EXHIBIT 13
MANAGEMENTS DISCUSSION OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
In fiscal 1995 the General Mills Board of Directors decided to
separate the Company into two independent public corporations, one
for consumer foods and one for restaurants. The Board's decision
was based on the belief that separate corporations with highly
integrated strategies, organizations and incentive programs will
produce the strongest growth performance and thereby enhance long-
term shareholder value. General Mills completed the spin-off
distribution of the Restaurant operations as a separate, free-
standing company, Darden Restaurants, Inc. (Darden), to our
shareholder on May 28, 1995. Also in May 1995, General Mills sold
the Gorton's frozen and canned seafood products business to allow
management to sharpen its focus on the best growth and return
opportunities in Foods.
Both the Restaurant operations and Gorton's are presented as
discontinued operations within these financial statements for all
periods presented.
Results of Operations
For the year ended May 28, 1995, combined earnings for continuing
and discontinued operations before unusual items totaled $3.12 per
share, down 11 percent from $3.50 per share in 1994, as various
operating actions taken to benefit future performance curtailed
current-year results. These fiscal 1995 combined earnings were
reduced by a net after-tax charge of $125.3 million, or $.79 per
share, related to the costs of various restructuring actions
partially offset by the gain on the sale of Gorton's. Fiscal 1994
results included an unusual after-tax charge of $87.1 million, or
$.55 per share to cover estimated costs associated with improper
use of a pesticide by an independent contractor treating some of
the Company's oat supplies. Including these charges, net earnings
totaled $367.4 million, or $2.33 per share, in 1995 and $469.9
million, or $2.95 per share in 1994.
Continuing Operations
In 1995, earnings for continuing Consumer Foods operations totaled
$371.3 million, or $2.35 per share, before restructuring charges,
down 13 percent from $427.1 million, or $2.69 per share in the
prior year. The profit results reflect the oats disruption
experienced in the first quarter, when cereal shipments declined 21
percent, as well as lower shipments of domestic snack products and
the impact of strategic trade-promotion changes that we expect will
increase future efficiency but that resulted in unit volume
declines during 1995. Total domestic unit volume was down 4
percent, and sales for continuing operations of $5.03 billion were
6 percent lower.
In the United States, Yoplait and Colombo yogurts, Foodservice
operations, family and bakery flour, and Betty Crocker dinner mix
products each recorded excellent performance, with volume gains and
profits at an all-time high. Big G cereal unit volume was down 8
percent for the year, and sales declined 12 percent, reflecting
both the lower volume and Big G's lower selling prices instituted
in April 1994. Profits declined by a lesser percentage than sales.
Big G's pound market share in fiscal 1995 was 22 percent,
reflecting steady rebuilding over the year from a first-quarter low
of 20 percent to over 23 percent in recent months. Snack product
sales were down 11 percent and profits were down significantly.
Outside the U.S., Canadian food operations recorded a 12 percent
unit volume gain and increased their cereal market share by nearly
1 percentage point to 15 percent. CPW, the company's cereal joint
venture with Nestle, reported 21 percent volume growth for the 12
months ended in March and sales increased 28 percent to about $500
million. Combined results for CPW's initial four European markets,
entered in 1991, reached profitability during the year. The Snack
Ventures Europe (SVE) joint venture with PepsiCo Foods
International recorded good profit growth and 15 percent volume
growth in 1995, and sales increased to about $830 million.
Restructuring charges for continuing operations in 1995 totaled
$111.6 million, or 71 cents per share, and primarily related to
elimination of the company's least-efficient manufacturing capacity
and to sales organization restructuring. Collectively, the
restructuring actions taken in 1995 are expected to generate annual
after-tax earnings improvements of about $20 million beginning in
1996. In 1994 there was an unusual after-tax charge of $87.1
million, or 55 cents per share, related to the improper pesticide
application noted above. After unusual charges, earnings from
continuing operations were $259.7 million, or $1.64 per share, in
1995 and $340.0 million, or $2.14 per share, in 1994.
Sales for continuing Consumer Foods operations grew 4 percent in
1994 to $5.33 billion with domestic packaged foods unit volume
increasing 3 percent. Earnings were $427.1 million, or $2.69 per
share in 1994 as compared to $441.4 million, or $2.71 per share in
1993, excluding unusual items from both years. Big G's profit
declined in 1994 reflecting the year-long cereal market promotional
escalation and the fourth-quarter impact of our pricing and
promotional actions (reduced prices on largest cereal brands and
reduced spending on inefficient consumer cereal coupons and trade
promotions). Yoplait yogurt, Betty Crocker Products, Canada Foods
and SVE posted profit increases in 1994. Including unusual items
for both years, net earnings totaled $340.0 million, or $2.14 per
share, in 1994 and $411.0 million, or $2.52 per share in 1993.
Net interest expense in 1995 was $101.2 million, an increase of
$22.4 million from 1994, primarily due to increased working
capital, higher interest rates, and previous borrowings associated
with the company's share repurchase program. The 1994 net interest
expense of $78.8 million was $22.8 million greater than 1993,
primarily due to funding required for the share repurchase program.
The effective income tax rates in 1995, 1994, and 1993 were 35.8%,
38.0%, and 39.2%, respectively. Excluding unusual items in all
years, the rates were 36.8%, 38.5%, and 38.1%, respectively. The
lower rate in 1995 was due to a number of factors, including a
lower impact from state income taxes. The effective rate in fiscal
1996 is expected to be closer to 38%.
It is management's view that changes in the rate of inflation have
not had a significant effect on profitability from continuing
operations over the three most recent years. Management attempts
to minimize the effects of inflation through appropriate planning
and operating practices.
During the first quarter of fiscal 1995, the company adopted SFAS
#115, "Accounting for Certain Investments in Debt and Equity
Securities," with no impact on net earnings.
Discontinued Operations
In 1995, earnings from discontinued operations before nonrecurring
items totaled $121.4 million, or 77 cents per share, compared with
$129.7 million, or 81 cents per share, in the prior year. Net
results for discontinued operations include a net gain of $53.3
million, or 34 cents per share, from the sale of Gorton's less
costs associated with the conversion of the Red Lobster Japan joint
venture to a royalty agreement. This net gain was offset by
charges totaling $67.0 million, or 42 cents per share, related to
selected restaurant-unit closings and the expenses associated with
separation into two companies. Fiscal 1994 results for
discontinued operations include a $3.7 million, 2-cent per share,
gain from accounting changes. Including these nonrecurring items
in both years, net earnings from discontinued operations were
$107.7 million, or 69 cents per share, in 1995 and $133.4 million,
or 83 cents per share, in 1994. The earnings from discontinued
operations in 1994 before nonrecurring items of $129.7 million, or
81 cents per share, compares with $122.0 million, or 75 cents per
share, before unusual items in 1993. The unusual charge in 1993 of
$26.9 million, or 17 cents per share, related primarily to
restaurant closings in the U.S. and Canada. See note two to the
Consolidated Financial Statements for discussion of the
discontinued operations.
Financial Condition
The Company intends to manage its businesses and financial ratios
so as to maintain a strong "A" bond rating, which allows access
to financing at reasonable costs. Currently, General Mills'
publicly issued long-term debt carries "A2" (Moody's Investors
Services, Inc.) and "A+" (Standard & Poor's Corporation) ratings.
Our commercial paper has ratings of "P-1" (Moody's) and "A-1"
(Standard & Poor's) in the United States and "R-1 (middle)" in
Canada from Dominion Bond Rating Service.
As a result of the spin-off of Darden Restaurants, Inc., General
Mills' stockholders' equity was significantly reduced. The
difference between General Mills' $1.6 billion investment in the
restaurant business and the total debt of $.4 billion on Darden's
balance sheet at spin-off was capitalized as stockholders' equity
in the new company, with the offset being a reduction in
stockholders' equity of approximately $1.2 billion on General
Mills' balance sheet. Consequently, the debt to capital ratio
increased to 93%. However, it is management's view that the most
important measures of financial strength are cash flow to debt
and fixed charge coverage. The cash flow to debt ratio measures
the amount of cash that the Company generates each year as a
percentage of its total debt. The fixed charge coverage ratio
measures the number of times each year that the company earns
enough to cover its fixed charges. Based on these ratios,
General Mills' financial condition remains strong, with a cash
flow to debt ratio of 38% and a fixed charge coverage of 4.1
times. Because of the strong cash flow characteristics of the
Company's continuing businesses, management expects these ratios
to further strengthen.
The composition of the Company's capital structure is shown in
the accompanying table.
