GENERAL MILLS INC quarterly report, Q1 FY2011

General Mills, Inc. — Form 10-Q Summary

Business context and reporting period

Consumer foods company; fiscal first quarter ended August 29, 2010, compared with the quarter ended August 30, 2009. Interim results are unaudited and not necessarily indicative of full-year results. Share and per-share data reflect the two-for-one stock split.

Financial performance and position

Calculated gross, operating, and net margins were approximately 43.2%, 21.5%, and 13.4%, respectively, versus 41.4%, 19.9%, and 12.1% in the prior-year quarter. Total current assets were $3,953.8 million versus current liabilities of $4,091.5 million. The company had $2.9 billion of committed credit lines, with no borrowings under them at quarter-end; one $1.1 billion facility was due to expire in October 2010. Management said operating cash flow and available financing should meet liquidity and capital needs for at least 12 months. The company remained in compliance with debt covenants.

Material changes versus the prior year

• Sales rose 1%, reflecting 2 percentage points of volume growth offset by 1 point of unfavorable foreign exchange; consolidated net price and mix were flat.
• Reported diluted EPS increased 13%, but the company’s adjusted measure was unchanged at $0.64. Favorable net mark-to-market effects on commodity positions and grain inventories contributed $0.06 per share in 2010, versus an unfavorable $0.02 per share in 2009.
• Total segment operating profit fell 2% to $749.1 million. U.S. Retail profit declined 3% to $614.6 million; International fell 1% to $62.0 million; Bakeries and Foodservice rose to $72.5 million from $65.2 million.
• Operating cash flow declined about 35%, mainly reflecting a larger use of cash from current assets and liabilities, including inventory growth. Inventories increased to $1,665.2 million from $1,344.0 million at fiscal year-end.
• Total debt increased $802.8 million from May 30, 2010. The company issued $500 million of 5.4% notes due 2040 and repurchased 21.4 million shares for $788.4 million; quarterly dividends were $0.28 per share.

Management commentary, outlook, and risks

Management cited higher volume, lower costs of sales, and favorable commodity and grain mark-to-market effects in reported results. U.S. Retail segment profit faced $54 million of unfavorable supply-chain costs and higher advertising; International advertising expense also increased. No specific full-year earnings or sales guidance is provided in the supplied filing text.

A significant subsequent risk is the Yoplait trademark license dispute: Sodima gave notice on September 3, 2010, purporting to terminate the U.S. license effective September 9, 2012. General Mills filed for arbitration on September 6 to preserve and enforce its rights. Other disclosed risks include commodity, foreign-exchange and interest-rate volatility; input-cost and supply-chain disruptions; competition and consumer demand; product safety; pension assumptions; and impairment of goodwill or intangible assets. A $20 million guarantee was provided for Cereal Partners Worldwide capital expenditures. No new restructuring actions were undertaken in the quarter.

Most important facts for investors to verify

• Whether the favorable $72 million net commodity and grain mark-to-market effect is temporary, and how adjusted EPS reconciles to GAAP EPS.
• Developments and potential financial or operating consequences of the Yoplait license arbitration and purported 2012 termination.
• Drivers of the operating-cash-flow decline and inventory increase, including the timing of working-capital recovery.
• Debt and refinancing position, particularly the October 2010 expiration of the $1.1 billion committed credit facility and increased short-term borrowings.
• Whether segment-level trends, supply-chain costs, pricing, and advertising spending support sustained earnings performance.