Business context and reporting period
General Mills, Inc. reported fiscal 2012 second-quarter and six-month results through November 27, 2011. The company operates in consumer foods through U.S. Retail, International, and Bakeries and Foodservice segments. Results include Yoplait, consolidated after the July 1, 2011 acquisition of controlling interests in Yoplait S.A.S. and Yoplait Marques S.A.S.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $4.624 billion, up 14% | $8.471 billion, up 12% |
| Operating profit | $717 million, down 13% | $1.356 billion, down 14% |
| Total segment operating profit | $873 million, up 2% | $1.600 billion, approximately flat |
| Net earnings attributable to General Mills | $445 million, down 28% | $850 million, down 22% |
| Diluted EPS | $0.67, down 27% | $1.28, down 22% |
| Diluted EPS excluding specified comparability items (non-GAAP) | $0.76, unchanged | $1.41, versus $1.40 |
| Operating cash flow | Not stated separately | $1.153 billion, versus $600 million |
For the quarter, cost of sales rose to $3.029 billion, primarily from higher volume, input costs and mix, and adverse commodity and grain mark-to-market effects. SG&A was $877 million; as a share of sales it declined 90 basis points year over year. Operating margin was approximately 15.5%, versus 20.2% a year earlier. Net interest was $87 million; the effective tax rate was 33.3%, compared with 21.7%.
Sales growth included acquisition-related volume. Management attributed 10 percentage points of quarterly sales growth to volume and 3 points to price and mix; foreign exchange added 1 point. Over six months, volume contributed 6 points, price and mix 5 points, and foreign exchange 1 point. U.S. Retail sales rose 3% in both periods, while segment operating profit fell 4%. International sales rose 55% for the quarter and 43% for six months, substantially reflecting Yoplait; operating profit increased 50% and 42%, respectively. Bakeries and Foodservice sales increased 12% in both periods; operating profit was flat for the quarter and lower for six months.
Liquidity, debt and capital
Six-month operating cash flow was $1.153 billion; investing activities used $1.311 billion, including $900 million net cash paid for acquisitions and $265 million of capital expenditures. Financing activities provided $59 million. Cash declined $111 million to $509 million. Total debt was $7.829 billion at November 27, up from $6.885 billion at May 29; cash and cash equivalents were $509 million. Current liabilities were $5.142 billion against current assets of $4.022 billion.
Debt due within 12 months was $1.732 billion, principally $1.020 billion of 6.0% notes due February 2012 and $520 million of 5.65% notes due September 2012. After quarter-end, the company issued $1.0 billion of 3.15% notes due 2021, intended partly to repay 6.0% notes and reduce commercial paper. It also refinanced Yoplait-related bank debt after quarter-end. The company reported compliance with debt and other restrictive covenants and said cash from operations and available financing should meet liquidity and capital needs for at least 12 months. Committed credit lines totaled $2.9 billion, with none drawn at quarter-end.
Changes, outlook, risks and unusual items
- Yoplait acquisition increased goodwill by approximately $1.545 billion and added $1.128 billion of intangible assets. The balance sheet included an $832 million redeemable interest and $476 million of noncontrolling interests.
- Quarterly commodity and grain mark-to-market effects increased cost of sales by $94 million, versus a $28 million decrease in the prior-year quarter. The six-month adverse effect was $132 million, versus a $100 million benefit in the prior year. These effects materially reduced reported GAAP earnings; adjusted EPS was flat for the quarter.
- Prior-year quarterly and six-month tax comparisons included a $100 million tax benefit from an IRS settlement, partly offset by an $11 million tax charge related to an adverse court decision. This contributed to higher current-period effective tax rates.
- Management did not provide specific fiscal-year earnings or sales guidance in the supplied filing text. It noted that interim results are not necessarily indicative of full-year results.
- Disclosed risks include competition and consumer response to pricing and promotions; input-cost and supply-chain volatility; commodity derivative mark-to-market volatility; foreign exchange and economic conditions; product quality and safety; acquisitions and integration; and impairment of goodwill or intangible assets. Unallocated corporate expense was $155 million for the quarter, including commodity mark-to-market costs and $4 million of acquisition integration costs.
Important facts for investors to verify
- Reconcile GAAP EPS of $0.67 to adjusted EPS of $0.76, including commodity mark-to-market effects and the acquisition integration adjustment.
- Assess the durability of underlying U.S. Retail volume and profit trends, including the disclosed declines in U.S. Retail pound volume.
- Review Yoplait’s contribution to reported growth, integration progress, acquired intangible asset values, and Sodiaal’s put rights over its redeemable interest.
- Evaluate refinancing and repayment plans for the $1.732 billion of current debt, alongside the subsequent debt issuance and Yoplait debt refinancing.
- Monitor commodity costs and derivative volatility, foreign currency exposures, and the assumptions supporting goodwill and intangible asset valuations.