GENERAL MILLS, INC. March 12, 2014
Dina Gatoff Ann Ku Heiwon Shin Mengqi (Merry) Xiao
General Mills, Inc. Net Sales and Operating Profit by Segment
For year ending
May 26, 2013
Dollars in Millions May 27, 2012
Percent of Total May 26, 2013 May 27, 2012 May 29, 2011
May 29, 2011
Growth May 26, 2013 May 27, 2012
In Millions Net sales: U.S. Retail International Bakeries and Foodservice Total
10,614.90
10,480.20
10,163.90
59.72%
62.91%
68.30%
1.29%
3.11%
5,200.20 1,959.00
4,194.30 1,983.40
2,875.50 1,840.80
29.26% 11.02%
25.18%
19.32% 12.37%
23.98% -1.23%
45.86%
17,774.10
16,657.90
14,880.20
2,392.90
2,295.30
490.2 314.6
429.6 286.7
3,197.70 326.1 —
100.00%
11.91% 100.00%
7.75%
100.00%
2,347.90
83.91%
89.58%
84.62%
-6.33%
5.85%
291.4 306.3
17.19% 11.03%
16.77% 11.19%
10.50% 11.04%
2.53% -1.40%
59.63% 1.35%
3,011.60
2,945.60
112.13%
117.53%
106.17%
347.6
184.1
—
-17.4
100.00%
100.00%
100.00%
Operating profit: U.S. Retail International Bakeries and Foodservice Total segment operating profit Unallocated corporate items Divestitures (gain) Restructuring, impairment, and other exit costs Operating profit
19.8
101.6
4.4
2,851.80
2,562.40
2,774.50
General Mills, Inc. Operating Profit Margin by Segment !
For year ending
May 26, 2013
Dollars in Millions May 27, 2012
May 29, 2011
In Millions Operating Profit Margin U.S. Retail
22.54%
21.90%
23.10%
International Bakeries and Foodservice
9.43% 16.06%
10.24% 14.45%
10.13% 16.64%
Total segment
17.99%
18.08%
19.80%
16.04%
15.38%
18.65%
Total
Dina Gatoff, Ann Ku, Heiwon Shin, Mengqi (Merry) Xiao BIP Accounting Project Part 5 12 March 2014 General Mills Company Analysis General Mills, Inc. is a large, global consumer foods company. In order to analyze the company, it is important to take a closer look at its different segments, including U.S. Retail, International, and Bakeries and Foodservice. It is also important to analyze performance by calculating relevant business ratios and comparing it to its industry competitors.
General Mills Segment Analysis Overall, between 2011 and 2012, GM experienced almost 12% growth in its sales, a significant increase from 2010 and 2011, where growth was less than 3% each and will be discussed in greater detail when the horizontal analysis is reviewed. When we analyze this geographically, most of this growth can be attributed to an increase in sales in the international market segment which experienced 45.86% growth as the international segment grew to be 25% of GM’s sales by segment. This was attributed to a growth of volume in its international markets, the acquisition of Yoplait S.A.S., and a slight increase in growth due to a favorable foreign currency exchange. Additionally, in 2012, there was nearly a 60% growth in yogurt sales, which make up about 15% of GM’s sales by product segment since they acquired the Yoplait yogurt brand in 2011. Net sales of U.S. retail had slight growth in 2012, which was the net result of a 9 point increase in price realization counteracted by a 6 point decrease in volume sold. Overall, the percent of total sales in the US decreased, but this was largely due to the growing volume of
international sales. The growth in operating profit in 2012 was significantly lower, at 2.24%, despite the 59.63% growth in international segment operating profit because the international segment is only 16.77% of operating profit. The discrepancy between the percentage of total operating profit and the percentage of total sales that the international segment has is due to a lower operating profit margin on international products of about 10% compared to 22% for U.S. Retail in 2012. In 2012, operating profit growth was negative because of a rise in unallocated corporate items, due to the restructuring charges incurred during the HR changes in 2012 where it paid about $100 million in severance charges for laying off employee in addition to a $200 million dollar voluntary contribution to their pension plan. The segment operating profit, calculated before restructuring charges, actually exhibited slight growth of 2%. Next, the Bakeries and Foodservice segment saw a small sales growth of 7.75% in 2012 and a small decline of 1.23% in 2013. While these did not impact the overall total sales numbers, as the segment fairly consistently accounted for about 12% of the sales, the rise in 2012 was explained by a positive net price realization and the fall in 2013 was explained by a significantly lower pound volume of product sold, offset by a change in product mix weighted towards higher margin product. Operating profit margins were relatively constant across the three segments for all three years with U.S. retail earning the highest margins at around 22% percent, international hovering around 10%, and Bakeries and Foodservice around 15%. While Bakeries and Foodservice is mostly a U.S. based portion of the business, it is separated into its own segment because it is a business segment that has a consistently lower margin, as products are sold at wholesale prices and is a relatively stable segment of GM’s customers.
