General Mills, Inc. — Form 10-Q
Reporting period: The quarter and nine months ended February 26, 2012 (fiscal 2012 Q3), compared with the periods ended February 27, 2011. The filing date was March 21, 2012. Although the request metadata says “2011 Q3,” the filing itself reports fiscal 2012 Q3.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $4,120.1 million, up 13% | $12,591.5 million, up 12% |
| Operating profit | $668.6 million, up from $654.8 million | $2,024.4 million, down from $2,238.1 million |
| Net earnings attributable to General Mills | $391.5 million, versus $392.1 million | $1,241.9 million, down from $1,478.1 million |
| Diluted EPS | $0.58, versus $0.59 | $1.86, versus $2.22 |
| Diluted EPS excluding identified comparability items | $0.55, versus $0.56 | $1.96, versus $1.96 |
| Net cash from operating activities | Not presented separately for the quarter | $1,657.2 million, versus $1,248.1 million |
Margins: Calculated operating margin was approximately 16.2% for the quarter versus 18.0% a year earlier, and 16.1% for nine months versus 19.9%. The filing attributes cost pressure mainly to higher input costs and product mix; reported results also reflect volatile commodity mark-to-market effects.
Cash, liquidity, and debt: Cash was $485.3 million at February 26, 2012, down from $619.6 million at May 29, 2011. Current assets were $3,836.3 million and current liabilities $3,849.0 million, yielding a calculated current ratio of approximately 1.0 and negative working capital of $12.7 million. Total debt was $7,634.7 million, up from $6,885.1 million; this includes $690.8 million of notes payable and $749.1 million of current long-term debt. The company said operating cash flow and available financing should meet liquidity and capital needs for at least 12 months. It was in compliance with debt covenants.
Capital spending was $423.9 million for nine months. Investing activities used $1,469.7 million, primarily reflecting the Yoplait acquisition. Financing activities used $317.1 million; dividends paid were $599.5 million and share repurchases were $312.5 million.
Changes versus the prior comparable periods
- Yoplait drove much of the reported sales expansion: the acquisition contributed 8 percentage points to quarterly sales growth and 6 points to nine-month growth. International sales rose 51% in the quarter and 46% year to date.
- U.S. Retail sales grew 4% in the quarter and 3% year to date, but volume fell 5% and 6%, respectively; favorable price and mix partly offset the declines. U.S. Retail operating profit fell 4% in both periods.
- International operating profit increased 40% in the quarter and 41% year to date, chiefly due to Yoplait and higher volume. Bakeries and Foodservice operating profit was flat for the quarter and down 5% year to date.
- Nine-month reported operating profit and earnings were lower, while adjusted diluted EPS was unchanged. The effective tax rate rose to 32.7% from 28.5%, primarily because the prior-year period included a $100 million tax benefit related to an IRS settlement.
- Operating cash flow improved year over year, mainly because working-capital changes were more favorable, including inventory reductions. The prior-year period included a substantial working-capital cash outflow.
Outlook, commentary, and risks
- The filing provides no specific sales, earnings, or EPS forecast. Management stated that cash flows and available short- and long-term financing were expected to cover needs for at least the next 12 months.
- Management cited higher commodity and input costs, lower U.S. Retail volume, and increased advertising and media spending. Quarterly sales growth also included acquisition-related volume; International price and mix were unfavorable.
- Commodity derivative and grain-inventory valuation effects were volatile: these items reduced nine-month reported results relative to the prior-year period. The company does not apply hedge accounting to commodity derivative positions, so mark-to-market changes can affect reported cost of sales before the related supply-chain exposure affects earnings.
- Market risks include commodity prices, interest rates, and foreign exchange. Reported one-day value-at-risk was $31 million for interest-rate instruments and $5 million for commodity instruments.
- Sodiaal holds a 49% redeemable interest in Yoplait S.A.S. with an annual put right over a limited portion, exercisable for up to nine years. The interest’s reported redemption value was $848.4 million.
- A YoPlus yogurt class-action lawsuit alleging misleading digestive-health claims was scheduled for trial in June 2012. The company said it would defend the case and had recorded no loss contingency; management did not consider pending claims reasonably likely to materially affect consolidated financial position or results.
- The annual goodwill and brand-impairment assessment found no impairment. The company identified no material changes to contractual obligations or off-balance-sheet arrangements outside the ordinary course.
Important facts for investors to verify
- How much future growth is attributable to Yoplait versus underlying volume, pricing, and mix, particularly given U.S. Retail volume declines.
- Whether input-cost inflation and commodity mark-to-market volatility continue to pressure margins and reported earnings.
- Debt maturities and refinancing needs, including $749.1 million of long-term debt classified as current and the $1.8 billion committed credit facility expiring in October 2012.
- The terms and potential cash implications of Sodiaal’s put rights, and the performance and integration of the Yoplait businesses.
- Developments in the YoPlus litigation and any resulting financial exposure.