UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 1-1185
GENERAL MILLS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-0274440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Number One General Mills Boulevard
Minneapolis, MN 55426
(Mail: P.O. Box 1113) (Mail: 55440)
(Address of principal executive offices) (Zip Code)
(763) 764-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
As of September 23, 2002, General Mills had 367,910,613 shares of its $.10 par
value common stock outstanding (excluding 134,396,051 shares held in treasury).
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GENERAL MILLS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In Millions, Except per Share Data)
Thirteen Weeks Ended
------------------------
AUGUST 25, August 26,
2002 2001
---------- ----------
Net Sales $ 2,362 $ 1,404
Costs and Expenses:
Cost of sales 1,386 721
Selling, general and administrative 533 372
Interest, net 142 49
Unusual items expense (income) 55 (15)
---------- ----------
Total Costs and Expenses 2,116 1,127
---------- ----------
Earnings before Taxes and Earnings
from Joint Ventures 246 277
Income Taxes 87 95
Earnings from Joint Ventures 17 9
---------- ----------
Earnings before cumulative effect
of change in accounting principle 176 191
Cumulative effect of change
in accounting principle -- (3)
---------- ----------
Net Earnings $ 176 $ 188
========== ==========
Earnings per Share - Basic:
Earnings before cumulative effect
of change in accounting principle $ .48 $ .67
Cumulative effect of change
in accounting principle -- (.01)
---------- ----------
Net Earnings $ .48 $ .66
========== ==========
Average Number of Common Shares
- Basic 367 285
========== ==========
Earnings per Share - Diluted:
Earnings before cumulative effect
of change in accounting principle $ .47 $ .65
Cumulative effect of change
in accounting principle -- (.01)
---------- ----------
Net Earnings $ .47 $ .64
========== ==========
Average Number of Common Shares -
Assuming Dilution 376 295
========== ==========
Dividends per Share $ .275 $ .275
========== ==========
See accompanying notes to consolidated condensed financial statements.
2
GENERAL MILLS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited) (Unaudited)
----------- -----------
AUGUST 25, August 26, May 26,
2002 2001 2002
---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 745 $ 53 $ 975
Receivables 1,059 600 1,010
Inventories:
Valued primarily at FIFO 379 242 335
Valued at LIFO (FIFO value exceeds LIFO by
$31, $30 and $31, respectively) 880 340 720
Prepaid expenses and other current assets 131 82 156
Deferred income taxes 226 62 241
---------- ---------- ----------
Total Current Assets 3,420 1,379 3,437
---------- ---------- ----------
Land, Buildings and Equipment, at Cost 4,695 3,234 4,618
Less accumulated depreciation (1,935) (1,722) (1,854)
---------- ---------- ----------
Net Land, Buildings and Equipment 2,760 1,512 2,764
Goodwill 8,474 804 8,473
Other Intangible Assets 90 74 90
Other Assets 1,853 1,390 1,776
---------- ---------- ----------
Total Assets $ 16,597 $ 5,159 $ 16,540
========== ========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable $ 1,328 $ 548 $ 1,217
Current portion of long-term debt 229 353 248
Notes payable 3,269 877 3,600
Other current liabilities 769 403 682
---------- ---------- ----------
Total Current Liabilities 5,595 2,181 5,747
Long-term Debt 5,547 2,213 5,591
Deferred Income Taxes 326 210 336
Deferred Income Taxes - Tax Leases 72 75 71
Other Liabilities 1,097 577 1,066
---------- ---------- ----------
Total Liabilities 12,637 5,256 12,811
---------- ---------- ----------
Minority Interest 299 -- 153
Stockholders' Equity:
Cumulative preference stock, none issued -- -- --
Common stock, 502, 408 and 502 shares issued,
respectively 5,743 763 5,733
Retained earnings 2,643 2,577 2,568
Less common stock in treasury, at cost, shares
of 134, 124 and 135, respectively (4,273) (3,053) (4,292)
Unearned compensation (57) (50) (57)
Accumulated other comprehensive income (395) (334) (376)
---------- ---------- ----------
Total Stockholders' Equity 3,661 (97) 3,576
---------- ---------- ----------
Total Liabilities and Equity $ 16,597 $ 5,159 $ 16,540
========== ========== ==========
See accompanying notes to consolidated condensed financial statements.
