General Mills, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended August 28, 2011; comparisons are with the quarter ended August 29, 2010, unless noted. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $3,847.6 | $3,533.1 | +9% |
| Operating profit | $638.9 | $760.4 | -16% |
| Net earnings attributable to General Mills | $405.6 | $472.1 | -14% |
| Diluted EPS | $0.61 | $0.70 | -13% |
| Diluted EPS excluding specified mark-to-market effects | $0.64 | $0.64 | Flat |
| Operating cash flow | $440.8 | $177.6 | +$263.2 |
| Capital expenditures | $132.8 | $132.6 | Approximately flat |
Net sales growth reflected 5 percentage points from net price realization and mix, 2 points from foreign exchange, and 2 points from volume, including Yoplait activity. Higher input costs and product mix increased cost of sales by $223. SG&A rose to $807.5, though its share of sales declined by 60 basis points. Approximate gross margin was 37.6% versus 43.1%; operating margin was 16.6% versus 21.5%. Net interest expense fell to $85.4, and the effective tax rate declined to 32.1% from 33.3%, primarily reflecting a favorable tax audit settlement.
Segments and material changes
- U.S. Retail: Sales increased 3% to $2,510.3, with pricing and mix more than offset by a 4-point decline in volume. Operating profit fell 5% to $585.2, reflecting higher input costs and increased advertising.
- International: Sales increased 30% to $856.3, including 26 points from one month of Yoplait activity and 10 points from currency, offset in part by unfavorable price and mix. Operating profit rose 30% to $80.7.
- Bakeries and Foodservice: Sales increased 13% to $481.0, primarily from pricing and mix; volume declined 2 points. Operating profit decreased 15% to $61.4 due mainly to higher input costs and lower grain merchandising earnings.
- Total segment operating profit declined 3% to $727.3. Unallocated corporate items shifted from $12.3 of income to $88.3 of expense, largely reflecting commodity and grain mark-to-market results: a $37.7 net expense in the quarter versus a $71.9 net gain in the prior-year quarter.
Cash, debt, and liquidity
Cash and cash equivalents were $338.2 at quarter-end, down from $619.6 at fiscal year-end. Operating cash flow was $440.8; investing activities used $1,157.7, including $900.1 of net cash for acquisitions and $132.8 for capital expenditures. Financing activities provided $431.9, including $712.6 of net additional notes payable. Dividends paid were $200.3, and share repurchases were $109.9.
Total debt increased to $8,049.7 from $6,885.1 at May 29, 2011. Current liabilities of $4,884.0 exceeded current assets of $4,096.4. The company reported $2.9 billion in committed credit lines, with none drawn, and $137.6 drawn on uncommitted lines. Long-term debt of $1,125.9 was classified as current, primarily $1,020 of 6.0% notes maturing in February 2012; management intended to refinance it before maturity and stated that available cash flows and financing should meet needs for at least 12 months. The company reported compliance with debt covenants.
Acquisition, outlook, and risks
On July 1, 2011, General Mills acquired a 51% controlling interest in Yoplait S.A.S. and a 50% interest in Yoplait Marques S.A.S. for an aggregate purchase price of $1.2 billion, including assumed debt and noncash consideration. The acquisition added $1.5 billion of goodwill. Sodiaal’s remaining interests include a 49% Yoplait S.A.S. interest recorded as a $904.4 redeemable interest, with limited annual put rights at fair value for up to nine years, and a 50% Yoplait Marques S.A.S. interest recorded as a $263.8 noncontrolling interest. Acquisition accounting remained preliminary for certain liabilities.
The filing provides no formal numeric full-year earnings or sales guidance. Management reported that adjusted diluted EPS was unchanged year over year and emphasized the effect of input-cost inflation and commodity mark-to-market volatility. Key disclosed risks include commodity and energy costs, competitive pricing and promotions, consumer demand, supply-chain disruptions, foreign exchange, interest rates, product safety, and potential impairment of goodwill or other intangible assets. The company’s one-day value-at-risk estimates were $34 for interest-rate instruments and $6 for commodity instruments.
Investor verification priorities
- Track Yoplait’s contribution to sales, profitability, and integration, as well as Sodiaal’s put rights and related obligations.
- Assess whether pricing can offset elevated input costs, especially given lower U.S. Retail volume and reduced segment operating profit.
- Verify refinancing of the debt due within 12 months and monitor short-term borrowings, liquidity, and covenant compliance.
- Separate underlying earnings trends from commodity and grain mark-to-market effects; the company’s adjusted EPS measure is non-GAAP.
- Monitor cash conversion and working-capital needs; first-quarter operating cash flow benefited from lower seasonal inventory buildup versus the prior year.