General Mills, Inc. — Form 10-Q Summary
Business context and reporting period
General Mills reported its fiscal 2013 third quarter and nine-month results for periods ended February 24, 2013, compared with the quarter and nine months ended February 26, 2012. The company operates in consumer foods through U.S. Retail, International, and Bakeries and Foodservice segments. Results include acquired and newly consolidated businesses, notably Brazil’s Yoki, and the assumed Canadian Yoplait franchise license.
Key financial metrics
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $4.431 billion, up 8% | $13.363 billion, up 6% |
| Operating profit | $642.1 million, down 4% | $2.251 billion, up 11% |
| Net earnings attributable to General Mills | $398.4 million, up 2% | $1.489 billion, up 20% |
| Diluted EPS | $0.60, versus $0.58 | $2.24, versus $1.86 |
| Segment operating profit | $748.8 million, up 11% | $2.476 billion, up 9% |
- Quarterly operating margin was approximately 14.5%, versus 16.2% a year earlier; nine-month operating margin was approximately 16.9%, versus 16.1%. Quarterly pressure reflected higher corporate costs, including commodity and grain mark-to-market effects.
- Management’s adjusted diluted EPS, excluding specified comparability items, was $0.64 for the quarter, up 16%, and $2.16 for nine months, up 10%. These are non-GAAP measures; reported GAAP EPS was lower.
- Nine-month operating cash flow was $2.146 billion, versus $1.662 billion. Capital spending was $412.2 million, implying operating cash flow less capital spending of approximately $1.734 billion.
- Cash and equivalents were $751.2 million at February 24, 2013, versus $471.2 million at May 27, 2012. Current assets were $4.366 billion and current liabilities $4.283 billion; current ratio was approximately 1.02.
- Total debt was $8.059 billion, up from $7.430 billion at fiscal year-end. Long-term debt, including current portion, had a reported fair value of $8.072 billion versus carrying value of $7.376 billion. The company had $2.7 billion in committed credit lines, with none drawn.
- Dividends declared were $0.330 per share for the quarter and $0.990 for nine months. Share repurchases totaled $744.8 million in nine months.
Material changes versus prior comparable periods
- Sales growth was substantially acquisition-driven: new businesses contributed 6 percentage points of quarterly growth and 5 points for nine months. Excluding new businesses, sales grew 2% in both periods.
- International sales rose 24% for the quarter and 23% for nine months, led by Yoki and Yoplait-related additions. International segment profit was flat in the quarter but up 16% for nine months.
- U.S. Retail sales increased 2% in the quarter and 1% for nine months; segment profit rose 13% and 7%, respectively. Bakeries and Foodservice sales were flat for the quarter and down 1% for nine months; segment profit rose 13% and 16%.
- Quarterly operating profit fell despite higher segment profit, as unallocated corporate expense increased to $100.6 million from $6.3 million. This chiefly reflected a $25.1 million net commodity and grain mark-to-market expense versus a $46.4 million net benefit a year earlier, plus higher pension expense.
- Nine-month net earnings and EPS benefited from a $66.7 million discrete, non-cash tax reduction related to the restructuring of General Mills Cereals, LLC. The company’s adjusted EPS excludes this tax item.
- Yoki was acquired in August 2012 for approximately $940 million, including assumed debt. Goodwill and other intangible assets rose, partly reflecting acquisitions and foreign currency translation.
Outlook, commentary, risks, and unusual items
- The filing gives no specific full-year sales or EPS guidance. 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. It cautioned that interim results are not necessarily indicative of full-year results.
- Management cited acquisition contributions, pricing and mix, advertising efficiencies, and cost control; it also noted input-cost increases, pension expense, foreign-exchange effects, and uneven performance among product lines. The company reported a $15 million Venezuela-related foreign-exchange loss after bolivar devaluation, including a $9 million remeasurement loss recorded in SG&A, and did not expect a material fourth-quarter impact.
- Risks identified include competition and consumer demand, raw-material and energy costs, supply-chain disruptions, foreign exchange and political conditions, acquisitions, product safety and recalls, retailer consolidation, benefit-plan assumptions, and possible impairment of goodwill or intangible assets. The annual impairment assessment found no impairment as of the assessment date.
- The company reported no pending claims or litigation considered reasonably likely to have a material adverse effect. It is defending a class action alleging misleading digestive-health claims for YoPlus yogurt.
- Restructuring charges were $18.0 million for nine months; related actions are expected to be completed by the end of fiscal 2014. The company reported compliance with debt and noncontrolling-interest covenants. A $744 million debt maturity, primarily $700 million of notes due in August 2013, was classified as current.
Most important facts for investors to verify
- How much future growth and profit depend on acquired businesses, particularly Yoki, versus underlying organic performance.
- Whether reported and adjusted EPS trends remain consistent after separating the one-time tax benefit, commodity mark-to-market effects, restructuring, and acquisition integration costs.
- Whether operating cash flow remains strong after working-capital movements, including the nine-month benefit from higher other current liabilities, and after acquisition and capital-spending requirements.
- Debt levels, refinancing of the August 2013 maturity, and the terms and potential obligations associated with redeemable Yoplait and GMC interests.
- Exposure to commodity prices, foreign exchange, pension costs, product-line declines, and the disclosed legal and product-related risks.