3
GENERAL MILLS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) (In Millions)
Thirteen Weeks Ended
-------------------------
AUGUST 25, August 26,
2002 2001
---------- ----------
Cash Flows - Operating Activities:
Net earnings $ 176 $ 188
Adjustments to reconcile net earnings to cash flow:
Depreciation and amortization 90 53
Deferred income taxes 40 6
Changes in current assets and liabilities
excluding effects of businesses acquired (37) (4)
Tax benefit on exercised options 4 9
Cumulative effect of change
in accounting principle -- 3
Unusual items expense (income) 55 (15)
Other, net (57) (24)
---------- ----------
Cash provided by continuing operations 271 216
Cash used by discontinued operations (1) (1)
---------- ----------
Net Cash Provided by Operating Activities 270 215
---------- ----------
Cash Flows - Investment Activities:
Purchases of land, buildings and equipment (94) (64)
Investments in businesses, intangibles and affiliates,
net of investment returns and dividends (38) (35)
Purchases of marketable investments (4) (40)
Proceeds from sale of marketable investments -- 20
Proceeds from disposal of land, buildings & equipment -- 7
Other, net (28) (5)
---------- ----------
Net Cash Used by Investment Activities (164) (117)
---------- ----------
Cash Flows - Financing Activities:
Change in notes payable (333) 16
Issuance of long-term debt 4 3
Payment of long-term debt (68) (18)
Proceeds from minority investors, net 147 --
Common stock issued 20 28
Purchases of common stock for treasury (17) (61)
Dividends paid (101) (78)
Other, net 12 1
---------- ----------
Net Cash Used by Financing Activities (336) (109)
---------- ----------
Decrease in Cash and Cash Equivalents $ (230) $ (11)
========== ==========
Cash Flows from Changes in Current Assets and
Liabilities, Excluding Effects of Businesses Acquired:
Receivables (35) 91
Inventories (203) (67)
Prepaid expenses and other current assets 26 17
Accounts payable 120 (72)
Other current liabilities 55 27
---------- ----------
Changes in Current Assets and Liabilities $ (37) $ (4)
========== ==========
See accompanying notes to consolidated condensed financial statements.
4
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) Background
These consolidated condensed financial statements do not include certain
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. However, in the opinion
of management, all adjustments considered necessary for a fair presentation have
been included and are of a normal recurring nature. Operating results for the
thirteen weeks ended August 25, 2002 are not necessarily indicative of the
results that may be expected for the fiscal year ending May 25, 2003.
These statements should be read in conjunction with the consolidated financial
statements and footnotes included in our annual report for the year ended May
26, 2002. The accounting policies used in preparing these consolidated condensed
financial statements are the same as those described in Note One of our annual
report, except as described in Note (8), "Accounting Rules Adopted."
Certain amounts in the prior year consolidated financial statements have been
reclassified to conform to the current year presentation.
(2) Acquisition
On October 31, 2001, we acquired the worldwide Pillsbury operations from Diageo
plc (Diageo). Pillsbury, based in Minneapolis, Minnesota, produces and
distributes leading food brands including Pillsbury refrigerated and frozen
dough and baked goods, Green Giant canned and frozen vegetables, Old El Paso
Mexican foods, Progresso soups, Totino's frozen pizza products and a wide range
of foodservice products.
