General Mills, Inc. — Form 10-Q Summary
Business context and period: Consumer foods company reporting its first quarter of fiscal 2017, the three months ended August 28, 2016, compared with the quarter ended August 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Results are unaudited.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $3,907.9 | $4,207.9 | Down 7% |
| Operating profit | $645.8 | $683.3 | Down 6% |
| Net earnings attributable to General Mills | $409.0 | $426.6 | Down 4% |
| Diluted EPS | $0.67 | $0.69 | Down 3% |
| Operating margin | 16.5% | 16.2% | Up 30 basis points, per management |
| Adjusted operating margin | 19.2% | Not clearly provided in the filing text | Management reported progress toward its FY2017 goal |
| Operating cash flow | $288.3 | $430.9 | Down $142.6 |
| Capital expenditures | $153.5 | $147.2 | Up $6.3 |
| Cash and cash equivalents | $765.7 | $763.7 at May 29, 2016 | Up $2.0 since fiscal year-end |
| Total debt | $8,871.9 | $8,430.9 at May 29, 2016 | Up $441.0 |
Net sales fell 4% organically: volume contributed negative 6 percentage points, partly offset by 2 points from price and mix. The prior-year comparison included North American Green Giant product lines divested in fiscal 2016. GAAP diluted EPS was $0.67; diluted EPS excluding specified comparability items was $0.78, down 1% from $0.79.
Quarter-end current assets were $4,193.0 and current liabilities were $5,215.1. Debt included $690.5 of notes payable, $1,103.4 of current long-term debt, and $7,078.0 of long-term debt. The company had $3.3 billion in committed and uncommitted credit facilities, of which $0.2 billion was borrowed, and reported compliance with debt and credit-facility covenants. It expected operating cash flow and available financing to meet liquidity and capital needs for at least the next 12 months. Approximately $1.103 billion of long-term debt was due within 12 months, including $1.0 billion of notes due February 2017.
Material changes and segment performance
- U.S. Retail: Sales declined 8% to $2,331.8 and operating profit declined 6% to $594.4. Sales weakness in meals, yogurt, cereal, and baking products was partly offset by snacks growth.
- International: Sales declined 6% to $1,129.8; the constant-currency decline was 2%. Operating profit fell 14% to $100.0, or 11% on a constant-currency basis. Management cited currency-driven inflation on imported products and the Green Giant divestiture.
- Convenience Stores and Foodservice: Sales declined 7% to $446.3, primarily due to market-index pricing on bakery flour. Operating profit increased 16% to $92.7, supported by lower input costs and higher grain merchandising earnings.
- SG&A expense decreased $99 million, reflecting lower media and advertising spending and cost savings. The effective tax rate declined to 30.9% from 32.7%, primarily due to discrete state tax benefits and U.S. federal legislation.
- Cash provided by operations fell $143 million, largely due to timing-related changes in current assets and liabilities, including trade and advertising accruals and income taxes payable. The company repurchased $399.7 million of stock and paid $290.9 million in dividends, versus $152.1 million and $266.5 million, respectively, a year earlier.
Outlook, management commentary, risks, and unusual items
- Management cited a difficult macroeconomic environment, tough comparisons with the prior-year quarter, and challenging sales performance in certain U.S. businesses. Productivity and cost-saving initiatives supported margin expansion. Management said adjusted operating margin progress was consistent with its fiscal 2017 full-year goal of 18.3%.
- The company recorded $72.5 million of restructuring charges and $13.8 million of related project costs in the quarter. New plans include International production changes affecting approximately 860 positions in Brazil and Greater China, and closure of the Vineland, New Jersey plant affecting approximately 370 positions. Management expects the Vineland action to be completed by fiscal 2019; International actions are expected to be completed by fiscal 2017. These actions involve estimated future charges and cash costs.
- A change in the method for estimating pension and other benefit service and interest costs reduced expense by approximately $17 million in the quarter. Management expected a roughly $68 million reduction for fiscal 2017 versus the prior method; the estimate was partly offset by a lower expected return assumption on certain plan assets.
- Commodity mark-to-market effects increased cost of sales by a net $16.6 million, compared with a net benefit of $2.7 million in the prior-year quarter. Results also include the impact of the Green Giant divestiture completed in fiscal 2016.
- Management reported no impairment in its latest annual assessment, but identified reduced valuation headroom for the Mountain High and Uncle Toby’s brands and potential decreasing coverage for Progresso and Food Should Taste Good; those brands will continue to be monitored.
- Risks identified include competitive and consumer-demand changes, raw-material and energy costs and availability, supply-chain disruption, foreign currency and economic conditions, effectiveness of restructuring and cost-saving plans, commodity and financial-market volatility, product quality and safety, regulation and litigation, and possible impairment of goodwill or intangible assets.
Important facts for investors to verify
- Whether the sharp organic volume decline and weakness in U.S. Retail businesses persist, and how much reported sales trends normalize after the Green Giant divestiture.
- Whether adjusted margin performance supports the 18.3% fiscal 2017 goal, and how the filing’s adjusted measures reconcile to GAAP results.
- Expected cash costs, timing, savings, and execution progress for restructuring actions, including the Brazil/China and Vineland plans.
- Cash conversion and working-capital trends, especially trade and advertising accruals, taxes payable, and inventory.
- Refinancing and liquidity plans for the $1.0 billion February 2017 maturity, alongside total debt and share repurchases.
- Potential impairment sensitivity for the named brands, and the effect of the pension-cost methodology change on comparisons and future benefit expense.