General Mills, Inc. — Fiscal 2023 Third-Quarter 10-Q
Reporting period: Quarter ended February 26, 2023; year-to-date figures cover the nine months ended that date. Comparisons are with the corresponding prior-year periods. Amounts are in millions of dollars unless noted.
Business context and results
General Mills operates packaged-food businesses across North America Retail, International, Pet, and North America Foodservice. In the quarter, higher pricing and favorable mix drove sales growth, while inflation, higher SG&A, commodity mark-to-market losses, and a smaller divestiture gain weighed on reported operating profit.
| Metric | Q3 FY2023 | Q3 FY2022 | 9M FY2023 | 9M FY2022 |
|---|---|---|---|---|
| Net sales | $5,125.9 | $4,537.7 | $15,064.2 | $14,101.6 |
| Operating profit | $730.2 | $815.3 | $2,615.6 | $2,459.7 |
| Net earnings attributable to General Mills | $553.1 | $660.3 | $1,979.0 | $1,884.5 |
| Diluted EPS | $0.92 | $1.08 | $3.28 | $3.07 |
| Operating margin | 14.2% | 18.0% | 17.4% | 17.4% |
Financial metrics and liquidity
- Sales and margins: Q3 sales increased 13%; organic sales rose 16%, entirely from organic net price realization and mix, with volume flat. Nine-month sales increased 7% and organic sales rose 12%, as 16 points of price/mix growth more than offset a 3-point decline in organic volume. Gross margin, calculated from reported sales and cost of sales, was approximately 32.5% for Q3 versus 30.9%; for nine months it was approximately 32.0% versus 32.9%.
- Adjusted performance: Q3 adjusted operating profit was $807.0, up 20% on a constant-currency basis; adjusted margin was 15.7%, versus 14.9%. Adjusted diluted EPS was $0.97, up 17% on a constant-currency basis. For nine months, adjusted operating profit was $2,567.9, up 11% constant currency, and adjusted EPS was $3.18, up 14% constant currency. These are non-GAAP measures.
- Cash flow: Nine-month operating cash flow was $2,027, down from $2,228. Capital expenditures were $351; operating cash flow less capital expenditures was approximately $1,676, compared with $1,878 a year earlier. The filing attributes lower operating cash flow primarily to increased inventory and higher cash income-tax payments.
- Balance sheet and debt: Cash was $618.7 at February 26, 2023. Current assets were $5,116.0 and current liabilities were $9,418.3. Notes payable were $959.8; current and long-term debt totaled $10,627.4, making total debt including notes payable $11,587.2. Long-term debt due within 12 months was $2,487.2. The company had $2.7 billion of committed credit facilities and $0.6 billion of uncommitted facilities, with none borrowed under those facilities; it reported compliance with covenants and expects operating cash flow and available financing to meet needs for at least 12 months.
- Capital allocation: In the nine months, General Mills paid $967 in dividends and repurchased $1,152 of shares. Financing activities used $1,956 of cash.
Changes versus prior comparable periods
- Q3 GAAP operating profit fell 10% and diluted EPS fell 15%, despite 13% sales growth. The prior-year quarter included substantially larger divestiture gains: $170.1 versus $13.7 in the current quarter.
- Nine-month GAAP operating profit rose 6% and diluted EPS rose 7%. Current-period results included a $444.6 net divestiture gain, primarily from selling the Helper main meals and Suddenly Salad businesses; prior-year gains were $170.1.
- Q3 North America Retail sales rose 15% and segment profit rose 29%; Foodservice sales rose 25% and segment profit rose 134%. Pet sales rose 14% while segment profit declined 7%. International sales declined 3% and segment profit increased 18%.
- For nine months, North America Retail sales and segment profit rose 12% and 24%, respectively; Foodservice rose 23% and 24%. Pet sales rose 10% while segment profit fell 13%. International sales fell 21% and segment profit fell 39%, reflecting divestitures, foreign exchange, volume declines, and the product recall.
Outlook, risks, and unusual items
- Management identified consumer economic health, inflation, and supply-chain disruption as major performance factors. It anticipated double-digit input-cost inflation for fiscal 2023, planned to address it through Holistic Margin Management savings and Strategic Revenue Management pricing, expected volume elasticities to increase but remain below historical levels, and expected supply-chain disruptions to moderate gradually. The supplied filing text does not provide a clear full-year earnings or sales guidance target.
- A voluntary recall of certain international Häagen-Dazs ice cream products resulted in a $25.5 nine-month charge. Management cited the recall as a factor in International performance.
- Commodity and grain mark-to-market effects reduced nine-month results by $266.4 in unallocated corporate items, compared with a net gain of $16.2 in the prior-year period. These effects can create earnings volatility.
- Brazilian tax authorities proposed adjustments disallowing certain Yoki goodwill-amortization tax benefits; the company said it intends to contest the matter. A separate São Paulo state sales-tax assessment includes taxes, interest, and penalties; the company says it cannot estimate a possible loss and has recorded no loss contingency.
- The annual impairment test identified no impairment, but the Uncle Toby’s brand was an exception to the generally substantial fair-value coverage; Progresso and EPIC also had risk of decreasing coverage. The company said it would continue monitoring them.
- The Inflation Reduction Act’s corporate alternative minimum tax and stock-repurchase excise tax were not expected to have a material impact; the excise tax was immaterial in the quarter. The filing also identifies inflation, interest and foreign-exchange rates, consumer response to pricing, supply-chain availability, product quality and recalls, competition, and potential asset impairments among risks.
Important facts for investors to verify
- Whether price increases and mix can continue to offset input-cost inflation without materially worsening volume trends.
- How much reported earnings are affected by divestiture gains, commodity mark-to-market changes, investment items, and other non-GAAP adjustments.
- The refinancing or repayment plan for $2,487.2 of debt classified as current, and the company’s liquidity as working-capital needs evolve.
- Any further costs or sales effects from the Häagen-Dazs recall, and developments in the Brazilian tax disputes.
- Whether Uncle Toby’s, Progresso, or EPIC brand valuations require impairment charges.
- That adjusted results and constant-currency growth rates are non-GAAP measures and should be assessed alongside GAAP results.