The total acquisition consideration (exclusive of direct acquisition costs) was
approximately $9,724 million. Under terms of the agreement, Diageo holds
contingent value rights that may require payment to Diageo on April 30, 2003, of
up to $395 million, depending on the General Mills stock price and the number of
General Mills shares that Diageo continues to hold on that date. If the General
Mills stock price averages less than $49 per share for the 20 trading days prior
to that date, Diageo will receive an amount per share equal to the difference
between $49 and the General Mills stock trading price, up to a maximum of $5 per
share.
The excess of the purchase price over the estimated fair value of the net assets
purchased was approximately $8 billion. The allocation of the purchase price is
based on preliminary estimates, subject to revisions when appraisals and
integration plans have been finalized. Revisions to the allocation, which may be
significant, will be reported in a future period as changes to various assets
and liabilities, including goodwill, other intangible assets, and deferred
income taxes. As of August 25, 2002, the goodwill balance includes all of the
excess purchase price of the Pillsbury acquisition, as the valuation of specific
intangible assets has not yet been completed. We expect the valuation to result
in a significant value for non-amortizable brands. We do not anticipate
significant amounts to be allocated to amortizable intangible assets and,
therefore, the amount of intangibles amortization is not expected to be material
to the results of operations in future periods.
The excess purchase price was adjusted in the first quarter of 2003, when we
announced that we would close the Hillsdale, Mich., plant which produced dry mix
products and flour for our foodservice business. The production capacity for the
dry mix product lines will be absorbed within other facilities throughout the
General Mills supply chain, while the flour mill business will be sold. A total
of 119 employees were affected by the closure.
We continue to evaluate plans to consolidate manufacturing, warehouse and
distribution activities into fewer locations. The closure of additional
Pillsbury facilities could result in additional severance and other exit
liabilities, which would increase the excess purchase price. These amounts will
be recorded on our consolidated balance sheet as adjustments to the excess
purchase price when plans have been finalized and announced. The integration of
Pillsbury into General Mills' operations also may result in the restructuring of
5
certain General Mills activities. These actions could result in additional
unusual charges, which will be recorded as expense in our consolidated
statements of earnings in the period during which plans are finalized.
Actual results of acquired business operations are included in the consolidated
statement of earnings for the period from November 1, 2001. The following
unaudited pro forma information for the prior year's first quarter presents a
summary of our consolidated results of operations and the acquired Pillsbury
operations as if the acquisition had occurred at the beginning of fiscal 2002.
13 Weeks ended
Aug. 26,
In Millions, Except per Share Data 2001
- ----------------------------------------------------------------------
Net Sales $ 2,425
Earnings before cumulative effect
of change in accounting principle 208
Net earnings 205
Earnings per Share - Basic
EPS before cumulative effect
of change in accounting principle .57
Net EPS - Basic .56
Earnings Per Share - Diluted
EPS before cumulative effect
of change in accounting principle .56
Net EPS - Diluted .55
- ----------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as increased interest expense on
acquisition debt. They do not reflect the effect of synergies that would have
been expected to result from the integration of the Pillsbury businesses. The
pro forma information does not purport to be indicative of the results of
operations that actually would have resulted had the combination occurred at the
beginning of fiscal 2002, or of future results of the consolidated entities.
(3) Unusual Items
In the first quarter of fiscal 2003, we recorded $41 million pretax charges
associated with the closure of our St. Charles, Illinois plant, and $14 million
pretax charges for Pillsbury transaction and integration costs. The total of
these unusual items was $55 million pretax expense, $35 million after tax ($.09
per diluted share).
In the first quarter of fiscal 2002, we reached settlements with additional
insurance companies that participated in the reinsurance of a property policy
covering a 1994 oats handling incident. We recorded $27 million pretax income,
net of associated costs, related to these settlements. This income was partially
offset by pretax charges of (1) $5 million associated with our pending
acquisition of The Pillsbury Company; (2) $4 million, primarily severance, for
the exit from the SQUEEZIT beverage business; and (3) $3 million, net of
insurance recovery, associated with a flash flood at our Cincinnati, Ohio,
cereal plant. The net of these unusual items was $15 million pretax income, $9
million after tax ($.03 per diluted share).
