General Mills, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended May 26, 2013 (52 weeks), with FY2012 as the primary comparison. The filing also reports fourth-quarter results; this is not a standalone FY2012 Q4 filing.
Business context and results
General Mills is a global branded food manufacturer, operating through U.S. Retail, International, and Bakeries and Foodservice segments. It manufactures in 16 countries and markets products in more than 100 countries. Wal-Mart represented 21% of consolidated sales.
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $17.774 billion | $16.658 billion |
| Gross margin | $6.424 billion; 36.1% | $6.045 billion; 36.3% |
| Operating profit | $2.852 billion | $2.562 billion |
| Segment operating profit | $3.198 billion; 18.0% of sales | $3.012 billion; 18.1% of sales |
| Net earnings attributable to General Mills | $1.855 billion | $1.567 billion |
| Diluted EPS | $2.79 | $2.35 |
| Diluted EPS excluding comparability items | $2.69 | $2.56 |
| Operating cash flow | $2.926 billion | $2.407 billion |
| Capital expenditures | $614 million | $676 million |
Fourth-quarter FY2013 net sales were $4.411 billion, versus $4.066 billion in FY2012 Q4. Net earnings attributable to General Mills were $366 million versus $325 million; diluted EPS was $0.55 versus $0.49.
Material changes and drivers
- Annual sales increased 7%; acquisitions and other new businesses contributed about 6 percentage points. Reported sales growth reflected 9 points from volume, offset by 1 point from price/mix and 1 point from foreign exchange.
- International sales rose 24% to $5.200 billion, largely reflecting acquired businesses; segment operating profit increased 14% to $490 million. U.S. Retail sales grew 1% and segment profit rose 4% to $2.393 billion. Bakeries and Foodservice sales declined 1%, while segment profit increased 10% to $315 million.
- Gross margin percentage edged down 0.2 percentage point. Management cited 3% input-cost inflation; mix and productivity actions helped offset cost pressure.
- GAAP net earnings rose 18% and diluted EPS rose 19%, while adjusted diluted EPS increased 5%. FY2013 included favorable discrete tax effects and commodity mark-to-market results; FY2012 included commodity mark-to-market losses and higher restructuring charges.
- Acquisitions included Yoki in Brazil, Yoplait Ireland, Food Should Taste Good, Parampara Foods, Immaculate Baking, and the Canadian Yoplait franchise license. Yoki’s purchase price was approximately $940 million.
Cash, debt, and liquidity
- At year-end, cash and cash equivalents were $741 million, total debt was $7.969 billion, and total assets were $22.658 billion. Debt increased $540 million year over year. Cash included $715 million held outside the United States, primarily to fund foreign operations and acquisitions.
- Committed credit facilities totaled $2.7 billion, with no amount drawn; $84 million was drawn on uncommitted lines. The company reported covenant compliance and stated that operating cash flow and available financing should cover liquidity and capital needs for at least 12 months.
- $1.443 billion of long-term debt was classified as current and due within 12 months. Total contractual obligations were $10.488 billion, excluding a separately presented $1.816 billion of other long-term obligations.
- Shareholder returns included $868 million of dividends paid ($1.32 per share) and approximately $1.015 billion of share repurchases. The annual dividend rate was raised 15% to $1.52, effective with the August 2013 payment.
Outlook, risks, and unusual items
- For FY2014, management targeted low-single-digit sales growth, mid-single-digit total segment operating profit growth, and high-single-digit diluted EPS growth excluding comparability items. It planned approximately $700 million of capital expenditures, a 15% dividend increase, and repurchases expected to reduce shares outstanding by 2% net.
- Management expected input-cost inflation to remain consistent with FY2013 and said holistic margin management savings and mix actions should more than offset it.
- FY2013 unusual/comparability items included a $63 million noncash tax benefit related to restructuring General Mills Cereals, LLC; a $34 million discrete tax benefit related to Medicare Part D; $20 million of restructuring charges; Yoki integration costs; and commodity/grain mark-to-market movements. Adjusted EPS is a non-GAAP measure.
- Key risks include commodity and energy cost volatility, intense branded/private-label competition, customer concentration and retailer pricing pressure, foreign exchange and political risks, supply-chain disruptions, food safety and recalls, pension assumptions, and potential impairment of goodwill and brands. Goodwill and indefinite-lived intangible assets totaled approximately $13.1 billion; no impairment was recorded in the FY2013 assessment.
- Pending tax matters include an IRS dispute over accrued-bonus deductions that could result in an approximately $80 million one-time cash tax payment if the company is unsuccessful. The company expected to pay most of the amount related to an adverse California apportionment decision in FY2014. Environmental remediation exposure was assessed as not material; management reported no pending litigation reasonably likely to have a material adverse effect.
Important facts for investors to verify
- How much of sales and profit growth is sustainable excluding acquisitions, and whether acquired businesses deliver expected returns; return on average total capital declined to 11.9% from 12.7%.
- Whether volume, pricing, and mix can support the FY2014 growth targets while input costs rise and gross margin remains pressured.
- Near-term refinancing and repayment plans for the $1.443 billion current debt portion, alongside continued dividends and repurchases.
- The resolution and potential cash impact of the IRS and California tax matters, and any changes in pension funding needs or assumptions.
- Reliance on Wal-Mart, which accounted for 21% of consolidated sales, and the sensitivity of reported earnings to commodity mark-to-market and discrete tax items.
KPMG issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of May 26, 2013.