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GIS > SEC Filings for GIS > Form 10-K on 3-Jul-2014All Recent SEC Filings

Show all filings for GENERAL MILLS INC

Form 10-K for GENERAL MILLS INC


3-Jul-2014

Annual Report


ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

We are a global consumer foods company. We develop distinctive value-added food products and market them under unique brand names. We work continuously to improve our established products and to create new products that meet consumers' evolving needs and preferences. In addition, we build the equity of our brands over time with strong consumer-directed marketing, innovative new products, and effective merchandising. We believe our brand-building strategy is the key to winning and sustaining leading share positions in markets around the globe.

Our fundamental financial goal is to generate superior returns for our stockholders over the long term. We believe that increases in net sales, segment operating profit, earnings per share (EPS), and return on average total capital are the key drivers of financial performance for our business.

Our specific growth objectives are to consistently deliver:

• low single-digit annual growth in net sales;

• mid single-digit annual growth in total segment operating profit excluding Venezuela currency devaluation;

• high single-digit annual growth in diluted EPS excluding certain items affecting comparability; and

• improvement in return on average total capital.

We believe that this financial performance, coupled with an attractive dividend yield, should result in long-term value creation for stockholders. We return a substantial amount of cash to stockholders through share repurchases and dividends.

Fiscal 2014 was a challenging year, as developed markets continued to experience weak consumer trends and quite low category growth. The cereal category in developed markets was soft and the global yogurt category was impacted by significant dairy inflation. For the fiscal year ended May 25, 2014, our net sales grew 1 percent and total segment operating profit excluding Venezuela currency devaluation of $3,154 million declined 2 percent from $3,223 million last year. Our return on average total capital declined by 40 basis points, as fiscal 2014 earnings did not grow in line with our capital base. Diluted EPS grew 1 percent and diluted EPS excluding certain items affecting comparability increased 4 percent (See the "Non-GAAP Measures" section below for discussion of total segment operating profit excluding Venezuela currency devaluation, diluted EPS excluding certain items affecting comparability and return on average total capital, which are not defined by generally accepted accounting principles (GAAP)). Net cash provided by operations totaled $2.5 billion in fiscal 2014, enabling us to increase our annual dividend payments per share by 17 percent from fiscal 2013. We also made significant capital investments totaling $664 million in fiscal 2014 and repurchased $1.7 billion of shares of common stock.

We achieved the following related to our key operating objectives for fiscal 2014:

• We delivered a strong line-up of consumer marketing, merchandising, and innovation to support our leading brands and continued to build our global platforms in markets around the world.

• We returned $2.7 billion to stockholders in fiscal 2014, including a 17 percent dividend increase and 47 percent more shares of common stock repurchased that resulted in a 3 percent net reduction in average shares outstanding.

• While we exercised good administrative cost control, executed strong holistic margin management (HMM) efforts, increased share repurchases and had favorable interest expense, net sales and segment operating profit excluding Venezuela currency devaluation performance were below our targets. We achieved 1 percent growth in net sales, primarily contributions from new businesses added in fiscal 2013. Total segment operating profit excluding Venezuela currency devaluation declined 2 percent and diluted EPS excluding certain items affecting comparability increased 4 percent.

Details of our financial results are provided in the "Fiscal 2014 Consolidated Results of Operations" section below.


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In fiscal 2015, we expect to generate constant currency growth consistent with our long-term model, including the effects of a 53 week year:

• We are targeting mid single-digit growth in constant currency net sales, primarily driven by volume growth and a 53rd week, with double-digit growth in emerging markets and low single-digit growth in developed markets.

• We expect to grow share in the U.S. cereal category through significant product innovation, build on our improving performance in the U.S. yogurt category, and continue our strong growth in the snack category around the world.

• We are targeting mid single-digit growth in total constant currency segment operating profit in fiscal 2015. We continue to view our HMM discipline of cost savings and mix management as a competitive advantage. Cost of sales HMM is expected to offset anticipated input cost inflation of 3 percent.

• We are targeting high single-digit growth in constant currency diluted EPS excluding certain items affecting comparability.

• We expect to deliver strong cash returns to stockholders in fiscal 2015, including annualized dividends per share of $1.64 and share repurchases that are expected to result in a net reduction in shares outstanding of at least 3 percent.

• Our businesses generate strong levels of cash flows, and we will use some of this cash to reinvest in our business. Our fiscal 2015 plans call for approximately $730 million of expenditures for capital projects.

