General Mills, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2016 (fiscal 2016 third quarter). Unless noted otherwise, dollar amounts are in millions. Comparisons are with the corresponding prior-year periods.
Business context and results
General Mills operates U.S. Retail, International, and Convenience Stores and Foodservice businesses. Results reflect the sale of North American Green Giant product lines, foreign-currency impacts, ongoing restructuring and cost savings, and lower sales volumes in parts of the business.
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $4,002; down 8% reported and 4% constant currency | $12,635; down 5% reported and 1% constant currency |
| Operating profit | $586, up from $537 | $2,175, up from $1,654 |
| Total segment operating profit | $679, down 3% reported and 1% constant currency | $2,345, up 5% reported and 8% constant currency |
| Net earnings attributable to General Mills | $362, up from $343 | $1,318, up from $1,035 |
| Diluted EPS | $0.59, up from $0.56 | $2.15, up from $1.67 |
| Diluted EPS excluding items affecting comparability | $0.65, down 7% (down 6% constant currency) | $2.26, up 7% (up 10% constant currency) |
| Cash dividends per share | $0.44, versus $0.41 | $1.32, versus $1.23 |
Approximate operating margin, calculated as operating profit divided by net sales, was 14.6% for the quarter versus 12.3% a year earlier, and 17.2% for the nine months versus 12.4%. These comparisons include material gains and restructuring charges.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,863, up from $1,561. Investing activities provided $335, including $826 of divestiture proceeds; the prior-year period used $1,408, including the Annie’s acquisition.
- Capital expenditures were $478. Financing activities used $1,721, including $795 of dividends, $602 of share repurchases, and net debt repayments.
- Cash and equivalents were $783 at February 28, 2016, versus $334 at May 31, 2015. The company reported $746 of cash held in foreign jurisdictions, intended to support foreign operations and potential acquisitions.
- Total debt was $8,768, down from $9,192 at May 31, 2015. Current debt maturities were $1,104; long-term debt was $7,024. The company said operating cash flow and available financing should meet liquidity and capital needs for at least 12 months.
- Committed and uncommitted credit facilities totaled $3.3 billion, with $0.3 billion borrowed. The company reported compliance with debt and credit facility covenants.
Material changes and management commentary
- Green Giant’s North American product lines were sold for $822.7 cash, with a reported pre-tax gain of about $199.1. The divestiture reduced third-quarter sales growth by 3 percentage points.
- International sales fell 13% in the quarter, largely reflecting currency translation; they were flat on a constant-currency basis. International segment operating profit declined 35% reported and 24% constant currency, affected by currency, the divestiture, and higher input costs.
- U.S. Retail sales fell 7% in the quarter, including an 8-point volume decline; segment operating profit was essentially flat. Convenience Stores and Foodservice sales declined 2%, while segment operating profit rose 31%.
- The effective tax rate rose to 31.0% for the quarter from 25.5%, primarily because of less favorable U.S. federal legislation effects and changes in earnings mix. For nine months, it was 34.3% versus 29.8%, including nondeductible expenses related to the Green Giant sale.
- Management attributed higher operating cash flow mainly to working-capital timing, including higher other current liabilities, partly offset by changes in noncash restructuring charges.
Outlook, risks and unusual items
- No specific full-year sales or EPS guidance is stated in the provided filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
- Restructuring charges were $199 for nine months, with another $39 of project-related costs. Estimated cumulative restructuring and project-related costs are $777, with targeted cumulative annual savings of $500 by fiscal 2018. Projects include workforce reductions and manufacturing-facility closures; completion dates vary through fiscal 2019.
- On March 16, 2016, the company sold its Venezuelan subsidiary and exited Venezuela; it expected a pre-tax loss of approximately $35 in the fourth quarter. Venezuela represented less than 1% of consolidated assets, liabilities, sales, and segment operating profit.
- The company identified Mountain High and Uncle Toby’s brands as having relatively limited fair-value cushions over carrying value (20% and 11%, respectively); no impairment was recorded, and management said it would continue monitoring them.
- Commodity derivatives are not accounted for as cash-flow hedges, so valuation changes can create earnings volatility. Other stated risks include competition, consumer demand and preferences, input costs and supply-chain disruption, foreign exchange and political conditions, product safety, and effectiveness of restructuring and cost-saving programs.
- Management reported effective disclosure controls as of February 28, 2016, with no material quarter-end change in internal control over financial reporting. No material ordinary-course changes in contractual obligations or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Reconcile GAAP EPS growth with adjusted EPS performance, particularly the effects of the Green Giant gain, restructuring, project costs, and commodity mark-to-market items.
- Assess whether lower U.S. Retail volumes and the International segment’s operating-profit decline persist, separating currency and divestiture impacts from underlying trends.
- Track restructuring cash outlays, remaining estimated costs, and delivery of the stated $500 annual savings target by fiscal 2018.
- Review the $1,104 of debt classified as current, including $1,000 of 5.7% notes due February 2017, and the company’s refinancing and liquidity plans.
- Monitor impairment headroom for Mountain High and Uncle Toby’s, commodity and foreign-exchange exposures, and the expected Venezuela disposal loss.