6
(4) Comprehensive Income
The following table summarizes total comprehensive income for the periods
presented (in millions):
Thirteen Weeks Ended Thirteen Weeks Ended
August 25, 2002 August 26, 2001
---------------------------------- ----------------------------------
Pretax Tax Net Pretax Tax Net
-------- -------- -------- -------- -------- --------
Earnings $ $ $ 176 $ $ $ 188
Other Comprehensive Income
(Loss):
Foreign currency
translation adjustments 15 -- 15 8 -- 8
Other Fair Value Changes:
Securities 8 (3) 5 2 -- 2
Hedge derivatives (121) 45 (76) (150) 56 (94)
Reclassification to earnings:
Securities -- -- -- -- -- --
Hedge derivatives 59 (22) 37 2 (1) 1
Cumulative effect of
adopting SFAS No. 133 -- -- -- (251) 93 (158)
-------- -------- -------- -------- -------- --------
$ (39) $ 20 $ (19) $ (389) $ 148 $ (241)
-------- -------- -------- -------- -------- --------
Comprehensive Income (Loss) $ 157 $ (53)
======== ========
Accumulated other comprehensive income (loss) balances were as follows (in
millions):
Aug. 25, Aug. 26, May 26,
2002 2001 2002
-------- -------- --------
Foreign currency
translation adjustments $ (98) $ (101) $ (113)
Unrealized gain (loss) from:
Securities 21 29 16
Hedge derivatives (311) (251) (272)
Pension plan minimum liability (7) (11) (7)
-------- -------- --------
Accumulated comprehensive income $ (395) $ (334) $ (376)
======== ======== ========
The changes in other comprehensive income are primarily non-cash items.
(5) Statements of Cash Flows
During the first three months, we made interest payments of $154 million (net of
amounts capitalized), versus $29 million last year. In the first three months of
fiscal 2003, we made tax payments of $16 million and received a $109 million
refund of fiscal 2002 tax overpayments. In the corresponding period of fiscal
2002, we made tax payments of $28 million.
(6) Operating Segments
We operate exclusively in the consumer foods industry, with multiple operating
segments organized generally by product categories.
We have aggregated our operating segments into three reportable segments: 1)
U.S. Retail; 2) Bakeries and Foodservice; and 3) International. U.S. Retail
consists of cereals, meals, refrigerated and frozen dough products, baking
products, snacks, yogurt and other. Our Bakeries and Foodservice segment
consists of products marketed to bakeries and offered to the commercial and
7
non-commercial foodservice sectors throughout the United States and Canada. The
International segment is comprised of retail markets outside the United States
and foodservice markets outside of the United States and Canada. With the
beginning of fiscal 2003, the Lloyd's foodservice and the bakery flour
businesses were realigned from the U.S. Retail segment to the Bakeries and
Foodservice segment. All prior year amounts are restated.
Management reviews operating results to evaluate segment performance. Operating
profit for the reportable segments excludes general corporate expenses. Interest
expense and income taxes are centrally managed at the corporate level and,
therefore, are not allocated to segments since they are excluded from the
measure of segment profitability reviewed by the Company's management. Under our
supply chain organization, our manufacturing, warehouse, distribution and sales
activities are substantially integrated across our operations in order to
maximize efficiency and productivity. As a result, fixed assets, capital
expenditures, and depreciation and amortization expenses are not maintained nor
available by operating segments.
The measurement of operating segment results is consistent with the presentation
of the Consolidated Statements of Earnings. Intercompany transactions between
reportable operating segments were not material in the periods presented.
