stemming from changes in interest and foreign exchange rates and commodity and equity prices. Changes in these factors could cause fluctuations in our earnings and cash flows. In the normal course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. The counterparties in these transactions are generally highly rated institutions. We establish credit limits for each counterparty. Our hedging transactions include but are not limited to a variety of derivative financial instruments. For information on interest rate, foreign exchange, commodity price, and equity instrument risk, please see Note 7 to the Consolidated Financial Statements in Item 8 of this report.

VALUE AT RISK

The estimates in the table below are intended to measure the maximum potential fair value we could lose in one day from adverse changes in market interest rates, foreign exchange rates, commodity prices, and equity prices under normal market conditions. A Monte Carlo value-at-risk (VAR) methodology was used to quantify the market risk for our exposures. The models assumed normal market conditions and used a 95 percent confidence level.

 

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The VAR calculation used historical interest and foreign exchange rates, and commodity and equity prices from the past year to estimate the potential volatility and correlation of these rates in the future. The market data were drawn from the RiskMetrics™ data set. The calculations are not intended to represent actual losses in fair value that we expect to incur. Further, since the hedging instrument (the derivative) inversely correlates with the underlying exposure, we would expect that any loss or gain in the fair value of our derivatives would be generally offset by an increase or decrease in the fair value of the underlying exposure. The positions included in the calculations were: debt; investments; interest rate swaps; foreign exchange forwards; commodity swaps, futures and options; and equity instruments. The calculations do not include the underlying foreign exchange and commodities or equity-related positions that are offset by these market-risk-sensitive instruments.

The table below presents the estimated maximum potential VAR arising from a one-day loss in fair value for our interest rate, foreign currency, commodity, and equity market-risk-sensitive instruments outstanding as of May 25, 2014, and May 26, 2013, and the average fair value impact during the year ended May 25, 2014.

 

     Fair Value Impact  
In Millions    May 25,
2014
    

Average

during

fiscal 2014

     May 26,
2013
 

Interest rate instruments

     $32.7        $29.5        $21.5  

Foreign currency instruments

     7.2        7.1        3.5  

Commodity instruments

     3.0        3.2        5.4  

Equity instruments

     1.1        0.8        0.7  
                            

 

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ITEM 8 Financial Statements and Supplementary Data

REPORT OF MANAGEMENT RESPONSIBILITIES

The management of General Mills, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The statements have been prepared in accordance with accounting principles that are generally accepted in the United States, using management’s 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 management’s 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 registered public accounting firm to review internal control, auditing, and financial reporting matters. The independent registered public accounting firm, internal auditors, and employees have full and free access to the Audit Committee at any time.

The Audit Committee reviewed and approved the Company’s annual financial statements. The Audit Committee recommended, and the Board of Directors approved, that the consolidated financial statements be included in the Annual Report. The Audit Committee also appointed KPMG LLP to serve as the Company’s independent registered public accounting firm for fiscal 2015, subject to ratification by the stockholders at the annual meeting.

 

/s/ K. J. Powell     /s/ D. L. Mulligan
K. J. Powell     D. L. Mulligan
Chairman of the Board     Executive Vice President
and Chief Executive Officer     and Chief Financial Officer

July 3, 2014

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

General Mills, Inc.:

We have audited the accompanying consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 25, 2014 and May 26, 2013, and the related consolidated statements of earnings, comprehensive income, total equity and redeemable interest, and cash flows for each of the fiscal years in the three-year period ended May 25, 2014. In connection with our audits of the consolidated financial statements, we have audited the accompanying financial statement schedule. We also have audited General Mills, Inc.’s internal control over financial reporting as of May 25, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). General Mills, Inc.’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s 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 company’s 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 company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Mills, Inc. and subsidiaries as of May 25, 2014 and May 26, 2013, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended May 25, 2014, 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. Also in our opinion, General Mills, Inc. maintained, in all material respects, effective internal control over financial reporting as of May 25, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Minneapolis, Minnesota

July 3, 2014

 

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Consolidated Statements of Earnings

GENERAL MILLS, INC. AND SUBSIDIARIES

(In Millions, Except per Share Data)

 

     Fiscal Year  
     2014     2013      2012  

Net sales

   $ 17,909.6     $ 17,774.1      $ 16,657.9  

Cost of sales

     11,539.8       11,350.2        10,613.2  

Selling, general, and administrative expenses

     3,474.3       3,552.3        3,380.7  

Divestiture (gain)

     (65.5             

Restructuring, impairment, and other exit costs

     3.6       19.8        101.6  
  

 

 

   

 

 

    

 

 

 

Operating profit

     2,957.4