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MarketScreener Homepage  >  Equities  >  Nyse  >  General Mills, Inc.    GIS

GENERAL MILLS, INC.

(GIS)
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GENERAL MILLS : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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09/23/2020 | 05:50pm EDT

INTRODUCTION




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



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



CONSOLIDATED RESULTS OF OPERATIONS



First Quarter Results



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



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

                                                               Quarter
                                                                Ended
                                                               Aug. 30,
                                            In millions,       2020 vs.    Percent
                                             except per        Aug. 25,     of Net      Constant-Currency
Quarter Ended Aug. 30, 2020                     share            2019       Sales          Growth (a)
Net sales                                     $    4,364.0         9 %
Operating profit                                     853.7        29 %        19.6 %
Net earnings attributable to General Mills           638.9        23 %
Diluted earnings per share                    $       1.03        21 %
Organic net sales growth rate (a)                                 10 %
Adjusted operating profit (a)                        832.5        22 %        19.1 %           22 %

Adjusted diluted earnings per share (a) $ 1.00 27 %

                    27 %

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

Consolidated net sales were as follows:



                                                                    Quarter Ended
                                                                     Aug. 30, 2020
                                                                      vs Aug. 25,
                                                    Aug. 30, 2020         2019       Aug. 25, 2019
Net sales (in millions)                             $      4,364.0          9%       $      4,002.5
Contributions from volume growth (a)                                         8 pts
Net price realization and mix                                                2 pts
Foreign currency exchange                                                  (1) pt
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.




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



                                       19

--------------------------------------------------------------------------------

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




Quarter Ended Aug. 30, 2020 vs.
Quarter Ended Aug. 25, 2019
Contributions from organic volume growth (a)                           8 

pts

Organic net price realization and mix                                  2 pts
Organic net sales growth                                              10 pts
Foreign currency exchange                                              (1)pt
Net sales growth                                                       9 pts
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.

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




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



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



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

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




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



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

                                       20

--------------------------------------------------------------------------------


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



Quarter Ended Aug. 30, 2020 vs.
Quarter Ended Aug. 25, 2019                             CPW       HDJ (a)   

Total

Contributions from volume growth (b)                      7 pts     (6) pts
Net price realization and mix                             2 pts       5 pts
Net sales growth in constant currency                     9 pts     (1) pt        7 pts
Foreign currency exchange                               (4) pts       1 pt      (3) pts
Net sales growth                                          5 pts    Flat           4 pts
Note: Table may not foot due to rounding.
(a) Häagen-Dazs Japan, Inc. (HDJ)
(b) Measured in tons based on the stated weight
of our product shipments.



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





SEGMENT OPERATING RESULTS



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



North America Retail Segment Results

North America Retail net sales were as follows:



                                                          Quarter Ended
                                                       Aug. 30, 2020 vs Aug.
                                      Aug. 30, 2020           25, 2019         Aug. 25, 2019
Net sales (in millions)              $       2,707.0                   14 %   $       2,376.1
Contributions from volume growth (a)                                   17 pts
Net price realization and mix                                         (2) pts
Foreign currency exchange                                            Flat

Note: Table may not foot due to rounding.

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

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




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




                                                             Quarter Ended
                                                             Aug. 30, 2020
Contributions from organic volume growth (a)                       17 pts
Organic net price realization and mix                             (2) pts
Organic net sales growth                                           14 pts
Foreign currency exchange                                        Flat
Net sales growth                                                   14 pts
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.




                                       21
--------------------------------------------------------------------------------


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



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



                       Quarter Ended
                       Aug. 30, 2020U.S. Meals & Baking           31 %
U.S. Cereal                   10
U.S. Yogurt and Other          5
U.S. Snacks                  (2)
Canada (a)                     3
Total                         14 %


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



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




Europe & Australia Segment Results

Europe & Australia net sales were as follows:



                                                              Quarter Ended
                                                            Aug. 30, 2020
                                                            vs. Aug. 25,
                                          Aug. 30, 2020         2019             Aug. 25, 2019
Net sales (in millions)                   $        491.0                 8 %     $        454.1
Contributions from volume growth (a)                                   (1) pt
Net price realization and mix                                            6 pts
Foreign currency exchange                                                3 pts
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.