Operating Segments
(Unaudited) (In Millions)
Thirteen Weeks Ended
-------------------------
Aug. 25, Aug. 26,
2002 2001
---------- ----------
Net Sales:
U.S. Retail $ 1,610 $ 1,180
Bakeries and Foodservice 438 155
International 314 69
---------- ----------
Total $ 2,362 $ 1,404
========== ==========
Operating Profit Before Unusual Items:
U.S. Retail $ 361 $ 297
Bakeries and Foodservice 53 26
International 22 3
Unallocated Corporate Items 7 (15)
---------- ----------
Total $ 443 $ 311
========== ==========
Operating Profit Including Unusual Items:
U.S. Retail $ 353 $ 317
Bakeries and Foodservice 20 26
International 22 3
Unallocated Corporate Items (7) (20)
---------- ----------
Total $ 388 $ 326
========== ==========
Interest, net 142 49
Income Taxes 87 95
Earnings from Joint Ventures 17 9
---------- ----------
Earnings before cumulative effect
of change in accounting principle 176 191
Cumulative effect of change
in accounting principle -- (3)
---------- ----------
Net Earnings $ 176 $ 188
========== ==========
8
(7) Minority Interest
In the first quarter of 2003, General Mills Capital, Inc. (GM Capital), a wholly
owned subsidiary, sold $150 million of its Series A preferred stock to an
unrelated third-party investor. GM Capital regularly enters into transactions
with the Company to purchase receivables of the Company. These receivables are
included in the consolidated balance sheet of the Company and the $150 million
purchase price for the Series A preferred stock is included in minority interest
on the balance sheet. The proceeds from the issuance of the preferred stock were
used to reduce short-term debt.
(8) Accounting Rules Adopted
Effective the first quarter of fiscal 2003, we adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." The adoption of SFAS No. 144 did not have a material
impact on the Company's financial statements.
Effective the first quarter of fiscal 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which requires all derivatives to be recorded at fair value
on the balance sheet and establishes new accounting rules for hedging. At May
28, 2001, we recorded the cumulative effect of adopting this accounting change,
as follows:
Included in
Accumulated
Included Other
in Comprehensive
(In millions, except per share data) Earnings Income
-------- --------
Pretax $ (5) $ (251)
Income tax effects 2 93
-------- --------
Total $ (3) $ (158)
======== ========
Per diluted share net earnings effect $ (.01)
========
The cumulative effect on earnings and on Accumulated Other Comprehensive Income
was primarily associated with the impact of lower interest rates on the
fair-value calculation for the delayed-starting interest rate swaps we entered
into in anticipation of our Pillsbury acquisition and other financing
requirements.
Effective the fourth quarter of fiscal 2002, we adopted the Financial Accounting
Standard Board's (FASB's) Emerging Issues Task Force (EITF) Issue 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products", which requires recording certain coupon and trade
promotion expenses as reductions of revenues. Since adopting this requirement
resulted only in the reclassification of certain expenses from selling, general
and administrative expense to a reduction of net sales, it did not affect our
financial position or net earnings. The impact was a reduction of net sales, and
a corresponding reduction in selling, general and administrative expense, of
$367 million in the first quarter of 2002.
(9) New Accounting Rules
In July 2002, The Financial Accounting Standards Board (FASB) issued Statement
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS No. 146). SFAS No. 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The adoption of this Standard may affect the timing of the recognition of future
exit or disposal costs. However, we do not expect the impact to be material.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL CONDITION
During the first quarter of fiscal 2003, cash flow from continuing operations
totaled $271 million, up $55 million from last year's first quarter. The
increase was up from the first quarter of fiscal 2002 due largely to the $95
million improvement in operating earnings before depreciation, amortization and
unusual items, partially offset by a $33 million increase in use of working
capital.
During the first three months, capital investment totaled $98 million. Fiscal
2003 capital investment is estimated to be approximately $750 million, including
construction costs to consolidate the Company's headquarters and costs of
integrating Pillsbury into the Company's information systems.
