General Mills, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, ended August 25, 2013; comparisons are with the quarter ended August 26, 2012. Amounts are in U.S. dollars. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $4,372.7 million | $4,051.0 million | +8% |
| Operating profit | $734.8 million | $780.1 million | −6% |
| Net earnings attributable to General Mills | $459.3 million | $548.9 million | −16% |
| Diluted EPS | $0.70 | $0.82 | −15% |
| Net cash from operating activities | $381.1 million | $488.8 million | −$107.7 million |
| Capital expenditures | $123.8 million | $140.6 million | −$16.8 million |
- Gross margin was approximately 36.9%, versus 40.2% a year earlier; operating margin was approximately 16.8%, versus 19.3%. The filing attributes cost-of-sales growth partly to higher volume and product mix.
- Total segment operating profit rose 6% to $811.6 million, while reported operating profit fell as unallocated corporate items swung to $74.0 million of expense from $20.7 million of income. Commodity and grain mark-to-market effects were a net $1 million expense in the current quarter, compared with an $82 million net benefit in the prior-year quarter.
- Management’s adjusted diluted EPS, excluding specified comparability items, was $0.70, up 6% from $0.66. Prior-year EPS benefited from a $67 million discrete tax item; the effective tax rate was 32.3% versus 22.7%.
- Cash and cash equivalents were $758.9 million at quarter-end. Total debt was $8.245 billion, up from $7.969 billion at fiscal year-end; long-term debt, including current portion, had a fair value of $7.039 billion versus a carrying amount of $6.662 billion. The company repaid $700 million of 5.25% notes during the quarter.
- Current assets were $4.693 billion and current liabilities were $5.463 billion. Notes payable rose to $1.583 billion from $599.7 million, principally reflecting commercial paper. The company had $2.7 billion of committed credit lines with no amounts drawn; $138.2 million was drawn on uncommitted lines.
- Cash used in financing was $237.3 million, including $298.2 million of treasury-stock purchases and $247.5 million of dividends paid. Dividends declared were $0.38 per share, compared with $0.33 a year earlier.
Business changes and segment results
- Net sales growth included 8 percentage points from volume, largely due to acquisitions and other “new businesses,” and 1 point from favorable price and mix; foreign exchange reduced growth by 1 point. New businesses contributed 5 percentage points of total sales growth.
- U.S. Retail sales increased 4% to $2.584 billion and segment operating profit rose 6% to $611.9 million. Growth was supported by price and mix; advertising and media expense increased 4%.
- International sales increased 22% to $1.321 billion, including 18 percentage points from new businesses. Growth was 25% on a constant-currency basis; segment operating profit was essentially flat at $125.6 million, as acquisition-related growth was offset by foreign exchange and higher advertising expense.
- Convenience Stores and Foodservice sales declined 1% to $467.8 million; segment operating profit rose 10% to $74.1 million. The segment’s name changed from Bakeries and Foodservice, with no change to its businesses.
- The quarter included Yoki, Immaculate Baking, and the Canadian Yoplait franchise license, acquired or assumed in prior fiscal periods. No acquisitions occurred in Q1 FY2014.
Cash flow, outlook, risks, and unusual items
- Operating cash flow decreased to $381.1 million, primarily reflecting a larger use of cash from changes in current assets and liabilities, including payment timing. Receivables and inventories increased during the quarter.
- Management stated that operating cash flows and available short- and long-term financing should meet liquidity and capital needs for at least the next 12 months. $720 million of cash was held in foreign jurisdictions for foreign operations and potential acquisitions; management said repatriation would occur only on a tax-neutral basis.
- The filing provides no specific full-year sales, earnings, or EPS guidance. Management noted that Q1 performance is not necessarily indicative of fiscal-year results.
- Previously announced restructuring actions generated $2.8 million of Q1 charges; no new actions were initiated. The actions are expected to conclude by fiscal year-end, with approximately $6 million of charges expected in fiscal 2014.
- Principal risks discussed include competition and consumer demand, commodity and energy costs and availability, supply-chain disruption, foreign exchange, interest rates, product quality and safety, customer purchasing patterns, acquisitions, and potential impairment of goodwill or intangible assets. Derivatives are used to manage commodity, currency, and interest-rate exposure; commodity derivative mark-to-market changes are recorded in current earnings.
- The company reported compliance with debt and noncontrolling-interest covenants. It had $748 million of long-term debt classified as current, primarily notes due in May 2014. No material changes to contractual obligations or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of continued sales growth reflects underlying volume and pricing versus acquired businesses, and whether International segment profitability improves.
- Whether cost inflation, product mix, and commodity mark-to-market volatility continue to pressure reported margins and operating profit.
- Whether operating cash flow recovers and working-capital needs, including receivables and inventories, remain manageable.
- How commercial-paper borrowings, upcoming maturities, share repurchases, and dividends affect debt and liquidity.
- Whether the prior-year tax benefit and other comparability adjustments are understood when comparing GAAP EPS with management’s adjusted EPS.