General Mills, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 22, 2015; comparable periods ended February 23, 2014. The filing covers fiscal 2015, notwithstanding the request metadata identifying 2014 Q3. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context
General Mills operates in consumer foods through U.S. Retail, International, and Convenience Stores and Foodservice segments. The quarter included Annie’s, acquired in October 2014 for approximately $821 million, funded with debt. Annie’s contributed about 1 percentage point to consolidated quarterly sales growth.
Financial performance and liquidity
| Metric | Fiscal Q3 2015 | Fiscal Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $4,350.9 | $4,377.4 | $13,331.5 | $13,625.8 |
| Operating profit | $537.2 | $670.6 | $1,653.7 | $2,275.5 |
| Net earnings attributable to General Mills | $343.2 | $410.6 | $1,034.5 | $1,419.8 |
| Diluted EPS | $0.56 | $0.64 | $1.67 | $2.18 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,561.4 | $1,724.2 |
- Quarterly sales declined 1%; nine-month sales declined 2%. Management attributed 4 percentage points of quarterly and 2 percentage points of nine-month sales decline to unfavorable currency translation.
- Reported operating margin was approximately 12.3% for the quarter versus 15.3% a year earlier, and 12.4% for the nine months versus 16.7%. These are calculated from reported sales and operating profit.
- Management reported adjusted diluted EPS, excluding specified comparability items, of $0.70 versus $0.62 for the quarter; constant-currency growth was 15%. Nine-month adjusted EPS was $2.11 versus $2.15; constant-currency performance was flat. These are non-GAAP measures.
- Nine-month investing cash outflow was $1,408.3, including $822.3 for acquisitions and $490.9 for capital expenditures. Financing cash outflow was $146.5. Cash ended at $784.2, down from $867.3 at fiscal year-end.
- Total debt was $10,291.1 at February 22, 2015, up from $8,785.8 at May 25, 2014. Cash was $784.2; the filing reports long-term debt fair value of $8,851.2 versus carrying value of $8,393.2, including current maturities.
- Current assets were $4,464.4 and current liabilities $6,702.5, for a calculated current ratio of approximately 0.67. Management said operating cash flow and available financing should meet liquidity and capital needs for at least 12 months. Committed and uncommitted credit facilities totaled $3.3 billion, with $0.2 billion borrowed; the company reported covenant compliance.
- Dividends were $0.41 per share for the quarter and $1.23 for the nine months. The company repurchased $1,161.7 of shares during the nine months.
Material changes versus comparable periods
- GAAP earnings fell materially: quarterly diluted EPS declined 12%, and nine-month diluted EPS declined 23%. The nine-month decline reflected lower reported operating profit and restructuring and other unusual costs; adjusted EPS was nearly flat on a constant-currency basis.
- Quarterly segment operating profit increased 1% reported and 3% on a constant-currency basis; nine-month segment operating profit fell 8% reported and 6% constant currency.
- By segment, quarterly sales rose 1% in U.S. Retail and 6% in Convenience Stores and Foodservice, while International sales fell 7% reported. Nine-month sales fell 3% in U.S. Retail and International and rose 4% in Convenience Stores and Foodservice.
- Cash from operations decreased $162.8 year over year for the nine months. Investing outflow increased substantially, primarily reflecting the Annie’s acquisition and higher capital spending.
- Other comprehensive income included a substantial foreign-currency translation loss: $801.1 for the nine months, compared with $83.7 in the prior-year period.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear full-year sales or EPS guidance figure. Management expected restructuring actions to be completed by the end of fiscal 2018 and projected approximately $456 million of total restructuring charges, about $261 million cash. Approximately $66 million of additional restructuring project costs, all cash, were also expected.
- Restructuring charges and project costs weighed on results: nine-month restructuring charges were $318.4, including $277.9 reported in the restructuring line and $40.5 in cost of sales. Plans include organizational reductions and closures or capacity changes at manufacturing facilities.
- Commodity and grain mark-to-market effects increased expense by $44 million in the quarter and $98 million for the nine months, versus net expense decreases in the comparable prior periods. These items are volatile and affect reported results.
- After quarter-end, the company approved a one-time repatriation of approximately $600 million of foreign earnings. It expected a fourth-quarter discrete tax charge of $60 million to $80 million and cash tax payments of $15 million to $25 million.
- Management estimated that updated mortality assumptions could increase combined fiscal 2016 pension and other postretirement benefit expense by approximately $70 million to $80 million.
- Foreign-exchange exposure affected reported international results. Venezuela’s new SIMADI exchange mechanism prompted a $7.2 million nine-month remeasurement loss; management said Venezuelan operations were less than 1% of consolidated assets, liabilities, sales, and segment operating profit.
- Impairment testing identified limited fair-value cushions over carrying value for Mountain High, Uncle Toby’s, and Green Giant brands; no impairment was recorded. The company said it would continue monitoring these brands.
- Risk factors cited include competition and consumer demand, commodity and supply-chain costs, foreign exchange and political conditions, product safety, customer consolidation, pension assumptions, and potential impairment of goodwill or intangible assets.
Important facts for investors to verify
- Reconcile the adjusted EPS and constant-currency measures to GAAP results, including the treatment and timing of restructuring and mark-to-market costs.
- Track restructuring spending, cash requirements, savings, facility closures, and whether completion dates and total cost estimates change.
- Assess debt maturities, commercial-paper reliance, refinancing capacity, and liquidity after the Annie’s acquisition and repatriation-related tax payments.
- Monitor segment volume and pricing trends, particularly U.S. Retail volume and International currency-adjusted performance.
- Verify the realized effects of the foreign-earnings repatriation and the fiscal 2016 pension-cost estimate.
- Follow impairment headroom for the named brands and the effect of currency movements on goodwill, intangible assets, and reported equity.