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 |
o | 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: 1-1185001-01185
GENERAL MILLS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 41-0274440 |
(State or other jurisdiction of |
|
Number One General Mills Boulevard | 55426 |
(Mail: P.O. Box 1113) |
|
(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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| ||
| Accelerated filer o | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares of Common Stock outstanding as of September 13, 2007: 323,345,851(excluding 178,960,813 shares held in the treasury).
General Mills, Inc.
Table of Contents
PART I – Financial Information | Page | |
Item 1. | ||
Consolidated Statements of Earnings for the quarters ended August 26, 2007 and August 27, 2006 | 3 | |
Consolidated Balance Sheets as of August 26, 2007 and May 27, 2007 | 4 | |
5 | ||
Consolidated Statements of Cash Flows for the quarters ended August 26, 2007 and August 27, 2006 | 6 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
Item 3. | 29 | |
Item 4. | 29 | |
PART II – Other Information | ||
Item 2. | 30 | |
Item 6. | 30 | |
| ||
| 31 | |
| ||
|
Page 2
Part I. FINANCIAL INFORMATION
Financial Statements. |
Item 1. Financial Statements.
GENERAL MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In Millions, Except per Share Data)
|
| Thirteen Weeks |
| Thirty-nine Weeks |
| ||||||||
|
| Feb. 25, 2007 |
| Feb. 26, 2006 |
| Feb. 25, 2007 |
| Feb. 26, 2006 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Sales |
| $ | 3,054 |
| $ | 2,877 |
| $ | 9,381 |
| $ | 8,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 1,982 |
|
| 1,891 |
|
| 5,966 |
|
| 5,667 |
|
Selling, general and administrative |
|
| 585 |
|
| 528 |
|
| 1,765 |
|
| 1,619 |
|
Restructuring and other exit costs (income) |
|
| 1 |
|
| 5 |
|
| (2 | ) |
| 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit |
|
| 486 |
|
| 453 |
|
| 1,652 |
|
| 1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| 107 |
|
| 100 |
|
| 322 |
|
| 294 |
|
Earnings before Income Taxes and |
|
| 379 |
|
| 353 |
|
| 1,330 |
|
| 1,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes |
|
| 127 |
|
| 123 |
|
| 468 |
|
| 442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax Earnings from Joint Ventures |
|
| 16 |
|
| 16 |
|
| 58 |
|
| 57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
| $ | 268 |
| $ | 246 |
| $ | 920 |
| $ | 868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share – Basic |
| $ | .77 |
| $ | .69 |
| $ | 2.65 |
| $ | 2.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share – Diluted |
| $ | .74 |
| $ | .68 |
| $ | 2.55 |
| $ | 2.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per Share |
| $ | .37 |
| $ | .34 |
| $ | 1.07 |
| $ | 1.00 |
|
See accompanying notes to consolidated financial statements. |
|
| Quarter Ended |
| ||||
|
| Aug. 26, |
| Aug. 27, |
| ||
Net sales |
| $ | 3,072.0 |
| $ | 2,860.4 |
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 1,915.8 |
|
| 1,796.7 |
|
Selling, general, and administrative expenses |
|
| 631.6 |
|
| 574.8 |
|
Restructuring, impairment, and other exit costs (income) |
|
| 14.5 |
|
| (1.9 | ) |
|
|
|
|
|
|
|
|
Operating profit |
|
| 510.1 |
|
| 490.8 |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| 113.3 |
|
| 105.0 |
|
|
|
|
|
|
|
|
|
Earnings before income taxes and after-tax earnings from joint ventures |
|
| 396.8 |
|
| 385.8 |
|
|
|
|
|
|
|
|
|
Income taxes |
|
| 130.3 |
|
| 138.0 |
|
|
|
|
|
|
|
|
|
After-tax earnings from joint ventures |
|
| 22.4 |
|
| 19.1 |
|
|
|
|
|
|
|
|
|
Net earnings |
| $ | 288.9 |
| $ | 266.9 |
|
|
|
|
|
|
|
|
|
Earnings per share – basic |
| $ | 0.85 |
| $ | 0.76 |
|
|
|
|
|
|
|
|
|
Earnings per share – diluted |
| $ | 0.81 |
| $ | 0.74 |
|
|
|
|
|
|
|
|
|
Dividends per share |
| $ | 0.39 |
| $ | 0.35 |
|
See accompanying notes to consolidated financial statements. |
Page 23
GENERAL MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
|
|
| Feb. 25, |
|
| May 28, |
|
|
|
| (Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 476 |
| $ | 647 |
|
Receivables |
|
| 1,208 |
|
| 1,076 |
|
Inventories |
|
| 1,225 |
|
| 1,055 |
|
Prepaid expenses and other current assets |
|
| 211 |
|
| 216 |
|
Deferred income taxes |
|
| 148 |
|
| 182 |
|
Total Current Assets |
|
| 3,268 |
|
| 3,176 |
|
|
|
|
|
|
|
|
|
Land, Buildings and Equipment, at Cost |
|
| 5,951 |
|
| 5,806 |
|
Less accumulated depreciation |
|
| (3,040 | ) |
| (2,809 | ) |
Net Land, Buildings and Equipment |
|
| 2,911 |
|
| 2,997 |
|
Goodwill |
|
| 6,788 |
|
| 6,652 |
|
Other Intangible Assets |
|
| 3,685 |
|
| 3,607 |
|
Other Assets |
|
| 2,014 |
|
| 1,775 |
|
|
|
|
|
|
|
|
|
Total Assets |
| $ | 18,666 |
| $ | 18,207 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $ | 658 |
| $ | 708 |
|
Current portion of long-term debt |
|
| 845 |
|
| 2,131 |
|
Notes payable |
|
| 2,177 |
|
| 1,503 |
|
Other current liabilities |
|
| 1,969 |
|
| 1,796 |
|
Total Current Liabilities |
|
| 5,649 |
|
| 6,138 |
|
Long-term Debt |
|
| 3,165 |
|
| 2,415 |
|
Deferred Income Taxes |
|
| 1,808 |
|
| 1,822 |
|
Other Liabilities |
|
| 945 |
|
| 924 |
|
Total Liabilities |
|
| 11,567 |
|
| 11,299 |
|
|
|
|
|
|
|
|
|
Minority Interests |
|
| 1,138 |
|
| 1,136 |
|
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, 502 shares issued, $.10 par value |
|
| 50 |
|
| 50 |
|
Additional paid-in capital |
|
| 5,803 |
|
| 5,653 |
|
Retained earnings |
|
| 5,650 |
|
| 5,107 |
|
Common stock in treasury, at cost, shares of 156 and 146, respectively |
|
| (5,807 | ) |
| (5,163 | ) |
Accumulated other comprehensive income |
|
| 265 |
|
| 125 |
|
Total Stockholders’ Equity |
|
| 5,961 |
|
| 5,772 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
| $ | 18,666 |
| $ | 18,207 |
|
See accompanying notes to consolidated financial statements. |
|
| Aug. 26, |
| May 27, |
| ||
|
| (Unaudited) |
