General Mills, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 26, 2017; filed March 21, 2017. The filing is unaudited. The request metadata labels the period “2016 Q3,” but the filing reports fiscal 2017 results.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $3.793 billion, down 5% | $11.813 billion, down 7% |
| Operating profit | $542.5 million, down 7%; 14.3% margin | $1.957 billion, down 10%; 16.6% margin |
| Net earnings attributable to General Mills | $357.8 million, down 1% | $1.249 billion, down 5% |
| Diluted EPS | $0.61, up 3% | $2.08, down 3% |
| Adjusted diluted EPS, excluding specified items | $0.72; up 8% on a constant-currency basis | $2.35; up 4% on a constant-currency basis |
| Operating cash flow | Not separately presented | $1.559 billion, versus $1.863 billion |
| Capital expenditures | Not separately presented | $475.2 million |
Adjusted EPS and adjusted margin are non-GAAP measures. Quarterly adjusted operating margin was 16.9%, up 100 basis points; nine-month adjusted margin was 18.6%, up 110 basis points. Quarterly GAAP diluted EPS benefited from lower average diluted shares following repurchases. The nine-month comparison includes the prior-year Green Giant divestiture gain.
Liquidity, debt and capital allocation
- At February 26, cash was $899.1 million; current assets were $4.128 billion and current liabilities were $5.744 billion.
- Total debt was $9.723 billion, up from $8.431 billion at May 29, 2016. Notes payable rose to $1.942 billion, including $1.638 billion of U.S. commercial paper; long-term debt, including current portion, was $7.781 billion.
- Committed and uncommitted credit facilities totaled $3.4 billion, of which $0.3 billion was borrowed. The company said it was in compliance with debt and credit covenants and expected operating cash flow and available financing to meet needs for at least 12 months.
- Nine-month operating cash flow declined $303 million, primarily due to a $610 million year-over-year swing in changes in current assets and liabilities. Investing activities used $424 million; financing activities used $983 million.
- The company repurchased $1.651 billion of stock and paid $856 million in dividends during the nine months. Dividends declared were $1.44 per share, compared with $1.32 in the prior-year period.
Material changes and management commentary
- Management cited challenging sales, with volume weakness—particularly in North America Retail—partly offset by favorable price and mix. Quarterly organic sales fell 5%; nine-month organic sales fell 5%. Nine-month reported sales also reflected the Green Giant divestiture and currency effects.
- North America Retail sales fell 7% in the quarter and 8% over nine months. U.S. Yogurt sales fell 20% in the quarter; management cited reduced marketing and trade support and increased competition in key categories.
- Cost savings and spending optimization supported adjusted margin improvement. Quarterly reported operating margin nevertheless declined 30 basis points, primarily due to higher restructuring expenses.
- Segment results were mixed: quarterly Convenience Stores & Foodservice profit rose 3%, Europe & Australia rose 25%, and Asia & Latin America improved to $10 million from $2 million; North America Retail profit declined 7%. Nine-month segment profit declined 5% in North America Retail and 12% in Europe & Australia, while rising 8% in Convenience Stores & Foodservice and 45% in Asia & Latin America.
- The company reorganized its reporting structure into four operating segments. It also changed its pension-cost estimation method; management said the change reduced service and interest costs by about $51 million for the nine months and expected a $68 million reduction for fiscal 2017.
Outlook, risks and unusual items
- Management reported progress toward its revised fiscal 2017 adjusted operating profit margin goal of 18%. The filing does not provide a clear full-year numerical forecast for revenue or EPS in the text provided. Management cautioned that it could not reconcile the forward-looking adjusted margin measure to GAAP without unreasonable effort.
- Restructuring charges were $208.3 million for the nine months, versus $199.2 million a year earlier; related project costs were another $36.4 million. New actions include a global reorganization expected to eliminate 400–600 positions and cost about $80 million, and a Melbourne plant closure affecting about 350 positions. Other restructuring affects operations in Brazil, China and the United States.
- The company recorded a $13.5 million loss on sale of its Martel, Ohio facility. The prior-year period included a $199.1 million gain on the Green Giant product-line sale.
- Goodwill and indefinite-lived intangible tests found no impairment overall, but the Latin America reporting unit had only 15% fair-value headroom and the Immaculate Baking brand 17%. Progresso, Green Giant and Food Should Taste Good brands were identified as having risk of decreasing valuation coverage.
- Other risks cited include competition and consumer demand, commodity and foreign-exchange volatility, supply-chain disruption, restructuring execution, pension assumptions, product safety, and potential impairment of goodwill or intangibles. The company disclosed no material off-balance-sheet or contractual-obligation changes outside the ordinary course of business.
- Subsequent to quarter-end, the company issued €300 million of floating-rate notes due 2019 and used the proceeds to repay part of its commercial paper. It had also issued $750 million of 3.2% notes due 2027 in January and repaid $1 billion of 5.7% notes in February.
Investor verification priorities
- Check whether North America Retail volume and yogurt sales stabilize, and whether marketing and trade-support levels change.
- Assess the durability of margin gains and cost savings against declining sales and rising restructuring costs; distinguish GAAP from adjusted results.
- Track working-capital movements, operating cash generation, commercial-paper balances and near-term debt maturities.
- Monitor restructuring cash costs, timing, position reductions and expected savings, alongside execution risks.
- Review valuation headroom and impairment risk for Latin America goodwill and the identified brands, as well as the impact of foreign exchange and commodity prices.