Capital Structure
May 28,
In Millions 1995
Notes payable $ 112.9
Current portion of long-term debt 93.7
Long-term debt 1,400.9
Deferred income taxes - tax leases 169.1
Total debt 1,776.6
Debt adjustments:
Leases - debt equivalent 165.0
Marketable investments, at cost (169.2)
Adjusted debt 1,772.4
Stockholders' equity 141.0
Total capital $1,913.4
We selectively use derivatives to hedge financial risks,
primarily interest rate volatility and foreign currency
fluctuations. The derivatives are generally treated as hedges
for accounting purposes. We manage our debt structure through
both issuance of fixed and floating-rate debt, and the use of
derivatives. The debt equivalent of our leases and deferred
income taxes related to tax leases are both fixed-rate
obligations. The accompanying table, when reviewed in
conjunction with the capital structure table, shows the
composition of our debt structure including the impact of
derivatives.
Debt Structure
$ in Millions May 28, 1995
Floating-rate debt $ 347.9 20%
Fixed-rate debt 1,090.4 61
Leases - debt equivalent 165.0 9
Deferred income taxes - tax leases 169.1 10
Total debt $1,772.4 100%
Commercial paper has historically been our primary source of
short-term financing. Bank credit lines are maintained to ensure
availability of short-term funds on an as-needed basis. In June
1995, our fee-paid credit lines were decreased from $650.0
million to $500.0 million.
Our shelf registration statement permits issuance of up to $97.1
million net proceeds in unsecured debt securities. The shelf
registration authorizes a medium-term note program that provides
additional flexibility in accessing the debt markets.
Sources and uses of cash in the past three fiscal years are shown
in the accompanying table.
Cash Sources (Uses)
In Millions 1995 1994 1993
From continuing operations $ 457.4 $ 561.3 $ 619.8
From discontinued operations 210.1 259.3 237.0
Fixed assets and other
investments, net-continuing (231.6) (395.8) (404.1)
Change in marketable securities 27.4 (50.1) (69.7)
Proceeds from disposition of
businesses 188.3 - -
Investment activities,
net-discontinued operations (357.5) (336.3) (310.3)
Increase (decrease) in outstanding
debt-net (312.6) 287.7 585.7
Financing activities-discontinued
operations 347.9 - -
Common stock issued 24.3 13.3 32.3
Treasury stock purchases (57.7) (145.7) (420.2)
Dividends paid (297.2) (299.4) (274.8)
Other (13.6) (4.2) (7.4)
Decrease in cash
and cash equivalents $ (14.8) $(109.9) $ (11.7)
Continuing operations generated $103.9 million less cash in 1995
than in the previous year primarily due to an increase in the
change in working capital. Capital expenditures in 1995 were
$156.5 million as compared to $212.5 million in 1994. Capital
expenditures in 1996 are estimated to be approximately $170
million. Proceeds from disposition of businesses of $188.3
million in 1995 includes the sale of Gorton's and certain Latin
American operations. Prior to the spin-off, the restaurant
operations initiated their own borrowings and the funds were used
to reduce the Company's notes payable.
REPORT OF MANAGEMENT RESPONSIBILITIES
The management of General Mills, Inc. is responsible for the
fairness and accuracy of the consolidated financial statements. The
consolidated financial statements have been prepared in accordance
with generally accepted accounting principles, using management's
best estimates and judgments where appropriate. The financial
information throughout this report 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
utilization of company 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 to
determine that management, internal auditors and independent
auditors are properly discharging their duties regarding internal
control and financial reporting. The independent auditors, internal
auditors and employees have full and free access to the Audit
Committee at any time.
KPMG Peat Marwick LLP, independent certified public accountants,
are retained to audit the consolidated financial statements. Their
report follows.
S. W. Sanger
Chairman of the Board and Chief Executive Officer
C. W. Gaillard
President
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is composed of six
outside directors. Its primary function is to oversee the
Company's system of internal controls, financial reporting
practices and audits to ensure their quality, integrity and
objectivity are sufficient to protect stockholder assets.
The Audit Committee met twice during 1995 to review the
overall audit scope, plans and results of the internal auditors
and independent auditors, the Company's internal controls,
emerging accounting issues, officer and director expenses, audit
fees, goodwill and other intangible values, and the audits of
the pension plans. The Committee also met separately without
management present and with the independent auditors to discuss
the audit. Acting with the other Board members, the Committee
reviewed the Company's annual financial statements and approved
them before issuance. Audit Committee meeting results were
reported to the full Board of Directors. The Audit Committee
recommended to the Board that KPMG Peat Marwick LLP be
reappointed for 1996, subject to the approval of stockholders at
the annual meeting.
The Audit Committee is satisfied that the internal control
system is adequate and that the stockholders of General Mills
are protected by appropriate accounting and auditing procedures.
M. D. Rose
Chairman, Audit Committee
INDEPENDENT AUDITORS' REPORT
The Stockholders and the Board of Directors of
General Mills, Inc.:
We have audited the accompanying consolidated balance sheets of
General Mills, Inc. and subsidiaries as of May 28, 1995 and May 29,
1994, and the related consolidated statements of earnings and cash
flows for each of the fiscal years in the three-year period ended
May 28, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of General Mills, Inc. and subsidiaries as of May 28, 1995
and May 29, 1994, and the results of their operations and their cash
flows for each of the fiscal years in the three-year period ended
May 28, 1995 in conformity with generally accepted accounting principles.
As discussed in notes five, fourteen and sixteen, respectively, to
the consolidated financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement
No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in fiscal 1995, and Statements No. 112, Employers'
Accounting for Postemployment Benefits, and No. 109, Accounting for
Income Taxes, in fiscal 1994.
Minneapolis, Minnesota
June 27, 1995
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended
May 28, May 29, May 30,
In Millions, Except per Share Data 1995 1994 1993
Continuing Operations:
Sales $5,026.7 $5,327.2 $5,138.4
Costs and Expenses:
Cost of sales 2,023.0 2,012.5 2,002.6
Selling, general and administrative 2,123.3 2,367.1 2,213.7
Depreciation and amortization 191.4 173.8 153.3
Interest, net 101.2 78.8 56.0
Unusual items 183.2 146.9 36.4
Total Costs and Expenses 4,622.1 4,779.1 4,462.0
Earnings from Continuing Operations before Taxes 404.6 548.1 676.4
Income Taxes 144.9 208.1 265.4
Earnings from Continuing Operations 259.7 340.0 411.0
Discontinued Operations after Taxes 107.7 133.4 95.1
Cumulative Effect to May 31, 1993
of Continuing Operations Accounting Changes - (3.5) -
Net Earnings $ 367.4 $ 469.9 $ 506.1
Earnings per Share:
Continuing operations $ 1.64 $ 2.14 $ 2.52
Discontinued operations .69 .83 .58
Cumulative effect of accounting changes - (.02) -
Net Earnings per Share $ 2.33 $ 2.95 $ 3.10
Average Number of Common Shares 158.0 159.1 163.1
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
May 28, May 29,
In Millions 1995 1994
Assets
Current Assets:
Cash and cash equivalents $ 13.0 $ 27.8
Receivables, less allowance for doubtful
accounts of $4.1 in 1995 and $3.6 in 1994 277.3 266.0
Inventories 372.0 339.3
Prepaid expenses and other current assets 80.8 80.4
Deferred income taxes 153.8 198.1
Total Current Assets 896.9 911.6
Land, Buildings and Equipment, at cost 1,456.6 1,503.2
Net Assets of Discontinued Operations - 1,508.1
Other Assets 1,004.7 881.1
Total Assets $3,358.2 $4,804.0
Liabilities and Equity
Current Liabilities:
Accounts payable $ 494.0 $ 513.9
Current portion of long-term debt 93.7 115.1
Notes payable 112.9 433.3
Accrued taxes 108.8 147.0
Accrued payroll 118.2 121.3
Other current liabilities 293.3 210.7
Total Current Liabilities 1,220.9 1,541.3
Long-term Debt 1,400.9 1,413.3
Deferred Income Taxes 248.6 209.5
Deferred Income Taxes -- Tax Leases 169.1 189.8
Other Liabilities 177.7 176.9
Total Liabilities 3,217.2 3,530.8
Common Stock Subject to Put Options - 122.0
Stockholders' Equity:
Cumulative preference stock, none issued - -
Common stock, 204.2 shares issued 379.5 251.0
Retained earnings 1,233.3 2,457.9
Less common stock in treasury, at cost,
