General Mills, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended November 29, 2015 (fiscal 2016); comparisons are to the periods ended November 23, 2014. Amounts are in millions of dollars except per-share data.
Business context and financial performance
General Mills operates in consumer foods through U.S. Retail, International, and Convenience Stores and Foodservice segments. In the quarter, it sold its North American Green Giant product lines for $822.7 million in cash and recorded a $199.1 million pretax gain. The company retained certain Green Giant brand rights outside North America.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $4,424.9, down 6% reported and 2% in constant currency | $8,632.8, down 4% reported and up 1% in constant currency |
| Segment operating profit | $839.4, down 1% reported and up 2% in constant currency | $1,665.9, up 8% reported and 12% in constant currency |
| Operating profit | $905.7, versus $559.0 | $1,589.0, versus $1,116.5 |
| Net earnings attributable to General Mills | $529.5, versus $346.1 | $956.1, versus $691.3 |
| Diluted EPS | $0.87, versus $0.56 | $1.56, versus $1.11 |
| Diluted EPS excluding specified comparability items (non-GAAP) | $0.82, up 2%; up 5% in constant currency | $1.61, up 14%; up 18% in constant currency |
| Net cash from operating activities | $1,156.0 for six months, versus $863.2 |
Higher reported operating profit, net earnings, and EPS reflect, in part, the Green Giant gain and lower restructuring charges versus the prior-year period. The company’s non-GAAP EPS excludes items including divestiture effects, restructuring, project costs, and commodity mark-to-market effects; it should be considered alongside GAAP results.
Segments and material changes
- U.S. Retail: Quarterly sales of $2,761.9 million fell 4%; operating profit of $600.4 million fell 3%. Six-month sales were essentially flat at $5,293.1 million, while operating profit rose 15% to $1,230.1 million. Quarter sales weakness reflected lower volume, with cost savings and lower advertising expense partly offsetting the pressure.
- International: Quarterly sales of $1,157.2 million fell 12% reported but rose 3% in constant currency; operating profit was $136.2 million, up 1% reported and 19% in constant currency. Six-month sales fell 12% reported but rose 4% in constant currency; operating profit fell 10% reported but increased 8% in constant currency. Foreign exchange was a major drag on reported sales and profit.
- Convenience Stores and Foodservice: Quarterly sales fell 4% to $505.8 million while operating profit rose 7% to $102.8 million. Six-month sales fell 2% to $983.5 million and operating profit was nearly flat at $182.6 million.
- Consolidated sales declines reflected lower volume in the quarter and significant currency translation headwinds, particularly in International. Management cited cost savings and lower media and advertising expense as offsets.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $1,156.0 million. Investing activities provided $523.0 million, including $822.7 million of Green Giant sale proceeds; capital expenditures were $293.5 million. Financing activities used $1,341.8 million, including $549.0 million for treasury stock purchases and $530.9 million of dividends.
- Cash and cash equivalents were $649.8 million at November 29, 2015, up from $334.2 million at May 31, 2015; $617 million was held in foreign jurisdictions. Current assets were $4,047.6 million and current liabilities were $4,969.4 million.
- Total debt was $8,823.5 million, down from $9,191.5 million at fiscal year-end. This included $1,100.2 million of current long-term debt and $306.7 million of notes payable. Long-term debt’s carrying amount, including current maturities, was $8,516.8 million.
- Approximately $1.1 billion of long-term debt was due within 12 months, including $750 million of floating-rate notes due January 2016. The company reported $3.3 billion in committed and uncommitted credit facilities, with $0.3 billion borrowed, and said it expected operating cash flows and available financing to meet liquidity and capital needs for at least 12 months.
- The company was in compliance with debt and credit-facility covenants. Its committed facilities require a fixed-charge coverage ratio of at least 2.5 times.
Outlook, risks, and unusual items
- The filing provides no specific consolidated sales, earnings, or EPS guidance. Management stated that interim results are not necessarily indicative of full-year results.
- Restructuring continues. Project Compass is expected to eliminate approximately 725–775 positions, with estimated net expenses of $62–$65 million and completion by the end of fiscal 2017. Project Century includes facility closures and network changes; estimated total Century charges are $420 million, with targeted cumulative annual savings of $172 million. The company also estimated $105 million of additional project-related cash costs, recorded in cost of sales, and targeted cumulative annual savings of $500 million across restructuring and related cost-reduction projects by fiscal 2018.
- Other Century actions include proposed closure of a U.K. facility, affecting approximately 265 positions, subject to consultation; closure of facilities in New Zealand, West Chicago, and Joplin; and previously announced U.S. facility exits. Charges and timing remain subject to execution of these plans.
- The effective tax rate was 37.4% for the quarter and 35.4% for six months, versus 31.8% in each prior-year period; management attributed the increase primarily to significant nondeductible expenses associated with the Green Giant divestiture.
- Foreign currency movements, consumer demand and preferences, competition and promotional activity, commodity and energy prices, supply-chain execution, restructuring savings, and potential impairment of intangible assets are identified risks. The Mountain High and Uncle Toby’s brands had fair values only 20% and 11%, respectively, above carrying value; management said it would continue monitoring them.
- The company uses commodity derivatives to manage input-price exposure; commodity derivatives do not receive hedge accounting, so mark-to-market changes can affect reported earnings. One-day value-at-risk estimates were $29 million for interest-rate instruments and $4 million for commodity instruments.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material contractual-obligation or off-balance-sheet changes outside the ordinary course were reported.
Most important facts for investors to verify
- How much of reported earnings growth is attributable to the $199.1 million Green Giant gain and lower year-over-year restructuring charges, versus underlying operating performance.
- Whether sales volumes and segment performance stabilize, particularly in U.S. Retail and International, and how currency movements continue to affect reported results.
- Whether restructuring plans meet cost, cash-charge, job-reduction, completion, and savings estimates, including the additional project-related costs.
- How the company will refinance or repay the approximately $1.1 billion of debt maturing within 12 months and maintain liquidity while funding dividends and repurchases.
- Whether the Mountain High and Uncle Toby’s brand valuations or other goodwill and intangible assets become subject to impairment.