Overall, the operating profit margin decreased in 2011-2013 from 18.65% to 16.04%. However, this trend is not representative of segment performance, as it accounts for the increase in costs for unallocated corporate items that resulted from restructuring charges in 2012 and 2013. The segment operating margin only decreased slightly in those years, most notably between 2011 and 2012, as operating profit rose more slowly than net sales due to a rise in cost of goods sold, partially attributed to a change in product mix. Common Size and horizontal analysis
Net sales fluctuated throughout 2009 to 2013. The largest changes occurred in 2012 and 2013. Still, in 2010 it increased about $80 million, which translated to almost 2.5%. While volume did not change, this increase was attributed to an increase from divested products and from a favorable change in product mix counteracted by a slight loss incurred by an adjustment
made for the extra week in 2009. In 2011, net sales continued on the positive trend, growing slightly less than 2% over the previous year. About half of the $200 million worth of growth resulted from an increase in volume sold in its international segment. The other half is attributed to mix and net price realization of their products sold. In 2012, the net sales growth hit 12% as the company earned almost $2 billion more than in 2011. This dramatic increase in net sales was due to increases across all three segments as previously mentioned in the segment analysis. In 2013, the net sales increased about 7%. This growth of almost $1 billion was due to increases in the International and U.S. Retail segments; it was, however, slightly lowered by a small decrease in the Bakeries and Foodservice segment. Overall, the components contributing to this growth were about 9 points from increased in volume sold, and loss of a point each for product mix and price realization, and foreign currency exchange. Additionally, it is notable that only about 2% of the increase overall was due to previous businesses, and 6% was from new businesses, Yoki, acquired in 2013, and Yoplait S.A.S., acquired in 2012. In 2012, there was a marked increase in growth of cost of sales of nearly 19%. The high costs of sales increased about 7% over that in 2013. However, during those three years, the percentage of net sales made up by cost of sales only went up about 3%. General Mills explained that most of these increases in 2012 and 2013 were associated with higher volumes, which explains why the percent of net sales did not increase significantly. The smaller increase in net sales can be largely explained by about $600 million increase in 2012, which was attributable to product mix and higher input costs. Additionally, the -4% change in cost of sales from 20092010 was explained by an accounting charge of $48 million it made to record the change in capitalization threshold for certain parts of their equipment. The 1% growth in the following year was attributed to a combination of higher net input costs and higher volume offset by the
decreased valuation of certain commodities. Selling, general and administrative expenses consistently accounted for about 20% of net sales in 2009-2013. However, these expenses did fluctuate year to year. The biggest change was between 2009-2010, where there was an 11.5% increase, although these only accounted for a 2% increase on the common size from year to year. The increase in expenses was driven by several factors, including an increase in advertising and media expense, and by the devaluation of the exchange rate between the Venezuelan bolivar fuerte versus the U.S. Dollar, and a $13 million in recovery of investments compared to the $35 million that were written off. In 2011, the increase in SG&A expenses was minimal, less than 1%. This small change was due to an increase in corporate pension expenses offset by a decrease in advertising and media expenses. In 2012, SG&A expenses jumped 6%, while the percentage of net sales actually fell slightly, because there was a much larger (12%) increase in net sales that year. The increased expenses were due to the costs associated with the acquisition of Yoplait S.A.S. and a slight increase in advertisingrelated expenses. In 2013, expenses increased 5%, and decreased less than 1% in the common size. These increased expenses were driven by pension expenses, addition of new businesses and a loss associated with the assets and liabilities of their Venezuelan subsidiary being remeasured, following further devaluation of the bolivar versus the U.S. dollar. While the divestiture gain in 2011 is not notable in the horizontal analysis, it does account for a slight increase in operating profit. The gain resulted from the sale of two product lines, including $14 million associated with their sale of a frozen goods product line, and $3 million from the sale of a pie shell product from their Bakeries and Foodservice segment. General Mills saw a large fluctuation in its restructuring costs throughout the relevant time periods. While these costs were relatively small, they were never over 1% of net sales.
