General Mills, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended May 27, 2018. This is an annual filing, not a standalone “2017 Q4” report; quarterly figures below are for FY2018’s fourth quarter. Financial amounts are in U.S. dollars.
Business context
General Mills manufactures and markets branded consumer foods worldwide and supplies foodservice and commercial baking customers. In April 2018, it acquired Blue Buffalo for approximately $8.0 billion, adding a Pet operating segment. Blue Buffalo’s results were excluded from FY2018 earnings because the company reports that segment on a one-month lag. Walmart represented 21% of consolidated sales.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $15.740 billion | $15.620 billion |
| Organic net sales growth | Flat | Down 4% |
| Operating profit | $2.509 billion; 15.9% margin | $2.566 billion; 16.4% margin |
| Total segment operating profit | $2.792 billion; down 5% (6% constant currency) | $2.953 billion |
| Adjusted operating profit margin | 17.2% | 18.1% |
| Net earnings attributable to General Mills | $2.131 billion | $1.658 billion |
| Diluted EPS | $3.64 | $2.77 |
| Adjusted diluted EPS | $3.11; up 1% (flat constant currency) | $3.08 |
| Cash from operations | $2.841 billion | $2.415 billion |
| Free cash flow | $2.218 billion | $1.731 billion |
| Total debt | $15.819 billion | $9.482 billion |
| Cash and cash equivalents | $399 million | $766 million |
Gross margin was 34.5%, down from 35.6%, primarily reflecting higher input costs. FY2018 reported net earnings and EPS benefited materially from a provisional $523.5 million net tax benefit related to the Tax Cuts and Jobs Act (TCJA); the reported effective tax rate was 2.7%, versus 28.8% in FY2017. The adjusted effective tax rate was 25.7%.
Capital spending was $623 million. The company paid $1.140 billion in dividends and repurchased $602 million of shares. Investing cash outflow was $8.685 billion, mainly due to the Blue Buffalo acquisition; financing activities provided $5.446 billion.
Material changes versus prior period
- Sales increased 1% as reported, but organic sales were flat: a 1-point price/mix contribution offset a 1-point volume decline. Currency added 1 point to reported growth.
- Operating profit fell 2%, and total segment operating profit fell 5%. Input cost inflation was 4% and higher merchandising costs pressured performance; HMM savings did not fully offset these pressures.
- North America Retail sales declined 1% and segment profit declined 4%; U.S. Yogurt sales fell 12%. Convenience Stores & Foodservice sales rose 3%, while Europe & Australia sales rose 9% as reported, including favorable currency. Asia & Latin America sales declined 1% and segment profit fell 53%.
- Debt rose by approximately $6.3 billion, principally to finance Blue Buffalo. The company issued $6.05 billion of debt and $970 million of net equity proceeds in connection with the acquisition.
- FY2017 included an additional month of Yoki results, affecting some year-over-year comparisons in Asia & Latin America.
Outlook, commentary, risks and unusual items
- For FY2019, management targets organic sales from flat to up 1%; reported sales growth of 9% to 10%, including Blue Buffalo; constant-currency adjusted operating profit growth of 6% to 9%; and constant-currency adjusted diluted EPS from flat to down 3% versus $3.11. The EPS outlook includes a 4-cent Blue Buffalo purchase-accounting headwind.
- Management expects approximately 5% input cost inflation in FY2019 and capital expenditures of approximately $745 million. It plans to invest in growth platforms, integrate Blue Buffalo, and continue cost and productivity initiatives.
- FY2018 included a $96.9 million impairment charge for Yoki, Mountain High, and Immaculate Baking brand assets, plus $34 million of Blue Buffalo transaction and integration costs. The TCJA tax accounting remained provisional and could be revised.
- Debt and liquidity warrant attention: total debt was $15.819 billion, including $1.600 billion of current long-term debt. Management stated cash flows and available financing should meet needs for at least 12 months; the company reported compliance with debt covenants. Fixed-charge coverage was 5.89, down from 7.26.
- Key disclosed risks include commodity and energy cost volatility, competitive and private-label pressure, customer concentration, foreign exchange and international exposure, supply-chain and product-safety disruptions, cyber risks, pension assumptions, and possible goodwill or brand impairment. Blue Buffalo integration and customer retention are additional risks; two customers accounted for 59% of Blue Buffalo’s FY2017 sales.
- The company reported no litigation expected to have a material adverse effect and stated environmental matters were not expected to be material. Its auditor gave an unqualified opinion on the financial statements and internal controls; Blue Buffalo, representing 29% of assets and no FY2018 sales, was excluded from the internal-control assessment.
Important facts for investors to verify
- Whether organic sales and volume trends improve, especially in North America Retail and U.S. Yogurt, and whether pricing can offset inflation without hurting demand.
- Blue Buffalo’s post-acquisition sales, margins, customer retention, integration costs, and progress toward expected growth and synergies.
- Debt repayment and refinancing plans, interest expense, covenant headroom, and liquidity after the acquisition.
- The final TCJA tax accounting and the sustainability of earnings excluding the one-time tax benefit and other comparability items.
- Progress on FY2019 guidance, restructuring savings, and the impairment outlook for brands and businesses with limited valuation headroom.