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 410.2 |
| $ | 417.1 |
|
Receivables |
|
| 1,064.0 |
|
| 952.9 |
|
Inventories |
|
| 1,554.8 |
|
| 1,173.4 |
|
Prepaid expenses and other current assets |
|
| 375.8 |
|
| 443.1 |
|
Deferred income taxes |
|
| 73.3 |
|
| 67.2 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
| 3,478.1 |
|
| 3,053.7 |
|
|
|
|
|
|
|
|
|
Land, buildings and equipment |
|
| 2,963.1 |
|
| 3,013.9 |
|
Goodwill |
|
| 6,685.5 |
|
| 6,835.4 |
|
Other intangible assets |
|
| 3,729.4 |
|
| 3,694.0 |
|
Other assets |
|
| 1,621.8 |
|
| 1,586.7 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 18,477.9 |
| $ | 18,183.7 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $ | 893.6 |
| $ | 777.9 |
|
Current portion of long-term debt |
|
| 1,946.5 |
|
| 1,734.0 |
|
Notes payable |
|
| 3,560.6 |
|
| 1,254.4 |
|
Other current liabilities |
|
| 1,104.7 |
|
| 2,078.8 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
| 7,505.4 |
|
| 5,845.1 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 3,003.8 |
|
| 3,217.7 |
|
Deferred income taxes |
|
| 1,421.2 |
|
| 1,433.1 |
|
Other liabilities |
|
| 1,846.5 |
|
| 1,229.9 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
| 13,776.9 |
|
| 11,725.8 |
|
|
|
|
|
|
|
|
|
Minority interests |
|
| 242.3 |
|
| 1,138.8 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
Common stock, 502.3 shares issued, $.10 par value |
|
| 50.2 |
|
| 50.2 |
|
Additional paid-in capital |
|
| 5,969.0 |
|
| 5,841.3 |
|
Retained earnings |
|
| 5,901.2 |
|
| 5,745.3 |
|
Common stock in treasury, at cost, shares of 181.2 and 161.7 |
|
| (7,364.2 | ) |
| (6,198.0 | ) |
Accumulated other comprehensive loss |
|
| (97.5 | ) |
| (119.7 | ) |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
| 4,458.7 |
|
| 5,319.1 |
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
| $ | 18,477.9 |
| $ | 18,183.7 |
|
See accompanying notes to consolidated financial statements. |
Page 34
GENERAL MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
|
| $.10 Par Value Common Stock |
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Issued |
| Treasury |
|
|
|
|
| Accumulated |
|
|
| ||||||||||||||||
In Millions, Except per Share Data |
| Shares |
| Par |
| Additional |
| Shares |
| Amount |
| Retained |
| Unearned |
| Other |
| Total |
| ||||||||||
Balance as of May 28, 2006 |
| 502.3 |
| $ | 50.2 |
| $ | 5,736.6 |
| (145.9 | ) | $ | (5,163.0 | ) | $ | 5,106.6 |
| $ | (83.5 | ) | $ | 125.4 |
| $ | 5,772.3 |
| |||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,143.9 |
|
|
|
|
|
|
|
| 1,143.9 |
| |||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net change on hedge derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22.3 |
|
| 22.3 |
| |||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 193.8 |
|
| 193.8 |
| |||
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (20.8 | ) |
| (20.8 | ) | |||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 195.3 |
|
| 195.3 |
| |||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,339.2 |
| |||
Adoption of SFAS No. 123R |
|
|
|
|
|
|
| (83.5 | ) |
|
|
|
|
|
|
|
|
| 83.5 |
|
|
|
|
| — |
| |||
Adoption of SFAS No. 158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (440.4 | ) |
| (440.4 | ) | |||
Cash dividends declared ($1.44 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (505.2 | ) |
|
|
|
|
|
|
| (505.2 | ) | |||
Stock compensation plans (includes income tax benefits of $73.1) |
|
|
|
|
|
|
| 164.6 |
| 9.5 |
|
| 339.4 |
|
|
|
|
|
|
|
|
|
|
| 504.0 |
| |||
Shares purchased |
|
|
|
|
|
|
|
|
| (25.3 | ) |
| (1,385.1 | ) |
|
|
|
|
|
|
|
|
|
| (1,385.1 | ) | |||
Unearned compensation related to restricted stock awards |
|
|
|
|
|
|
| (95.0 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (95.0 | ) | |||
Issuance of shares to settle conversion on zero coupon convertible debentures, net of tax |
|
|
|
|
|
|
| (10.7 | ) |
|
|
| 10.7 |
|
|
|
|
|
|
|
|
|
|
| — |
| |||
Earned compensation |
|
|
|
|
|
|
| 129.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 129.3 |
| |||
Balance as of May 27, 2007 |
| 502.3 |
| $ | 50.2 |
| $ | 5,841.3 |
| (161.7 | ) | $ | (6,198.0 | ) | $ | 5,745.3 |
| $ | — |
| $ | (119.7 | ) | $ | 5,319.1 |
| |||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 288.9 |
|
|
|
|
|
|
|
| 288.9 |
| |||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net change on hedge derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2.9 | ) |
| (2.9 | ) | |||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 17.7 |
|
| 17.7 |
| |||
Amortization of losses and prior service costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7.4 |
|
| 7.4 |
| |||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22.2 |
|
| 22.2 |
| |||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 311.1 |
| |||
Cash dividends declared ($.39 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (133.4 | ) |
|
|
|
|
|
|
| (133.4 | ) | |||
Stock compensation plans (includes income tax benefits of $8.3) |
|
|
|
|
|
|
| 116.0 |
| 1.4 |
|
| 54.2 |
|
|
|
|
|
|
|
|
|
|
| 170.2 |
| |||
Shares purchased |
|
|
|
|
|
|
|
|
| (20.9 | ) |
| (1,220.4 | ) |
|
|
|
|
|
|
|
|
|
| (1,220.4 | ) | |||
Unearned compensation related to restricted stock awards |
|
|
|
|
|
|
| (101.2 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (101.2 | ) | |||
Adoption of FIN 48 |
|
|
|
|
|
|
| 57.8 |
|
|
|
|
|
|
| 8.4 |
|
|
|
|
|
|
|
| 66.2 |
| |||
Capital appreciation paid to holders of Series B-1 limited membership interests in General Mills Cereals, LLC (GMC) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8.0 | ) |
|
|
|
|
|
|
| (8.0 | ) | |||
Earned compensation |
|
|
|
|
|
|
| 55.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 55.1 |
| |||
Balance as of August 26, 2007 |
| 502.3 |
| $ | 50.2 |
| $ | 5,969.0 |
| (181.2 | ) | $ | (7,364.2 | ) | $ | 5,901.2 |
| $ | — |
| $ | (97.5 | ) | $ | 4,458.7 |
|
See accompanying notes to consolidated financial statements.
