General Mills, Inc. — Form 10-Q Summary
Business context and reporting period: Consumer foods company with U.S. Retail, International, and Convenience Stores and Foodservice segments. This report covers the quarter and six-month period ended November 23, 2014, the second quarter of fiscal 2015. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Quarter ended Nov. 23, 2014 | Prior-year quarter | Six months ended Nov. 23, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $4,712.2 | $4,875.7 | $8,980.6 | $9,248.4 |
| Operating profit | $559.0 | $870.1 | $1,116.5 | $1,604.9 |
| Net earnings attributable to General Mills | $346.1 | $549.9 | $691.3 | $1,009.2 |
| Diluted EPS | $0.56 | $0.84 | $1.11 | $1.54 |
| Operating cash flow | Not presented separately | Not presented separately | $863.2 | $1,008.9 |
- Quarterly sales fell 3%; segment operating profit declined 8% (6% at constant currency). Six-month sales fell 3%; segment operating profit declined 11% (10% at constant currency).
- Quarterly gross margin was approximately 34.4% versus 36.1%; operating margin was 11.9% versus 17.8%. Six-month gross margin was approximately 34.1% versus 36.5%; operating margin was 12.4% versus 17.4%.
- Management reported diluted EPS excluding specified comparability items of $0.80 for the quarter versus $0.83, flat year over year on a constant-currency basis. For six months, adjusted diluted EPS was $1.41 versus $1.53, down 6% on a constant-currency basis. These are non-GAAP measures.
- Six-month capital expenditures were $317.6; net cash used in investing was $1,171.2, including the Annie’s acquisition. Net cash provided by financing was $369.7. Dividends paid were $503.2 and share repurchases were $968.8.
- At period end, cash was $894.5, current assets $4,986.4, and current liabilities $6,093.7. Total debt was $10,535.2, up from $8,785.8 at May 25, 2014. The company had $3.0 billion of committed credit facilities, with $0.1 billion borrowed, and reported compliance with covenants. It said operating cash flow and available financing should cover needs for at least 12 months.
Material changes and business developments
- General Mills acquired Annie’s on October 21, 2014, for an aggregate purchase price of $821.2, funded with debt; cash paid net of acquired cash was reported as $809. The acquisition added $589.8 of goodwill and $268.4 of intangible assets. Pro forma effects were not material; purchase accounting remained preliminary.
- U.S. Retail sales declined 4% in both the quarter and six-month period, reflecting weaker volume and pricing/mix. U.S. Retail segment operating profit fell 10% for the quarter and 17% for six months.
- International sales declined 6% for the quarter and 2% for six months as reported, but grew 3% and 5%, respectively, at constant currency. International operating profit fell 12% for the quarter (2% at constant currency) and rose 1% for six months (7% at constant currency).
- Convenience Stores and Foodservice sales increased 4% for the quarter and 3% for six months; segment operating profit rose 13% and 15%, respectively.
- Foreign currency translation produced a $389.8 six-month loss in other comprehensive income. Foreign exchange also weighed on reported International results.
Outlook, commentary, risks, and unusual items
- No overall fiscal 2015 sales or EPS guidance is stated in the provided filing text. Management described ongoing efficiency and network restructuring initiatives, expected to be completed by the end of fiscal 2017.
- Restructuring and exit charges were $214.6 in the quarter and $228.6 for six months, plus $19.0 classified in cost of sales. The initiatives are expected to generate approximately $363 of total charges, of which approximately $178 is expected to be cash. Project Catalyst targets about 700–800 positions; two Project Century facility actions affect about 680 positions, and a Yoplait/General Mills facilities combination affects about 240 positions.
- Commodity derivative and grain-inventory mark-to-market effects increased expense by $5.1 in the quarter and $54.3 for six months in unallocated corporate items, versus net benefits in the comparable prior-year periods. Such changes can make reported results volatile.
- Cash from operations declined by $145.7 year over year for the six-month period, reflecting lower earnings and a less favorable change in working capital, including higher inventory balances. The company also cited higher supply-chain costs and weaker U.S. Retail volume.
- Key stated risks include competition and consumer demand, input-cost and supply-chain volatility, foreign exchange and political conditions, product quality and safety, customer inventory changes, and potential impairment of goodwill or intangible assets. Europe and U.S. Yogurt had declining performance; the company said it would continue monitoring them and perform its annual impairment test in fiscal 2015’s third quarter.
- Venezuela represented less than 1% of consolidated assets, liabilities, sales, and segment operating profit; the reported six-month remeasurement impact was immaterial. The filing also notes a $37.8 aggregate fair value of derivatives with credit-rating-related collateral features that could require collateral if triggered.
Important facts for investors to verify
- Whether underlying volume and pricing trends improve, particularly in U.S. Retail, and whether reported International growth continues after currency effects.
- Actual restructuring costs, cash payments, timing, and realized savings compared with the approximately $363 total-charge estimate.
- Annie’s integration, acquisition accounting adjustments, and the effect of acquisition-related debt on leverage and interest expense.
- Working-capital needs, especially inventory, and whether operating cash flow recovers from the six-month decline.
- Progress of the fiscal 2015 impairment review for Europe and U.S. Yogurt, and movements in foreign-currency and commodity exposures.