General Mills, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine-month period ended February 24, 2019 (fiscal 2019). The request metadata says “2018 Q3,” but the filing covers fiscal 2019 Q3.
Business context and performance
General Mills is a packaged-foods company with five operating segments: North America Retail, Convenience Stores & Foodservice, Europe & Australia, Asia & Latin America, and Pet. Pet includes Blue Buffalo, acquired in fiscal 2018; its results are reported on a one-month lag.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $4,198.3 million | $3,882.3 million | $12,703.5 million | $11,850.2 million |
| Operating profit | $651.3 million | $569.5 million | $1,799.8 million | $1,883.8 million |
| Operating margin | 15.5% | 14.7% | 14.2% | 15.9% |
| Net earnings attributable to General Mills | $446.8 million | $941.4 million | $1,182.5 million | $1,776.6 million |
| Diluted EPS | $0.74 | $1.62 | $1.96 | $3.05 |
Quarterly sales rose 8% (10% constant currency), primarily from Blue Buffalo; organic sales grew 1%, with 3 points of favorable price and mix offset by a 2-point decline in organic volume. Nine-month sales rose 7% (9% constant currency), while organic sales were flat. Management cited favorable pricing and mix, but declining organic volume, as key trends.
Adjusted diluted EPS, excluding items affecting comparability, was $0.83 for the quarter, up 5% reported and 6% constant currency; nine-month adjusted EPS was $2.39, up 3%. Adjusted operating margin was 17.4% in Q3 versus 15.1%, and 16.8% for nine months versus 16.2%. These are non-GAAP measures.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $2,027.6 million, down from $2,135.3 million. Investing used $407.7 million, including $367.9 million of capital expenditures; financing used $1,458.0 million.
- Cash and cash equivalents were $547.1 million at February 24, 2019, compared with $399.0 million at fiscal year-end. Total debt was $15,021.1 million, down from $15,818.6 million; this includes $1,971.3 million of notes payable.
- Current assets were $4,169.8 million and current liabilities $7,516.6 million. Available committed and uncommitted credit facilities totaled $3.6 billion, with $0.2 billion borrowed. The company reported compliance with debt and credit covenants.
- Dividends paid in the first nine months totaled $883.7 million. The quarterly dividend was $0.49 per share.
- Management stated that operating cash flows and available financing should meet liquidity and capital needs for at least the next 12 months. In March 2019, after quarter-end, the company issued €300 million of 0% notes due January 2020, intending to use proceeds and cash to repay floating-rate notes due March 2019.
Material changes and unusual items
- Blue Buffalo contributed to sales growth and added debt-related interest expense. Nine-month interest expense was $397.0 million, up $160 million, primarily due to higher average debt from the acquisition. Nine-month Pet segment sales and operating profit were $1,025.3 million and $158.3 million; prior-year Pet results were not included.
- Q3 GAAP earnings were affected by a $35.4 million pre-tax loss on the sale of Argentina’s La Salteña business and $59.7 million of restructuring, impairment, and exit costs. The nine-month total for these costs was $267.7 million, including $192.6 million of brand impairments and $14 million of manufacturing-asset impairments.
- The brand impairment followed lower long-range sales projections for Progresso, Food Should Taste Good, and Mountain High. Management also identified potential declining impairment coverage for the Pillsbury brand and U.S. Yogurt reporting unit, which it will monitor.
- New global supply-chain and systems actions are expected to generate approximately $125 million of restructuring charges plus about $2 million of project costs; the company expects approximately $30 million of cash spending and completion by the end of fiscal 2022. Actions include exiting the Carson, California yogurt facility and are subject, in some cases, to labor consultations.
- The prior-year comparison was materially affected by a one-time Tax Cuts and Jobs Act benefit: Q3 FY2018 included a $523.5 million provisional net tax benefit. Fiscal 2019 Q3 included a further $7.2 million tax benefit as the company completed its accounting. Reported effective tax rates were 17.7% for Q3 and 21.4% for nine months in FY2019, versus tax benefits in the comparable FY2018 periods.
Outlook, risks, and contingencies
The filing does not provide a clear numerical full-year sales or earnings guidance figure in the supplied text. Management emphasized pricing and mix benefits alongside weak organic volume. Key disclosed risks include competitive and consumer-demand changes, input-cost and supply-chain pressures, foreign exchange, Blue Buffalo integration and retention, product quality and recalls, litigation and regulation, and further goodwill or intangible-asset impairments. Commodity and interest-rate movements are also relevant; the filing reports one-day value-at-risk of $50 million for interest-rate instruments, $18 million for foreign exchange, and $2 million each for commodity and equity instruments.
Other notable exposures include $1,017.5 million of accounts payable to suppliers using third-party payment-financing services (the company states these remain obligations to suppliers), and a Yoplait redeemable interest of $548.9 million that Sodiaal may put to the company under specified terms. The company said it was analyzing the expected balance-sheet impact of new lease accounting requirements and could not yet reasonably estimate the amount.
Investor verification priorities
- Confirm whether organic volume stabilizes and whether pricing and mix can sustain sales and margin performance.
- Track Blue Buffalo integration, Pet segment growth and margins, acquisition-related costs, and the effect of acquisition debt on interest expense.
- Review impairment assumptions and subsequent coverage for Progresso, Food Should Taste Good, Mountain High, Pillsbury, and U.S. Yogurt.
- Monitor actual restructuring charges, cash spending, labor consultations, facility exit plans, and realized savings against management’s estimates.
- Assess debt maturities, short-term borrowing needs, covenant compliance, and liquidity after the disclosed post-quarter-end refinancing.
- Reconcile reported results with management’s non-GAAP adjusted measures and the unusually favorable prior-year tax comparison.