Business context and reporting period
General Mills, Inc. filed this unaudited Form 10-Q for its fiscal third quarter and nine-month period ended February 27, 2011. The business reports three segments: U.S. Retail, International, and Bakeries and Foodservice. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Net sales | $3,646.2 | $3,589.3 | $11,245.9 | $11,106.4 |
| Operating profit | $654.8 | $561.6 | $2,238.1 | $2,133.2 |
| Net earnings attributable to General Mills | $392.1 | $332.5 | $1,478.1 | $1,318.6 |
| Diluted EPS | $0.59 | $0.48 | $2.22 | $1.94 |
| Net interest expense | $85.0 | $94.2 | $256.9 | $274.6 |
- Management reported Q3 sales growth of 2% and total segment operating profit growth of 10%; nine-month sales grew 1% and total segment operating profit grew 1%. Q3 diluted EPS excluding specified comparability items was $0.56 versus $0.49; nine-month adjusted diluted EPS was $1.96 versus $1.89. These are non-GAAP measures.
- Q3 segment sales and operating profit: U.S. Retail $2,513.7 and $533.0; International $688.4 and $68.8; Bakeries and Foodservice $444.1 and $66.7. U.S. Retail operating profit declined, while International and Bakeries and Foodservice profit increased.
- Nine-month operating cash flow was $1,248.1, versus $1,558.2 in the prior-year period. Investing cash outflow was $466.9 and financing cash outflow was $972.0. Cash declined by $132.9 to $540.3.
- At February 27, 2011, total debt was $6,848.8, up from $6,425.9 at May 30, 2010. Current liabilities were $4,511.3 and current assets were $3,842.9. Long-term debt classified as current was $1,031.2, primarily notes due in February 2012. Total equity was $6,112.2.
- Nine-month capital spending was $423.4; share repurchases were $1,163.5 and dividends paid were $547.5. The declared dividend was $0.84 per share for the nine-month period, compared with $0.72 previously.
Material changes versus comparable periods
- Q3 net earnings attributable to General Mills rose 18%, and diluted EPS rose 23%; average diluted shares fell by 29 million, primarily due to repurchases. Nine-month net earnings rose 12% and diluted EPS rose 14%.
- Q3 sales growth came from volume; net price realization and mix and foreign exchange were flat. For the nine months, volume contributed 2 percentage points, partly offset by 1 point from lower net price realization and mix.
- Operating profit benefited from favorable mark-to-market effects on commodity positions and grain inventories, lower restructuring costs, and a $14.3 divestiture gain. Higher input costs and pension expense were offsets. The favorable mark-to-market impact was $33.4 in Q3 and $133.3 for the nine months, versus an unfavorable $5.0 and favorable $47.6, respectively, in the prior-year periods.
- Nine-month operating cash flow was lower by $310.1, largely reflecting a $612.4 use of cash from changes in current assets and liabilities, including inventory growth and changes in other current liabilities.
- The company revised certain revenue and expense classifications beginning in fiscal 2011 and recast comparative figures; management stated this did not affect previously reported net earnings or EPS. All share and per-share data reflect the 2010 two-for-one stock split.
Outlook, commentary, risks and unusual items
- Management said fiscal 2011 pricing actions taken in Q3 had not yet been fully reflected and expected their effects to be more evident in Q4. No specific full-year sales or earnings guidance is provided in the supplied filing text.
- Management said operating cash flows and available short- and long-term financing should be adequate for liquidity and capital needs for at least the next 12 months. The company had $2.9 billion of committed credit lines, with no borrowings against them at quarter-end, and reported compliance with debt covenants.
- The company expected to pay approximately $400 million in fiscal 2011 related to an IRS settlement; $31.2 million had been paid through Q3. The settlement reduced uncertain tax liabilities and contributed to an $88.9 million net reduction in Q2 income tax expense. A California court decision increased uncertain tax liabilities by $11.5 million; the company intended to appeal and said payment would await final resolution.
- An $11 million charge increased an environmental liability for an active cleanup site in Moonachie, New Jersey. Commodity prices, foreign exchange, interest rates, pension assumptions, product safety and quality, competition, consumer demand, supply-chain costs and disruption, and uncertain tax matters were among the cited risks.
- Fiscal 2011 acquisitions included the Mountain High yogurt business for $84.8 million. The company also agreed to acquire Pasta Master for $36.6 million, subject to adjustments and expected completion in Q4. Subsequent to quarter-end, it made a binding offer of approximately €810 million for specified controlling and brand interests in Yoplait, subject to approvals and other conditions.
- The company sold an international foodservice frozen baked goods product line for $24.9 million cash and recorded a $14.3 million pretax gain. No new restructuring actions were undertaken in the first nine months of FY2011.
- Commodity derivatives are not designated for hedge accounting; their mark-to-market changes are recorded in cost of sales and can create earnings volatility. The filing also describes derivative counterparty exposure and collateral provisions tied to credit ratings.
Important facts for investors to verify
- How much of Q3 and nine-month profit growth reflects underlying operations versus commodity mark-to-market movements, the divestiture gain, and the IRS-related tax benefit.
- Whether Q4 pricing actions offset higher input costs without materially weakening volume, product mix, or consumer demand.
- Cash conversion and working-capital trends, especially inventory growth, alongside the upcoming $1,031.2 million debt maturity and expected IRS settlement payment.
- Progress and final terms, approvals, financing, and integration risks for the Pasta Master and proposed Yoplait transactions.
- Resolution of the California tax matter, environmental cleanup liability, and exposure to commodity, currency, interest-rate, pension, and counterparty risks.