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



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




                                                Quarter Ended
                                                Aug. 30, 2020

Contributions from organic volume growth (a) Flat Organic net price realization and mix

                 7 pts
Organic net sales growth                              7 pts
Foreign currency exchange                             3 pts
Divestiture                                         (1) pt
Net sales growth                                      8 pts

Note: Table may not foot due to rounding.

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

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

                                       22

--------------------------------------------------------------------------------




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





Pet Segment Results


Pet net sales were as follows:



                                                               Quarter Ended
                                                           Aug. 30, 2020 vs Aug.
                                         Aug. 30, 2020            25, 2019         Aug. 25, 2019
Net sales (in millions)                   $       391.7                     6 %      $       367.8
Contributions from volume growth (a)                                       11 pts
Net price realization and mix                                             (4) pts
Foreign currency exchange                                                Flat
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.




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



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





                                                             Quarter Ended
                                                             Aug. 30, 2020
Contributions from organic volume growth (a)                       11 pts
Organic net price realization and mix                             (4) pts
Organic net sales growth                                            6 pts
Foreign currency exchange                                        Flat
Net sales growth                                                    6 pts
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.




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




Convenience Stores & Foodservice Segment Results

Convenience Stores & Foodservice net sales were as follows:





                                                           Quarter Ended
                                                         Aug. 30, 2020 vs
                                       Aug. 30, 2020      Aug. 25, 2019         Aug. 25, 2019
Net sales (in millions)                 $       391.6                 (12) %     $       445.0
Contributions from volume growth (a)                                   (9) 

pts

Net price realization and mix                                          (3) 

pts

Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.


                                       23

--------------------------------------------------------------------------------




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



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




                                               Quarter Ended
                                               Aug. 30, 2020

Contributions from organic volume growth (a) (9)pts Organic net price realization and mix

                 (3)pts
Organic net sales growth                             (12)pts
Net sales growth                                     (12)pts


Note: Table may not foot due to rounding.

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

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

Asia & Latin America Segment Results

Asia & Latin America net sales were as follows:



                                                               Quarter Ended
                                                          Aug. 30, 2020 vs. Aug.
                                         Aug. 30, 2020           25, 2019            Aug. 25, 2019
Net sales (in millions)                  $        382.7                    6 %    $          359.5
Contributions from volume growth (a)                                      20 pts
Net price realization and mix                                            (4) pts
Foreign currency exchange                                               (10) pts
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.




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




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




                                                Quarter Ended
                                                Aug. 30, 2020

Contributions from organic volume growth (a) 20 pts Organic net price realization and mix

               (4) pts
Organic net sales growth                             17 pts
Foreign currency exchange                          (10) pts
Net sales growth                                      6 pts

Note: Table may not foot due to rounding.

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




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



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

                                       24

--------------------------------------------------------------------------------


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





UNALLOCATED CORPORATE ITEMS



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



LIQUIDITY



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



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



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



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




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



CAPITAL RESOURCES


Our capital structure was as follows:




In Millions                         Aug. 30, 2020     May 31, 2020
Notes payable                     $         162.7   $        279.0
Current portion of long-term debt         2,625.7          2,331.5
Long-term debt                           10,832.9         10,929.0
Total debt                               13,621.3         13,539.5
Redeemable interest                         584.9            544.6
Noncontrolling interests                    313.3            291.0
Stockholders' equity                      8,444.6          8,058.5
Total capital                     $      22,964.1$     22,433.6


                                       25
--------------------------------------------------------------------------------

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



In Billions                                            Facility Amount     Borrowed Amount
Credit facility expiring:
May 2022                                             $             2.7   $               -
September 2022                                                     0.2                   -
Total committed credit facilities                                  2.9                   -
Uncommitted credit facilities                                      0.7                 0.1
Total committed and uncommitted credit facilities    $             3.6   $             0.1



We have a 51 percent controlling interest in Yoplait SAS and a 50 percent
interest in Yoplait Marques SNC and Liberté Marques Sàrl. Sodiaal International
(Sodiaal) holds the remaining interests in each of these entities. We
consolidate these entities into our consolidated financial statements. We record
Sodiaal's 50 percent interests in Yoplait Marques SNC and Liberté Marques Sàrl
as noncontrolling interests, and its 49 percent interest in Yoplait SAS as a
redeemable interest on our Consolidated Balance Sheets. Sodiaal has the ability
to put all or a portion of its redeemable interest to us at fair value once per
year, up to three times before December 2024. As of August 30, 2020, the
redemption value of the redeemable interest was $585 million, which approximates
its fair value.