These fluctuating costs are reflective of the corporate actions the company was taking throughout in order to meet its long-term growth goals. In 2010, the costs fell 23% and the relevant expenses were incurred by discontinued several product lines and several charges from a restructuring plan previously announced. While it did not specify what the restructuring plan entailed, General Mills did state that often its restructuring plans incur costs over multiple years as they reach completion and that these plans involve various activities, including asset write-offs, exits costs, termination fees and depreciation of restructured assets. In 2011, the restructuring and impairment line item costs decreased a further 85%. General Mills only had under $4.5 million in restructuring costs. These costs were, again, partially attributed to non-specified, previously announced restructuring actions, in addition to exit-costs associated with discontinuing a product line. The company also noted that while it incurs these multi-year charges, at completion of the restructuring project it sees cash savings or reduced depreciation. In 2012, General Mills started a new productivity and cost savings plan. Overall, this plan would incur costs over several years to support the improvement of organizational effectiveness and growth by increasing efficiencies and alignment of its businesses. As this was a large undertaking, it planned to carry out the plan through 2014. However, the largest portion of the costs was incurred in 2012. This cost the company $101 million in restructuring charges in 2012, $1 million of which was from a previously announced plan. The costs incurred that year included $88 million worth of expenses towards employee severance across all segments and $13 million writing off assets in the U.S. retail segment. Overall, the initiation of this productivity and cost savings plan accounted for the huge spike in restructuring and impairment costs, from previous years, and explains why in 2012 these costs are at their highest percentage of net sales at 0.6%. In 2013, restructuring costs decreased significantly, to 80%, which placed them back to
0.1% of net sales. While the company was still carrying out the productivity and cost savings plan announced the previous year, there was only $19.8 million worth of charges allocated to fiscal year 2013. These charges consisted of more employee severance expenses and exit costs. Again, these costs were incurred from all segments. The operating profit varied significantly throughout these years, both in its percentage of net sales and in its year to year growth. In particular, it is interesting to examine the changes in operating profit with and without restructuring, since General Mills undertook significant restructuring costs throughout the years. The trends can be easily explained by reasons previously mentioned. The operating profit, notably, increased almost 15% in 2010 (slightly less without restructuring taken into account) because net sales had a slight increase and both restructuring costs and cost of sales went down. In 2011, the increase in operating profit was more moderate because, while restructuring costs decreased significantly by percentage, they had already been relative to net sales. Furthermore, there was only a moderate increase in net sales that year, and moderate increases in cost of sales and general expenses. In 2012, while it looks like operating profit dropped 8%, a lot of that was attributable to the restructuring charges undertaken by the productivity and cost savings plan. Without restructuring there is a smaller 4% decline in operating profit attributed to the relative increase in cost of sales due to higher input costs and product mix (the portion of cost of sales that increased due to higher volume would not affect the operation profit as it increased proportionally to net sales). Finally in 2013 General Mills experienced about an 11% increase in operating profit. Only 8% of this is relevant as the rest reflects the fact that restructuring charges were significantly lower this year. This 8% resulted from the rising net sales, much of which was from the newly acquired businesses Yoplait and Yoki, and the slightly lower increase in SG&A expenses.
Net earnings attributable to General Mills fluctuates consistently with its operating profit numbers. This reflects that the company has relatively consistent percentages of its earnings that go towards paying interest and taxes. While taxes are generally proportional to the company's assets the relatively consistent interest levels reflect the fact that the company has maintained a steady debt level, as will be demonstrated by the debt ratio analysis.
