General Mills, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 24, 2019, in fiscal 2020. Comparisons are with the quarter and six-month period ended November 25, 2018. Amounts are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $4,420.8; essentially flat year over year | $8,423.3; down 1% |
| Organic net sales | Up 1% | Essentially flat |
| Operating profit / margin | $811.2 / 18.3%, versus $547.0 / 12.4% | $1,473.6 / 17.5%, versus $1,148.5 / 13.5% |
| Adjusted operating profit / margin | $813.1 / 18.4%, up 6% (7% constant currency) | $1,495.2 / 17.8%, up 6% (7% constant currency) |
| Net earnings attributable to General Mills | $580.8, versus $343.4 | $1,101.4, versus $735.7 |
| Diluted EPS | $0.95, versus $0.57; adjusted EPS $0.95, up 11% constant currency | $1.80, versus $1.22; adjusted EPS $1.74, up 12% constant currency |
| Operating cash flow | $1,456.6 for six months, versus $1,396.5 | |
| Capital expenditures | $158.5 for six months, versus $253.8 |
Quarterly gross margin was approximately 35.5% of sales, compared with approximately 34.2% a year earlier, based on reported sales and cost of sales. The company declared dividends of $0.49 per share in each quarter ($0.98 for six months).
Segments and notable changes
- Pet: Sales rose 16% in the quarter and 11% for six months; six-month operating profit increased to $161.7 from $85.3, largely reflecting the prior-year $53 million Blue Buffalo inventory purchase-accounting charge and improved pricing/mix.
- North America Retail: Sales were essentially flat in both periods; six-month operating profit increased 3% to $1,202.4.
- Convenience Stores & Foodservice: Quarterly sales were flat and six-month sales declined 2%; six-month operating profit was approximately unchanged.
- Europe & Australia: Sales declined 5% in the quarter and 7% for six months, including currency headwinds and weaker volume. Operating profit increased from a low base.
- Asia & Latin America: Sales declined 5% in the quarter and 7% for six months, affected by lower volume, currency, and prior divestitures. Operating profit increased from a low base.
The large increase in reported operating profit and EPS chiefly reflects comparison with the prior-year quarter and six-month periods, which included about $205.8 million of asset-impairment charges. Current-period adjusted growth was more modest. Six-month earnings also benefited from a $53.1 million discrete, non-cash tax reduction following a subsidiary reorganization.
Cash, debt, liquidity, and balance sheet
- Cash and cash equivalents were $560.2 at November 24, up from $450.0 at fiscal year-end; $514 million was held in foreign jurisdictions.
- Total debt was $13,835.4, down from $14,490.0 at May 26, 2019. The company repaid $500 million of 2.20% notes during the quarter. Six-month financing cash outflow was $1,179.8, including $596.3 of dividends and net debt repayments.
- Current liabilities were $7,362.3 and current assets $4,478.9. Current debt maturities totaled $1,537.2, including notes due or subject to remarketing within the next 12 months.
- Committed credit facilities totaled $2.9 billion and were undrawn; total committed and uncommitted facilities were $3.6 billion, with $0.2 billion borrowed. The company reported compliance with debt and credit covenants.
- Management said operating cash flow and available short- and long-term financing should meet liquidity and capital needs for at least the next 12 months.
- Operating lease adoption added $403.8 of right-of-use assets and $417.1 of present-value lease obligations. Adoption did not materially affect earnings, cash flows, or retained earnings.
Outlook, risks, and contingencies
- The filing provides no specific full-year fiscal 2020 sales or earnings guidance in the supplied text. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management cited lower input costs and lower consumer promotional expenses as contributors to adjusted quarterly margin improvement; six-month adjusted margin also benefited from favorable price/mix, partly offset by higher input costs.
- The annual impairment test found no impairment, but fair-value headroom was relatively limited for the Europe & Australia reporting unit (14%) and Progresso brand (5%). Pillsbury was identified as having risk of decreasing coverage; management said it would continue monitoring these assets.
- Brazil’s São Paulo state tax authorities assessed additional sales taxes, interest, and penalties. General Mills disputes the claim, intends to defend its position, and said it could not estimate a possible loss; no contingency was recorded.
- Other disclosed exposures include commodity and foreign-exchange volatility, interest-rate risk, product quality and safety, changing consumer demand, competition, supply-chain disruption, and risks associated with acquisitions and intangible-asset impairments. The filing reports one-day value-at-risk estimates of $92 million for interest rates, $13 million for foreign exchange, $3 million for commodities, and $2 million for equity instruments.
- Supplier financing services were used by suppliers with $1,279.2 of the company’s accounts payable; the company stated these remain obligations to suppliers under its agreements.
Important facts for investors to verify
- Whether organic sales growth can be sustained, particularly given weak volumes in several international businesses and stronger Pet results.
- How much of reported earnings growth reflects recurring operations versus prior-year impairments, tax benefits, commodity mark-to-market movements, and other adjustments.
- Performance and valuation headroom for Europe & Australia, Progresso, and Pillsbury intangible assets.
- Near-term refinancing and liquidity needs, including the $1.537 billion of current long-term debt and the timing of upcoming maturities.
- Potential financial exposure from the São Paulo tax assessment and the significance of supplier financing arrangements.
- Adjusted, organic, and constant-currency measures are non-GAAP; review the filing’s reconciliations alongside GAAP results.