As of August 25, 2002, we had adjusted debt plus minority interests of
approximately $9.2 billion compared to $9.1 billion at the end of fiscal 2002;
this increase is due primarily to seasonal working capital requirements. These
amounts reflect debt incurred and assumed in connection with our acquisition of
Pillsbury.
At the end of the first quarter, approximately half of our debt was long term,
40 percent was short term (excluding the impact of reclassification from our
long-term credit facility), and the balance was leases and tax-benefit leases.
During fiscal 2002, General Mills filed a Registration Statement with the
Securities and Exchange Commission covering the sale of up to $8.0 billion in
debt securities. As of August 25, 2002, $4.5 billion remained available under
the Registration Statement for future debt issuance. On September 18, 2002, we
began a new medium-term note program under the Registration Statement for the
sale from time to time of up to $750 million of notes with maturities of nine
months or more. As of the date of this report, we have not issued any notes
under the program. We plan to refinance the majority of our short-term debt with
long-term debt in fiscal 2003.
Commercial paper is a continuing source of short-term financing. We can issue
commercial paper in the United States and Canada, as well as in Europe. Our
commercial paper borrowings are supported by $4 billion in fee-paid committed
credit lines. As part of our core facilities we have a $1.05 billion 364-day
facility that expires in January 2003 and a $1.05 billion five-year facility
that expires in January 2006. Our committed credit lines also include a $1.9
billion bridge facility we set up at the time of the acquisition that expires in
January 2003. As of August 25, 2002, the company had no outstanding borrowings
under these facilities. Additionally, we have $45 million in uncommitted credit
lines available.
We believe that cash flows from operations together with available short and
long-term debt financing will be adequate to meet our liquidity and capital
needs.
As of August 25, 2002, we have recorded approximately $300 million of minority
interest financing on our balance sheet. In May 2002, we sold a minority
interest in a subsidiary to an unrelated third-party investor for $150 million.
This subsidiary holds some of our manufacturing assets and trademarks. In the
first quarter of 2003, we sold a minority interest in another subsidiary for
$150 million, as described in Note (7) "Minority Interest." We did not recognize
any gain or loss in connection with the issuance of the minority interests. All
assets, liabilities and results of operations of these subsidiaries are
reflected in our financial statements, and the third party's investment is
reflected as minority interest on our balance sheet.
RESULTS OF OPERATIONS
Net sales for the 13 weeks ended August 25, 2002 grew 68 percent to $2.36
billion, including the incremental contribution of Pillsbury businesses acquired
October 31, 2001. Total worldwide volume grew 2 percent on a comparable basis,
as if General Mills had owned the Pillsbury businesses in the previous year.
10
Reported earnings were $176 million in the first quarter of fiscal 2003 as
compared to $188 million earnings last year. Basic earnings per share of 48
cents for the first quarter ended August 25, 2002, were down 27 percent from 66
cents a year earlier. Diluted earnings per share of 47 cents for the first
quarter of fiscal 2003 were also down 27 percent from 64 cents per share earned
in the same period last year.
First-quarter results for both fiscal 2003 and 2002 included unusual items. In
fiscal 2003, the company recorded unusual expenses of $55 million pretax, $35
million after tax (9 cents per diluted share), associated with the closure of a
foodservice plant to eliminate excess production capacity, and other
Pillsbury-related transaction and integration costs. In last year's first
quarter, the company had a net unusual gain of $15 million pretax, $9 million
after tax (3 cents per diluted share) primarily associated with insurance
settlements covering a 1994 oats handling incident.
Excluding unusual items in both years and the impact of last year's accounting
change (SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities), earnings after tax grew 16 percent to $211 million from $182
million. First quarter diluted earnings per share excluding unusual items and
the accounting change were 56 cents, compared to 62 cents last year. The average
number of diluted shares outstanding was 27 percent higher this year, reflecting
shares issued for the Pillsbury acquisition.