Accounting Analysis General Mills and Kellogg’s are both significant companies in the consumer foods industry. Although the two companies have some similarities in accounting policies, we must take into account differences in the accounting methods between the two companies when we compare them. Some of the similarities between accounting policies include depreciation method and fiscal year. Both GM and Kellogg’s operate on the 52/53 week fiscal year, but GM contained a 53rd week in 2009 and Kellogg’s contained a 53rd week in 2008. Fortunately, the years that we calculated our ratios were not affected by the 53rd weeks in both companies. Both companies record assets at cost and use the straight-line depreciation method over the estimated useful life. However, the two companies may have slight differences in their estimate of useful life. GM offers more broad estimates: 40-50 years for buildings and 3-10 years for equipment, furniture, and software. Kellogg’s provides more detailed estimates: 5-30 years for manufacturing machinery and equipment, 4-5 years for office equipment, 3-7 years for computer equipment and capitalized software, 15-25 years for building components, and 50 years for building structures. One of the main differences between GM and Kellogg’s is the inventory method. GM uses LIFO for US sales and FIFO for international sales, except for grain inventories which are
valued at market. Kellogg’s values their inventory at lower of cost or market and records their cost based on average cost. This must be taken into consideration when comparing the ratios in our analysis. In order to make Kellogg’s numbers comparable to GM’s numbers, we can undo the COGS transactions made by Kellogg’s and use LIFO instead for US sales and FIFO for international sales. Another note to take into consideration is the differences in restructuring activities between the two companies. Both companies list long term growth as reasoning for their restructuring charges but have different missions and goals. Kellogg’s had decreasing restructuring charges throughout 2011-13 with fairly small deviation: $61 million in 2011, $56 million in 2012, and $42 million in 2013. Most of the restructuring charges went towards improving the global manufacturing network, reducing waste, and increasing the efficiency and effectiveness of global support functions. GM had varying restructuring charges throughout 2011-13: $1.7 million in 2011, $100.6 million in 2012, and $18.6 million in 2013. The expense in 2011 was due to the discontinuation of a fruit-flavored snack product line. In 2012, the high restructuring charges were due to improving organizational effectiveness and key growth strategies--these organizational changes improved business alignment and administrative efficiency. $87.6 million was allocated to employee severance expense, while $13.0 million was used to write off “certain long-lived assets” not specified in the 10-k report. In order to account for these differences, we need to find a way to normalize the restructuring charges, perhaps by applying the average amount spent on restructuring to each year. When comparing the ratios of General Mills and Kellogg’s, it is important to take into consideration all of the variations in the accounting methods used. These variations can sometimes explain significant differences in the relevant company ratios.
Ratio Analysis
Asset Turnover Ratios
From 2011 to 2013, General Mills' total asset turnover remained stable. Total asset turnover is a function of accounts receivable, inventory, and fixed asset turnover, and from the table above, we can see that the increase in inventory and fixed asset turnover was evened out by the decrease in accounts receivable turnover, leading to a relatively unchanged total asset turnover. The decrease in accounts receivable turnover is due to the huge $123 million increase in accounts receivable in 2013 from GM’s acquisition of Yoki--a number that was not countered by a mere 7% increase in sales. The increase in inventory turnover was the effect of the same 7% increase in sales, combined with a much more significant decrease in inventory, due to inventory
reduction efforts in 2012. The fixed asset turnover changes are a result of fluctuating cash flows for investing activities from 2011 to 2012--the cash invested in PPE more than doubled from $715 million in 2011 to $1.87 billion 2012, but was cut back to $1.51 billion in 2013. One of General Mills’ closest competitors, Kellogg’s, has an asset turnover that has been slowly declining, but is still higher than that of General Mills. Having a higher asset turnover in a food business is good for a company because its product is sold and moves off the shelf more quickly, resulting in less write-offs due to expired or spoiled products. One hypothesis for this discrepancy is that General Mills has much more product diversity than Kellogg’s.
Income Margin Ratios
General Mills’ net return on investment decreased from 2011 to 2012, and then increased again in 2013. Since we previously discussed GM’s asset turnover remaining constant through the past 3 years, and ROI being a function of asset turnover and income margin, this fluctuation can be attributed to the change in net income margin, which changed from 12.09% (2011) to 9.41% (2012) to 10.44% (2013). We hypothesize this change reflects the restructuring General Mills went through in 2012, where 850 employees were fired. When we recalculated the net income margin and ROI without the restructuring costs, as shown above, we found our hypothesis to be proved true--both ratios without restructuring were definitely higher than those with restructuring, but there was still a distinct drop from 2011 to 2012. The drop in net income margin is due to the increases in SG&A expenses in 2012, mostly related to the acquisition of Yoplait S.A.S., and an increase in cost of sales that was partly due to higher input costs and a shift towards a lower margin product mix, which created a relatively lower net income as compared to sales in 2012, as discussed in the segment analysis. Kellogg’s had a stable net return on investment from 2011 to 2012, but saw a more significant change from 2012 to 2013, which is due to the almost doubling of their net income margin in 2013. We believe this spike is attributable to Kellogg’s $2.695 billion acquisition of the Pringles brand from Proctor and Gamble in 2012. Aside from 2013 and Kellogg’s acquisition, General Mills has been outperforming them, with higher income margins in 2011 and 2012.