Certain terms used throughout this report are defined in a glossary in Item 8 of this report.

FISCAL 2014 CONSOLIDATED RESULTS OF OPERATIONS

Our consolidated results for fiscal 2014 include one additional quarter of operating activity from the acquisition of Yoki Alimentos S.A. (Yoki) in Brazil, one additional quarter of operating activity from the assumption of the Canadian Yoplait franchise license, and three additional quarters of operating activity from the acquisition of Immaculate Baking Company in the United States. Collectively, these items are referred to as "new businesses" in comparing our fiscal 2014 results to fiscal 2013.

Fiscal 2014 net sales grew 1 percent to $17,910 million including 1 percentage point of growth contributed by new businesses. Excluding new businesses, net sales grew 1 percent, offset by 1 percentage point of unfavorable foreign currency exchange. In fiscal 2014, net earnings attributable to General Mills were $1,824 million, down 2 percent from $1,855 million in fiscal 2013, and we reported diluted EPS of $2.83 in fiscal 2014, up 1 percent from $2.79 in fiscal 2013. Fiscal 2014 results include a gain on the divestiture of certain grain elevators, the impact of Venezuela currency devaluation, gains from the mark-to-market valuation of certain commodity positions and grain inventories, and restructuring charges related to our fiscal 2012 productivity and cost savings plan. Fiscal 2013 results include the effects from various discrete tax items, the impact of Venezuela currency devaluation, restructuring charges related to our fiscal 2012 productivity and cost savings plan, integration costs resulting from the acquisition of Yoki, and gains from the mark-to-market valuation of certain commodity positions and grain inventories. Diluted EPS excluding these items affecting comparability totaled $2.82 in fiscal 2014, up 4 percent from $2.72 in fiscal 2013 (see the "Non-GAAP Measures" section below for a description of our use of this measure and our discussion of the items affecting comparability).


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

Components of Net Sales Growth

                                                        Fiscal 2014
                                                           vs. 2013
               Contributions from volume growth (a)           1  pt
               Net price realization and mix                  1  pt
               Foreign currency exchange                     (1) pt
               Net sales growth                               1  pt

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

Net sales grew 1 percent in fiscal 2014 driven by an 1 percentage point increase in contributions from volume growth, including 2 percentage points of contribution from volume growth due to new businesses. Favorable net price realization and mix contributed 1 percentage point of growth, and unfavorable foreign currency exchange decreased net sales growth by 1 percentage point.

Cost of sales increased $190 million in fiscal 2014 to $11,540 million. Higher volume drove an $115 million increase in cost of sales. Product mix also drove an $130 million increase in cost of sales. In fiscal 2014, we recorded a $49 million net decrease in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories as described in Note 7 to the Consolidated Financial Statements in Item 8 of this report, compared to a net decrease of $4 million in fiscal 2013. We also recorded a $23 million foreign exchange loss in fiscal 2014 related to the Venezuela currency devaluation compared to a $16 million loss in fiscal 2013. In fiscal 2013, we also recorded a $17 million non-recurring expense related to the assumption of the Canadian Yoplait franchise license.

Gross margin declined 1 percent in fiscal 2014 versus fiscal 2013. Gross margin as a percent of net sales of 36 percent was relatively flat compared to fiscal 2013.

Selling, general and administrative (SG&A) expenses decreased $78 million in fiscal 2014 versus fiscal 2013. The decrease in SG&A expenses was primarily driven by a 3 percent decrease in advertising and media expense, a smaller contribution to the General Mills Foundation, a decrease in incentive compensation expense and lower pension expense compared to fiscal 2013. In fiscal 2014, we recorded a $39 million charge related to Venezuela currency devaluation compared to a $9 million charge in fiscal 2013. In addition, we recorded $12 million of integration costs in fiscal 2013 related to our acquisition of Yoki. SG&A expenses as a percent of net sales decreased 1 percent compared to fiscal 2013.

Restructuring, impairment, and other exit costs totaled $4 million in fiscal 2014. The restructuring charge related to a productivity and cost savings plan approved in the fourth quarter of fiscal 2012. These restructuring actions were completed in fiscal 2014. In fiscal 2014, we paid $22 million in cash related to restructuring actions.