Page 5
GENERAL MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In Millions)
|
|
| Thirty-nine Weeks Ended |
|
|
| Quarter Ended |
| ||||||||||||||||
|
|
| Feb. 25, |
| Feb. 26, |
|
|
| Aug. 26, |
| Aug. 27, |
| ||||||||||||
Cash Flows – Operating Activities | Cash Flows – Operating Activities |
|
|
|
|
|
|
| Cash Flows – Operating Activities |
|
|
|
|
|
|
| ||||||||
Net earnings | Net earnings |
| $ | 920 |
| $ | 868 |
| Net earnings |
| $ | 288.9 |
| $ | 266.9 |
| ||||||||
Adjustments to reconcile net earnings to net cash |
|
|
|
|
|
|
| |||||||||||||||||
Adjustments to reconcile net earnings to net cash | Adjustments to reconcile net earnings to net cash |
|
|
|
|
| ||||||||||||||||||
provided by operating activities: | provided by operating activities: |
|
|
|
|
| ||||||||||||||||||
Depreciation and amortization | Depreciation and amortization |
|
| 313 |
|
| 317 |
| Depreciation and amortization |
|
| 108.2 |
|
| 104.4 |
| ||||||||
After-tax earnings from joint ventures | After-tax earnings from joint ventures |
|
| (22.4 | ) |
| (19.2 | ) | ||||||||||||||||
Stock-based compensation | Stock-based compensation |
|
| 105 |
|
| 33 |
| Stock-based compensation |
|
| 55.1 |
|
| 53.1 |
| ||||||||
After-tax earnings from joint ventures |
|
| (58 | ) |
| (57 | ) | |||||||||||||||||
Tax benefit on exercised options |
|
| — |
|
| 21 |
| |||||||||||||||||
Deferred income taxes | Deferred income taxes |
|
| 13 |
|
| — |
| Deferred income taxes |
|
| (17.0 | ) |
| 9.6 |
| ||||||||
Distributions of earnings from joint ventures | Distributions of earnings from joint ventures |
|
| 16.4 |
|
| 10.9 |
| ||||||||||||||||
Pension, other postretirement, and postemployment benefit costs | Pension, other postretirement, and postemployment benefit costs |
|
| (16.3 | ) |
| (12.9 | ) | ||||||||||||||||
Restructuring, impairment, and other exit costs (income) | Restructuring, impairment, and other exit costs (income) |
|
| 13.9 |
|
| (1.9 | ) | ||||||||||||||||
Changes in current assets and liabilities | Changes in current assets and liabilities |
|
| (125 | ) |
| (26 | ) | Changes in current assets and liabilities |
|
| (417.5 | ) |
| (326.5 | ) | ||||||||
Distributions of joint venture earnings |
|
| 18 |
|
| 32 |
| |||||||||||||||||
Pension and other postretirement costs |
|
| (20 | ) |
| (17 | ) | |||||||||||||||||
Restructuring and other exit costs |
|
| (2 | ) |
| 16 |
| |||||||||||||||||
Other, net | Other, net |
|
| (11 | ) |
| 41 |
| Other, net |
|
| 11.1 |
|
| 26.2 |
| ||||||||
Net Cash Provided by Operating Activities |
|
| 1,153 |
|
| 1,228 |
| |||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||
Net cash provided by operating activities | Net cash provided by operating activities |
|
| 20.4 |
|
| 110.6 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash Flows – Investing Activities | Cash Flows – Investing Activities |
|
|
|
|
|
|
| Cash Flows – Investing Activities |
|
|
|
|
| ||||||||||
Purchases of land, buildings and equipment | Purchases of land, buildings and equipment |
|
| (249 | ) |
| (191 | ) | Purchases of land, buildings and equipment |
|
| (67.9 | ) |
| (61.4 | ) | ||||||||
Acquisitions | Acquisitions |
|
| (82 | ) |
| (10 | ) | Acquisitions |
|
| 1.3 |
|
| (57.7 | ) | ||||||||
Investments in affiliates, net | Investments in affiliates, net |
|
| (108 | ) |
| 4 |
| Investments in affiliates, net |
|
| (2.3 | ) |
| (126.7 | ) | ||||||||
Proceeds from divestitures |
|
| 14 |
|
| — |
| |||||||||||||||||
Proceeds from disposal of land, buildings and equipment |
|
| 12 |
|
| 4 |
| |||||||||||||||||
Proceeds from disposal of land, buildings, and equipment | Proceeds from disposal of land, buildings, and equipment |
|
| 11.2 |
|
| 10.4 |
| ||||||||||||||||
Other, net | Other, net |
|
| (2 | ) |
| (28 | ) | Other, net |
|
| 6.6 |
|
| (4.7 | ) | ||||||||
Net Cash Used by Investing Activities |
|
| (415 | ) |
| (221 | ) | |||||||||||||||||
Net cash used by investing activities | Net cash used by investing activities |
|
| (51.1 | ) |
| (240.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash Flows – Financing Activities | Cash Flows – Financing Activities |
|
|
|
|
|
|
| Cash Flows – Financing Activities |
|
|
|
|
| ||||||||||
Change in notes payable | Change in notes payable |
|
| 656 |
|
| 1,503 |
| Change in notes payable |
|
| 2,297.2 |
|
| 719.5 |
| ||||||||
Issuance of long-term debt |
|
| 1,500 |
|
| — |
| |||||||||||||||||
Payment of long-term debt | Payment of long-term debt |
|
| (2,049 | ) |
| (1,344 | ) | Payment of long-term debt |
|
| — |
|
| (66.7 | ) | ||||||||
Repurchase of Series B-1 limited membership interests in | Repurchase of Series B-1 limited membership interests in |
|
|
|
|
| ||||||||||||||||||
General Mills Cereals, LLC (GMC) | General Mills Cereals, LLC (GMC) |
|
| (843.0 | ) |
| — |
| ||||||||||||||||
Repurchase of General Mills Capital, Inc. preferred stock | Repurchase of General Mills Capital, Inc. preferred stock |
