General Mills, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended May 29, 2016 (52 weeks). The filing is an annual report, not a standalone 2015 fourth-quarter filing; FY2015 had 53 weeks. FY2016 also included an additional month of results from Annie’s and Yoplait SAS following fiscal-calendar changes. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
General Mills makes and markets branded consumer foods through U.S. Retail, International, and Convenience Stores and Foodservice segments. Major categories include cereal, convenient meals, snacks, yogurt, baking products, and super-premium ice cream. Wal-Mart accounted for 20% of consolidated sales and 30% of U.S. Retail sales.
Key financial results
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Net sales | $16,563.1 | $17,630.3 | Down 6%; down 2% on a constant-currency basis |
| Gross margin | $5,829.5; 35.2% | $5,949.2; 33.7% | Amount down 2%; margin up 150 basis points |
| Operating profit | $2,707.4; 16.3% | $2,077.3; 11.8% | Up 30%, heavily affected by lower restructuring and impairment charges and divestiture gains |
| Total segment operating profit | $2,999.5 | $3,035.0 | Down 1% reported; up 1% constant currency |
| Net earnings attributable to General Mills | $1,697.4 | $1,221.3 | Up 39% |
| Diluted EPS | $2.77 | $1.97 | Up 41%; adjusted diluted EPS was $2.92 versus $2.86, up 2% (5% constant currency) |
| Net cash from operating activities | $2,629.8 | $2,542.8 | Up $87.0 |
| Capital expenditures / free cash flow | $729.3 / $1,900.5 | $712.4 / $1,830.4 | Free cash flow conversion was 104% of adjusted net earnings |
| Total debt | $8,430.9 | $9,191.5 | Down $760.6 |
At year-end, cash and cash equivalents were $763.7, including $645.2 held outside the United States. Current assets were $3,937.2 and current liabilities were $5,014.7. The company reported $1,103.4 of current long-term debt, including $1,000 million of 5.7% notes due February 2017. It had $2.9 billion of committed credit facilities, of which $0.1 billion was borrowed, and stated that cash flows and available financing should meet needs for at least 12 months. Covenants were met.
Cash returned to shareholders totaled $1,506.5: dividends of $1,071.7 and net share repurchases of $434.8 after option-exercise proceeds. The dividend was $1.78 per share, up 7%. Share repurchases were $606.7 before option proceeds.
Segments and material changes
- U.S. Retail: Sales fell 5% to $10,007.1; segment operating profit rose 1% to $2,179.0. Sales declines included portfolio changes and the prior year’s extra week; profit benefited from cost savings, lower advertising expense, and lower supply-chain costs.
- International: Sales fell 10% to $4,632.2 as reported, but grew 3% constant currency. Segment operating profit declined 15% to $441.6, including a 12-point adverse foreign-exchange impact; slower growth in China and Brazil and divestitures also weighed.
- Convenience Stores and Foodservice: Sales fell 4% to $1,923.8, while segment operating profit increased 7% to $378.9, supported by favorable mix and cost savings.
- Sales growth components were volume down 3 points, price/mix up 1 point, and foreign exchange down 4 points. The prior-year 53rd week reduced the year-over-year comparison by about 1 point.
- Portfolio actions included the North American Green Giant divestiture for $822.7 cash proceeds and a $199.1 pretax gain; sales of the Venezuela subsidiary and Argentina foodservice business, with pretax losses of $37.6 and $14.8; and acquisitions of EPIC and Brazilian yogurt maker Carolina. FY2015 included the $821.2 Annie’s acquisition.
Outlook, management commentary, and risks
Management described FY2016 as progress toward long-term growth goals but noted that sales growth fell short of expectations. It reported nearly $350 million of cost savings in FY2016 from restructuring and cost-management initiatives, and targeted $600 million of annual savings by FY2018. The company targeted an adjusted operating margin of 20% by FY2018, 400 basis points above FY2015.
- FY2017 outlook: Organic net sales expected to be flat to down 2%; constant-currency total segment operating profit expected to rise 6%–8%; adjusted operating margin expected to expand about 150 basis points; and constant-currency adjusted diluted EPS expected to grow 6%–8% from the FY2016 base of $2.92. Capital expenditures were expected to be about $734 million.
- Management expected input-cost inflation of about 2% in FY2017. Its “growth” businesses, representing about 75% of sales, were expected to grow at a low-single-digit organic rate; “foundation” businesses were expected to decline mid-single digits.
- FY2017 shareholder-return plans included an annualized dividend rate of $1.92 per share and expected net reduction in average diluted shares of approximately 1%–2% from repurchases. Forward-looking adjusted measures are non-GAAP and the filing says they could not be reconciled to GAAP because excluded items could not be accurately predicted.
- Key risks include intense competition and private-label substitution; retailer concentration and bargaining power; volatile commodity, packaging, energy, and currency costs; food safety, quality, and recall exposure; changing consumer preferences; supply-chain disruption; execution of cost reductions; international economic and political risks; cyber incidents; pension assumptions; and possible impairment of goodwill or brands.
- Goodwill and other intangible assets totaled about $13.3 billion on the balance sheet. No goodwill impairment was recorded; Mountain High and Uncle Toby’s had relatively limited fair-value cushions, while Progresso and Food Should Taste Good were identified as having risk of decreasing coverage.
- The company disclosed two active environmental cleanup sites, but stated that pending legal matters were not reasonably likely to materially affect consolidated financial position or results. It also disclosed $383.2 million of guarantees for consolidated subsidiaries and $239.1 million for non-consolidated affiliates, mainly CPW.
Most important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus lower restructuring charges, commodity mark-to-market effects, and the Green Giant divestiture gain; compare GAAP results with adjusted measures.
- Whether the FY2017 sales, margin, and EPS targets—and the $600 million FY2018 savings target—are achieved, including the cash costs and operational effects of restructuring.
- Whether weaker U.S. Retail volumes and International performance improve, and how currency, China and Brazil conditions, and portfolio divestitures affect results.
- Debt maturity and refinancing plans, particularly the $1.0 billion notes due in February 2017, alongside capital spending, dividends, and repurchases.
- Changes in the valuation headroom for the identified brands and the sensitivity of pension costs and obligations to lower discount rates and investment returns.