General Mills, Inc. — Form 10-Q Summary
Business context and period: Consumer foods company; first quarter of fiscal 2018, ended August 27, 2017. Comparisons are with the quarter ended August 28, 2016. Financial amounts below are in millions of dollars unless stated otherwise. Segment results reflect a reorganization of reporting segments; the change did not affect consolidated results.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter | Change/comment |
|---|---|---|---|
| Net sales | $3,769.2 | $3,907.9 | Down 4%; organic volume contribution fell 4 points, while price/mix and currency were flat. |
| Operating profit | $625.8 | $645.8 | Down 3%; reported operating margin was 16.6%, versus 16.5%. |
| Adjusted operating profit margin | 17.1% | 19.2% | Down 210 basis points; non-GAAP measure excluding specified items. |
| Net earnings attributable to General Mills | $404.7 | $409.0 | Down 1%. |
| Diluted EPS | $0.69 | $0.67 | Up 3%; adjusted diluted EPS was $0.71 versus $0.78, down 9%. |
| Operating cash flow | $590.5 | $370.8 | Up $219.7, primarily reflecting timing changes in current assets and liabilities. |
| Capital spending | $116.3 | $153.5 | Cash used for property, plant and equipment. |
| Total debt | $10,087.7 | $9,481.7 at May 28, 2017 | Quarter-end balance; notes payable increased to $1,660.3 from $1,234.1. |
| Cash and cash equivalents | $820.8 | $766.1 at May 28, 2017 | Includes $790 million held in foreign jurisdictions. |
| Dividends and repurchases | $284.3 dividends; $600.3 repurchases | $290.9 dividends; $399.7 repurchases | Repurchased 10.9 million shares. |
Material changes and segment performance
- North America Retail sales fell 5% to $2,438.2 and operating profit fell 15% to $533.2. Sales declines included U.S. Yogurt (-22%), U.S. Cereal (-7%) and U.S. Snacks (-2%); management cited lower volume, increased trade expense, higher input costs and advertising expense.
- Europe & Australia sales rose 3% to $491.9, but operating profit fell 30% to $30.6, principally due to input-cost inflation, including currency-driven inflation on imported products.
- Convenience Stores & Foodservice sales were essentially flat at $447.1; operating profit declined 8% to $84.8, primarily due to higher input costs and unfavorable mix.
- Asia & Latin America sales declined 8% to $392.0 and operating profit declined to $15.5 from $22.3. Management attributed the sales comparison partly to a prior-year reporting-period shift and challenges with an enterprise reporting-system implementation at Yoki; pricing actions partly offset volume declines.
- Consolidated reported results benefited from lower restructuring charges and more favorable commodity mark-to-market effects versus the prior-year quarter. Adjusted EPS and adjusted margin, which exclude specified items, declined.
Liquidity, debt and other material matters
- Cash from operations rose as working-capital cash use was much lower than a year earlier. Management attributed much of the change to timing of accounts payable, including extended payment terms, and trade and incentive accruals.
- Quarter-end total current assets were $4,338.5 and current liabilities were $5,889.9. The company had $3.4 billion of committed and uncommitted credit facilities, with $0.3 billion borrowed; it reported compliance with applicable covenants, including a 2.5x fixed-charge-coverage requirement.
- $604.7 of long-term debt was classified as current, including $500 million of 1.4% notes due October 2017 and $100 million of 6.39% notes due for remarketing in February 2018. Management stated that operating cash flows and available financing would meet liquidity and capital needs for at least the next 12 months.
- Restructuring charges were $17.5, versus $72.5 in the prior-year quarter; related project costs were $1.2, versus $13.8. Initiatives include a global reorganization affecting approximately 600 positions, a Melbourne plant closure affecting approximately 350 positions, and the Vineland, New Jersey plant closure. The filing estimates $27 million of future restructuring charges and $12 million of future project-related costs, with timing and cash impact varying by initiative.
- Sodiaal may put all or part of its Yoplait SAS redeemable interest to General Mills once per year, up to three times before December 2024. Its reported redemption value was $967.5 at quarter-end.
- The company identified goodwill/intangible-asset impairment sensitivity: Latin America reporting-unit fair value exceeded carrying value by 15%, and Immaculate Baking brand fair value exceeded carrying value by 17% at the fiscal 2017 assessment. Progresso, Green Giant, Food Should Taste Good and U.S. Yogurt were also identified as having potential for decreasing coverage.
- Commodity, foreign-exchange, interest-rate and equity market risks remain. The filing reports estimated one-day value-at-risk of $3 million for commodities and $24 million for foreign exchange, among other exposures.
Outlook and management commentary
- Management said first-quarter sales were in line with expectations and cited market-share improvement in a number of important markets, including the U.S. It also cited a challenging macro environment, unfavorable trade-expense phasing and higher input costs.
- The filing does not provide a clear numerical full-year sales or earnings forecast in the supplied text. Management stated that current restructuring actions are expected to be completed on differing schedules, including by fiscal 2018 year-end for the global reorganization and by fiscal 2019 year-end for certain plant/product-line actions.
- Key disclosed risks include competition and consumer demand changes, commodity and supply-chain cost/availability, foreign exchange and political conditions, product quality and safety, information-technology failures, execution of restructuring and cost-saving plans, benefit-plan assumptions, and impairment of goodwill or intangible assets.
- New stock-based payment accounting resulted in a $17.7 windfall tax benefit recognized in income tax expense. Adoption of the new goodwill impairment guidance did not affect results or financial position. The company expects new lease accounting to materially affect its balance sheet, but stated it could not yet quantify the impact.
Important facts for investors to verify
- Whether sales-volume declines in North America Retail and Asia & Latin America persist, and whether Yoki reporting-system issues and the prior-year comparison effect are resolved.
- Whether higher input costs and trade-expense timing continue to pressure adjusted margins and EPS.
- Whether operating cash-flow improvement is repeatable, given management’s emphasis on payment-term and accrual timing.
- How the increase in total debt, upcoming maturities and potential Sodiaal redemption obligations affect financing needs and capital allocation.
- Progress, total costs, cash requirements and realized savings from restructuring initiatives and share repurchases.
- Developments in impairment coverage for the named brands and reporting units, and the eventual balance-sheet impact of lease-accounting adoption.