shares of 46.3 in 1995 and 45.7 in 1994 (1,372.1) (1,334.4)
Unearned compensation and other (57.9) (160.2)
Cumulative foreign currency adjustment (41.8) (63.1)
Total Stockholders' Equity 141.0 1,151.2
Total Liabilities and Equity $3,358.2 $4,804.0
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
May 28, May 29, May 30,
In Millions 1995 1994 1993
Cash Flows - Operating Activities:
Earnings from continuing operations $ 259.7 $336.5 $411.0
Adjustments to reconcile earnings to cash flow:
Depreciation and amortization 191.4 173.8 153.3
Deferred income taxes 59.0 (34.0) 34.7
Change in current assets and liabilities, net
of effects from business acquired (227.8) (79.1) 11.2
Unusual expenses 183.2 146.9 36.4
Other, net (8.1) 17.2 (26.8)
Cash provided by continuing operations 457.4 561.3 619.8
Cash provided by discontinued operations 210.1 259.3 237.0
Net Cash Provided by Operating Activities 667.5 820.6 856.8
Cash Flows - Investment Activities:
Purchases of land, buildings and equipment (156.5) (212.5) (317.2)
Investments in businesses, intangibles and
affiliates, net of dividends (48.8) (140.7) (53.3)
Purchases of marketable securities (21.7) (83.8) (82.8)
Proceeds from sale of marketable securities 49.1 33.7 13.1
Proceeds from disposal of land, buildings
and equipment 1.2 3.3 4.9
Proceeds from disposition of businesses 188.3 - -
Other, net (27.5) (45.9) (38.5)
Discontinued operations investment activities, net (357.5) (336.3) (310.3)
Net Cash Used by Investment Activities (373.4) (782.2) (784.1)
Cash Flows - Financing Activities:
Increase (decrease) in notes payable (330.4) 93.2 207.6
Issuance of long-term debt 135.0 273.6 422.6
Payment of long-term debt (117.2) (79.1) (44.5)
Common stock issued 24.3 13.3 32.3
Purchases of common stock for treasury (57.7) (145.7) (420.2)
Dividends paid (297.2) (299.4) (274.8)
Other, net (13.6) (4.2) (7.4)
Discontinued operations financing activities 347.9 - -
Net Cash Used by Financing Activities (308.9) (148.3) (84.4)
Decrease in Cash and Cash Equivalents (14.8) (109.9) (11.7)
Cash and Cash Equivalents - Beginning of Year 27.8 137.7 41.2
Reclassification of Marketable Securities - - 108.2
Cash and Cash Equivalents - End of Year $ 13.0 $ 27.8 $137.7
Cash Flow from Changes in Current Assets and Liabilities:
Receivables $ (11.9) $(11.5) $(43.4)
Inventories (52.7) (76.1) 37.6
Prepaid expenses and other current assets (11.9) (22.2) 19.0
Accounts payable (18.1) (5.7) 3.1
Other current liabilities (133.2) 36.4 (5.1)
Change in Current Assets and Liabilities $(227.8) $(79.1) $ 11.2
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note One: Summary of Significant Accounting Policies
A. Principles of Consolidation
The consolidated financial statements include the following domestic
and foreign operations: parent company and 100% owned subsidiaries,
and General Mills' investment in and share of net earnings or losses
of 20-50% owned companies.
Our fiscal year ends on the last Sunday in May. Years 1995, 1994
and 1993 each consisted of 52 weeks.
B. Land, Buildings, Equipment and Depreciation
Buildings and equipment are depreciated over estimated useful lives
ranging from three to 50 years, primarily using the straight-line
method. Accelerated depreciation methods are generally used for
income tax purposes.
When an item is sold or retired, the accounts are relieved of its
cost and related accumulated depreciation; the resulting gains and
losses, if any, are recognized.
C. Inventories
Inventories are valued at the lower of cost or market. Certain
domestic inventories are valued using the LIFO method, while other
inventories are generally valued using the FIFO method.
D. Intangible Assets
Goodwill represents the difference between purchase prices of
acquired companies and the related fair values of net assets acquired
and accounted for by the purchase method of accounting. Goodwill
acquired after October 1970 is amortized on a straight-line basis
over 40 years or less.
Intangible assets include an amount that offsets a minimum liability
recorded for a pension plan with assets less than accumulated
benefits as required by Financial Accounting Standard No. 87.
The costs of patents, copyrights and other intangible assets are
amortized evenly over their estimated useful lives.
The Audit Committee of the Board of Directors annually reviews
goodwill and other intangibles. At its meeting on April 24, 1995,
the Board of Directors affirmed that the remaining amounts of these
assets have continuing value.
E. Research and Development
All expenditures for research and development are charged against
earnings in the year incurred. The charges for 1995, 1994 and 1993
were $59.8 million, $59.1 million and $55.7 million, respectively.
F. Earnings per Share
Earnings per share has been determined by dividing the appropriate
earnings by the weighted average number of common shares
outstanding during the year. Common share equivalents were not
material.
G. Foreign Currency Translation
For most foreign operations, local currencies are considered the
functional currency. Assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rates prevailing
throughout the period. Translation effects are accumulated in the
foreign currency adjustment in stockholders' equity.
H. Statements of Cash Flows
For purposes of the statement of cash flows, we consider all
investments purchased with a maturity of three months or less to
be cash equivalents.
I. Segment Information
As of May 28, 1995 with the spin-off of the restaurant segment, we
operate exclusively in the consumer foods industry. See note two.
J. Advertising Costs
Advertising expense (including production and communication costs)
for fiscal 1995, 1994 and 1993 was $323.7, $292.1 and $282.6
million, respectively. Prepaid advertising costs (including
syndication properties) of $33.1 and $43.4 million were reported as
assets at May 28, 1995 and May 29, 1994, respectively, We expense
the production costs of advertising the first time the advertising
takes place.
Note Two: Discontinued Operations
On May 28, 1995, General Mills separated into two independent public
corporations, General Mills, Inc. and Darden Restaurants, Inc.
(Darden), through a distribution of the shares of Darden (a wholly-
owned subsidiary) to General Mills' shareholders ("spin-off"). General
Mills' shareholders received one share of Darden for each share of
General Mills common stock owned as of the close of business on May 15,
1995. This distribution reduced Stockholders' Equity by $1,218.7
million. Our former restaurant operations included in Darden are now
presented as a part of Discontinued Operations for all periods
presented.
On May 18, 1995, we sold Gorton's to Unilever United States, Inc.,
New York City. Gorton's, headquartered in Gloucester, Mass., is a
leading marketer of frozen and canned seafood products to the grocery
and foodservice markets in the United States and Canada. Gorton's is
also now included in Discontinued Operations for all periods presented.
Discontinued Operations are summarized as follows:
Fiscal Year
In Millions 1995 1994 1993
Total net sales $3,366.9 $3,189.7 $2,996.2
Pretax earnings $ 80.0 $ 205.2 $ 167.5
Income taxes 17.9 75.5 72.4
Net earnings - operations 62.1 129.7 95.1
Accounting changes - 3.7 -
Spin-off costs and other (7.7) - -
Gorton's sale and Red Lobster Japan
joint venture termination 53.3 - -
Discontinued Operations, net $ 107.7 $ 133.4 $ 95.1
The "Net earnings-operations" amounts include restructuring
charges of $59.3 million and $26.9 million in 1995 and 1993,
respectively, related primarily to the cost of restaurant closings
in the U.S. and Canada. The accounting changes are the net
cumulative effect to May 31, 1993 of the discontinued operations'
adoption of Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", and SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." "Spin-off costs and other"
includes expenses associated with the creation of Darden and the
separation. "Gorton's sale and Red Lobster Japan joint venture
termination" includes the gain on the disposition of Gorton's as
well as costs associated with the termination of our restaurant
joint-venture arrangement in Japan and conversion to a royalty
agreement.
Note Three: Unusual Items
In 1995, we recorded restructuring charges of $183.2 million pretax,
$111.6 million after tax ($.71 per share) primarily related to
shutting down and scaling back production systems at four food
manufacturing locations and realignment of the sales organization.
The charges include approximately $139 million in non-cash charges
primarily related to asset write-offs and approximately $44 million
of charges to be settled in cash, primarily related to disposal of
assets and severance costs. The restructuring activities will be
completed in fiscal 1996.
