General Mills, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended November 28, 2021; comparisons are with the corresponding periods of fiscal 2021. General Mills sells packaged foods through five operating segments: North America Retail, Pet, Convenience Stores & Foodservice, Europe & Australia, and Asia & Latin America. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $5,024.0 | $4,719.4 | $9,563.9 | $9,083.4 |
| Operating profit | $800.1 | $916.6 | $1,644.4 | $1,770.3 |
| Operating margin | 15.9% | 19.4% | 17.2% | 19.5% |
| Net earnings attributable to General Mills | $597.2 | $688.4 | $1,224.2 | $1,327.3 |
| Diluted EPS | $0.97 | $1.11 | $1.99 | $2.14 |
| Adjusted operating profit | $821.3 | $865.5 | $1,640.5 | $1,698.0 |
| Adjusted diluted EPS | $0.99 | $1.06 | $1.98 | $2.06 |
- Q2 reported sales rose 6%; organic sales increased 5%, driven by pricing and mix. Volume contribution was down 1 percentage point, while organic volume was flat. For the six months, sales rose 5% and organic sales 4%.
- Q2 operating profit and GAAP diluted EPS each declined 13%; adjusted operating profit fell 6% on a constant-currency basis and adjusted EPS fell 7%. For the six months, operating profit declined 7%, GAAP EPS 7%, adjusted operating profit 4% on a constant-currency basis, and adjusted EPS 4%.
- Higher input costs were the principal margin pressure. Q2 cost of sales increased $395 million year over year; management attributed the increase mainly to product rate and mix. Favorable pricing and mix, lower certain SG&A expenses, and some volume recovery partly offset cost pressure. Reported margins also reflect items affecting comparability; adjusted measures are non-GAAP.
- Q2 segment trends: North America Retail sales rose 2% but operating profit fell 7%; Pet sales rose 29% and profit 10%, including the acquired pet-treat business; Convenience Stores & Foodservice sales rose 23% and profit 20%; Europe & Australia sales fell 1% and profit 56%; Asia & Latin America sales rose 5% and profit 43%. Acquisition effects contributed materially to Pet growth.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $1,497.8 million, compared with $1,426.8 million. Capital expenditures were $224.3 million; operating cash flow less capital expenditures was approximately $1,273.5 million, a derived measure.
- Investing cash outflow was $1,396.0 million, primarily reflecting the $1.2 billion cash acquisition of Tyson Foods’ pet-treat business. Financing cash outflow was $427.2 million, including $623.2 million of dividends and $375.0 million of share repurchases. Cash and cash equivalents decreased $360.5 million from the fiscal-year opening balance.
- At November 28, 2021, the balance sheet reported cash of $1,021.0 million, current debt of $600.7 million, notes payable of $1,098.0 million, and long-term debt of $10,973.6 million. The filing separately identifies debt classified as held for sale, including $56.6 million of long-term debt and $262.9 million of notes payable. The cash-flow statement reports ending cash of $1,144.7 million, including $123.7 million classified as held for sale.
- Available committed and uncommitted credit lines totaled $3.6 billion, with $0.2 billion borrowed. The company reported compliance with debt and credit-facility covenants, including a 2.5-times minimum fixed-charge coverage covenant. It stated that operating cash flow and available financing should meet liquidity and capital needs for at least 12 months.
- The MD&A also cites $510.1 million of cash and cash equivalents, including cash held for sale in foreign jurisdictions. This differs from the balance-sheet and cash-flow cash amounts; the filing text does not clearly reconcile the figures.
Material changes, outlook, and risks
- Acquisition: General Mills acquired Tyson Foods’ pet-treat business for $1.2 billion in cash, financed with cash and short-term debt. It recorded $759.4 million of goodwill and $370.0 million of acquired intangible assets. The acquired business is reported in Pet on a one-month lag.
- Divestitures: After the quarter, General Mills completed the sale of its European Yoplait interests to Sodiaal in exchange for full ownership of the Canadian Yoplait business, reduced brand royalties in the U.S. and Canada, and cash. Management expected to record a pretax gain in Q3 FY2022. Agreements to sell European dough businesses were expected to close by fiscal year-end, subject to labor consultations, regulatory approvals, and customary conditions.
- Management outlook: For fiscal 2022, management expected at-home food volume to decline year over year across most core markets but remain above pre-pandemic levels, and away-from-home demand to recover without reaching pre-pandemic levels. It anticipated increased net price realization in response to significant input-cost inflation. The supplied filing text provides no specific updated full-year earnings or sales guidance.
- Key risks: Management highlighted continuing uncertainty from COVID-19, shifts between at-home and away-from-home demand, elevated commodity and other input costs, and supply-chain disruption. Other stated risks include consumer response to pricing, competition, product quality and recalls, currency movements, regulation and tax changes, and potential asset impairment.
- Unusual items and contingencies: Q2 included $37.6 million of transaction costs related to the Yoplait and European dough sales and $3.5 million of pet-acquisition integration costs in the adjusted-profit reconciliation. New Asia & Latin America restructuring actions are expected to incur about $21 million of charges and project costs, including approximately $12 million cash, with completion expected by the end of FY2024. The company is contesting Brazilian tax-authority challenges to goodwill amortization and a São Paulo state sales-tax assessment; it said it could not estimate a possible loss on the latter and recorded no loss contingency.
- Impairment monitoring: The annual test found no impairment, but the Uncle Toby’s brand had only 7% excess fair value over carrying value ($55 million carrying value). Management also cited potential decreasing coverage for the Europe & Australia reporting unit and Progresso, Green Giant, and EPIC brands and said it would continue monitoring them.
Most important facts for investors to verify
- Whether pricing and mix can continue to offset input-cost inflation without further volume declines or margin erosion.
- The cash figure reconciliation: $510.1 million in MD&A versus $1,021.0 million on the balance sheet and $1,144.7 million in the cash-flow statement, with held-for-sale cash classifications.
- Completion terms, proceeds, and expected gain from the Yoplait transaction, and timing and conditions for the European dough divestitures.
- Pet segment growth and profitability after the Tyson acquisition, including integration costs and acquired-business contributions.
- Developments in the Brazilian tax disputes, impairment coverage of flagged brands and reporting unit, and the expected cost and cash timing of restructuring actions.
- Changes to fiscal 2022 outlook as pandemic-related demand patterns, supply-chain conditions, and input costs evolve.