General Mills, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 30, 2010 (52 weeks). The filing is an annual report, not a standalone 2009 Q4 filing. The comparable fiscal 2009 had 53 weeks; share and per-share data reflect a two-for-one stock split distributed June 8, 2010. Financial amounts below are in U.S. dollars; “B” means billion and “M” means million.
Business context and reporting period
General Mills makes and markets branded consumer foods, including cereals, yogurt, snacks, soups, meals, vegetables, dough and frozen products. It operates through U.S. Retail, International, and Bakeries and Foodservice, and holds 50% interests in Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ). Fiscal 2010 sales were concentrated in U.S. Retail (70%); international operations accounted for 18% of consolidated sales. Wal-Mart represented 23% of consolidated sales.
Key financial results
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $14.80B | $14.69B |
| Gross margin | $5.87B; 39.7% of sales | $5.23B; 35.6% of sales |
| Operating profit | $2.61B | $2.33B |
| Segment operating profit (non-GAAP) | $2.86B; 19.3% of sales | $2.64B; 18.0% of sales |
| Net earnings attributable to General Mills | $1.53B | $1.30B |
| Diluted EPS | $2.24 | $1.90 |
| Operating cash flow | $2.18B | $1.83B |
| Capital expenditures | $650M | $563M |
| Total debt | $6.43B | $7.08B |
| Cash and cash equivalents | $673M | $750M |
Sales increased about 1%; net earnings rose 17% and diluted EPS rose 18%. Gross margin expanded 410 basis points, primarily from lower input costs, favorable mix, and holistic margin management (cost savings, marketing efficiencies, and mix initiatives). Advertising and media spending increased 24% to $909M, contributing to higher SG&A as a share of sales. Interest expense, net, was $402M, including a $40M loss on debt repurchases. The effective tax rate declined to 35.0% from 37.1%, despite a $35M charge associated with health-care reform.
Segment results were mixed: U.S. Retail sales rose 3% and operating profit increased 8%; International sales rose 4% but operating profit fell 17% to $219M; Bakeries and Foodservice sales fell 14% to $1.77B while operating profit increased to $250M. The Bakeries and Foodservice sales decline reflected divestitures, lower volume, and commodity-indexed pricing. CPW sales grew 6%; HDJ sales declined 4%.
Cash, debt, liquidity, and capital allocation
Operating cash flow increased $353M year over year, mainly with higher earnings. Investing activities used $721M, including capital expenditures and $131M invested in affiliates, primarily CPW. Financing activities used $1.50B, including $692M of share repurchases and $644M of dividends. Debt declined about $650M year over year; the company paid $437M to repurchase $400M principal of notes, funding the tender with commercial paper.
At year-end, the company had $2.9B of committed credit facilities, with no committed-facility borrowings, plus $0.3B of uncommitted facilities, of which $76M was drawn. It reported compliance with debt covenants and a fixed-charge coverage ratio of 6.42. Management stated cash flows and available financing should meet liquidity and capital needs for at least 12 months. Current assets were $3.48B and current liabilities $3.77B.
Material changes, unusual items, and outlook
- Fiscal 2010 growth occurred despite one fewer week than fiscal 2009. Volume contributions were flat overall; net price realization and mix contributed one percentage point to sales growth. Fiscal 2009 sales growth included a 53rd week and divestiture-related effects.
- Fiscal 2010 results included the $40M debt-tender loss, $35M non-cash health-care reform tax charge, $31M of restructuring and exit costs, and a $7M net mark-to-market commodity and grain inventory expense. Fiscal 2009 included an $85M net divestiture gain, a $41M insurance settlement gain, and a $53M tax expense following an adverse court decision. Management’s adjusted diluted EPS, a non-GAAP measure, was $2.30 versus $1.99.
- The company exited a kids’ refrigerated yogurt beverage line, microwave soup, and breadcrumbs, recording primarily non-cash impairment charges. It reported no acquisitions or divestitures in fiscal 2010.
- Management’s fiscal 2011 outlook was low-single-digit sales growth, driven by volume, and mid-single-digit segment operating profit growth, while anticipating renewed input-cost inflation and continued advertising investment. Planned capital expenditures were approximately $700M. Management announced a 17% dividend increase to an annual $1.12 per share and continued share repurchases.
- Other notable exposures include the IRS challenge to tax benefits related to a past GMC transaction, which management described as a significant potential liability; $728M of total uncertain-tax-position liabilities and related interest and penalties, with approximately $425M expected to be paid in the next 12 months; pension and postretirement funding and assumption risk; commodity, currency, interest-rate, food-safety, and supply-chain risks; and customer concentration. The company identified $10.3B of goodwill and indefinite-lived intangibles, with impairment dependent on assumptions about future performance and discount rates.
- Management considered three active environmental cleanup matters and ordinary-course litigation not likely to have a material adverse effect based on current information. It cautioned that its environmental exposure could increase if other potentially responsible parties cannot pay. Guarantees and comfort letters totaled $538M for consolidated subsidiaries and $302M for non-consolidated affiliates, mainly CPW. The independent auditor reported fairly presented financial statements and effective internal control over financial reporting.
Most important facts for investors to verify
- Whether forecast volume growth and margin gains can offset renewed commodity inflation and higher advertising costs, particularly given the sharp Bakeries and Foodservice sales decline and weaker International segment profit.
- The outcome, timing, and cash impact of the IRS GMC tax dispute, including whether payments exceed the accrued amounts.
- Debt maturity and refinancing needs, short-term commercial-paper reliance, credit-facility availability, and the sustainability of dividends and repurchases alongside planned capital spending.
- Wal-Mart’s 23% share of consolidated sales and the effect of customer bargaining power, private-label competition, or purchasing changes.
- Pension and retiree-benefit sensitivity to discount rates, asset returns, and health-care costs, and the valuation assumptions supporting the $10.3B of goodwill and indefinite-lived intangibles.