General Mills, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 28, 2010; comparisons are with the corresponding periods ended November 29, 2009. Unless noted otherwise, financial figures are in millions of dollars. Interim results are unaudited.
Business context and results
General Mills operates in consumer foods through U.S. Retail, International, and Bakeries and Foodservice segments. Second-quarter net sales rose 1% to $4,066.6 million. For the six months, sales rose 1% to $7,599.7 million. In both periods, volume growth was partly offset by weaker net price realization and mix; foreign exchange also weighed on six-month growth.
Key financial metrics
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $4,066.6; +0.8% | $7,599.7; +1.1% |
| Operating profit | $822.9; -6.3% | $1,583.3; +0.7% |
| Net earnings attributable to General Mills | $613.9; +8.6% | $1,086.0; +10.1% |
| Diluted EPS | $0.92 vs. $0.83 | $1.63 vs. $1.46 |
| Diluted EPS excluding specified comparability items (non-GAAP) | $0.76 vs. $0.77; -1% | $1.40 vs. $1.41; -1% |
| Net cash from operating activities | Not reported as a quarterly figure in the supplied text | $599.5 vs. $987.1 |
Calculated operating margin was approximately 20.2% for the quarter (21.8% prior year) and 20.8% for the six months (20.9% prior year). Cost of sales increased to $2,432.6 million in the quarter and $4,441.4 million for six months, reflecting higher volume, input costs, and product mix. Segment operating profit was $853.2 million for the quarter, down 3%, and $1,602.3 million for six months, down 2%.
At November 28, 2010, cash and cash equivalents were $566.3 million, down from $673.2 million at May 30, 2010. Total debt was $7,045.7 million, up from $6,425.9 million; long-term debt was $5,864.1 million and notes payable $1,169.9 million. Current assets were $4,016.6 million and current liabilities $3,733.6 million. The company had $2.9 billion of committed credit lines with no borrowings outstanding under those facilities. Management said operating cash flow and available financing should meet liquidity and capital needs for at least 12 months.
Six-month operating cash flow fell by $387.6 million year over year, primarily because changes in current assets and liabilities used $736.4 million of cash, including higher inventories and changes in other current liabilities. Investing activities used $266.4 million, including $284.3 million of capital expenditures. Financing activities used $482.7 million, including $963.6 million of share repurchases and $366.3 million of dividends; the company also issued $500 million of long-term notes.
Material changes versus prior period
- Quarterly U.S. Retail sales were essentially flat and segment operating profit fell 4%, mainly due to unfavorable pricing and mix and higher supply-chain costs. International sales increased 4% and operating profit rose 25%; Bakeries and Foodservice sales rose 3%, while operating profit declined from $88.7 million to $77.1 million.
- Lower quarterly GAAP operating profit contrasted with higher reported net earnings and EPS. A substantially lower effective tax rate—21.7% versus 33.1%—was primarily associated with tax matters, while diluted shares outstanding also declined due mainly to repurchases.
- Six-month net earnings and diluted EPS increased, but adjusted diluted EPS excluding the filing’s specified items declined 1%. This highlights the contribution of tax and commodity mark-to-market items to reported results.
- The company repurchased 26.2 million shares for $963.6 million in the first half, compared with $235.4 million of repurchases in the prior-year period. Dividends per share were $0.56 versus $0.47, with per-share amounts adjusted for the two-for-one stock split.
- Prior-year income statement classifications were revised to align with current presentation; the changes did not affect previously reported net earnings or EPS.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year earnings or sales guidance. Management cautions that interim results are not necessarily indicative of the fiscal year ending May 29, 2011.
- An IRS settlement concerning tax years 2002–2008 reduced uncertain-tax-position liabilities; the company expects to pay approximately $420 million in fiscal 2011. A California court decision increased uncertain-tax liabilities by $11.5 million; General Mills intends to appeal and says payment will await final resolution.
- Quarter and six-month results include commodity and grain inventory mark-to-market effects and the net benefit of the two tax matters. The company reported net commodity-related expense decreases of $28 million for the quarter and $100 million for six months; these volatile accounting effects are reflected in its non-GAAP EPS reconciliation.
- The company agreed to acquire the Mountain High yogurt business for $85 million in cash, subject to an inventory-related purchase-price adjustment, with completion expected in the third quarter of fiscal 2011. It also agreed to sell an International foodservice frozen baked-goods product line for $24.6 million, with an approximately $13 million after-tax gain expected in the third quarter.
- Key disclosed risks include competition and consumer response to pricing and promotions, commodity and energy costs, supply-chain disruption, foreign exchange, pension costs, product safety and recalls, acquisitions or dispositions, and resolution of uncertain tax matters. Derivative and interest-rate exposures are also relevant; the company reported one-day value-at-risk estimates of $27 million for interest-rate instruments and $5 million for commodity instruments.
- Debt agreements contain restrictive covenants; the company reported compliance at November 28, 2010. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Reconcile reported EPS growth with the 1% decline in the company’s non-GAAP comparable EPS, including the tax settlement and commodity mark-to-market adjustments.
- Monitor operating cash conversion, inventory growth, and other working-capital movements, as these materially reduced first-half operating cash flow.
- Assess the effect of the expected $420 million IRS settlement payment and the unresolved California tax appeal on cash needs and tax expense.
- Track debt growth, share repurchases, dividends, and remaining committed credit availability alongside management’s 12-month liquidity assessment.
- Follow the expected completion and financial impact of the Mountain High acquisition and frozen baked-goods divestiture, including the estimated divestiture gain.