In 1994, we recorded an after-tax charge of $87.1 million ($.55 per
share) to cover estimated costs associated with the actions of an
independent licensed contractor who made an improper substitution of
a pesticide in treating some of our oat supplies, a portion of which
was used in production. While the substitution presented no consumer
health or safety issues, the pesticide had not been registered for
use on oats and thus its application represented a FDA regulatory
violation. The charge included estimated costs associated with the
disposition of finished oat products and oats inventory and other
related expenses, as well as the anticipated settlement of several
consumer class action lawsuits. Most of these costs were incurred in
fiscal 1995 and the original charge has not required adjustment.
We recorded restructuring charges in 1993 related primarily to
costs for increasing consumer foods manufacturing productivity and
efficiency, and our share of streamlining and tax reorganization
costs associated with the formation of Snack Ventures Europe. These
charges reduced net earnings by $30.4 million ($.19 per share).
These actions were substantially completed in 1994.
Note Four: Acquisition and Investments
In 1995, we formed a joint venture, International Dessert Partners
(IDP), with CPC International Inc. to market dessert and baking mixes in
Latin America. We own 50 percent of IDP.
In 1994, we purchased the Colombo yogurt business for approximately
$75.0 million from a U.S. subsidiary of Bongrain S.A. The transaction
did not have any material effect on our 1994 earnings.
In 1993, we entered into a joint venture, Snack Ventures Europe (SVE),
with PepsiCo Foods International to merge six existing Continental
European snack operations (three from each company) into one company to
develop, manufacture and market snack foods. We own 40.5 percent of
SVE. The merger was effective July 1992. We reclassified the net
individual assets and liabilities of our operations to investment in
affiliates and excluded the noncash transaction from our statement of
cash flows.
During 1995 and 1994, we made capital contributions and advances of
$49.3 million and $48.3 million, respectively, to Cereal Partners
Worldwide (CPW), our joint venture with Nestle, S.A. Capital advanced
to our other two joint ventures was not material.
Note Five: Balance Sheet Information
The components of certain balance sheet accounts are as follows:
May 28, May 29,
In Millions 1995 1994
Land, Buildings and Equipment:
Land $ 18.5 $ 18.4
Buildings 524.9 507.8
Equipment 1,877.5 1,762.0
Construction in progress 191.0 224.3
Total land, buildings and equipment 2,611.9 2,512.5
Less accumulated depreciation (1,155.3) (1,009.3)
Net land, buildings and equipment $ 1,456.6 $ 1,503.2
Other Assets:
Prepaid pension $ 320.7 $ 262.1
Marketable securities, at market in
1995; at cost in 1994 214.7 196.1
Investments in and advances to affiliates 214.7 172.0
Intangible assets 119.9 124.1
Miscellaneous 134.7 126.8
Total other assets $ 1,004.7 $ 881.1
We adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of May 30, 1994. Adoption of this
standard had no impact on our Consolidated Statement of Earnings,
and the Consolidated Balance Sheet was not materially affected.
Beginning in fiscal 1995, available-for-sale securities, including
their associated derivatives, are reflected at fair market value in
the Consolidated Balance Sheet. The aggregate unrealized gains and
losses on available-for-sale securities, net of tax effects, are
accumulated in the "Unearned compensation and other" account within
Stockholders' Equity.
As of May 28, 1995, a comparison of cost and market values of our
marketable securities is as follows:
Market Net Gain Gross Gross
In Millions Cost Value or (Loss) Gain Loss
Asset-backed bonds $ 28.6 $ 28.6 $ - $ - $ -
Corporate bonds 27.4 27.4 - - -
Foreign government securities 34.9 34.6 (.3) .4 (.7)
Municipal bonds 12.3 12.1 (.2) - (.2)
US Treasury and agencies 66.0 112.0 46.0 46.0 -
Totals $169.2 $214.7 $45.5 $46.4 $(.9)
Marketable securities with a carrying value of $1.2 million were
sold during fiscal 1995 with a gain of $.7 million. Proceeds on
scheduled maturities were approximately $47.2 million.
Scheduled maturities of our marketable securities are as follows:
In Millions Cost Market Value
Under one year $ 12.3 $ 12.1
From 1 to 3 years 64.4 64.0
From 4 to 7 years 28.5 28.8
Over 7 years 64.0 109.8
Totals $169.2 $214.7
Note Six: Inventories
The components of inventories are as follows:
May 28, May 29,
In Millions 1995 1994
Raw materials, work in process and supplies $ 77.1 $ 97.9
Finished goods 282.2 237.2
Grain 65.7 47.0
Reserve for LIFO valuation method (53.0) (42.8)
Total inventories $372.0 $339.3
At May 28, 1995 and May 29, 1994, respectively, inventories of
$237.3 million and $234.4 million were valued at LIFO.
Note Seven: Financial Instruments and Risk Management
Most of our financial instruments are recorded on the balance sheet.
A few (known as "derivatives") are off-balance-sheet items.
Derivatives are financial instruments whose value is derived from one
or more underlying financial instruments. Examples of such
underlying instruments are currencies, equities, commodities and
interest rates. The carrying amount and fair value of our financial
instruments at the balance-sheet dates are as follows:
May 28, 1995 May 29, 1994
Carrying Fair Carrying Fair
In Millions Amount Value Amount Value
Assets and Liabilities
Assets:
Cash and cash equivalents $ 13.0 $ 13.0 $ 27.8 $ 27.8
Receivables 277.3 277.3 266.0 266.0
Marketable securities 216.3 216.3 196.1 231.4
Liabilities:
Accounts payable 494.0 494.0 513.9 513.9
Debt 1,607.5 1,689.6 1,961.7 2,020.9
Derivatives relating to:
Marketable securities (1.6) (1.6) - (.1)
Debt - 1.3 - (.7)
The fair values were estimated using current market quotes and
interest rates. Gains or losses from derivatives offset and
neutralize the corresponding losses or gains from the asset or
liability being hedged. We ensure that these derivative instruments
correlate with the asset or liability being hedged, and we do not
issue or hold derivatives for trading or speculative purposes.
We use derivative instruments to reduce financial risk in three
areas: interest rates, foreign currency, and commodities. The
notional amounts of derivatives do not represent actual amounts
exchanged by the parties and, thus, are not a measure of the exposure
of the Company through its use of derivatives. Interest rate swap
and foreign exchange agreements are made with a diversified group of
highly rated financial institutions, whereas commodities agreements
are entered into through various regulated exchanges. We have credit
exposure associated with these agreements to the extent that the
instruments have a positive fair value, but we do not anticipate any
losses. The Company does not have a significant concentration of
risk with any single party or group of parties in any of its
financial instruments.
(1) Interest Rate Risk Management - We use interest rate swaps to
hedge and/or lower financing costs, to adjust our floating- and fixed-
rate debt positions, and to lock in a positive interest rate spread
between certain assets and liabilities. An interest rate swap used
in conjunction with a debt financing may allow the Company to create
fixed or floating-rate financing at a lower cost than with a stand-
alone financing. Generally, under interest rate swaps, the Company
agrees with a counterparty to exchange the difference between fixed-
rate and floating-rate interest amounts calculated by reference to an
agreed notional principal amount. A basis swap involves the exchange
of two floating-rate interest amounts, each calculated by reference
to a different interest rate index or formula.
The following table indicates the types of swaps used to hedge
various assets and liabilities and their weighted average interest
rates. Average variable rates are based on rates as of the end of
the reporting period. The swap contracts mature from fiscal 1996 to
fiscal 2007.
May 28, 1995 May 29, 1994
$ in Millions Asset Liability Asset Liability
Receive fixed swaps - notional amount $ - $90.0 $ - $137.9
Average receive rate - 6.8% - 5.4%
Average pay rate - 5.8% - 4.2%
Pay fixed swaps - notional amount $74.8 $21.3 $81.9 $ 25.0
Average receive rate 6.4% 6.1% 4.8% 4.4%
Average pay rate 8.3% 6.2% 6.9% 8.8%
Basis swaps - notional amount $ - $ - $ - $145.0
Average receive rate - - - 3.0%
Average pay rate - - - 4.2%
The interest rate differential on interest rate swaps used to hedge
existing assets and liabilities is recognized as an adjustment of
interest expense or income over the term of the agreement.
The Company uses interest rate options and cap agreements primarily
to reduce the impact of interest rate changes on its floating-rate
debt, as well as to hedge the value of call options contained in long-
term debt issued by the Company in earlier periods. In return for an
upfront payment, an interest rate swap option grants the purchaser
the right to receive(pay), the fixed rate interest amount in an
interest rate swap. In return for an upfront payment, a cap
agreement entitles the purchaser to receive the amount, if any, by
which an agreed upon floating rate index exceeds the cap interest
rate. The following table summarizes our option and cap agreements,
which mature in fiscal 1997.