|
| (150.0 | ) |
| — |
| ||||||||||||||||
Proceeds from sale of Class A limited membership interests in GMC | Proceeds from sale of Class A limited membership interests in GMC |
|
| 92.3 |
|
| — |
| ||||||||||||||||
Common stock issued | Common stock issued |
|
| 217 |
|
| 85 |
| Common stock issued |
|
| 29.8 |
|
| 71.5 |
| ||||||||
Tax benefit on exercised options | Tax benefit on exercised options |
|
| 47 |
|
| — |
| Tax benefit on exercised options |
|
| 8.3 |
|
| 14.6 |
| ||||||||
Purchases of common stock for treasury | Purchases of common stock for treasury |
|
| (895 | ) |
| (806 | ) | Purchases of common stock for treasury |
|
| (1,278.7 | ) |
| (706.4 | ) | ||||||||
Dividends paid | Dividends paid |
|
| (377 | ) |
| (363 | ) | Dividends paid |
|
| (132.1 | ) |
| (125.7 | ) | ||||||||
Other, net |
|
| (8 | ) |
| (2 | ) | |||||||||||||||||
Net Cash Used by Financing Activities |
|
| (909 | ) |
| (927 | ) | |||||||||||||||||
Net cash provided (used) by financing activities | Net cash provided (used) by financing activities |
|
| 23.8 |
|
| (93.2 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Increase (decrease) in Cash and Cash Equivalents |
|
| (171 | ) |
| 80 |
| |||||||||||||||||
Cash and Cash Equivalents – Beginning of Year |
|
| 647 |
|
| 573 |
| |||||||||||||||||
Cash and Cash Equivalents – End of Period |
| $ | 476 |
| $ | 653 |
| |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Cash Flows from Changes in Current Assets and Liabilities: |
|
|
|
|
|
|
| |||||||||||||||||
Decrease in cash and cash equivalents | Decrease in cash and cash equivalents |
|
| (6.9 | ) |
| (222.7 | ) | ||||||||||||||||
Cash and cash equivalents – beginning of year | Cash and cash equivalents – beginning of year |
|
| 417.1 |
|
| 647.4 |
| ||||||||||||||||
Cash and cash equivalents – end of period | Cash and cash equivalents – end of period |
| $ | 410.2 |
| $ | 424.7 |
| ||||||||||||||||
Cash Flow from Changes in Current Assets and Liabilities: | Cash Flow from Changes in Current Assets and Liabilities: |
|
|
|
|
| ||||||||||||||||||
Receivables | Receivables |
| $ | (129 | ) | $ | (62 | ) | Receivables |
| $ | (109.3 | ) | $ | (106.3 | ) | ||||||||
Inventories | Inventories |
|
| (175 | ) |
| (129 | ) | Inventories |
|
| (378.8 | ) |
| (373.2 | ) | ||||||||
Prepaid expenses and other current assets | Prepaid expenses and other current assets |
|
| 9 |
|
| 8 |
| Prepaid expenses and other current assets |
|
| 65.0 |
|
| 30.7 |
| ||||||||
Accounts payable | Accounts payable |
|
| (56 | ) |
| (74 | ) | Accounts payable |
|
| 114.7 |
|
| 140.6 |
| ||||||||
Other current liabilities | Other current liabilities |
|
| 226 |
|
| 231 |
| Other current liabilities |
|
| (109.1 | ) |
| (18.3 | ) | ||||||||
Changes in Current Assets and Liabilities |
| $ | (125 | ) | $ | (26 | ) | |||||||||||||||||
Changes in current assets and liabilities | Changes in current assets and liabilities |
| $ | (417.5 | ) | $ | (326.5 | ) | ||||||||||||||||
See accompanying notes to consolidated financial statements. | See accompanying notes to consolidated financial statements. | See accompanying notes to consolidated financial statements. |
Page 46
GENERAL MILLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Background
The accompanying Consolidated Financial Statements of General Mills, Inc. (we, us, our, or the Company) and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. 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 and thirty-nine weeksquarter ended February 25,August 26, 2007, are not necessarily indicative of the results that may be expected for the fiscal year ending May 27, 2007.25, 2008.
These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended May 28, 2006, as amended by Amendment No. 1 on Form 10-K/A filed January 8, 2007, and the Form 8-K filed on January 16, 2007 (the Form 8-K).27, 2007. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 12 to the Consolidated Financial Statements in that Form 10-K, except as discloseddiscussed in Notes 216 and 3 below. Certain prior years’ amounts18 to these Consolidated Financial Statements for the quarter ended August 26, 2007. In addition, certain reclassifications to our previously reported financial information have also been reclassifiedmade to conform to the current year presentation as disclosed in Note 3 belowperiod presentation.
(2) Acquisitions and in our Form 8-K.Divestitures
During the thirdfirst quarter of fiscal 2008, we acquired a controlling interest in HD Distributors (Thailand) Company Limited. Prior to acquiring the controlling interest, we accounted for the transaction as a joint venture. The purchase price, net of cash acquired, resulted in a $1.3 million cash inflow classified in acquisitions on the Consolidated Statements of Cash Flows. The pro forma effect of this acquisition was not material.
