General Mills, Inc. — Q1 FY2015 10-Q
Reporting period: Quarter ended August 24, 2014; comparative quarter ended August 25, 2013. Amounts are in millions of dollars, except per-share data. Interim results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $4,268.4 | $4,372.7 | -2% |
| Operating profit | $557.5 | $734.8 | -24% |
| Net earnings attributable to General Mills | $345.2 | $459.3 | -25% |
| Diluted EPS | $0.55 | $0.70 | -21% |
| Operating cash flow | $329.4 | $381.1 | -14% |
- Calculated gross margin was approximately 33.7%, down from 36.9%; operating margin was approximately 13.1%, down from 16.8%. These are calculated from reported financial statement values.
- Management reported diluted EPS of $0.61 excluding specified comparability items (commodity and grain mark-to-market effects and restructuring), versus $0.70 a year earlier; constant-currency decline was 13%.
- Net cash used in investing was $197.2, including $148.6 of capital spending and $33.2 of net investments in affiliates. Net cash used in financing was $153.1. Cash ended at $841.2, down $26.1 during the quarter.
- Total debt was $9,319.9 at quarter-end, versus $8,785.8 at May 25, 2014. Current liabilities of $5,793.1 exceeded current assets of $4,695.5; cash was $841.2. Available committed and uncommitted credit facilities totaled $3.4 billion, with $0.3 billion borrowed. The company reported compliance with its debt and credit covenants.
- Quarterly dividend was $0.41 per share. The company repurchased 8.8 million shares for $462.5.
Material changes and segment results
- Sales fell 2% overall, reflecting lower volume and unfavorable foreign exchange, partly offset by favorable net price realization and mix. Segment operating profit fell 15% to $690.5; unallocated corporate expense rose to $119.0 from $74.0.
- U.S. Retail: Sales declined 5% to $2,444.3 and operating profit declined 25% to $457.2, with lower volume, unfavorable pricing/mix and product mix cited as drivers.
- International: Sales increased 2% to $1,351.1, or 6% on a constant-currency basis; operating profit rose 16% reported and 17% constant currency to $146.0.
- Convenience Stores and Foodservice: Sales rose 1% to $473.0 and operating profit increased 18% to $87.3, mainly due to lower input costs and favorable pricing/mix.
- Cost of sales increased $70.0. A $49.2 net mark-to-market expense for certain commodity positions and grain inventories, compared with $0.8 a year earlier, weighed on results. Restructuring charges were $14.0 versus $2.8.
Outlook, commentary and risks
- The filing provides no specific full-year sales or EPS guidance. Management said operating cash flows and available short- and long-term financing should meet liquidity and capital needs for at least the next 12 months.
- Management described multi-year efficiency and restructuring programs. Project Century targets approximately $100 million of annual savings by the end of fiscal 2017; overhead cost-reduction efforts target $40 million of savings in fiscal 2015, with additional savings expected in fiscal 2016.
- The quarter’s International restructuring plan affects approximately 240 positions, is expected to cost about $15 million, and is expected to be completed in fiscal 2016. Subsequent to quarter-end, the company approved a yogurt capacity consolidation and announced a tentative proposed Lodi plant closure; the filing estimates material additional costs and job impacts for these actions. Project Catalyst was also approved, but estimated costs were not yet available.
- On September 8, 2014, General Mills agreed to acquire Annie’s Inc. for $46 per share in cash, with an approximate transaction value of $820 million. Closing was expected by December 31, 2014; the company intended to use available credit.
- Key exposures include commodity prices, foreign exchange and interest rates, competition, consumer demand and preferences, input availability, supply-chain disruptions, product safety, pension assumptions, and impairment risk. Europe and Yoplait U.S. reporting units had declining performance; management said it would continue monitoring them. Venezuela represented less than 1% of consolidated assets, liabilities, sales and segment operating profit.
- Debt maturing within 12 months was $855 million, primarily $750 million of 5.2% notes due March 2015. Derivative provisions could require $20.7 million of collateral if the company’s debt fell below investment grade.
Important facts for investors to verify
- Whether sales, volume and U.S. Retail profitability stabilize, and whether reported results recover from the quarter’s margin decline.
- How commodity mark-to-market volatility affects subsequent earnings and the timing of related gains or losses.
- Actual costs, timing, savings and execution risks for Project Century, the yogurt consolidation, the proposed Lodi closure and Project Catalyst.
- Financing and integration details for the Annie’s acquisition, including final closing terms and effects on debt and liquidity.
- Debt refinancing and liquidity developments, including the March 2015 note maturity and the company’s continuing covenant compliance.