May 28, 1995 May 29, 1994
Notional Average Notional Average
$ in Millions Amount Rate Amount Rate
Swap options sold - pay fixed $ - -% $ 21.3 6.8%
Caps purchased - receive floating 200.0 7.0 221.7 4.9
Caps sold - pay floating - - 200.0 6.5
The premiums paid/received for interest rate options and cap
agreements are included in other assets/liabilities and are amortized
to interest expense over the terms of the agreements. Amounts
receivable or payable under the cap agreements are recognized as
yield adjustments over the life of the related debt.
(2) Foreign-Currency Exposure - We selectively hedge the potential
effect of foreign currency fluctuations related to operating activities
and net investments in foreign operations by entering into foreign
exchange contracts with major financial institutions. Realized and
unrealized gains and losses on hedges of firm commitments are included
in the cost basis of the asset being hedged and are recognized as the
asset is expensed through cost of goods sold or depreciation. Realized
and unrealized gains and losses on contracts that hedge other operating
activities are recognized currently in net earnings. Realized and
unrealized gains and losses on contracts that hedge net investments
are recognized in the foreign currency adjustment in stockholders'
equity.
The components of our net foreign investment exposure by geographic
region are as follows:
May 28, May 29,
In Millions 1995 1994
Europe $171.1 $118.3
North/South America 26.5 (34.5)
Asia 1.9 1.3
Total exposure 199.5 85.1
After-tax hedges (7.0) 47.9
Net exposure $192.5 $133.0
At May 28, 1995, we had forward contracts maturing in fiscal 1996 to
sell $62.1 million of foreign currencies. The fair value of these
contracts is based on third-party quotes and was immaterial at May 28,
1995.
(3) Commodities - The Company uses an integrated set of financial
instruments in its purchasing cycle, including purchase orders,
noncancellable contracts, futures contracts, and futures options.
Except as described below, these instruments are all used to purchase
ingredients for the Company's internal needs, and to manage purchase
prices and inventory values as practical. All futures contracts and
futures options are exchange-based instruments with ready liquidity
and determinable market values. Unrealized gains and losses are
recorded monthly and deferred until the physical ingredients flow
through cost of goods sold. The net gain and losses deferred and
expensed are immaterial. At May 28, 1995 and May 29, 1994, the
aggregate fair value of our ingredient derivatives position was $53.8
million and $41.4 million, respectively.
The Company also has a grain-merchandising operation, which uses
cash contracts, futures contracts, and futures options. All futures
contracts and futures options are exchange-based instruments with
ready liquidity and market values. Neither results of operations nor
the year-end positions from grain-merchandising operations was
material to the Company's overall results.
Note Eight: Notes Payable
The components of notes payable and their respective weighted average
interest rates at the end of the period are as follows:
May 28, 1995 May 29, 1994
Weighted Weighted
Average Average
Notes Interest Notes Interest
$ in Millions Payable Rate Payable Rate
U.S. commercial paper $ 78.3 6.1% $339.2 4.1%
Canadian commercial paper 22.8 7.7 83.3 5.7
Financial institutions 261.8 6.4 260.8 4.5
Amounts reclassified to
long-term debt (250.0) 6.0 (250.0) 4.1
Total notes payable $112.9 $433.3
To ensure availability of funds, we maintain bank credit lines
sufficient to cover our outstanding short-term borrowings. As of
May 28, 1995, we had $650.0 million fee-paid lines (decreased to
$500.0 million in June 1995) and $179.6 million uncommitted, no-fee
lines available in the U.S. and Canada. In addition, other foreign
subsidiaries had unused credit lines of $105.1 million.
We have a revolving credit agreement expiring in 1999 that provides
for the fee-paid credit lines. This agreement provides us with the
ability to refinance short-term borrowings on a long-term basis, and
therefore we have reclassified a portion of our notes payable to
long-term debt.
Note Nine: Long-term Debt
May 28, May 29,
In Millions 1995 1994
4.3% to 9.1% medium-term notes,
due 1995 to 2033 $1,094.4 $1,080.3
Zero coupon notes, yield 11.1%, $306.0
due August 15, 2013 43.1 41.4
ESOP loan guaranty (related to restaurant
operations - see note two) - 50.0
8.3% ESOP loan guaranty,
due through June 30, 2007 74.5 78.3
Zero coupon notes, yield 11.7%, $64.4
due August 15, 2004 22.6 20.2
Notes payable, reclassified 250.0 250.0
Other 10.0 8.2
1,494.6 1,528.4
Less amounts due within one year (93.7) (115.1)
Total long-term debt $1,400.9 $1,413.3
Our shelf registration statement permits the issuance of up to $97.1
million net proceeds in unsecured debt securities to reduce short-
term debt and for other general corporate purposes. This
registration includes a medium-term note program that allows us to
issue debt quickly for various amounts and at various rates and
maturities.
In 1995, we issued $125.0 million of debt under our medium-term
note program with maturities from two to 12 years and interest rates
from 6.4% to 8.0%. In 1994, $217.9 million of debt was issued under
this program with maturities from one to 40 years and interest rates
from 4.3% to 7.3%.
The Company has guaranteed the debt of the Employee Stock Ownership
Plan; therefore, the loan is reflected on our consolidated balance
sheets as long-term debt with a related offset in stockholders'
equity, "Unearned compensation and other."
The sinking fund and principal payments due on long-term debt are
(in millions) $93.7, $123.6, $151.6, $99.7 and $90.1 in years ending
1996, 1997, 1998, 1999 and 2000, respectively. The notes payable
that are reclassified under our revolving credit agreement are not
included in these principal payments.
Our marketable securities include zero coupon U.S. Treasury
securities. These investments are intended to provide the funds for
the payment of principal and interest for the zero coupon notes due
August 15, 2004 and 2013.
Note Ten: Stock Options
The following table contains information on stock options:
Average Option
Shares Price per Share
Granted
1995 4,063,100 $55.11
1994 4,868,098 63.22
1993 3,384,144 66.64
Exercised
1995 725,437 $32.31
1994 562,714 31.08
1993 1,962,063 22.90
Expired
1995 574,714 $59.33
1994 459,800 62.56
1993 288,907 61.63
Outstanding at year end
1995 21,974,796 $41.60
1994 18,009,478 49.52
1993 14,163,894 44.50
Exercisable at year end
1995 14,406,840 $33.71
1994 10,278,466 38.73
1993 9,488,948 36.23
A total of 10,990,501 shares (including 1,514,336 shares for salary
replacement options and 293,901 shares for restricted stock) are
available for grants of options or restricted stock to employees under
our 1990 and 1993 stock plans through October 1, 1998. An additional
2,082,400 shares are available for grants under the 1993 plan on a one-
for-one basis as common stock is repurchased by the Company. Options
may be granted at a price not less than 100 percent of fair market
value on the date the option is granted. Options now outstanding
include some granted under the 1984 and 1988 option plans, under which
no further rights may be granted. All options expire within 10 years
plus one month after the date of grant. The plans provide for full
vesting of options in the event there is a change of control.
The 1993 plan permits awards of restricted stock to key employees
subject to a restricted period and a purchase price, if any, to be paid
by the employee as determined by the Compensation Committee of the
Board of Directors. The 1988 plan also permitted such awards. Most of
the restricted stock awards require the employee to deposit personally
owned shares (on a one-for-one basis) with the Company during the
restricted period. In 1995, grants from the 1993 plan of 67,303 shares
of restricted stock were made and on May 29, 1995, there were 178,246
of such shares outstanding after adjustments related to the spin-off.
The 1988 plan permitted the granting of performance units
corresponding to stock options granted. The value of performance units
will be determined by return on equity and growth in earnings per share
measured against preset goals over three-year performance periods. For
seven years after a performance period, holders may elect to receive
the value of performance units (with interest) as an alternative to
exercising corresponding stock options. On May 28, 1995, there were
2,638,656 outstanding options with corresponding performance units or
performance unit accounts.
A total of 45,800 shares are available for grants of options and
restricted stock to non-employee directors until September 30, 1998
under a separate 1990 stock plan. As of May 29, 1995, there were
20,898 shares of such stock outstanding after adjustments related to
the spin-off. Each newly elected non-employee director is granted an
option to purchase 2,500 shares at fair market value on the date of
grant. Options expire 10 years after the date of grant. Each year
400 shares of restricted stock will be awarded to each non-employee
director, restricted until the later of the expiration of one year or
completion of service on the Board of Directors.
