GENERAL MILLS INC quarterly report, Q1 FY2020

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General Mills, Inc. — Form 10-Q Summary

Business context and period: General Mills is a packaged-foods company with five operating segments: North America Retail, Convenience Stores & Foodservice, Europe & Australia, Asia & Latin America, and Pet. This report covers the quarter ended August 25, 2019, the first quarter of fiscal 2020; comparisons are with the quarter ended August 26, 2018. Results for one quarter are not necessarily indicative of the full fiscal year.

Financial performance

  • Sales: Net sales were $4.00 billion, down 2% year over year; organic net sales declined 1%. Organic volume contributed a 4-point decline, partly offset by 3 points from organic price realization and mix. Foreign exchange reduced reported sales by 1 point.
  • Profit and margins: Operating profit was $662.4 million, up 10%, and operating margin rose to 16.5% from 14.7%. Adjusted operating profit was $682.1 million, up 6% (7% at constant currency), with adjusted margin of 17.0% versus 15.7%. Net earnings attributable to General Mills were $520.6 million, up 33%; diluted EPS was $0.85 versus $0.65. Adjusted diluted EPS was $0.79, up 11% (13% at constant currency).
  • Cash flow: Operating cash flow was $572.1 million versus $607.4 million. Capital spending was $69.8 million, producing free cash flow of approximately $502 million, calculated as operating cash flow less capital spending. Investing cash outflow was $83.7 million; financing cash outflow was $428.6 million. Cash increased $54.8 million to $504.8 million.
  • Liquidity and debt: Total debt was $14.31 billion, down from $14.49 billion at May 26, 2019. Current liabilities were $6.90 billion and current assets $4.26 billion. Available committed and uncommitted credit lines totaled $3.6 billion, with $0.2 billion borrowed. The company reported compliance with debt and credit covenants and said cash flows and available financing should cover liquidity and capital needs for at least 12 months.
  • Shareholder returns: Dividends paid were $298.5 million; the declared dividend was $0.49 per share, unchanged from the prior-year quarter.

Material changes and segment trends

  • Sales declined in Europe & Australia (9%), Asia & Latin America (10%), and Convenience Stores & Foodservice (4%); North America Retail was approximately flat. Pet sales rose 7%.
  • Pet operating profit increased to $80.9 million from $14.5 million, primarily because the prior-year quarter included a $53 million Blue Buffalo inventory purchase-accounting charge, as well as this quarter’s favorable price and mix.
  • North America Retail operating profit increased 2% to $559.9 million. Convenience Stores & Foodservice declined 6% to $91.1 million; Europe & Australia declined 20% to $27.6 million; Asia & Latin America declined 17% to $10.1 million.
  • Consolidated sales were pressured by lower volume across segments except Pet and unfavorable currency, partly offset by higher pricing and favorable mix. Higher input costs and restructuring charges were offsets to margin improvement.
  • Interest expense fell to $118.7 million from $133.5 million, reflecting lower average debt balances and rates. The reported effective tax rate fell to 11.7% from 22.6%, chiefly due to a $53.1 million noncash tax benefit from a subsidiary reorganization and international discrete tax benefits; the adjusted tax rate was 20.9% versus 22.7%.

Outlook, risks, and unusual items

  • The filing provides no specific forward sales, earnings, or margin guidance. Management states that operating results for the quarter may not indicate full-year results.
  • Restructuring charges were $14.3 million, primarily related to previously announced global supply-chain efficiency actions expected to be completed by the end of fiscal 2022. No new restructuring actions were undertaken this quarter.
  • Fiscal 2019 impairment testing resulted in $192.6 million of charges for Progresso, Food Should Taste Good, and Mountain High intangible assets. Management noted potential impairment sensitivity for the Latin America reporting unit and Yoki brand, and said it would monitor Pillsbury and the U.S. Yogurt reporting unit.
  • The company adopted new lease-accounting and hedge-accounting requirements in the quarter. Lease adoption added $409.3 million of right-of-use assets and $421.4 million of lease liabilities; management said adoption had no material effect on retained earnings, earnings, or cash flows.
  • Key stated risks include competition and consumer demand, pricing and promotion response, input-cost and supply-chain volatility, foreign exchange and political conditions, product quality and safety, acquisition integration, restructuring execution, pension assumptions, IT security, and possible goodwill or intangible-asset impairment. One-day value-at-risk estimates were $110 million for interest rates, $16 million for foreign exchange, $3 million for commodities, and $2 million for equity exposures.

Investor verification priorities

  1. Verify the drivers and durability of the quarter’s volume decline and whether pricing and mix can continue to offset it.
  2. Separate recurring earnings performance from the $53.1 million tax benefit, commodity mark-to-market effects, restructuring charges, and prior-year Blue Buffalo inventory adjustment; review the company’s non-GAAP reconciliations.
  3. Monitor sales, volumes, margins, and currency effects in Europe & Australia and Asia & Latin America, as well as the basis for Pet’s year-over-year profit comparison.
  4. Assess near-term refinancing needs: $1.392 billion of long-term debt was classified as current, including notes due in October 2019 and January 2020.
  5. Track impairment headroom for the Latin America and Yoki assets and the company’s stated monitoring of Pillsbury and U.S. Yogurt.