General Mills, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended November 27, 2022, and six-month year-to-date period. Comparisons are with the corresponding prior-year periods unless noted. Amounts are in U.S. dollars.
Business context and results
General Mills sells packaged foods through North America Retail, International, Pet, and North America Foodservice. The quarter’s sales growth was driven by pricing and mix, while lower shipment volumes and higher input costs pressured results. The six-month results also include a $430.9 million divestiture gain.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $5.221 billion, up 4%; organic sales up 11% | $9.938 billion, up 4%; organic sales up 11% |
| Volume and price/mix contribution | Reported volume −12 points; price/mix +17 points. Organic volume −6 points; organic price/mix +17 points. | Reported volume −12 points; price/mix +17 points. Organic volume −5 points; organic price/mix +16 points. |
| Operating profit and margin | $799.8 million, essentially flat; 15.3% margin, down 60 basis points | $1.885 billion, up 15%, including the divestiture gain; 19.0% margin, up 180 basis points |
| Adjusted operating profit and margin | $879.7 million, up 7% on a constant-currency basis; 16.9% margin, up 60 basis points | $1.761 billion, up 8% on a constant-currency basis; 17.7% margin, up 50 basis points |
| Net earnings attributable to General Mills | $605.9 million, up 1% | $1.426 billion, up 16% |
| Diluted EPS | $1.01, up 4%; adjusted EPS $1.10, up 12% on a constant-currency basis | $2.36, up 19%; adjusted EPS $2.21, up 13% on a constant-currency basis |
Cash flow, debt, and liquidity
- Six-month operating cash flow was $1.201 billion, down from $1.498 billion. Management attributed the decline primarily to inventory growth and higher cash tax payments.
- Capital expenditures were $226.7 million; derived free cash flow was approximately $974 million, versus approximately $1.274 billion a year earlier.
- Cash and cash equivalents were $644.1 million at November 27, 2022. Current assets were $5.331 billion and current liabilities $9.208 billion.
- Long-term debt, including its current portion, had a carrying value of $10.587 billion. Notes payable were $1.153 billion. Current maturities of long-term debt were $1.964 billion.
- The company reported $3.3 billion of committed and uncommitted credit facilities available and no borrowings under those facilities. It was in compliance with debt and credit covenants and said operating cash flow and available financing should meet liquidity needs for at least 12 months.
- Financing activities used $1.231 billion in the first half, including $901.3 million of share repurchases and $647.9 million of dividends paid. Net debt issuance was $253 million.
Material changes and segment performance
- North America Retail: Quarterly sales increased 11% to $3.373 billion and operating profit rose 24% to $837 million, primarily reflecting price and mix; volume contributions declined.
- International: Quarterly sales fell 27% to $672 million and operating profit fell 70% to $18 million. Sales were affected by divestitures, foreign exchange, lower volume, and a voluntary Häagen-Dazs product recall; higher input costs also pressured profit.
- Pet: Quarterly sales were essentially flat at $593 million, while operating profit declined 34% to $87 million, reflecting higher costs and lower volume contributions.
- North America Foodservice: Quarterly sales increased 24% to $583 million and operating profit rose 20% to $82 million, led by pricing and mix, including market-index pricing on bakery flour.
- The company sold its Helper main meals and Suddenly Salad business for $606.8 million and recorded a $442.2 million pretax gain. It acquired TNT Crust for a purchase price of $253 million, funded with U.S. commercial paper.
Outlook, risks, and unusual items
- Management expected double-digit input-cost inflation in fiscal 2023. It planned to address this through Holistic Margin Management cost savings and Strategic Revenue Management pricing and mix actions. It expected volume elasticities to increase but remain below historical levels, and supply-chain disruptions to moderate gradually. The filing text does not provide a clear quantified full-year earnings or sales forecast.
- Commodity and grain mark-to-market effects were unfavorable: a $25.1 million net expense in the quarter and $199.8 million for the six months in unallocated corporate items. Management cautioned these valuations can create earnings volatility.
- A voluntary recall of certain international Häagen-Dazs ice cream products resulted in a $24.4 million charge for the six months. The filing also describes product quality and safety, inflation, supply-chain disruption, consumer response to pricing, currency, and impairment as risks.
- Management expected approximately $25 million of charges and project costs for previously announced International restructuring actions, and approximately $140 million of restructuring charges for global organizational realignment, with the latter expected to be completed by the end of fiscal 2023. Other announced actions are expected to be completed by the end of fiscal 2024.
- The annual goodwill and indefinite-lived intangible impairment assessment identified no impairment charge, but the Uncle Toby’s brand was an exception to the stated substantial valuation coverage; Progresso and EPIC brand assets were also identified as having risk of decreasing coverage. The company said it would continue monitoring these businesses.
- The company is contesting Brazilian tax matters, including a proposed disallowance of certain goodwill amortization benefits and a São Paulo state sales-tax assessment. For the São Paulo matter, it said it could not estimate a possible loss and had recorded no loss contingency.
- The Inflation Reduction Act was not expected by the company to have a material impact on financial results or liquidity at that time. Its impact would continue to be monitored.
Important facts for investors to verify
- Whether pricing and mix can continue to offset input-cost inflation without further weakening volumes.
- The persistence of the International and Pet segment profit declines, and the operational and financial effects of the Häagen-Dazs recall.
- Cash conversion and inventory trends, given the year-over-year decline in operating cash flow and free cash flow.
- Upcoming debt maturities, refinancing costs, and the effect of higher interest rates on borrowing and the floating-rate exposure.
- Progress and final costs of restructuring, the status of the Brazilian tax disputes, and impairment coverage for the Uncle Toby’s, Progresso, and EPIC brands.