[Note: Sales figures provided below are as reported and net of expenses
reclassified under EITF 01-09. Operating profits are as reported, before unusual
items. Unit volume comparisons provided below are on a comparable basis, as if
General Mills had owned the Pillsbury businesses in the previous year.]
U.S. Retail Segment Results
Net sales for General Mills' domestic retail operations grew 36 percent to $1.61
billion for the quarter, and operating profits rose 22 percent to $361 million.
Comparable unit volume grew 3 percent. Big G led this growth with a strong 6
percent unit volume increase compared to a slight decline last year. Consumer
sales for Big G cereals grew 3 percent for the quarter, in line with overall
category growth. Yogurt unit volume grew 11 percent for the quarter, with strong
contributions from YOPLAIT WHIPS!, introduced in January, and established
product lines. Meals unit volume was up 1 percent led by PROGRESSO soup, OLD EL
PASO dinner kits and GREEN GIANT canned vegetables.
Pillsbury USA volume was up slightly, driven by gains for TOTINO'S pizza and
PILLSBURY frozen baked goods, and introductory shipments late in the quarter for
new refrigerated dough products. Snacks unit volume was down 1 percent as good
gains in grain and salty snacks were more than offset by declines in popcorn and
the impact of last year's exit from the SQUEEZIT beverage business. Baking
Products unit volume declined 4 percent.
Bakeries and Foodservice Segment Results
Net sales for the company's Bakeries and Foodservice operation more than doubled
to $438 million, and operating profits doubled to $53 million. Comparable unit
volume was down 1 percent, reflecting economic weakness that dampened
foodservice distributor, restaurant, and supermarket bakery business. Volumes
were up in convenience stores and our wholesale business.
International Segment Results
Net sales for General Mills' consolidated international business more than
quadrupled to $314 million, and operating profits grew to $22 million,
reflecting the addition of the Pillsbury businesses. Comparable unit volume for
our consolidated international business was down 4 percent, as declines in Latin
America due to macro-economic trends more than offset gains in Asia, Europe and
Canada.
11
Joint Venture Summary
Reported earnings after tax from joint ventures totaled $17 million, compared to
$9 million in 2002. Profits for our Cereal Partners Worldwide (CPW) joint
venture with Nestle, and our Snack Ventures Europe (SVE) joint venture with
PepsiCo together reached $11 million, up 12 percent from the year ago quarter.
That profit growth was driven by strong unit volume increases of 10 percent for
CPW and 11 percent for SVE. Haagen-Dazs joint ventures formed by Pillsbury in
Asia contributed incremental earnings, more than offsetting introductory
marketing expenses at 8th Continent, the Company's soymilk joint venture with
DuPont.
Corporate Items
Interest expense for the quarter more than doubled to $142 million, reflecting
additional debt used to finance the Pillsbury acquisition. General Mills'
effective tax rate excluding unusual items for the first quarter was 35.5
percent, compared to 34 percent in the same period last year.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note One to the
Consolidated Financial Statements included in our annual report for the year
ended May 26, 2002. The accounting policies used in preparing our interim fiscal
2003 consolidated condensed financial statements are the same as those described
in our annual report, except as described in Note (8), "Accounting Rules
Adopted."
Our critical accounting policies are those that have meaningful impact on the
reporting of our financial condition and results, and that require significant
management judgment and estimates. These policies include our accounting for (a)
trade and consumer promotion activities; (b) asset impairments; and (c) income
taxes.
The amount and timing of recognition of trade and consumer promotion expense
involves management judgment related to the estimated utilization of the
promotion activities. The vast majority of year-end liabilities associated with
these activities are resolved within the following fiscal year and therefore do
not require highly uncertain long-term estimates.
Evaluating the impairment of long-lived assets, including goodwill, involves
management judgment in estimating the fair values and future cash flows related
to these assets. Although the predictability of long-term cash flows may be
somewhat uncertain, our evaluations indicate fair values of assets significantly
in excess of stated book values. Therefore, we believe the risk of unrecognized
impairment is low.