During the first quarter of fiscal 2007, our Cereal Partners Worldwide (CPW) joint venture completed the acquisition of the Uncle Tobys cereal business in Australia for approximately $385.6 million. We funded our 50 percent share of the purchase price by making additional advances to and equity contributions in CPW totaling $135.1 million (classified as investments in affiliates, net, on the Consolidated Statements of Cash Flows) and by acquiring a 50 percent beneficial interest in certain intellectual property for $57.7 million (classified as acquisitions on the Consolidated Statements of Cash Flows). During the first quarter of fiscal 2008, we completed the allocation of our purchase price and reclassified $16.1 million from goodwill to other intangible assets on our Consolidated Balance Sheets.
Also, during the first quarter of fiscal 2007, we changedcommitted to a plan to sell our par-baked bread product line, including plants in Chelsea, Massachusetts and Tempe, Arizona, and recorded a $6.0 million loss on the timingsale, including the write-off of $6.2 million of goodwill, in restructuring, impairment, and other exit costs.
(3) Restructuring, Impairment, and Other Exit Costs
During the first quarter of fiscal 2008, we took several restructuring actions. Due to declining financial results, we decided to exit our frozen waffle product line (retail and foodservice) and to close our frozen waffle plant in Allentown, Pennsylvania, affecting 111 employees. We recorded a charge of $10.1 million related to this closure, consisting of $3.9 million of employee severance charges and a $6.2 million non-cash impairment charge against long-lived assets at the plant. We also completed an analysis of the viability of our annual goodwill impairment testing fromBakeries and Foodservice frozen dough facility in Trenton, Ontario, and will close the first day of our fiscal year to December 1. During fiscal 2007, we performed this annual impairment test on May 29, 2006,facility, affecting 470 employees. We recorded an $8.5 million charge for employee severance expenses and again on December 1, 2006. This accounting change is preferable incurtailment charges associated with a defined benefit pension plan. These actions, including the circumstances because moving the date of our annual goodwill impairment testing into the third quarter better aligns this impairment test with theanticipated timing of the presentationdisposition of the plants we will close, are expected to be completed by February 28, 2009.
Page 7
We also restructured our production scheduling and discontinued our cake product line at our Chanhassen, Minnesota, Bakeries and Foodservice plant. These actions affected 125 employees, and we recorded a charge for employee severance expenses of $3.0 million in the first quarter of fiscal 2008. These actions are expected to be completed by the end of fiscal 2008.
Collectively, the total charge we expect to incur with respect to these impairment and restructuring actions is approximately $65.0 million, of which approximately $45.0 million is expected to be recognized in fiscal 2008.
During the first quarter of fiscal 2008, we also completed the sale of our strategic plan to the Boardpreviously closed Vallejo, California plant. We received $10.6 million in proceeds and recorded a gain of Directors.$7.1 million.
In addition, atRestructuring, impairment, and other exit costs (income) in the first quarter of fiscal 2008 were as follows:
Expense (income), in millions |
|
|
| |
Closure of Allentown, Pennsylvania frozen waffle plant |
| $ | 10.1 |
|
Closure of Trenton, Ontario frozen dough plant |
|
| 8.5 |
|
Restructuring of production scheduling and discontinuation of cake product line at Chanhassen, Minnesota plant |
|
| 3.0 |
|
Gain on sale of previously closed Vallejo, California plant |
|
| (7.1 | ) |
Total |
| $ | 14.5 |
|
Restructuring, impairment, and other exit costs (income) in the first quarter of fiscal 2007 were as follows:
Expense (income), in millions |
|
|
| |
Gain on sale of previously closed plant in San Adrian, Spain |
| $ | (8.6 | ) |
Impairment of long-lived assets and write off of associated goodwill related to par-baked bread line, including its plants in Chelsea, Massachusetts and Tempe, Arizona |
|
| 6.2 |
|
Charges associated with restructuring actions previously announced |
|
| 0.5 |
|
Total |
| $ | (1.9 | ) |
(4) Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill in the first quarter of fiscal 2008 were as follows:
In millions |
| U.S. |
| International |
| Bakeries and |
| Joint |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 27, 2007 |
| $ | 5,202.9 |
| $ | 142.2 |
| $ | 981.8 |
| $ | 508.5 |
| $ | 6,835.4 |
|
Finalization of purchase accounting |
|
| — |
|
| — |
|
| — |
|
| (16.1 | ) |
| (16.1 | ) |
Adoption of FIN 48 |
|
| (110.9 | ) |
| (10.6 | ) |
| (30.4 | ) |
| — |
|
| (151.9 | ) |
Other activity, primarily foreign currency translation |
|
| 5.0 |
|
| 3.2 |
|
| 1.4 |
|
| 8.5 |
|
| 18.1 |
|
Balance as of Aug. 26, 2007 |
| $ | 5,097.0 |
| $ | 134.8 |
| $ | 952.8 |
| $ | 500.9 |
| $ | 6,685.5 |
|
Page 8
The changes in the carrying amount of other intangible assets in the first quarter of fiscal 2008 were as follows:
In millions |
| U.S. |
| International |
| Joint |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 27, 2007 |
| $ | 3,175.2 |
| $ | 460.9 |
| $ | 57.9 |
| $ | 3,694.0 |
|
Finalization of purchase accounting |
|
| — |
|
| 14.5 |
|
| 16.1 |
|
| 30.6 |
|
Other activity, primarily foreign currency translation |
|
| — |
|
| 4.6 |
|
| 0.2 |
|
| 4.8 |
|
Balance as of Aug. 26, 2007 |
| $ | 3,175.2 |
| $ | 480.0 |
| $ | 74.2 |
| $ | 3,729.4 |
|
(5) Inventories
The components of inventories were as follows:
In millions |
| Aug. 26, |
| May 27, |
| ||
Raw materials and packaging |
| $ | 285.5 |
| $ | 242.1 |
|
Finished goods |
|
| 1,154.4 |
|
| 898.0 |
|
Grain |
|
| 220.3 |
|
| 111.4 |
|
Excess of FIFO or weighted-average cost over LIFO cost |
|
| (105.4 | ) |
| (78.1 | ) |
Total |
| $ | 1,554.8 |
| $ | 1,173.4 |
|
(6) Derivatives and Hedging Activities
Application of hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,”as amended (SFAS 133), requires significant resources, recordkeeping, and analytical systems. As a result of the rising compliance costs and the complexity associated with the application of hedge accounting, we have elected to discontinue the use of hedge accounting for all commodity derivative positions entered into after the beginning of fiscal 2008. Accordingly, the changes in the values of these derivatives are recorded in cost of sales in our Consolidated Statements of Earnings currently.