The number and exercise price of options outstanding when the
Restaurant operations were spun off were adjusted to compensate for
the market value of the Darden shares distributed to our
stockholders. This adjustment increased the number of General Mills
options outstanding by 1,202,369 shares and decreased the price of
the option shares outstanding by approximately 17.7 percent.
Note Eleven: Stockholders' Equity
$.10 Par Value Common Stock Cumulative
(One Billion Shares Authorized) Unearned Foreign
In Millions, Except Issued Treasury Retained Compensation Currency
per Share Data Shares Amount Shares Amount Earnings and Other Adjustment Total
Balance at May 31, 1992 204.2 $343.6 (38.7) $ (802.9) $ 2,049.0 $(172.3) $(46.5) $1,370.9
Net Earnings 506.1 506.1
Cash dividends declared ($1.68
per share), net of income
taxes of $4.2 (270.6) (270.6)
Stock option, profit sharing and
ESOP plans 15.1 1.3 19.7 34.8
Shares purchased on open market (6.3) (413.2) (413.2)
Unearned compensation related to
restricted stock awards (3.2) (3.2)
Earned compensation 9.6 9.6
Minimum pension liability adjustment (1.6) (1.6)
Translation adjustments, net of
income tax benefit of $2.0 (14.3) (14.3)
Balance at May 30, 1993 204.2 358.7 (43.7) (1,196.4) 2,284.5 (167.5) (60.8) 1,218.5
Net earnings 469.9 469.9
Cash dividends declared ($1.88
per share), net of income
taxes of $2.9 (296.5) (296.5)
Stock option, profit sharing and
ESOP plans 8.0 .4 7.5 15.5
Shares purchased on open market (2.4) (145.7) (145.7)
Put option premium 6.3 .2 6.5
Transfer of put options (122.0) (122.0)
Unearned compensation related to
restricted stock awards (3.9) (3.9)
Earned compensation 9.6 9.6
Minimum pension liability adjustment 1.6 1.6
Translation adjustments, net of
income taxes of $4.2 (2.3) (2.3)
Balance at May 29, 1994 204.2 251.0 (45.7) (1,334.4) 2,457.9 (160.2) (63.1) 1,151.2
Unrealized gain, net of income taxes
of $14.0, on available-for-sale
securities at May 30, 1994 22.0 22.0
Net earnings 367.4 367.4
Cash dividends declared ($1.88
per share), net of income
taxes of $3.1 (294.1) (294.1)
Stock option, profit sharing and
ESOP plans 10.0 .4 17.2 27.2
Shares purchased via puts, or on open
market (1.0) (57.7) (57.7)
Put option premium/settlements, net (3.5) 2.8 (.7)
Transfer of put options 122.0 122.0
Unearned compensation related
to restricted stock awards (5.6) (5.6)
Earned compensation 11.0 11.0
Change in unrealized gain, net of
of income taxes of $3.7, on
available-for-sale securities 5.8 5.8
Amount charged to gain on sale of
foreign operations 3.6 3.6
Translation adjustments, net of
income tax benefit of $.2 7.6 7.6
Transfer of equity components to
Darden prior to spin-off 69.1 10.1 79.2
Distribution of equity to
stockholders from spin-off of
Restaurant operations (1,297.9) (1,297.9)
Balance at May 28, 1995 204.2 $379.5 (46.3) $(1,372.1) $ 1,233.3 $ (57.9) $(41.8) $ 141.0
Cumulative preference stock of 5.0 million shares, without par value, is
authorized but unissued.
We have a shareholder rights plan that entitles each outstanding
share of common stock to one-fourth of a right. Each right entitles
the holder to purchase one one-hundredth of a share of cumulative
preference stock (or, in certain circumstances, common stock or other
securities), exercisable upon the occurrence of certain events. The
rights are not transferable apart from the common stock until a person
or group has acquired 20 percent or more, or makes a tender offer for
20 percent or more, of the common stock. If the Company is then
acquired in a merger or other business combination transaction, each
right will entitle the holder (other than the acquiring company) to
receive, upon exercise, common stock of either the Company or the
acquiring company having a value equal to two times the exercise price
of the right. The rights are redeemable by the Board in certain
circumstances and expire on March 7, 1996. At May 28, 1995, there
were 39.5 million rights issued and outstanding.
The Board of Directors has authorized the repurchase, from time to
time, of common stock for our treasury, provided that the number of
shares held in treasury shall not exceed 60.0 million.
Through private transactions in fiscal 1994, we issued put options
that entitled the holder to sell shares of our common stock to us, at
a specified price, if the holder exercised the option. The amount
related to our potential obligation at May 29, 1994 was transferred
from stockholders' equity to "Common Stock Subject to Put Options."
There are no put options outstanding at May 28, 1995.
Note Twelve: Interest Expense
The components of net interest expense are as follows:
Fiscal Year
In Millions 1995 1994 1993
Interest expense $150.0 $121.7 $99.8
Capitalized interest (5.2) (6.1) (11.5)
Interest income (19.4) (16.4) (14.7)
Total interest expense, net 125.4 99.2 73.6
Net interest allocated to discontinued
operations (24.2) (20.4) (17.6)
Interest expense, net $101.2 $ 78.8 $56.0
During 1995, 1994 and 1993, we paid interest (net of amount
capitalized) of $135.2 million, $99.0 million and $77.0 million,
respectively. The interest allocated to discontinued operations is
net of capitalized interest credits of $4.3 million, $4.1 million and
$3.0 million in 1995, 1994 and 1993, respectively.
Note Thirteen: Retirement Plans
We have defined-benefit plans covering most employees. Benefits for
salaried employees are based on length of service and final average
compensation. The hourly plans include various monthly amounts for each
year of credited service. Our funding policy is consistent with the
funding requirements of federal law and regulations. Our principal plan
covering salaried employees has a provision that any excess pension
assets would be vested in plan participants if the plan is terminated
within five years of a change in control. Plan assets consist
principally of listed equity securities and corporate obligations, and
U.S. government securities.
Components of net pension income are as follows:
Fiscal Year
Expense (Income) in Millions 1995 1994 1993
Service cost--benefits earned $ 13.5 $ 14.6 $ 11.3
Interest cost on projected benefit obligation 55.1 52.9 48.5
Actual return on plan assets (106.9) (47.8) (128.2)
Net amortization and deferral 8.3 (43.9) 36.2
Net pension expense (income) $(30.0) $(24.2) $(32.2)
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the benefit obligations were 8.0% and 4.5% in 1995, and 8.8% and 4.5% in
1994, respectively. The expected long-term rate of return on assets was
10.4%.
The funded status of the plans and the amount recognized on the
consolidated balance sheets (as determined as of May 31, 1995 and 1994)
are as follows:
May 28, 1995 May 29, 1994
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
In Millions Benefits Assets Benefits Assets
Actuarial present value of
benefit obligations:
Vested benefits $ 623.7 $ 16.5 $537.1 $ 12.3
Nonvested benefits 41.4 1.3 51.1 1.8
Accumulated benefit obligations 665.1 17.8 588.2 14.1
Projected benefit obligation 709.2 19.0 635.2 16.6
Plan assets at fair value 942.8 1.1 862.4 .1
Plan assets in excess of
(less than) the projected
benefit obligation 233.6 (17.9) 227.2 (16.5)
Unrecognized prior service cost 30.0 2.9 33.0 2.4
Unrecognized net loss (gain) 166.2 (13.3) 129.6 2.2
Recognition of minimum liability - 7.1 - (8.5)
Unrecognized transition (asset)
liability (109.4) 5.3 (124.7) 6.6
Prepaid (accrued) pension cost $ 320.4 $(15.9) $265.1 $(13.8)
We have defined-contribution plans covering salaried and non-union
employees with net assets of $614.6 million at May 28, 1995 and $543.5
million at May 29, 1994. Our main defined contribution plan is a 401(k)
savings plan which is open to substantially all employees. The plan
includes investment funds and an Employee Stock Ownership Plan (ESOP).
The ESOP's only assets are Company shares and temporary cash balances.
Expense recognized for all defined-contribution plans in fiscal 1995,
1994 and 1993 was $5.4 million, $4.7 million and $7.7 million,
respectively. The ESOP's share of this expense was $5.0 million, $4.3
million and $5.2 million, respectively. The ESOP's expense is calculated
by the "shares allocated" method.