During fiscal 2014, we recorded a divestiture gain of $66 million related to the sale of certain grain elevators in our U.S. Retail segment. There were no divestitures in fiscal 2013.

Interest, net for fiscal 2014 totaled $302 million, $15 million lower than fiscal 2013. The average interest rate decreased 41 basis points, including the effect of the mix of debt, generating a $31 million decrease in net interest. Average interest bearing instruments increased $367 million, generating a $16 million increase in net interest.


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Our consolidated effective tax rate for fiscal 2014 was 33.3 percent compared to 29.2 percent in fiscal 2013. The 4.1 percentage point increase was primarily related to the restructuring of our General Mills Cereals, LLC (GMC) subsidiary during the first quarter of 2013 which resulted in a $63 million decrease to deferred income tax liabilities related to the tax basis of the investment in GMC and certain distributed assets, with a corresponding non-cash reduction to income taxes. During fiscal 2013, we also recorded a $34 million discrete decrease in income tax expense and an increase in our deferred tax assets related to certain actions taken to restore part of the tax benefits associated with Medicare Part D subsidies which had previously been reduced in fiscal 2010 with the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. Our fiscal 2013 tax expense also includes a $12 million charge associated with the liquidation of a corporate investment.

After-tax earnings from joint ventures for fiscal 2014 decreased to $90 million compared to $99 million in fiscal 2013 primarily driven by increased consumer spending at Cereal Partners Worldwide (CPW) and unfavorable foreign currency exchange from Hδagen-Dazs Japan, Inc. (HDJ).

The change in net sales for each joint venture is set forth in the following table:

Joint Venture Change in Net Sales



                             As Reported         Constant Currency Basis
                              Fiscal 2014                     Fiscal 2014
                                 vs. 2013                        vs. 2013
           CPW                         (1 )%                         Flat
           HDJ                         (8 )                            9  %
           Joint Ventures              (2 )%                           2  %

In fiscal 2014, CPW net sales declined by 1 percentage point due to unfavorable foreign currency exchange. Contribution from volume growth was flat compared to fiscal 2013. In fiscal 2014, net sales for HDJ decreased 8 percentage points from fiscal 2013 as 11 percentage points of contributions from volume growth was offset by 17 percentage points of net sales decline from unfavorable foreign currency exchange and 2 percentage points of net sales decline attributable to unfavorable net price realization and mix.

Average diluted shares outstanding decreased by 20 million in fiscal 2014 from fiscal 2013 due primarily to the repurchase of 36 million shares, partially offset by the issuance of 7 million shares related to stock compensation plans.

FISCAL 2014 CONSOLIDATED BALANCE SHEET ANALYSIS

Cash and cash equivalents increased $126 million from fiscal 2013.

Receivables increased $37 million from fiscal 2013 primarily driven by timing of sales.

Inventories increased $14 million from fiscal 2013.

Prepaid expenses and other current assets decreased $29 million from fiscal 2013, mainly due to a decrease in other receivables related to the liquidation of a corporate investment.

Land, buildings, and equipment increased $64 million from fiscal 2013, as $664 million of capital expenditures were partially offset by depreciation expense of $585 million.

Goodwill and other intangible assets increased $27 million from fiscal 2013, primarily due to foreign exchange.

Other assets increased $302 million from fiscal 2013, primarily related to favorable investment returns on pension plan assets.


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Accounts payable increased $188 million from fiscal 2013, primarily due to the extension of payment terms.

Notes payable and long-term debt, including current portion, increased $817 million from fiscal 2013 primarily due to $228 million of net long-term debt issuances and $573 million of net commercial paper issuances.

The current and noncurrent portions of net deferred income taxes liability increased $331 million from fiscal 2013 primarily as a result of changes in the funded status of our defined benefit postretirement plans which were recognized through accumulated other comprehensive income (AOCI).

Other current liabilities decreased $378 million from fiscal 2013, primarily driven by dividends declared in the fourth quarter of fiscal 2013 that were paid in the first quarter of fiscal 2014.

Other liabilities decreased $310 million from fiscal 2013, primarily driven by a decrease in pension, postemployment, and postretirement liabilities.

Redeemable interest increased $17 million from fiscal 2013.

Retained earnings increased $1,085 million from fiscal 2013, reflecting fiscal 2014 net earnings of $1,824 million less dividends declared of $740 million. Treasury stock increased $1,532 million from fiscal 2013, due to $1,775 million of share repurchases, partially offset by $243 million related to stock-based compensation plans. Additional paid in capital increased $65 million from fiscal 2013, including $30 million related to the settlement of an accelerated share repurchase agreement. AOCI decreased by $245 million from fiscal 2013.

