General Mills, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 26, 2019. The request metadata says “2018 Q4,” but this filing is an annual report for fiscal 2019; the filing also provides fourth-quarter comparisons, summarized below. Unless otherwise stated, dollar amounts are in millions.
Business context and performance
General Mills is a global branded food manufacturer with retail, foodservice, international, and pet food businesses. Fiscal 2019 was the first full fiscal year to include Blue Buffalo, acquired in fiscal 2018; fiscal 2018 reported results did not include Pet segment operating results. Walmart represented 20% of consolidated net sales.
| Metric | FY2019 | Comparison |
|---|---|---|
| Net sales | $16,865 | Up 7% reported; organic sales flat |
| Gross margin | $5,757; 34.1% | Margin down 40 basis points |
| Operating profit | $2,516; 14.9% margin | Up 4%; margin down 50 basis points |
| Adjusted operating profit | $2,858; 16.9% margin | Up 9% reported and 10% constant currency |
| Net earnings attributable to General Mills | $1,753 | Down 18% |
| Diluted EPS | $2.90 | Down 20%; adjusted diluted EPS was $3.22, up 4% constant currency |
| Operating cash flow / free cash flow | $2,807 / $2,269 | Free cash flow conversion was 115% of adjusted net earnings |
| Cash and total debt | $450 / $14,490 | Debt declined $1,329 from prior year |
Reported net sales included a 9-point contribution from acquisitions and divestitures, principally Blue Buffalo, offset by 2 points of foreign exchange. Organic volume declined 2 points while organic price and mix added 2 points. Reported diluted EPS fell largely because fiscal 2018 included a $524 million one-time tax benefit related to U.S. tax reform.
Fourth-quarter fiscal 2019 net sales were $4,162 versus $3,890 in the prior-year quarter; attributable earnings were $570 versus $354, and diluted EPS was $0.94 versus $0.59. The prior-year quarter included unusual tax-related effects, so the earnings comparison is not purely operational.
Material changes and segment results
- Blue Buffalo contributed $1,431 in fiscal 2019 net sales and $268 in segment operating profit. Its acquisition was financed with approximately $6 billion of debt, $1 billion of equity, and cash on hand.
- North America Retail sales fell 2% to $9,925; segment operating profit rose 3% to $2,277. U.S. snacks were a weak area, with sales down 4%.
- Convenience Stores & Foodservice sales rose 2% to $1,969 and segment operating profit rose 7% to $420.
- Europe & Australia sales fell 5% to $1,887 and segment operating profit fell 13% to $123, reflecting currency, lower volume, and higher input costs.
- Asia & Latin America sales fell 3% to $1,653, mainly due to currency and divestitures; organic sales grew 6% and segment operating profit rose 83% to $72.
- Gross margin was pressured by higher input costs and commodity mark-to-market effects. Interest expense rose: net interest was $522 versus $374, primarily reflecting acquisition-related debt.
Liquidity, debt, and unusual items
Operating cash flow was nearly unchanged year over year at $2.8 billion. Capital expenditures were $538, dividends paid were $1.2 billion, and free cash flow was $2.3 billion. The company reported $3.6 billion of committed and uncommitted credit facilities, with $0.2 billion borrowed; committed facilities were undrawn. Management stated that operating cash flow and available financing should meet liquidity and capital needs for at least 12 months. Approximately $1.4 billion of long-term debt was due within 12 months.
Fiscal 2019 included $193 million of brand impairment charges for Progresso, Food Should Taste Good, and Mountain High, plus manufacturing-asset impairments. Restructuring, impairment, and other exit costs totaled $275 million; the company also recorded a $35 million loss on the sale of its Argentina business and a $5 million gain on the sale of its China yogurt business. Total goodwill and indefinite-lived intangible assets were approximately $20.6 billion.
Outlook, risks, and contingencies
For fiscal 2020, management forecast organic net sales growth of 1% to 2%, constant-currency adjusted operating profit growth of 2% to 4%, adjusted diluted EPS growth of 3% to 5%, and free cash flow conversion of at least 95%. Expected input-cost inflation was approximately 4%; capital expenditures were expected to be about 3.5% of reported sales. Fiscal 2020 includes a 53rd week, which management planned to reinvest in capabilities and brand building. These are non-GAAP outlook measures and are not reconciled to GAAP in the filing.
- Principal risks include intense competition and private-label pressure, retailer bargaining power, and customer concentration; Walmart accounts for 20% of consolidated sales. PetSmart and Petco accounted for 36% and 14% of Pet segment sales, respectively.
- Commodity-price, currency, and inflation exposure may affect margins; the company does not fully hedge commodity costs. Supply-chain disruption, product safety or recall events, changing consumer preferences, and cyber incidents are also identified risks.
- Debt levels and refinancing needs, interest-rate exposure, pension assumptions, and possible goodwill or brand impairments are material financial risks. Latin America and the Yoki brand had limited impairment headroom; Pillsbury and U.S. Yogurt were being monitored.
- Sodiaal may exercise put rights over its Yoplait SAS redeemable interest, valued at $552 million at year-end. The company reported $682 million of guarantees for consolidated subsidiaries and $134 million for non-consolidated affiliates, mainly CPW.
- Two environmental cleanup sites were active. Management said pending legal matters were not reasonably likely to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate organic growth and underlying earnings from acquisition effects, foreign exchange, tax items, impairments, and other adjustments; review the company’s non-GAAP reconciliations.
- Assess Blue Buffalo’s growth, integration, and contribution to earnings and cash flow, noting the prior-year segment comparison is not like-for-like.
- Track volume trends and margins in North America Retail, especially snacks, and recovery in Europe & Australia and U.S. Yogurt.
- Review debt maturities, leverage reduction, interest costs, and the company’s capacity to sustain dividends while funding investment.
- Monitor impairment headroom for goodwill and brands, commodity inflation, restructuring execution, and the Yoplait put obligation.