Regardless of designation for accounting purposes, we believe all of our commodity hedges are economic hedges of our risk exposures, and as a result we consider these derivatives to be hedges for purposes of measuring segment operating performance. Thus, these gains and losses are reported in unallocated corporate expenses outside of segment operating results until such time that the exposure we are hedging affects earnings. At that time we reclassify the hedge gain or loss from unallocated corporate expenses to segment operating profit, allowing our operating segments to economically realize the effects of the hedge without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate expenses. Commodity derivatives previously accounted for as cash flow hedges are not affected by this change, and any gains or losses deferred to accumulated other comprehensive loss in stockholders’ equity will remain there until the hedged item affects earnings.
Pursuant to our new policy, unallocated corporate expenses in the first quarter of fiscal 2008 include a net $3.0 million loss from commodity derivatives, consisting of a $15.1 million mark to market gain on our open commodity derivative positions, primarily from agricultural derivatives, offset by the impact of reclassifying $18.1 million of gains on hedge positions, primarily agricultural derivatives, to segment operating profit during the period, which partially offset higher input costs on the hedged exposures.
Page 9
(7) Debt
The components of notes payable at the end of the respective periods were as follows:
In millions |
| Aug. 26, |
| May 27, |
| ||
U.S. commercial paper |
| $ | 1,810.4 |
| $ | 476.9 |
|
Euro commercial paper |
|
| 1,636.8 |
|
| 639.0 |
|
Financial institutions |
|
| 113.4 |
|
| 138.5 |
|
Total |
| $ | 3,560.6 |
| $ | 1,254.4 |
|
On August 3, 2007, we shifted responsibilityentered into a credit facility with an initial aggregate revolving commitment of $750.0 million. The facility will expire on December 6, 2007. As of August 26, 2007, we had not drawn against this facility.
On August 29, 2007, we completed the sale of $700.0 million of 5.65 percent fixed-rate notes due September 10, 2012. The proceeds of the notes were used to repay outstanding commercial paper. Interest on the notes is payable semi-annually in arrears. The notes may be redeemed at our option at any time for several customers froma specified make-whole amount. The notes are senior unsecured, unsubordinated obligations and contain a change of control provision, as defined in the instruments governing the notes.
Our credit facilities and certain of our Bakeries and Foodservice segment to our U.S. Retail segment. All prior year amounts have been reclassified for comparative purposes. See Notes 6 and 15 below.long-term debt agreements contain restrictive covenants. As of August 26, 2007, we were in compliance with all of these covenants.
(2) Stock-Based Compensation(8) Minority Interests
On August 7, 2007, we repurchased for a net amount of $843.0 million all of the outstanding Series B-1 limited membership interests (Series B-1 Interests) previously issued by our subsidiary General Mills Cereals, LLC (GMC) as part of a required remarketing of those interests. The purchase price reflected the Series B-1 Interests’ original capital account balance of $835.0 million and $8.0 million of capital account appreciation attributable and paid to the third party holder of the Series B-1 Interests. The capital appreciation paid to the third party holder of the Series B-1 Interests was recorded as a reduction to retained earnings, a component of stockholders’ equity, on the Consolidated Balance Sheets, and reduced net earnings available to common stockholders in our basic and diluted earnings per share (EPS) calculations. We used commercial paper to fund the repurchase.
We and the third party holder of all of GMC’s outstanding Class A limited membership interests (Class A Interests) agreed to reset, effective on June 28, 2007, the preferred rate of return applicable to the Class A Interests to the sum of 3 month LIBOR plus 65 basis points. On June 28, 2007, we also sold $92.3 million of additional Class A Interests to the same third party. There was no gain or loss associated with these transactions. As of August 26, 2007, the carrying value of all outstanding Class A Interests on our Consolidated Balance Sheets was $242.3 million, and the capital account balance of the Class A Interests, upon which preferred distributions are calculated, was $248.1 million.
On June 28, 2007, we repurchased for $150.0 million all of the outstanding Series A preferred stock of our subsidiary General Mills Capital, Inc. (GM Capital) using proceeds from the sale of the Class A Interests and commercial paper. There was no gain or loss associated with this repurchase.
Page 10
(9) Stockholders’ Equity
The following table provides detail of total comprehensive income:
|
| Quarter Ended |
| Quarter Ended |
| ||||||||||||||
|
| Aug. 26, 2007 |
| Aug. 27, 2006 |
| ||||||||||||||
In millions |
| Pretax |
| Tax |
| Net |
| Pretax |
| Tax |
| Net |
| ||||||
Net earnings |
|
|
|
|
|
|
| $ | 288.9 |
|
|
|
|
|
|
| $ | 266.9 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency Translation adjustments |
| $ | 17.7 |
| $ | — |
| $ | 17.7 |
| $ | (2.4 | ) | $ | — |
| $ | (2.4 | ) |
Minimum pension liability |
|
| — |
|
| — |
|
| — |
|
| (4.7 | ) |
| 1.6 |
|
| (3.1 | ) |
Other fair value changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
| (1.0 | ) |
| 0.3 |
|
| (0.7 | ) |
|
|
|
|
|
|
|
|
|
Hedge derivatives |
|
| 19.4 |
|
| (7.2 | ) |
| 12.2 |
|
| (18.3 | ) |
| 7.0 |
|
| (11.3 | ) |
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge derivatives |
|
| (22.5 | ) |
| 8.1 |
|
| (14.4 | ) |
| 11.8 |
|
| (4.3 | ) |
| 7.5 |
|
Amortization of losses and prior service costs |
|
| 11.4 |
|
| (4.0 | ) |
| 7.4 |
|
| — |
|
| — |
|
| — |
|
Other comprehensive income (loss) |
| $ | 25.0 |
| $ | (2.8 | ) | $ | 22.2 |
| $ | (13.6 | ) | $ | 4.3 |
| $ | (9.3 | ) |
Total comprehensive income |
|
|
|
|
|
|
| $ | 311.1 |
|
|
|
|
|
|
| $ | 257.6 |
|
Except for reclassifications to earnings, changes in other comprehensive income (loss) are primarily noncash items.
