Business context and reporting period
General Mills, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended February 28, 2010 (fiscal 2010 third quarter). The company sells consumer food products through U.S. Retail, International, and Bakeries and Foodservice segments. Amounts below are in millions of dollars unless stated otherwise. Comparisons are with the corresponding periods ended February 22, 2009.
Financial performance and position
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $3,629.1; up 3% | $11,226.1; up 2% |
| Operating profit (GAAP) | $561.6; down from $605.7 | $2,133.2; up from $1,693.2 |
| Total segment operating profit (non-GAAP) | $607.4; up 8% | $2,255.1; up 14% |
| Net earnings | $332.5; up from $288.9 | $1,318.6; up from $945.6 |
| Diluted EPS | $0.96; up from $0.85 | $3.87; up from $2.73 |
| Operating cash flow | Not presented separately | $1,558.2; prior year $1,129.9 |
| Capital expenditures | Not presented separately | $418.9; prior year $351.1 |
For the quarter, cost of sales was $2,251.6, down $8.3 year over year, while SG&A rose $139.0 to $809.6. Management attributed higher SG&A primarily to increased advertising and media spending; SG&A as a percentage of sales increased 3 percentage points. Nine-month SG&A increased $300.6, and its sales ratio rose 2 percentage points. No consolidated gross or operating margin percentage is stated directly in the filing.
At February 28, 2010, cash and equivalents were $691.3, total assets $18,216.2, and total debt $6,360.1, down from $7,075.5 at May 31, 2009. Total current assets were $3,677.1 and current liabilities $2,986.4. Stockholders’ equity was $6,232.1. The company had $581.1 in notes payable and $107.4 of long-term debt due within 12 months.
Changes versus prior comparable periods
- Quarterly GAAP operating profit fell despite higher segment operating profit, with the comparison affected by prior-year favorable commodity mark-to-market results and a $41 million insurance settlement gain. Quarterly diluted EPS also benefited in the prior year from that settlement, while prior-year EPS included a $0.15 charge from an uncertain-tax ruling.
- Nine-month operating profit and EPS rose substantially. The comparison reflects lower commodity-related costs versus the prior-year period, which included a $289 million net commodity mark-to-market expense; prior-year results also included a $128.8 million gain on the Pop-Secret divestiture and the insurance settlement gain.
- U.S. Retail sales rose 3% in the quarter and 4% year to date; segment operating profit increased 9% and 14%, respectively. International sales rose 11% in the quarter, partly from favorable currency, but operating profit declined 48%; year-to-date sales rose 4% and operating profit declined 18%. Bakeries and Foodservice sales fell 10% in the quarter and 14% year to date, while operating profit improved in both periods, largely on lower input costs.
- Operating cash flow increased $428.3 year to date, while investing cash use rose to $484.7, including $418.9 of capital spending and $121.8 invested in affiliates. Financing cash use was $1,134.4, including $505.0 of long-term debt repayments, $324.3 of share repurchases, and $478.3 of dividends.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year earnings or sales guidance. Management said operating results to date are not necessarily indicative of full-year results and believes operating cash flows and available short- and long-term financing will meet liquidity and capital needs for at least 12 months.
- In January 2010, Venezuela devalued its currency, producing a $14 million foreign-exchange loss. Venezuela also became highly inflationary; management did not expect a material effect in fiscal fourth quarter. The company continued using the official exchange rate for translation, citing its intended dividend-remittance channel.
- The quarter included a $48 million charge from changing the capitalization threshold for certain equipment parts following a parts-management system upgrade. Fiscal 2010 restructuring and impairment charges totaled $30.4 year to date, including non-cash charges for exiting underperforming products; related actions were expected to be completed by fiscal 2011.
- Commodity, interest-rate, and foreign-exchange risks are managed with derivatives. Commodity derivative mark-to-market changes can cause earnings volatility. The disclosed one-day estimated value-at-risk was $31 million for interest-rate instruments and $8 million for commodity instruments.
- Credit facilities totaling $2.9 billion supported commercial paper; none were drawn at quarter end. The company reported compliance with debt covenants. Forward-looking risks include competition, consumer demand and pricing, input costs and supply-chain disruption, currency and political risks, product safety, benefit-plan assumptions, and uncertain tax matters.
- Disclosure controls were considered effective as of February 28, 2010, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Assess the drivers of the gap between quarterly segment operating-profit growth and lower GAAP operating profit, particularly commodity mark-to-market volatility and prior-year unusual gains.
- Track International segment profitability, Venezuela currency/inflation developments, and continued weakness in Bakeries and Foodservice sales.
- Review the sustainability of higher advertising spending and the effect of input costs, pricing, mix, and volume on margins.
- Monitor working-capital cash use, capital and affiliate investment, debt maturities, and the refinancing capacity of committed credit lines.
- Check the status and remaining costs of product exits and the $48 million equipment-parts accounting charge, as well as future tax developments and other disclosed contingencies.