The ESOP uses Company shares to convey benefits to employees and through
increased share ownership to align employee interests with that of
shareholders. The Company matches a percentage of employee contributions
with a base match plus a variable year-end match that depends on annual
results. Employees receive the Company match in the form of ESOP shares.
The ESOP originally purchased Company shares with borrowed funds from
third parties (guaranteed by the Company), plus $10.0 million borrowed
from the Company at a variable interest rate. The ESOP shares are
included in net shares outstanding for the purposes of calculating
earnings per share. The ESOP's third-party debt is described in the long-
term debt footnote. At May 28, 1995, the ESOP's debt to the Company had
a balance of $7.0 million with an interest rate of 6.3% and sinking fund
payments due to June 2015.
The Company treats dividends paid to the ESOP the same as other
dividends. Dividends received on leveraged shares (i.e., all shares
originally purchased with the debt proceeds) are used for debt service,
while dividends received on unleveraged shares are passed through to
participants.
The Company's cash contribution to the ESOP is calculated so as to pay
off enough debt to release sufficient shares to make the Company
match. The ESOP uses the Company's cash contributions to the plan,
plus the dividends received on the ESOP's leveraged shares, to make
principal and interest payments on the ESOP's debt. As loan payments
are made, shares become unemcumbered by debt and become committed to
be allocated. The ESOP allocates shares to individual employee
accounts on the basis of the match of employee payroll savings
(contributions), plus reinvested dividends received on previously
allocated shares. In 1995, 1994 and 1993, the ESOP incurred interest
expense of $6.6 million, $6.8 million and $7.2 million, respectively.
The ESOP received dividends of $6.2 million, $6.0 million and $5.4
million; plus Company contributions of $4.8 million, $4.7 million and
$5.7 million in the respective years. These funds were used to make
interest and principal payments.
The number of Company shares within the ESOP are summarized as follows:
May 28, May 29,
Number of shares 1995 1994
Unreleased shares 2,690,000 2,393,000
Committed to be allocated 66,000 64,000
Allocated to participants 1,966,000 1,529,000
Total shares 4,722,000 3,986,000
On May 28, 1995, the ESOP received Darden shares from the spin-off
distribution described in note two. The Darden shares were
immediately exchanged for Company shares, based on their relative
market values immediately preceding the distribution date.
Note Fourteen: Other Postretirement and Postemployment Benefits
We sponsor several plans that provide health care benefits to the
majority of our retirees. The salaried plan is contributory with
retiree contributions based on years of service.
We fund plans for certain employees and retirees on an annual basis.
In 1995, 1994 and 1993 we contributed $13.7 million, $38.3 million
and $30.6 million, respectively. Plan assets consist principally of
listed equity securities and U.S. government securities.
Components of the postretirement health care expense are as follows:
Fiscal Year
Expense (Income) in Millions 1995 1994 1993
Service cost--benefits earned $ 4.5 $ 5.0 $ 3.2
Interest cost on accumulated benefit
obligation 14.3 13.4 10.6
Actual return on plan assets (15.1) (1.5) (3.9)
Net amortization and deferral 5.0 (4.6) (1.1)
Net postretirement expense $ 8.7 $ 12.3 $ 8.8
The funded status of the plans and the amount recognized on our
consolidated balance sheets are as follows:
May 28, 1995 May 29, 1994
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
In Millions Benefits Assets Benefits Assets
Accumulated benefit obligations:
Retirees $ 36.2 $ 47.2 $ 36.3 $ 44.7
Fully eligible active employees 14.6 8.5 12.7 7.1
Other active employees 35.8 50.6 27.0 36.8
Accumulated benefit obligations 86.6 106.3 76.0 88.6
Plan assets at fair value 104.6 7.5 89.3 7.1
Accumulated benefit obligations in
excess of (less than) plan assets (18.0) 98.8 (13.3) 81.5
Unrecognized prior service cost .1 17.3 .1 19.2
Unrecognized net loss (27.1) (33.8) (28.1) (23.2)
Accrued (prepaid) postretirement
benefits $(45.0) $ 82.3 $(41.3) $ 77.5
The discount rates used in determining the actuarial present value
of the benefit obligations were 8.0% and 8.8% in 1995 and 1994,
respectively. The expected long-term rate of return on assets was
10%.
The assumed health care cost trend-rate increase in the per capita
charges for benefits ranged from 6.2% to 9.8% for 1996 depending on
the medical service category. The rates gradually decrease to 4.4%
to 5.7% for 2007 and remain at that level thereafter. If the health
care cost trend rate increased by one percentage point in each future
year, the aggregate of the service and interest cost components of
postretirement expense would increase for 1995 by $3.1 million and
the accumulated benefit obligation as of May 28, 1995 would increase
by $30.5 million.
In 1994, we adopted Statement of Financial Accounting Standards
(SFAS) No. 112, "Employers' Accounting for Postemployment Benefits."
The cumulative effect as of May 31, 1993 of changing to the accrual
basis for severance and disability costs was a decrease in net
earnings of $14.7 million ($.09 per share).
Note Fifteen: Profit-sharing Plans
We have profit-sharing plans to provide incentives to key individuals who
have the greatest potential to contribute to current earnings and
successful future operations. These plans were approved by the Board of
Directors upon recommendation of the Compensation Committee. The awards
under these plans depend on profit performance in relation to pre-
established goals. The plans are administered by the Compensation
Committee, which consists solely of outside directors. Profit-sharing
expense, including performance unit accruals, was $.9 million, $1.5
million and $6.7 million in 1995, 1994 and 1993, respectively.
Note Sixteen: Income Taxes
We adopted SFAS No. 109, "Accounting for Income Taxes" as of May
31, 1993. The adoption of SFAS 109 changed our method of
accounting for income taxes from the deferred method to the asset
and liability method. Deferred income taxes reflect the
differences between assets and liabilities recognized for
financial reporting purposes and amounts recognized for tax
purposes measured using the current enacted tax rates. The
cumulative effect of adoption was an increase in net earnings of
$11.2 million ($.07 per share).
The components of earnings from continuing operations before
income taxes and the income taxes thereon are as follows:
Fiscal Year
In Millions 1995 1994 1993
Earnings (loss) before income taxes:
U.S. $ 391.7 $533.3 $688.7
Foreign 12.9 14.8 (12.3)
Total earnings before income taxes $ 404.6 $548.1 $676.4
Income taxes:
Current:
Federal $ 86.0 $187.1 $185.4
State and local .1 45.9 46.6
Foreign (.2) 9.1 (1.3)
Total current 85.9 242.1 230.7
Deferred:
Federal 50.6 (17.5) 31.1
State and local 11.1 (4.3) 4.5
Foreign (2.7) (12.2) (.9)
Total deferred 59.0 (34.0) 34.7
Total income taxes $144.9 $208.1 $265.4
During 1995 and 1994, net income tax (expense)/benefits of $(8.0)
million and $3.5 million, respectively, were allocated to
stockholders' equity. These expenses/ benefits were attributable
to the exercise of employee stock options, dividends paid on
unallocated ESOP shares, translation adjustments and unrealized
gain on marketable securities.
During 1995, 1994 and 1993, we paid income taxes of $104.1
million, $202.2 million and $196.4 million, respectively.
In prior years we purchased certain income-tax items from other
companies through tax lease transactions. Total current income
taxes charged to earnings reflect the amounts attributable to
operations and have not been materially affected by these tax
leases. Actual current taxes payable on 1995, 1994 and 1993
operations were increased by approximately $12 million, $10
million and $10 million, respectively, due to the current effect
of tax leases. These tax payments do not affect taxes for
statement of earnings purposes since they repay tax benefits
realized in prior years. The repayment liability is classified as
"Deferred Income Taxes - Tax Leases."
The following table reconciles the U.S. statutory income tax rate
with the effective income tax rate:
Fiscal Year
1995 1994 1993
U.S. statutory rate 35.0% 35.0% 34.0%
State and local income taxes, net of
federal tax benefits 3.5 5.1 5.1
Other, net (2.7) (2.1) .1
Effective income tax rate 35.8% 38.0% 39.2%
The tax effects of temporary differences that give rise to
deferred tax assets and liabilities are as follows:
May 28, May 29,
In Millions 1995 1994
Accrued liabilities $ 80.6 $111.5
Unusual charge for oats 9.5 59.8
Unusual charge for restructuring 42.5 -
Compensation and employee benefits 55.2 57.7
Disposition liabilities 29.1 31.6
Foreign tax loss carryforward 19.4 16.2
Other 11.2 10.9
Gross deferred tax assets 247.5 287.7
Depreciation 139.4 137.8
Prepaid pension asset 125.1 104.9
Intangible assets 12.8 12.7
Other 53.8 32.6
Gross deferred tax liabilities 331.1 288.0
Valuation allowance 11.2 11.1
Net deferred tax liability $ 94.8 $ 11.4
As of May 28, 1995, we have foreign operating loss carryovers for
tax purposes of $47.1 million, which will expire as follows if not
offset against future taxable income: $11.0 million in 1998, $9.4
million in 1999, $11.2 million in 2000, $15.2 million in 2001, and
$.3 million in 2002.