Accumulated other comprehensive loss balances, net of tax effects, were as follows:
In millions |
| Aug. 26, |
| May 27, |
| ||
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
| $ | 419.8 |
| $ | 402.1 |
|
Unrealized gain (loss) from: |
|
|
|
|
|
|
|
Securities |
|
| 3.2 |
|
| 3.9 |
|
Hedge derivatives |
|
| (38.7 | ) |
| (36.5 | ) |
Pension, other postretirement and postemployment benefits: |
|
|
|
|
|
|
|
Net actuarial loss |
|
| (442.4 | ) |
| (448.5 | ) |
Prior service costs |
|
| (39.4 | ) |
| (40.7 | ) |
Accumulated other comprehensive loss |
| $ | (97.5 | ) | $ | (119.7 | ) |
(10) Stock Plans
We have various stock-based compensation programs under which awards, including stock options, restricted stock, and restricted stock units, may be granted to employees and non-employee directors. These programs and related accounting are described on pages 58 to 60 of our fiscal 2007 Annual Report on Form 10-K.
Options may be priced at 100 percent or more of the fair market value of our stock on the date of grant, and generally vest four years after the date of grant. Options generally expire 10 years and one month after the date of grant. The 2006 Compensation Plan for Non-Employee Directors (2006 Director Plan) allows each non-employee director to receive upon election and re-election to the Board of Directors options to purchase shares of common stock that generally vest one year, and expire 10 years, after the date of grant.
Stock and units settled in stock subject to a restricted period and a purchase price, if any (as determined by the Compensation Committee of the Board of Directors), may be granted to key employees under the 2005 Stock Compensation Plan. Restricted shares and restricted stock units, up to 50 percent of the value of an individual’s cash incentive award, may also be granted under the Executive Incentive Plan. Certain restricted share and restricted stock unit awards require the employee to deposit personally owned shares with a broker (on a one-for-one basis) during the restricted period. Restricted shares and restricted stock units generally vest and become unrestricted four years after the date of grant. Participants are entitled to cash dividends on such awarded shares and units, but the sale or transfer of these shares and units is restricted during the vesting period. Participants holding restricted shares, but not restricted stock units, are also entitled to vote on matters submitted to holders of common stock for a vote. The 2006 Director Plan allows each non-employee director to receive upon election and re-election to the Board restricted stock units that generally vest one year after the date of grant.
We issue shares from treasury stock upon the exercise of stock options and the vesting of restricted stock units.
Page 5
Prior to May 29, 2006, we applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations in accounting for stock-based compensation. No compensation expense for stock options was recognized in our Consolidated Statements of Earnings prior to fiscal 2007, as the exercise price was equal to the market price of our stock at the date of grant. Expense attributable to other types of share-based awards was recognized in our results under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).
Effective May 29, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised) “Share-Based Payment” (SFAS 123R), which changed the accounting for compensation expense associated with stock options, restricted stock awards, and other forms of equity compensation. We elected the modified prospective transition method as permitted by SFAS 123R; accordingly, results from prior periods have not been restated. Under this method, stock-based compensation expense for the thirteen and thirty-nine weeks ended February 25, 2007, includes quarterly amortization related to the remaining unvested portion of all equity compensation awards granted prior to May 29, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and quarterly amortization related to all equity compensation awards granted on or subsequent to May 29, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Prior to the adoption of SFAS 123R, we made pro forma disclosures in accordance with SFAS 123, in which we calculated compensation expense for stock option awards on a straight-line basis over their vesting periods. This treatment differs from the requirements of SFAS 123R, which requires that a stock-based award be considered vested for expense attribution purposes when the award recipient’s retention of the award is no longer contingent on providing subsequent service. Accordingly, beginning in fiscal 2007, we have prospectively revised our expense attribution method so that the compensation expense is recognized immediately for awards granted to retirement-eligible individuals or over the lesser of the award’s vesting period or the period from the grant date of the award to the recipient’s retirement eligibility date.
The compensation expense related to share-basedstock-based payments recognized in selling, general, and administrative expenseexpenses in the Consolidated Statements of Earnings for the thirteen and thirty-nine weeks ended February 25, 2007, was $24 million and $105 million, respectively. The impact of adoption of SFAS 123R was an incremental expense of $9 million ($6 million after-tax or $0.02 cents per diluted share) in the thirteen weeks ended February 25, 2007 and $61 million ($38 million after-tax or $0.11 cents per diluted share) in the thirty-nine weeks ended February 25, 2007.
Amounts for the thirteen and thirty-nine weeks ended February 26, 2006 are presented in the table below in accordance with SFAS 123. Stock-based employee compensation expense is principally related to restricted stock unit awards; stock-based employee compensation expense included in pro forma amounts also reflects expenses related to stock option grants.first quarter of fiscal 2008 was $55.1 million.
Page 611
In Millions, except per share data |
|
| Thirteen |
|
| Thirty-nine Weeks Ended |
|
|
|
|
|
|
|
|
|
Net earnings, as reported |
| $ | 246 |
| $ | 868 |
|
|
|
|
|
|
|
|
|
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects |
|
| 8 |
|
| 22 |
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
| (12 | ) |
| (37 | ) |
Pro forma net earnings |
| $ | 242 |
| $ | 853 |
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
Basic – as reported |
| $ | .69 |
| $ | 2.42 |
|
Basic – pro forma |
| $ | .68 |
| $ | 2.38 |
|
|
|
|
|
|
|
|
|
Diluted – as reported |
| $ | .68 |
| $ | 2.29 |
|
Diluted – pro forma |
| $ | .66 |
| $ | 2.24 |
|
Prior to the adoption
We recognized $8.3 million of SFAS 123R, we reported allexcess tax benefits resulting from options exercised in the exercisefirst quarter of stock optionsfiscal 2008, and $14.6 million in the first quarter of fiscal 2007. These amounts are classified as operatingfinancing cash flows in our Consolidated Statements of Cash Flows. In accordance with SFAS 123R, the presentation of our Consolidated Statements of Cash Flows beginning in fiscal 2007 has changed to report the excess tax benefits from the exercise of the stock options as financing cash flows. This amount totaled $47 million for the thirty-nine weeks ended February 25, 2007.
