General Mills, Inc. — Form 10-Q Summary
Business context and period. General Mills is a consumer foods company. This filing covers the second quarter and six months of fiscal 2018, ended November 26, 2017; comparisons are with the corresponding fiscal 2017 periods. Segment reporting reflects the company’s reorganized structure: North America Retail, Convenience Stores & Foodservice, Europe & Australia, and Asia & Latin America.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $4.199 billion, up 2%; organic sales up 1%, volume flat | $7.968 billion, down 1%; organic sales down 1%, volume down 1% |
| Operating profit | $730 million, down 5%; margin 17.4% vs. 18.7% | $1.356 billion, down 4%; margin 17.0% vs. 17.6% |
| Net earnings attributable to General Mills | $431 million, down 11% | $835 million, down 6% |
| Diluted EPS | $0.74, down 8%; adjusted EPS $0.82, down 5% on a constant-currency basis | $1.43, down 3%; adjusted EPS $1.53, down 7% on a constant-currency basis |
| Operating cash flow | Not presented for the quarter | $1.567 billion vs. $1.079 billion |
- Profitability and drivers: Management attributed margin pressure to higher input costs, including currency-driven inflation on imported products, unfavorable trade expense phasing, and higher advertising expense. Cost savings partly offset these pressures. Adjusted operating margin was 17.4% for the quarter and 17.2% for the six months, down 220 basis points year over year in both periods.
- Segments: Quarterly sales rose in all four segments, but segment operating profit declined across all four. North America Retail sales increased 1% in the quarter but fell 2% for six months; U.S. Yogurt sales were down 11% and 17%, respectively. Convenience Stores & Foodservice sales grew 5% and 3%. Europe & Australia sales rose 7% and 5%, substantially aided by currency, while operating profit fell 35% and 32%. Asia & Latin America sales rose 2% in the quarter but fell 3% for six months; operating profit fell 42% and 37%.
- Cash flow and investment: Six-month operating cash flow increased $488 million year over year, primarily reflecting a $703 million favorable change in current assets and liabilities, including payment timing and extended supplier terms. Investing cash outflow was $271 million, including $260 million of capital spending. Financing cash outflow was $1.131 billion, including $600 million of share repurchases and $565 million of dividends.
- Debt and liquidity: Total debt was $9.727 billion at November 26, 2017, compared with $9.482 billion at May 28, 2017. Cash and equivalents were $962 million. Available committed and uncommitted credit facilities totaled $3.4 billion, of which $0.3 billion was borrowed. The company reported compliance with debt and credit-facility covenants and expects operating cash flow and financing availability to meet needs for at least 12 months.
- Shareholder returns: Dividends declared were $0.49 per share for the quarter and $0.98 for six months. Average diluted shares fell by 19 million in the quarter and 22 million for six months, mainly due to repurchases.
Material changes, outlook and risks
- Quarterly sales growth reflected favorable foreign exchange and net price realization/mix; organic volume was flat. Six-month sales declined mainly because of weaker volume in North America Retail and Asia & Latin America.
- A $42.2 million prior-year tax adjustment increased income tax expense and total liabilities in the quarter. Management said it was immaterial to its estimated fiscal 2018 earnings. The reported effective tax rate was 35.9% for the quarter and 33.4% for six months; adjusted rates were 29.3% and 29.9%, respectively.
- The company noted pending U.S. tax reform could materially affect future financial statements; the impact was still being assessed. No numerical earnings or sales guidance is provided in the supplied filing text.
- Restructuring charges were $19.7 million for six months, compared with $114.3 million a year earlier; project-related costs were $5.4 million. Ongoing initiatives include a global reorganization expected to affect about 600 positions, with approximately $76 million of expected net expense, and plant/product-line actions expected to continue into fiscal 2018 or 2019.
- The annual impairment test found no impairment, but Yoki and Progresso brand assets and the Latin America reporting unit had relatively limited fair-value cushions of 1%, 6%, and 21%, respectively. Food Should Taste Good, Green Giant, and U.S. Yogurt were also identified as having risk of decreasing coverage.
- Sodiaal may put some or all of its Yoplait SAS redeemable interest to General Mills annually, up to three times before December 2024; its reported redemption value was $793 million. Supplier payment programs covered $874 million of accounts payable, which remain obligations to suppliers.
- Other disclosed risks include competition, consumer demand and preferences, input-cost and supply-chain volatility, foreign exchange, product quality and safety, restructuring execution, pension assumptions, impairments, and information-technology failures. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether volume, particularly in U.S. Yogurt and Asia & Latin America, stabilizes and whether organic sales growth continues.
- Whether input-cost inflation, trade expense, and advertising continue to pressure margins, and whether savings initiatives offset those costs.
- The sustainability and composition of stronger operating cash flow, given its dependence on working-capital timing and supplier payment terms.
- The effects of U.S. tax reform and the $42.2 million prior-year tax adjustment on subsequent reported results and liabilities.
- Progress, remaining cash costs, and expected benefits of restructuring, along with impairment headroom for the identified brands and reporting units.
- Debt maturities, refinancing needs, the potential Yoplait put obligation, and continued covenant compliance.