Noncontrolling interests increased $14 million in fiscal 2014.

FISCAL 2013 CONSOLIDATED RESULTS OF OPERATIONS

Our consolidated results for fiscal 2013 include three quarters of operating activity from the acquisitions of Yoki in Brazil and Food Should Taste Good in the United States, and the assumption of the Canadian Yoplait franchise license (Yoplait Canada), four quarters of results for Yoplait Ireland and Parampara Foods in India, and two quarters of results for Immaculate Baking Company in the United States. Also included in the first quarter of fiscal 2013 are two additional months of results from the acquisition of Yoplait S.A.S. Collectively, these items are referred to as "new businesses" in comparing our fiscal 2013 results to fiscal 2012.

Fiscal 2013 net sales grew 7 percent to $17,774 million. In fiscal 2013, net earnings attributable to General Mills were $1,855 million, up 18 percent from $1,567 million in fiscal 2012, and we reported diluted EPS of $2.79 in fiscal 2013, up 19 percent from $2.35 in fiscal 2012. Fiscal 2013 results include the effects from various discrete tax items, the impact of Venezuela currency devaluation, restructuring charges related to our fiscal 2012 productivity and cost savings plan, integration costs resulting from the acquisition of Yoki, and gains from the mark-to-market valuation of certain commodity positions and grain inventories. Fiscal 2012 results include losses from the mark-to-market valuation of certain commodity positions and grain inventories, restructuring charges related to our 2012 productivity and cost savings plan, and integration costs resulting from the acquisitions of Yoplait S.A.S. and Yoplait Marques S.A.S. Diluted EPS excluding these items affecting comparability totaled $2.72 in fiscal 2013, up 6 percent from $2.56 in fiscal 2012 (see the "Non-GAAP Measures" section below for a description of our use of this measure and our discussion of the items affecting comparability).


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

Components of Net Sales Growth

                                                        Fiscal 2013
                                                           vs. 2012
               Contributions from volume growth (a)           9 pts
               Net price realization and mix                 (1) pt
               Foreign currency exchange                     (1) pt
               Net sales growth                               7 pts

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

Net sales grew 7 percent in fiscal 2013, including 6 percentage points of growth contributed by new businesses, primarily Yoki, Yoplait S.A.S., and Yoplait Canada. Excluding the impact of new businesses, net sales grew 2 percent, partially offset by 1 percentage point of unfavorable foreign currency exchange. Contributions from volume growth increased net sales by 9 percentage points, including 8 percentage points of contribution from volume growth due to new businesses. Unfavorable net price realization and mix decreased net sales growth by 1 percentage point and unfavorable foreign currency exchange decreased net sales growth by 1 percentage point.

Cost of sales increased $737 million in fiscal 2013 to $11,350 million. Higher volume drove a $982 million increase in cost of sales. We also recorded a $17 million non-recurring expense related to the assumption of the Canadian Yoplait franchise license and a $16 million charge related to Venezuela currency devaluation in fiscal 2013. These increases were partially offset by a $170 million decrease in cost of sales attributable to product mix. In fiscal 2013, we recorded a $4 million net decrease in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories as described in Note 7 to the Consolidated Financial Statements in Item 8 of this report, compared to a net increase of $104 million in fiscal 2012.

Gross margin grew 6 percent in fiscal 2013 versus fiscal 2012. Gross margin as a percent of net sales of 36 percent was relatively flat compared to fiscal 2012.

SG&A expenses were up $172 million in fiscal 2013 versus fiscal 2012. The increase in SG&A expenses was primarily driven by the addition of new businesses and an increase in pension expense. In addition, we recorded a $9 million foreign exchange loss resulting from the remeasurement of assets and liabilities of our Venezuelan subsidiary following the devaluation of the bolivar in fiscal 2013. Excluding these items, SG&A expenses decreased compared to fiscal 2012, including a 2 percent decrease in advertising and media expense. SG&A expenses as a percent of net sales were flat compared to fiscal 2012.