Income tax expense involves management judgment as to the ultimate resolution of
any tax issues. Historically, our assessments of the ultimate resolution of tax
issues have been reasonably accurate. The current open issues are not dissimilar
from historical items.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Company's market risk during the
thirteen weeks ended August 25, 2002. For additional information, see "Market
Risk Management" on page 17 of the Company's 2002 Annual Report to Shareholders.
Item 4. Controls and Procedures.
Not applicable.
12
Part II. OTHER INFORMATION
Item 5. Other Information.
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995 that are based on management's
current expectations and assumptions. The words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions identify "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from the potential results discussed in such
statements. In particular, our predictions about future volume and earnings
could be affected by difficulties resulting from the Pillsbury acquisition, such
as integration problems; failure to achieve synergies; unanticipated
liabilities; inexperience in new business lines; and changes in the competitive
environment. Our future results also could be affected by a variety of
additional factors such as: competitive dynamics in the U.S. ready-to-eat cereal
market, including pricing and promotional spending levels by competitors; the
impact of competitive products and pricing; product development; actions of
competitors other than as described above; acquisitions or disposals of
businesses or assets; changes in capital structure; changes in laws and
regulations, including changes in accounting standards; customer demand;
effectiveness of advertising and marketing spending or programs; consumer
perception of health-related issues; economic conditions, including changes in
inflation rates or interest rates; fluctuation in the cost and availability of
supply chain resources; and foreign economic conditions, including currency rate
fluctuations. The Company undertakes no obligations to publicly revise any
forward-looking statements to reflect future events or circumstances.
13
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 Statement of Computation of Earnings per Share.
Exhibit 12 Statement of Ratio of Earnings to Fixed Charges.
Exhibit 99.1 Amendment No. 2, dated August 26, 2002, to
Five-Year Credit Agreement, dated January 24,
2001 among the Company, JP Morgan Chase Bank
(successor to The Chase Manhattan Bank), as
Administrative Agent, and the other financial
institutions party thereto.
Exhibit 99.2 Amendment No. 3, dated August 26, 2002, to
364-Day Credit Agreement, dated January 24, 2001
among the Company, JP Morgan Chase Bank, as
Administrative Agent, and the other financial
institutions party thereto.
Exhibit 99.3 Amendment No. 2, dated September 27, 2002, to
Credit Agreement, dated October 30, 2001 among
the Company, JP Morgan Chase Bank (successor to
Morgan Guaranty Trust Company of New York), as
Administrative Agent, and the other financial
institutions party thereto.
Exhibit 99.4 Amendment No. 3, dated August 26, 2002, to
Credit Agreement, dated October 30, 2001 among
the Company, JP Morgan Chase Bank, as
Administrative Agent, and the other financial
institutions party thereto.
(b) Reports on Form 8-K:
On August 14, 2002, the Company filed a Report on Form 8-K to
report the filing of (i) statements under oath of the principal
executive officer and the principal financial officer regarding
facts and circumstances relating to Exchange Act filings, and
(ii) the certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL MILLS, INC.
----------------------------------------
(Registrant)
Date October 7, 2002 /s/ S. S. Marshall
--------------- ----------------------------------------
S. S. Marshall
Senior Vice President,
General Counsel
Date October 7, 2002 /s/ K. L. Thome
--------------- ----------------------------------------
K. L. Thome
Senior Vice President,
Financial Operations
14
I, Stephen W. Sanger, Chairman of the Board and Chief Executive Officer of
General Mills, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of General Mills,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: October 7, 2002
/s/ Stephen W. Sanger
- ------------------------------------------
Stephen W. Sanger
Chairman of the Board and
Chief Executive Officer
15
I, James A. Lawrence, Chief Financial Officer of General Mills, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of General Mills,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: October 7, 2002
/s/ James A. Lawrence
- ------------------------------------------
James A. Lawrence
Chief Financial Officer
16