General Mills, Inc. — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended May 29, 2011 (52 weeks). The filing also presents fourth-quarter FY2011 results compared with fourth-quarter FY2010; this is not a standalone quarterly filing. Amounts below are U.S. dollars.
Business context
General Mills is a global branded-food manufacturer and marketer, with U.S. Retail, International, and Bakeries and Foodservice segments. It operates in 15 countries and markets products in more than 100 countries. Wal-Mart accounted for 23% of consolidated sales, making customer concentration a notable consideration.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change or context |
|---|---|---|---|
| Net sales | $14.880 billion | $14.636 billion | Up 2%; volume contributed 1 percentage point and price/mix 1 point |
| Gross margin | $5.954 billion; 40.0% of sales | $5.800 billion; 39.6% | Up 3% in dollars and 40 basis points in margin; mark-to-market gains were a key factor |
| Operating profit | $2.775 billion | $2.606 billion | Up 6% |
| Net earnings attributable to General Mills | $1.798 billion | $1.531 billion | Up 18% |
| Diluted EPS | $2.70 | $2.24 | Up 20%; excluding specified comparability items, $2.48 versus $2.30, up 8% |
| Operating cash flow | $1.527 billion | $2.181 billion | Down $654 million, mainly from working-capital cash use and pension contributions |
| Capital expenditures | $649 million | $650 million | Significant ongoing investment |
| Total debt | $6.885 billion | $6.426 billion | Up $459 million; includes $1.031 billion of current long-term debt |
| Cash and cash equivalents | $620 million | $673 million | Down $54 million |
Year-end current assets were $3.902 billion and current liabilities $3.659 billion. General Mills had $2.9 billion of committed credit facilities, none drawn at year-end, and reported compliance with debt covenants. Management stated it expected operating cash flow and available financing to cover liquidity and capital needs for at least 12 months.
Material changes and fourth-quarter results
- International sales rose 7% to $2.876 billion, led by volume growth; segment operating profit increased 52% to $291 million.
- U.S. Retail sales were essentially flat at $10.164 billion; segment operating profit declined 2% to $2.348 billion, partly reflecting higher supply-chain costs.
- Bakeries and Foodservice sales increased 6% to $1.841 billion, principally from price/mix; segment operating profit rose to $306 million from $263 million.
- Fourth-quarter FY2011 sales were $3.634 billion versus $3.529 billion; net earnings attributable to General Mills were $320 million versus $212 million; diluted EPS was $0.48 versus $0.31.
- Operating cash flow fell despite higher earnings, with current assets and liabilities using $721 million of cash versus providing $143 million in FY2010. Inventories rose $265 million year over year, primarily due to commodity cost inflation.
Outlook, commentary, risks, and unusual items
- For FY2012, excluding the Yoplait acquisition effects, management targeted mid-single-digit sales growth, primarily from pricing, while assuming a modest decline in pound volume. It targeted low-single-digit growth in total segment operating profit.
- Management expected input costs to increase 10% to 11% and planned to rely on pricing, cost savings, and mix management to largely offset the pressure. Planned capital expenditures were approximately $670 million, excluding Yoplait-related needs.
- On July 1, 2011, after year-end, General Mills completed its $1.2 billion acquisition of a 51% controlling interest in Yoplait S.A.S. and a 50% interest in Yoplait Marques S.A.S. Management expected to reduce FY2012 share repurchases; its stated plan was to offset normal stock-option exercises.
- FY2011 reported earnings benefited from commodity and grain mark-to-market results versus losses in FY2010, and from a tax benefit related to settlement of IRS matters. The effective tax rate declined to 29.7% from 35.0%; the company also paid $385 million related to the IRS settlement. These factors make reported EPS growth less representative of underlying growth.
- Other notable items included $17 million of net divestiture gains, $4 million of restructuring and exit costs, and $95 million of pension, postretirement, and postemployment benefit expense versus $11 million of benefit-plan income in FY2010. A voluntary $200 million contribution was made to principal domestic pension plans.
- Principal risks include commodity and energy inflation, competitive pricing and private-label pressure, concentrated retail customers, food safety and recalls, supply-chain disruption, foreign exchange and political exposure, debt and refinancing needs, pension assumptions, and possible impairment of $10.5 billion in goodwill and indefinite-lived intangibles. No pending litigation was identified as reasonably likely to have a material adverse effect; three environmental cleanup sites were active, with probable aggregate exposure assessed as not material.
- The board approved an annualized dividend rate of $1.22 per share in June 2011, a 9% increase from the FY2011 rate. The auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective.
Important facts for investors to verify
- How much of reported earnings and gross-margin growth reflects recurring operating performance versus commodity mark-to-market gains and tax settlements; compare GAAP EPS with the company’s adjusted EPS reconciliation.
- Whether pricing and productivity can offset the forecast 10% to 11% input-cost increase without materially weakening volume or market share.
- The cash-flow and leverage effects of the Yoplait acquisition, including integration results, financing costs, and the planned reduction in share repurchases.
- Whether working capital, especially inventory, converts back into cash and whether operating cash flow recovers after its FY2011 decline.
- Exposure to Wal-Mart and other large customers, upcoming debt maturities, and sensitivity of pension and intangible-asset valuations to assumptions and market conditions.