Restructuring, impairment, and other exit costs totaled $20 million in fiscal 2013. In fiscal 2013, we recorded a $19 million restructuring charge related to a productivity and cost savings plan approved in the fourth quarter of fiscal 2012, consisting of $11 million of employee severance expense and other exit costs of $8 million. All of our operating segments were affected by these actions including $16 million related to our International segment, $2 million related to our U.S. Retail segment, and $1 million related to our Convenience Stores and Foodservice segment. In addition, we recorded $1 million of charges associated with other previously announced restructuring actions. In fiscal 2013, we paid $80 million in cash related to restructuring actions. In fiscal 2012, we recorded a $102 million restructuring charge related to the productivity and cost savings plan approved in the fourth quarter of fiscal 2012.

Interest, net for fiscal 2013 totaled $317 million, $35 million lower than fiscal 2012. The average interest rate decreased 60 basis points, including the effect of the mix of debt, generating a $43 million decrease in net interest. Average interest bearing instruments increased $167 million, primarily from an increase in incremental borrowing to fund the acquisition of Yoki, generating an $8 million increase in net interest.


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Our consolidated effective tax rate for fiscal 2013 was 29.2 percent compared to 32.1 percent in fiscal 2012. The 2.9 percentage point decrease was primarily related to the restructuring of our GMC subsidiary during the first quarter of fiscal 2013 which resulted in a $63 million decrease to deferred income tax liabilities related to the tax basis of the investment in GMC and certain distributed assets, with a corresponding discrete non-cash reduction to income taxes. During fiscal 2013, we also recorded a $34 million discrete decrease in income tax expense and an increase in our deferred tax assets related to certain actions taken to restore part of the tax benefits associated with Medicare Part D subsidies which had previously been reduced in fiscal 2010 with the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. Our fiscal 2013 tax expense also includes a $12 million charge associated with the liquidation of a corporate investment.

After-tax earnings from joint ventures for fiscal 2013 increased to $99 million compared to $88 million in fiscal 2012 primarily due to higher tax rates in fiscal 2012 as a result of discrete tax items and higher operating profit offset by unfavorable foreign currency exchange in fiscal 2013.

The change in net sales for each joint venture is set forth in the following table:

Joint Venture Change in Net Sales



                  As Reported         Constant Currency Basis
                   Fiscal 2013                     Fiscal 2013
                      vs. 2012                        vs. 2012
CPW                         (1 )%                           2  %
HDJ                         (2 )                            5
Joint Ventures              (1 )%                           3  %

In fiscal 2013, CPW net sales declined by 1 percentage point as 2 percentage points of net sales growth from favorable net price realization and mix were offset by 3 percentage points of net sales decline from unfavorable foreign currency exchange. Contribution from volume growth was flat compared to fiscal 2012. In fiscal 2013, net sales for HDJ decreased 2 percentage points from fiscal 2012 as 6 percentage points of net sales growth from volume contribution was offset by 7 percentage points of net sales decline from unfavorable foreign currency exchange and 1 percentage point of net sales decline attributable to unfavorable net price realization and mix.

Average diluted shares outstanding decreased by 1 million in fiscal 2013 from fiscal 2012, due primarily to the repurchase of 24 million shares.

RESULTS OF SEGMENT OPERATIONS

Our businesses are organized into three operating segments: U.S. Retail; International; and Convenience Stores and Foodservice.


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The following tables provide the dollar amount and percentage of net sales and operating profit from each segment for fiscal years 2014, 2013, and 2012:

                                                                                 Fiscal Year
                                                  2014                               2013                               2012
                                                        Percent of                         Percent of                         Percent of
In Millions                              Dollars             Total          Dollars             Total          Dollars             Total
Net Sales
U.S. Retail                           $ 10,604.9                59 %     $ 10,614.9                60 %     $ 10,480.2                63 %
International                            5,385.9                30          5,200.2                29          4,194.3                25
Convenience Stores and Foodservice       1,918.8                11          1,959.0                11          1,983.4                12
Total                                 $ 17,909.6               100 %     $ 17,774.1               100 %     $ 16,657.9               100 %


Segment Operating Profit
U.S. Retail                           $  2,311.5                75 %     $  2,392.9                75 %     $  2,295.3                76 %
International                              472.9                15            490.2                15            429.6                14
Convenience Stores and Foodservice         307.3                10            314.6                10            286.7                10
Total                                 $  3,091.7               100 %     $  3,197.7               100 %     $  3,011.6               100 %

Segment operating profit excludes unallocated corporate items, gain on . . .

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