We have not recognized a deferred tax liability for unremitted
earnings of $78.7 million for our foreign operations because we do
not expect those earnings to become taxable to us in the
foreseeable future. A determination of the potential liability is
not practicable. If a portion were to be remitted, we believe
income tax credits would substantially offset any resulting tax
liability.
Note Seventeen: Leases and Other Commitments
An analysis of rent expense by property leased follows:
Fiscal Year
In Millions 1995 1994 1993
Warehouse space $14.0 $13.3 $12.5
Equipment 8.7 8.1 8.8
Other 3.7 3.6 5.1
Total rent expense $26.4 $25.0 $26.4
Some leases require payment of property taxes, insurance and
maintenance costs in addition to the rent payments. Contingent and
escalation rent in excess of minimum rent payments and sublease
income netted in rent expense were insignificant.
Noncancelable future lease commitments are (in millions) $17.5 in
1996, $12.8 in 1997, $4.1 in 1998, $3.2 in 1999, $1.9 in 2000 and
$3.7 after 2000, with a cumulative total of $43.2.
We are contingently liable under guarantees and comfort letters
for $96.4 million. The guarantees and comfort letters are
principally issued to support borrowing arrangements, primarily
for our joint ventures. The Company remains the primary
guarantor on a number of Darden leases and other obligations;
however Darden has indemnified the Company against any loss.
Note Eighteen: Geographic Information
Unallocated
Corporate Consolidated
In Millions U.S.A. Foreign Items (a) Total
Sales
1995 $4,840.7 $186.0 $ - $5,026.7
1994 5,156.8 170.4 - 5,327.2
1993 4,932.7 205.7 - 5,138.4
Operating Profits
1995 503.5(b) .4 (b) (99.3) 404.6
1994 642.7(c) 2.8 (97.4) 548.1
1993 780.6(d) (12.0)(d) (92.2) 676.4
Identifiable Assets
1995 2,531.9 300.6 525.7 3,358.2
1994 2,502.3 245.7 2,056.0(e) 4,804.0
1993 2,273.3 215.6 1,821.5(e) 4,310.4
(a) Corporate expenses reported here include net interest expense and
general corporate expenses.
(b) U.S.A. and Foreign operating profits are net of charges of $179.1
million and $4.1 million, respectively, for the unusual items
described in note three.
(c) U.S.A. operating profits include a charge of $146.9 million for
unusual items described in note three.
(d) U.S.A. and Foreign operating profits include a charge of $25.8
million and $7.6 million, respectively, for unusual items.
(e) For 1994 and 1993, Unallocated Corporate Items include the net assets
of discontinued operations. See note two.
The foreign sales above were primarily by our Canadian subsidiary.
The foreign operating profits above also include our share of the
results from our joint ventures, Cereal Partners Worldwide (CPW)
and Snack Ventures Europe (SVE).
Note Nineteen: Quarterly Data (unaudited)
Summarized quarterly data for 1995 and 1994 follows:
In Millions, Except per Share First Quarter Second Quarter Third Quarter
and Market Price Amounts 1995 1994 1995 1994 1995 1994
Sales $1,156.7 $1,306.3 $1,417.3 $1,448.6 $1,224.2 $1,277.6
Gross profit (a) 720.8 834.1 848.8 899.4 727.1 796.9
Earnings (loss) from
continuing operations 118.0 129.0 134.8 126.0 20.2(b) 110.8
Earnings (loss) per share from
continuing operations .75 .81 .85 .79 .13 .70
Discontinued operations 32.8 40.3 14.4 14.7 (14.8) 34.2
Cumulative effect of accounting changes - (3.5) - - - -
Net earnings 150.8 165.8 149.2 140.7 5.4 145.0
Net earnings per share .95 1.04 .95 .88 .03 .91
Dividends per share .47 .47 .47 .47 .47 .47
Market price of common stock:
High 56 1/4 68 3/4 58 3/8 67 3/4 61 5/8 63
Low 49 3/8 56 7/8 52 7/8 59 5/8 53 1/4 55 1/2
In Millions, Except per Share Fourth Quarter Total Year
and Market Price Amounts 1995 1994 1995 1994
Sales $1,228.5 $1,294.7 $5,026.7 $5,327.2
Gross profit (a) 707.0 784.3 3,003.7 3,314.7
Earnings (loss) from continuing
operations (13.3)(b) (25.8)(c) 259.7 340.0
Earnings (loss) per share from
continuing operations (.09) (.16) 1.64 2.14
Discontinued operations 75.3 44.2 107.7 133.4
Cumulative effect of accounting changes - - - (3.5)
Net earnings 62.0 18.4 367.4 469.9
Net earnings per share .40 .12 2.33 2.95
Dividends per share .47 .47 1.88 1.88
Market price of common stock:
High 63 3/4 57 63 3/4 68 3/4
Low 58 49 7/8 49 3/8 49 7/8
<FN>
(a) Before charges for depreciation.
(b) Includes an after-tax loss of $82.8 million ($.52 per share) in the third quarter
and $28.8 million ($.19 per share) in the fourth quarter related to restructuring.
(c) Includes an after-tax loss of $87.1 million ($.55 per share) related to the improper
treatment of oat supplies by an independent contractor.
</FN>
ELEVEN YEAR FINANCIAL SUMMARY
May 28, May 29, May 30, May 31, May 26,
In Millions, Except per Share Data 1995 1994 1993 1992 1991
Financial Results
Net earnings (loss) per share $ 2.33 $ 2.95 $ 3.10 $ 2.99 $ 2.87
Continuing operations earnings per share 1.64 2.14 2.52 2.39 2.26
Return on average equity 52.0% 37.7% 39.1% 39.9% 49.2%
Dividends per share 1.88 1.88 1.68 1.48 1.28
Sales 5,027 5,327 5,138 4,964 4,657
Costs and expenses:
Cost of sales 2,023 2,012 2,003 1,967 1,819
Selling, general and administrative 2,123 2,367 2,214 2,152 2,090
Depreciation and amortization 192 174 153 143 134
Interest, net 101 79 56 45 51
Unusual expenses (income) 183 147 36 (12) (48)
Earnings before income taxes 405 548 676 669 611
Earnings from continuing operations 260 340 411 396 372
Discontinued operations after taxes 107 134 95 100 101
Net earnings (loss) 367 470 506 496 473
Earnings from continuing operations as a
percent of sales 5.2% 6.4% 8.0% 8.0% 8.0%
Weighted average number of common shares 158 159 163 166 165
Taxes (income, payroll, property, etc.)
per share 1.30 1.68 1.98 2.08 1.86
Financial Position
Total assets 3,358 4,804 4,310 3,997 3,561
Land, buildings and equipment, net 1,457 1,503 1,463 1,398 1,168
Working capital at year end (324) (630) (386) (238) (142)
Long-term debt, excluding current portion 1,401 1,413 1,264 916 875
Stockholders' equity 141 1,151 1,219 1,371 1,114
Stockholders' equity per share .89 7.26 7.59 8.28 6.74
Other Statistics
Total dividends 297 299 275 245 211
Gross capital expenditures 157 213 317 396 279
Research and development 60 59 56 55 52
Advertising media expenditures 324 292 283 309 314
Wages, salaries and employee benefits 538 558 556 598 633
Number of employees (actual) 9,882 10,616 10,577 12,195 12,521
Accumulated LIFO reserve 53 43 47 50 54
Common stock price range (a):
High 63 3/4 68 3/4 74 1/8 75 7/8 60 7/8
Low 49 3/8 49 7/8 62 54 1/4 37 7/8
Close 60 5/8 54 1/2 65 1/4 63 1/2 58
<FN>
(a) Prices shown are before the spin-off described in note two. The closing prices on May 30, 1995 of the two
common stocks were $50 for General Mills and $11 1/8 for Darden Restaurants.
Note: All amounts presented in this summary have been restated to a continuing basis only.
</FN>