General Mills, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the first quarter of fiscal 2019, ended August 26, 2018, compared with the quarter ended August 27, 2017. General Mills operates in packaged foods across North America Retail, Convenience Stores & Foodservice, Europe & Australia, Asia & Latin America, and Pet.
Blue Buffalo, acquired in fiscal 2018 for approximately $8.0 billion, contributed to the quarter’s results. Pet segment results are reported on a one-month lag; this quarter included seven days of post-acquisition Pet results.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change/comment |
|---|---|---|---|
| Net sales | $4.094 billion | $3.769 billion | Up 9%; organic sales flat |
| Operating profit | $601.5 million | $605.3 million | Down 1% |
| Operating margin | 14.7% | 16.0% | Down 130 basis points |
| Adjusted operating margin | 15.7% | 16.5% | Down 80 basis points |
| Net earnings attributable to General Mills | $392.3 million | $404.7 million | Down 3% |
| Diluted EPS | $0.65 | $0.69 | Down 6% |
| Adjusted diluted EPS | $0.71 | $0.71 | Unchanged on a constant-currency basis |
| Net interest expense | $133.5 million | $72.4 million | Increase primarily reflects acquisition-related borrowing |
| Effective tax rate | 22.6% | 30.4% | Lower primarily due to TCJA effects |
Reported sales growth reflected 9 percentage points from acquisition and divestiture effects, including Blue Buffalo. Organic volume contributed negative 1 point, offset by positive 1 point from organic price realization and mix. Adjusted operating profit grew 3% on a constant-currency basis.
Operating cash flow was $607.4 million, versus $590.5 million. Investing activities used $139.6 million, including $112.7 million of capital expenditures; financing activities used $423.0 million. Cash increased $33.9 million to $432.9 million.
At quarter-end, total debt was $15.614 billion, comprising $1.349 billion of notes payable, $1.599 billion of current long-term debt, and $12.665 billion of long-term debt. Current assets were $4.186 billion and current liabilities $7.188 billion. Available committed and uncommitted credit facilities totaled $3.6 billion, with $0.2 billion borrowed. Management said operating cash flows and available financing should meet liquidity and capital needs for at least 12 months. The company was in compliance with debt and credit-facility covenants.
Dividends were $0.49 per share, unchanged year over year; $294.2 million of dividends were paid. Treasury-stock purchases were minimal in the quarter.
Material changes and segment results
- Blue Buffalo added $343.3 million in Pet sales and $14.5 million in Pet operating profit. Pet profit included a $53 million acquired-inventory fair-value charge and $3 million of customer-relationship intangible amortization.
- North America Retail sales fell 2% to $2.388 billion, while segment operating profit rose 3% to $548.1 million. Lower volume was partly offset by price and mix.
- Europe & Australia sales rose 2% to $500.7 million and operating profit rose 13% to $34.5 million.
- Convenience Stores & Foodservice sales rose 4% to $463.2 million and operating profit rose 14% to $97.1 million.
- Asia & Latin America sales rose 2% to $399.0 million, including 8% organic growth offset by adverse currency. Operating profit fell to $12.2 million, down 38% on a constant-currency basis.
Operating profit margin pressure reflected the acquired-inventory adjustment, higher input costs, and adverse commodity mark-to-market effects. Unallocated corporate items increased to $106.3 million from $53.6 million, including a $31.1 million net commodity and grain mark-to-market expense and $8.7 million of Blue Buffalo integration costs. The prior-year quarter included $17.5 million of restructuring charges, versus a $1.4 million net recovery this quarter.
Outlook, risks and unusual items
- The filing provides no specific updated fiscal-year sales, earnings, or margin guidance. Management’s stated liquidity view is that available operating cash flow and financing are adequate for at least the next 12 months.
- The company had not completed its accounting for the Tax Cuts and Jobs Act. A provisional $523.5 million net tax benefit was recorded in fiscal 2018; further adjustments could materially affect taxes and the effective tax rate.
- Blue Buffalo integration, retaining key personnel, and realizing acquisition benefits are identified risks. The acquisition added substantial goodwill and brand intangibles; purchase accounting remained subject to review.
- Impairment monitoring is relevant: earlier testing showed limited fair-value headroom for Yoki and Progresso brands and the Latin America reporting unit, while Food Should Taste Good, Green Giant, and U.S. Yogurt were also identified for monitoring. A $96.9 million impairment for Yoki, Mountain High, and Immaculate Baking was recorded in fiscal 2018.
- Other cited risks include competition and consumer demand, pricing and promotions, commodity and energy costs, supply-chain disruption, foreign-exchange volatility, product safety, pension assumptions, and changes in tax or regulatory requirements.
- New lease accounting requirements, expected to take effect for General Mills in fiscal 2020, were expected to materially affect the balance sheet; the company said it could not yet reasonably estimate the impact.
Most important facts for investors to verify
- How much of reported sales growth and future performance is attributable to Blue Buffalo versus organic growth, particularly given flat consolidated organic sales.
- Whether price and mix can offset weak or declining volume in key North American businesses and higher input costs.
- Whether acquisition-related charges, integration costs, and increased interest expense subside as expected, and how debt reduction progresses.
- How the TCJA tax accounting is finalized and whether subsequent adjustments materially change the reported tax rate.
- Whether monitored brands and reporting units retain sufficient impairment headroom, and whether lease adoption materially changes reported liabilities and leverage.