General Mills, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six-month period ended November 27, 2016 (fiscal 2017). Figures are in millions of dollars except per-share amounts. The filing is unaudited; interim results are not necessarily indicative of full-year results.
Business context and financial performance
General Mills operates in consumer foods through U.S. Retail, International, and Convenience Stores and Foodservice segments. Management cited challenging sales, continued cost savings, and margin expansion initiatives.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $4,112.1; down 7% | $8,020.0; down 7% |
| Organic net sales | Down 4% | Down 4% |
| Operating profit | $768.9; down 15% | $1,414.7; down 11% |
| Operating margin | 18.7%, versus 20.5% | 17.6%, versus 18.4% |
| Adjusted operating margin (non-GAAP) | 19.6%, up 160 basis points | 19.4%, up 120 basis points |
| Net earnings attributable to General Mills | $481.8; down 9% | $890.8; down 7% |
| Diluted EPS | $0.80; down 8% | $1.47; down 6% |
| Adjusted diluted EPS (non-GAAP) | $0.85; up 4% | $1.63; up 1%; up 2% constant currency |
Sales declines reflected lower volumes, partly offset by positive pricing and mix. Prior-year Green Giant divestiture reduced comparability and included a $199.1 gain; the current period included a $13.5 loss on sale of the Martel, Ohio facility. Reported and adjusted results differ due to divestiture, restructuring, project-related, and commodity mark-to-market items.
Segments and material changes
- U.S. Retail: Sales fell 9% in the quarter and 8% for six months. Meals, yogurt, baking, and cereal weakened, while snacks grew. Segment operating profit rose 2% to $615.4 in the quarter, but declined 2% to $1,209.8 for six months.
- International: Sales declined 5% in both periods; constant-currency sales fell 3%. Operating profit fell 22% in the quarter and 19% for six months, partly due to currency-driven inflation on imported products and divestitures.
- Convenience Stores and Foodservice: Sales declined 4% in the quarter and 5% for six months, mainly reflecting market-index pricing on bakery flour. Operating profit increased 6% to $109.1 in the quarter and 11% to $201.8 for six months, aided by savings and lower input costs.
Consolidated sales declined 7% as volume reduced growth by 10 points in the quarter and 9 points for six months; pricing and mix contributed 3 points in both periods. Foreign exchange was flat for the quarter and reduced six-month sales growth by 1 point.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $987.6, down from $1,156.0. Changes in current assets and liabilities used $372.3, versus providing $57.0 in the prior-year period, primarily due to trade and advertising accruals and income taxes payable.
- Investing activities used $280.0, including $318.3 of capital expenditures; prior-year investing cash flow included $822.7 of Green Giant sale proceeds.
- Financing activities used $628.9. The company repurchased $1,349.9 of shares and paid $575.5 in dividends. Net debt issuance was $1,164.5.
- Cash and equivalents were $809.7 at quarter-end, including $746 held in foreign jurisdictions. Total debt was $9,471.3, up from $8,430.9 at May 29, 2016. Current liabilities were $6,244.4 and current assets were $4,111.5.
- $1,507.6 of long-term debt was classified as current, including $1,000 of 5.7% notes due February 2017. The company reported $3.3 billion in committed and uncommitted credit facilities, with $0.2 billion borrowed, and stated it expected operating cash flow and available financing to cover needs for at least 12 months.
- The company reported compliance with debt and credit covenants. Its main committed credit facility requires a fixed-charge coverage ratio of at least 2.5 times.
Outlook, management commentary, and risks
- Management reported progress toward its fiscal 2017 adjusted operating margin goal of 18.3%; first-half adjusted margin was 19.4%. The filing does not provide a clear full-year sales or EPS forecast in the supplied text.
- After quarter-end, the company approved global restructuring actions affecting approximately 400–600 positions. It expected third-quarter pre-tax charges of $60–$90 and savings of $70–$90 by the end of fiscal 2018.
- Ongoing restructuring includes plant closures and product-line changes. Current-period charges were $114.3 for the six months, with $24.9 of additional project-related costs. Management estimated $29.5 of future project-related costs.
- A change in the method for estimating pension and benefit service and interest costs reduced first-half expense by approximately $34; management expected an approximately $68 reduction for fiscal 2017 versus the prior method.
- Annual impairment testing found no impairment, but Immaculate Baking and the Latin America reporting unit had fair-value cushions of only 17% and 15%, respectively. Progresso, Green Giant, and Food Should Taste Good brands were also identified as having risk of decreasing coverage.
- Risks identified include competition and changing consumer demand, promotional effectiveness, commodity and energy costs, supply-chain disruption, foreign currency and political conditions, product safety, customer purchasing patterns, restructuring execution, and impairment of goodwill or intangible assets.
- Commodity, interest-rate, foreign-exchange, and equity one-day value-at-risk estimates were $2, $25, $21, and $1, respectively. Commodity derivatives are not designated for hedge accounting, so mark-to-market changes can affect reported results.
Important facts for investors to verify
- Whether volume and organic-sales trends improve, particularly in U.S. Retail meals, yogurt, baking, and cereal and in International markets.
- Whether adjusted margin and EPS growth persist after recognizing that these non-GAAP measures exclude specified items.
- How the February 2017 debt maturity is refinanced and how increased short-term borrowing affects liquidity and interest costs.
- Whether restructuring charges, future project costs, position reductions, and projected savings track management’s estimates.
- Whether the relatively limited impairment cushions for Immaculate Baking and Latin America, and the named brand risks, change in future testing.