GENERAL MILLS INC quarterly report, Q3 FY2018

Business context and reporting period

General Mills, Inc. filed this unaudited Form 10-Q for the quarter ended February 25, 2018, the third quarter of fiscal 2018. The request metadata says “2017 Q3,” which does not match the period stated in the filing. Results are compared with the quarter and nine-month period ended February 26, 2017. Dollar amounts below are in millions unless otherwise stated.

Financial results

The sharp increase in reported earnings and EPS primarily reflects a $503.8 provisional net tax benefit from the Tax Cuts and Jobs Act (TCJA), rather than comparable improvement in underlying operating performance. Adjusted EPS excludes specified comparability items; the filing reports adjusted EPS growth of 8% for the quarter and a 2% decline for the nine months on a constant-currency basis.

Cash flow, debt, and liquidity

• Nine-month operating cash flow was $2,135.3, up $476.3 from the prior-year period. Management attributed the increase largely to working-capital movements, particularly accounts payable timing and extended payment terms.
• Investing cash outflow was $424.9, including $397.9 of capital expenditures. Financing cash outflow was $1,569.7, including $601.2 of share repurchases and $846.5 of dividends.
• Cash and cash equivalents were $953.1 at February 25, 2018, including $907 held in foreign jurisdictions.
• Total debt was $9,624.9, compared with $9,481.7 at May 28, 2017. Long-term debt, including its current portion, was $8,414.1. $1,250.5 of long-term debt was classified as current, including $1,150 of 5.65% notes due February 2019.
• Available committed and uncommitted credit facilities totaled $11.9 billion, of which $0.4 billion was borrowed. The company reported compliance with debt and credit covenants and said operating cash flow and available financing should meet liquidity and capital needs for at least 12 months.

Material changes versus the prior comparable period

• Quarterly reported sales rose 2%, helped by favorable foreign exchange and price/mix; organic volume was flat. For the nine months, reported sales were flat and organic sales declined 1%, reflecting lower volume.
• Quarterly reported operating profit rose 9%, partly because restructuring costs fell to $7.5 from $77.6. Adjusted operating margin nevertheless declined, with higher input costs only partly offset by price/mix and lower advertising expense.
• For the nine months, segment operating profit fell 9% reported (10% on a constant-currency basis), to $2,064.9. Input-cost inflation and weaker results in several international businesses pressured profitability.
• Segment performance was mixed: North America Retail operating profit was flat for the quarter but down 7% year to date; Convenience Stores & Foodservice profit fell 10% and 7%, respectively; Europe & Australia fell 35% and 33%; and Asia & Latin America posted a $2.1 quarterly loss and a 51% year-to-date decline.
• Quarterly net interest expense increased $12.9 to $89.3. This included $13.8 of expense from repurchasing medium-term notes and costs related to financing preparations for the Blue Buffalo transaction.

Outlook, management commentary, risks, and unusual items

• Blue Buffalo acquisition: General Mills agreed to acquire Blue Buffalo for $40 per share in cash, representing approximately $8.0 billion enterprise value, and expects to repay approximately $394 of Blue Buffalo debt at closing. The company expected to finance the transaction with debt, cash on hand, and approximately $1.0 billion in equity; it had secured an $8.5 billion bridge facility commitment. Closing was expected by fiscal year-end, subject to regulatory approvals and customary conditions. The filing provides no broader quantified full-year sales or earnings guidance.
• Acquisition risks: Completion, financing, integration, synergies, and expected growth are uncertain. General Mills warned that it lacks prior experience in pet food and noted Blue Buffalo’s largest customer represented 41% of its 2017 net sales. Transaction, financing, integration, or restructuring costs could adversely affect results and cash flow.
• Tax uncertainty: The TCJA accounting was provisional and could be revised during the permitted measurement period. The company had not completed calculations for the transition tax, foreign-earnings repatriation, or certain GILTI effects; resulting adjustments could materially affect tax expense and the effective tax rate.
• Restructuring: Existing multi-year initiatives generated $27.3 of charges in the first nine months, versus $208.3 a year earlier. A post-quarter global cost-savings initiative was expected to produce $40–$60 of primarily cash charges in the fourth quarter of fiscal 2018, with most actions expected to be completed by fiscal year-end.
• Asset impairment watch: The fiscal 2018 goodwill and intangible-asset test found no impairment, but fair-value coverage was only 1% for Yoki, 6% for Progresso, and 21% for the Latin America reporting unit. The company also cited potential decreasing coverage for Food Should Taste Good, Green Giant, and the U.S. Yogurt reporting unit.
• Other risks and unusual disclosures: Management cited input-cost and commodity volatility, foreign exchange, competition, consumer demand, supply-chain disruption, product quality, and execution of cost savings among relevant risks. A prior-year-related adjustment increased tax expense and liabilities by $40.5 and was deemed immaterial. The filing also disclosed two flour shipments rebooked by an unrelated party onto Iranian-flag vessels without the company’s knowledge or consent; proceeds were $56,319, and the company said it did not intend future shipments using those vessels.

Important facts for investors to verify

• Whether Blue Buffalo closed as planned, how it was financed, and the resulting leverage, integration costs, and customer retention.
• Final TCJA accounting, including the transition tax, deferred-tax remeasurement, repatriation assumptions, and GILTI treatment.
• Underlying operating trends apart from the tax benefit: organic volume, price/mix, input-cost inflation, and adjusted margins.
• Whether operating cash flow remains strong after separating recurring cash generation from favorable working-capital timing and extended supplier payment terms.
• Upcoming debt maturities, refinancing needs, and the effect of acquisition financing on debt and interest expense.
• Progress in weaker international segments and the impairment sensitivity of brands and reporting units with limited fair-value headroom.