ROE Ratios
General Mills’ ROE dropped significantly in 2012 from 2011, although it recovered half of that drop in 2013. Since ROE is a function of ROI and debt ratio, and GM’s debt ratio has stayed relatively stable from 2011 to 2013, their ROE drop in 2012 is caused by the drop in ROI in 2012 to 7.88% from 2011’s 9.89%, which we discussed in the section above. In the same time period, Kellogg’s ROE changed considerably as well, plunging from 2011 to 2012, but springing back to an even higher level in 2013 than it was in 2011. This huge increase in ROE in 2013 can be traced back to the 50% increase in ROI, and decrease in debt ratio. We hypothesize that one main reason for this change is the aforementioned acquisition of Pringles in 2013. Acquisition aside, Kellogg’s has consistently had a higher ROE, because it has a consistently higher debt ratio. Kellogg’s finances its operations with more long-term debt.
Price Earnings and Dividend Ratios
General Mills’ price earnings ratio has been steadily increasing since 2011, but for different reasons each year. The increase in 2012 was a result of decreasing earnings per share, because GM’ stock price stayed relatively constant to the year before. Conversely, the increase in 2013 was not only because of increasing EPS--the stock price also increased by 25% . If we take a look at the trend of the overall market, we can see that this is because the Dow Jones Industrial Average experienced a huge spike and prices market-wide increased. When the entire market is doing well, investors have more confidence in each company individually, and stock prices are bound to rise. One other factor that contributed to the increase in stock price for GM is Warren Buffett’s acquisition of Heinz, and his public desire for more. The stock prices for several companies within the food industry spiked because of the anticipation of more possible deals similar to this one.
Current Ratio and Acid Test Ratio
From 2011-12, General Mills’ current ratio decreased because current assets decreased and current liabilities increased. Current liabilities increased because of an increase in accounts payable from the acquisition of Yoplait S.A.S. and timing changes of payments, an increase in notes payable due to debt refinancing, and an increase in “other current liabilities” due to
restructuring/exit cost reserves and consumer marketing accruals. Current assets decreased due to a decrease in cash and cash equivalents, a decrease in inventories due to inventory reduction efforts, and a decrease in prepaid expenses and other current assets due to a decrease in derivative receivable balances. From 2012-13, current ratio again decreased even more. Both current assets and current liabilities increased, but the percent change in current liabilities was greater than that of current assets, leading to a decrease in current ratio. Current liabilities increased because of an increase in accounts payable due to the acquisition of Yoki and extension of payment terms, an increase in notes payable due to debt issuances, an increase in deferred income taxes liability due to contributions to the fiscal 2013 pension plan, and an increase in “other current liabilities� due to an increase in dividend accruals and trade and consumer accruals. Current assets also increased because of an increase in cash and cash equivalents, an increase in receivables and inventories due to the acquisition of Yoki, an increase in prepaid expenses and other current assets due to an increase in receivables involved with the liquidation of an investment, and an increase in deferred income taxes due to contributions to the fiscal 2013 pension plan. Similar to the current ratio, the acid test ratio also decreased throughout 2011-13. It is important to note that from 2011-12, inventories decreased by $130 million due to inventory reduction efforts, and from 2012-13, inventories increased by $67 million due to the acquisition of Yoki.
Conclusion In conclusion, General Mills has been seeing positive revenue growth over the last few years. We believe these trends will continue as they are the results of wise acquisitions that the company has made to key segments, including acquiring Yoki, an international foods company, and Yoplait, to increase its yogurt segment. These acquisitions have already yielded a positive impact on net sales in the years since they have been acquired. Also, these acquisitions have allowed General Mills to diversify its businesses across geographic and product segments. When we compared GM’s performance to that of its main competitor, Kellogg’s, we can see that GM had consistently been outperforming Kellogg’s in income margin and ROI, save for 2013 when Kellogg’s made a large acquisition. Finally, the restructuring charges that General Mills has undertaken in the past few years shows that it is committed to achieving its long term efficiency goals, and as the most recent productivity plan is set to complete in 2014, it can hope to start seeing a positive impact on its increase in operational effectiveness.
Documentation 2013 Fixed Assets
GM Restructuring Charges
Fiscal 2012 Consolidated Balance Sheet Analysis
Fiscal 2013 Consolidated Balance Sheet Analysis
Kellogg’s Restructuring Charges
The New York Times: “Shares of General Mills Rise on Higher Sales”
Bloomberg: “Buffett’s Cash Makes General Mills to Grainger Targets”
DJIA Close Prices