General Mills, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended November 25, 2018; comparisons are to the quarter and six months ended November 26, 2017, unless stated otherwise. Financial amounts are in millions of U.S. dollars except per-share data.
Business context and reporting period
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, is included in the Pet segment; Pet results are reported on a one-month lag, and the prior-year comparison excludes Pet.
Key financial metrics
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $4,411.2 | $4,198.7 | $8,505.2 | $7,967.9 |
| Operating profit | $547.0 | $709.0 | $1,148.5 | $1,314.3 |
| Operating margin | 12.4% | 16.9% | 13.5% | 16.5% |
| Net earnings attributable to General Mills | $343.4 | $430.5 | $735.7 | $835.2 |
| Diluted EPS | $0.57 | $0.74 | $1.22 | $1.43 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,396.5 | $1,566.8 |
- Sales and margins: Reported sales rose 5% in Q2 and 7% for the six-month period, primarily from Blue Buffalo. Organic sales declined 1% in Q2 and were flat for the six months. Q2 organic volume fell 3%, partly offset by 2% favorable price and mix; six-month organic volume fell 2%, also offset by 2% price and mix.
- Adjusted measures (non-GAAP): Q2 adjusted operating profit was $765.2 million, with a 17.3% margin, up 40 basis points; adjusted diluted EPS was $0.85, up 2% on a constant-currency basis. Six-month adjusted operating profit was $1,406.5 million, with a 16.5% margin, down 20 basis points; adjusted diluted EPS was $1.56, up 1% on a constant-currency basis. These exclude items affecting comparability.
- Cash flow and investment: Six-month operating cash flow was $1,396.5 million. Investing activities used $295.4 million, including $253.8 million for property, plant and equipment. Financing activities used $947.3 million, including $589.2 million of dividends. Cash and cash equivalents were $532.7 million at November 25, versus $399.0 million at May 27, 2018.
- Debt and liquidity: Total debt was $15,255.5 million, down from $15,818.6 million at fiscal year-end; cash was $532.7 million. Current long-term debt was $1,990.6 million and notes payable were $1,056.3 million. The company had $2.9 billion of undrawn committed credit facilities and $3.5 billion total committed and uncommitted facilities, of which $0.2 billion was borrowed. It reported compliance with debt and facility covenants and expects cash flows and available financing to meet needs for at least 12 months.
- Interest and taxes: Net interest expense rose to $132.7 million in Q2 and $266.2 million for six months, mainly due to acquisition-related debt and higher rates. The reported effective tax rate was 24.5% for Q2 and 23.5% for six months; the filing attributes the decrease versus prior-year periods primarily to the Tax Cuts and Jobs Act and a prior-period tax adjustment in Q2 FY2018.
Material changes versus prior periods
- Reported sales benefited from Blue Buffalo, but underlying organic sales remained weak, with declining organic volume in Q2 and for the six-month period.
- Reported operating profit and EPS declined, heavily affected by $205.8 million of asset impairments and higher interest expense. Q2 restructuring, impairment, and exit costs totaled $209.4 million, versus $1.6 million in the prior-year quarter.
- The company impaired Progresso, Food Should Taste Good, and Mountain High brand assets by $192.6 million due to lower long-range sales projections, and recorded a $13.2 million impairment of North America Retail manufacturing assets.
- Cash from operations decreased $170.3 million year over year for the six-month period, primarily due to weaker earnings and a $262 million change in current assets and liabilities, including the timing of accounts payable. Noncash impairment charges partly offset the decline.
- Blue Buffalo added $335.2 million of Q2 sales and $70.8 million of Q2 operating profit. Six-month Pet operating profit included a $53 million purchase-accounting inventory adjustment and customer-list amortization.
- North America Retail sales fell 3% in both Q2 and the six-month period. For Q2, Convenience Stores & Foodservice sales were flat, Europe & Australia sales fell 3%, and Asia & Latin America sales fell 4% as currency effects offset organic growth.
Outlook, management commentary, risks, and unusual items
- The filing provides no specific full-year sales, profit, or EPS guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management cites lower organic volume, input-cost inflation, foreign currency pressure in some regions, and acquisition-related interest costs. Cost management and favorable pricing and mix supported some segment results.
- The $8.0 billion Blue Buffalo acquisition was financed with approximately $6.0 billion of debt, $1.0 billion of equity, and cash on hand. Integration costs were $6.8 million in Q2 and $15.5 million for six months. Management identifies integration, retention, and customer or supplier reactions as risks.
- Impairment testing also identified limited excess fair value for the Latin America reporting unit (7%) and Yoki brand (10%); Pillsbury and the U.S. Yogurt reporting unit had risk of decreasing coverage and will be monitored.
- Accounting for certain Tax Cuts and Jobs Act effects remained provisional, with completion expected during the fiscal 2019 measurement period. The company also planned to finalize its assessment of withholding taxes related to repatriating certain foreign earnings in Q3 FY2019.
- New lease accounting requirements, expected to take effect in Q1 FY2020, are expected to materially affect the balance sheet; the company could not yet reasonably estimate the impact. The company also identifies commodity, currency, interest-rate, supply-chain, product-quality, consumer-demand, competitive, and impairment risks.
- The company adopted new revenue-recognition rules in Q1 FY2019, recording a $33.9 million cumulative-effect reduction to opening retained earnings. It said the new requirements did not create material differences in revenue accounting.
Important facts for investors to verify
- Whether organic volume trends stabilize, especially in North America Retail, and whether pricing can offset volume and input-cost pressure.
- Blue Buffalo’s ongoing sales, margins, integration progress, and the effect of acquisition debt on interest expense and future cash generation.
- The assumptions behind the Progresso, Food Should Taste Good, and Mountain High impairments, and whether other brands or reporting units require impairment.
- Cash conversion and working-capital movements, particularly the effect of accounts-payable timing on operating cash flow.
- Upcoming debt maturities, including approximately $1.991 billion of long-term debt classified as current, and the resolution of provisional tax accounting and expected lease-accounting effects.