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

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



To ensure availability of funds, we maintain bank credit lines and have
commercial paper programs available to us in the United States and Europe. In
response to uncertainty surrounding the availability and cost of commercial
paper borrowings as a result of the COVID-19 pandemic, we issued $750 million of
fixed-rate notes in April 2020 and reduced our borrowings under commercial paper
programs. As the COVID-19 pandemic evolves, we will continue to evaluate its
impact to our sources of liquidity. We also have uncommitted and asset-backed
credit lines that support our foreign operations.



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




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



OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS




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




SIGNIFICANT ACCOUNTING ESTIMATES




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



                                       26
--------------------------------------------------------------------------------


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



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



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



                                              Carrying
                                              Value of        Excess Fair Value as
                                             Intangible       of Fiscal 2020 Test
In Millions                                    Asset                  Date
Europe & Australia                        $        672.6                       14%
Progresso                                 $        330.0                        5%




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





RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS




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



NON-GAAP MEASURES



We have included in this report measures of financial performance that are not
defined by GAAP. We believe that these measures provide useful information to
investors, and include these measures in other communications to investors.



For each of these non-GAAP financial measures, we are providing below a
reconciliation of the differences between the non-GAAP measure and the most
directly comparable GAAP measure, an explanation of why we believe the non-GAAP
measure provides useful information to investors, and any additional material
purposes for which our management or Board of Directors uses the non-GAAP
measure. These non-GAAP measures should be viewed in addition to, and not in
lieu of, the comparable GAAP measure.



Several measures below are presented on an adjusted basis. The adjustments are either items resulting from infrequently occurring events or items that, in management's judgment, significantly affect the year-to-year assessment of operating results.

Organic Net Sales Growth Rates




We provide organic net sales growth rates for our consolidated net sales and
segment net sales. This measure is used in reporting to our Board of Directors
and executive management and as a component of the measurement of our
performance for incentive compensation purposes. We believe that organic net
sales growth rates provide useful information to investors because they provide
transparency to underlying performance in our net sales by excluding the effect
that foreign currency exchange rate fluctuations, acquisitions, divestitures,
and a 53rd week, when applicable, have on year-to-year comparability. A
reconciliation of these measures to reported net sales growth rates, the
relevant GAAP measures, are included in our Consolidated Results of Operations
and Results of Segment Operations discussions in the MD&A above.



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

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

                                       27

--------------------------------------------------------------------------------

Our adjusted operating profit margins are calculated as follows:



                                              Quarter Ended
                                  Aug. 30, 2020           Aug. 25, 2019
                                         Percent of               Percent of
In Millions                     Value     Net Sales       Value    Net Sales
Operating profit as reported $   853.7        19.6 %    $ 662.4        16.5 %
Mark-to-market effects (a)      (16.4)       (0.4) %       15.0         0.4 %
Investment activity, net (b)    (13.0)       (0.3) %      (9.5)       (0.2) %
Product recall (c)                 7.1         0.2 %          -           - %
Restructuring charges (d)          1.0           - %       14.3         0.4 %
Adjusted operating profit    $   832.5        19.1 %    $ 682.1        17.0 %

Note: Table may not foot due to rounding.


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

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

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


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


Adjusted Operating Profit Growth on a Constant-currency Basis




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



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



                                                             Quarter Ended
                                              Aug. 30, 2020      Aug. 25, 2019   Change
Operating profit as reported               $          853.7   $          662.4     29 %
Mark-to-market effects (a)                           (16.4)               

15.0

Investment activity, net (b)                         (13.0)              (9.5)
Product recall (c)                                      7.1                  -
Restructuring charges (d)                               1.0               14.3
Adjusted operating profit                  $          832.5   $          682.1     22 %
Foreign currency exchange impact                                            

Flat

Adjusted operating profit growth, on
a constant-currency basis                                                   

22 %

Note: Table may not foot due to rounding.


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

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

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


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


Adjusted Diluted EPS and Related Constant-currency Growth Rate

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

                                       28

--------------------------------------------------------------------------------

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



                                                            Quarter Ended
Per Share Data                                 Aug. 30, 2020    Aug. 25, 2019  Change
Diluted earnings per share, as reported      $          1.03  $          0.85        21 %
Mark-to-market effects (a)                            (0.02)             

0.02

Investment activity, net (b)                          (0.02)           (0.01)
Product recall (c)                                      0.01                -
Restructuring charges (d)                                  -             0.02
Tax item (e)                                               -           (0.09)

Adjusted diluted earnings per share $ 1.00 $ 0.79 27 % Foreign currency exchange impact

Flat

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

27 %

Note: Table may not foot due to rounding.


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

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

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


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

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



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


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




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



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



                             Percentage Change in       Impact of
                            After-Tax Earnings from      Foreign    

Percentage Change in After-Tax

                                     Joint              Currency      

Earnings from Joint Ventures

                             Ventures as Reported       Exchange       on Constant-Currency Basis
Quarter Ended Aug. 30,
2020                                         89 %           1 pt                       88 %
Note: Table may not foot
due to rounding.



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




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



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



                                                                            Percentage Change in
                                 Percentage Change in   Impact of Foreign       Net Sales on
                                      Net Sales              Currency             Constant-
                                     as Reported             Exchange          Currency Basis
Quarter Ended Aug. 30, 2020               3 %                 (2) pts                     5 %
Note: Table may not foot due
to rounding.




                                       29
--------------------------------------------------------------------------------

Constant-currency Segment Operating Profit Growth Rates




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



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



                                                  Quarter Ended Aug. 30, 2020
                         Percentage Change in     Impact of Foreign    

Percentage Change in Operating

                           Operating Profit            Currency           

Profit on Constant-Currency

                             as Reported               Exchange                      Basis
North America
Retail                               24 %                Flat                               24 %
Europe & Australia                   93 %                   4 pts                           89 %
Pet                                  12 %                Flat                               12 %
Asia & Latin
America                              99 %                  31 pts                           68 %
Note: Table may not foot due to
rounding.



Adjusted Effective Income Tax Rate

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

Adjusted effective income tax rates are calculated as follows:



                                                      Quarter Ended
                                        Aug. 30, 2020               Aug. 25, 2019
In Millions                           Pretax       Income         Pretax       Income
(Except Per Share Data)            Earnings (a)    Taxes       Earnings (a)    Taxes
As reported                      $        775.9$    170.8$        573.9$     67.2
Mark-to-market effects (b)               (16.4)      (3.8)             15.0        3.5
Investment activity, net (c)             (13.0)      (3.0)            (9.5)      (2.2)
Product recall (d)                          7.1        0.8                -          -
Restructuring charges (e)                   1.0        0.2             14.3        2.6
Tax item (f)                                  -          -                -       53.1
As adjusted                      $        754.6$    165.1$        593.7$    124.2
Effective tax rate:
As reported                                          22.0%                       11.7%
As adjusted                                          21.9%                       20.9%
Sum of adjustment to income
taxes                                           $    (5.7)$     57.0
Average number of common shares
- diluted EPS                                        619.8                  

611.5

Impact of income tax adjustments
on adjusted diluted EPS                         $   (0.01)

$ 0.09

Note: Table may not foot due to rounding.

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


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

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

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


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

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

                                       30

--------------------------------------------------------------------------------

Glossary



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



AOCI. Accumulated other comprehensive income (loss).

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

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

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


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


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

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

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

Euribor. Euro Interbank Offered Rate.

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

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

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

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

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

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

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

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




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



Gross margin. Net sales less cost of sales.

                                       31

--------------------------------------------------------------------------------


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



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



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



LIBOR. London Interbank Offered Rate.

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

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

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

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

Noncontrolling interests. Interests of subsidiaries held by third parties.

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

OCI. Other Comprehensive Income.

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

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

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

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

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

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

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




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



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



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


                                       32

--------------------------------------------------------------------------------

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




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



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



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



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



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



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

© Edgar Online, source Glimpses


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