Net cash proceeds from the exercise of stock options less shares used for withholding taxes were $75$30.6 million for the thirteen weeks ended February 25, 2007,first quarter of fiscal 2008, and $33$74.7 million for the thirteen weeks ended February 26, 2006. Net cash proceeds from the exercisefirst quarter of stock options were $226 million for the thirty-nine weeks ended February 25, 2007, and $89 million for the thirty-nine weeks ended February 26, 2006.fiscal 2007.
The weighted-average grant-date fair values of stock options granted during the thirty-nine weeks ended February 25,first quarter of fiscal 2008, were estimated at $10.60 per share, and during the first quarter of fiscal 2007, were estimated at $10.74 per share, and during the thirty-nine weeks ended February 26, 2006, were estimated at $8.04 per share, using the Black-Scholes option-pricing model with the following assumptions:
Thirty-nine Weeks Ended |
| Feb. 25, |
| Feb. 26, |
| ||
| Quarter Ended | ||||||
| Aug. 26, 2007 | Aug. 27, 2006 | |||||
Risk-free interest rate |
| 5.3% |
| 4.3% |
| 5.1% | 5.3% |
Expected term |
| 8 years |
| 7 years |
| 8.5 years | 8 years |
Expected volatility |
| 19.7% |
| 20.0% |
| 15.6% | 19.7% |
Expected dividend growth rate |
| 9.2% |
| 10.2% |
| ||
Dividend yield | 2.7% | 2.8% |
We estimate the fair value of each option on the grant date using the Black-Scholes option-pricing model, which requires us to make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. We estimate our future stock price volatility using the historical volatility over the expected term of the option, excluding time periods of volatility we believe a marketplace participant would exclude in their estimate of our stock price volatility. For the fiscal 2008 grants, we have excluded historical volatility for fiscal 2002 and prior, primarily because volatility driven by the acquisition of Pillsbury does not reflect what we believe to be expected future volatility. We also have considered, but did not use, implied volatility in our estimate as trading activity in options on our stock, especially those with tenors of greater than 6 months, is insufficient to provide a reliable measure of expected volatility. Our method of selecting the other valuation assumptions is explained on pages 58 and 59 in our Annual Report on Form 10-K for the fiscal year ended May 27, 2007.
Page 7
Information on stock option activity follows:
|
| Shares |
|
| Weighted- |
| Weighted- |
|
| Aggregate |
|
| Shares |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
Outstanding at May 28, 2006 |
| 58,203 |
| $ | 41.45 |
|
|
|
|
|
| |||||||||||
Outstanding as of May 27, 2007 |
| 53,773.2 |
| $ | 43.09 |
|
|
|
|
|
| |||||||||||
Granted |
| 5,285 |
| $ | 51.34 |
|
|
|
|
|
|
| 5,352.6 |
|
| 58.79 |
|
|
|
|
| |
Exercised |
| (6,756 | ) | $ | 36.85 |
|
|
|
|
|
|
| (868.9 | ) |
| 37.23 |
|
|
|
|
| |
Forfeited or expired |
| (230 | ) | $ | 46.12 |
|
|
|
|
|
|
| (39.2 | ) |
| 50.09 |
|
|
|
|
| |
Outstanding at Feb. 25, 2007 |
| 56,502 |
| $ | 42.90 |
| 4.81 |
| $ | 807 |
| |||||||||||
Exercisable at Feb. 25, 2007 |
| 42,159 |
| $ | 41.07 |
| 3.69 |
| $ | 679 |
| |||||||||||
Outstanding as of Aug. 26, 2007 |
| 58,217.7 |
|
| 44.62 |
| 4.98 |
| $ | 746.7 |
| |||||||||||
Exercisable as of Aug. 26, 2007 |
| 38,649.5 |
| $ | 41.31 |
| 3.32 |
| $ | 618.4 |
|
The intrinsic value of options exercised was $35 million during the thirteen weeks ended February 25, 2007,first quarter of fiscal 2008, was $18.6 million, and $122was $37.9 million duringin the thirty-nine weeks ended February 25,first quarter of fiscal 2007. The intrinsic value of options exercised was $17 million during the thirteen weeks ended February 26, 2006, and $54 million during the thirty-nine weeks ended February 26, 2006.
Page 12
Information on restricted stock unit activity follows:
|
| Shares |
|
| Weighted- |
|
| Units |
| Weighted- |
| |
Non-vested at May 28, 2006 |
| 3,672 |
| $ | 46.87 |
| ||||||
Non-vested as of May 27, 2007 |
| 4,785.9 |
| $ | 48.74 |
| ||||||
Granted |
| 1,704 |
|
| 51.47 |
|
| 1,761.0 |
|
| 58.76 |
|
Vested |
| (458 | ) |
| 45.62 |
|
| (350.0 | ) |
| 47.13 |
|
Forfeited |
| (124 | ) |
| 48.02 |
|
| (47.3 | ) |
| 50.35 |
|
Non-vested at Feb. 25, 2007 |
| 4,794 |
| $ | 48.60 |
| ||||||
Non-vested as of Aug. 26, 2007 |
| 6,149.6 |
| $ | 51.69 |
|
The total grant-date fair value of restricted stock unit awards whichthat vested in the first thirty-nine weeksquarter of fiscal 20072008 was $21$16.5 million. The total grant-date fair value of restricted stock unit awards whichthat vested in the first thirty-nine weeksquarter of fiscal 20062007 was $30$11.1 million.
At February 25,As of August 26, 2007, unrecognized compensation costscost related to non-vested stock options and restricted stock units was $162$262.4 million. This cost will be recognized as a reduction of earnings over thirty-three26 months, on average.
(3) Reclassifications
At the beginning of fiscal 2007, we made certain changes in the classifications of revenues and expenses, balance sheet liabilities, and cash flows from joint ventures. We have reclassified previously reported Consolidated Statements of Earnings, Consolidated Balance Sheets and Consolidated Statements of Cash Flows to conform to the current year presentation. These reclassifications had no effect on previously reported net earnings. On January 16, 2007, we filed a Form 8-K to recast all historical financial information previously presented in our Annual Report on Form 10-K for the year ended May 28, 2006, to reflect the reclassifications disclosed below for all prior periods.
We made a change in accounting principle to classify shipping costs associated with the distribution of finished products to our customers as cost of sales (previously recorded in selling, general and administrative expense). We made the change in principle because we believe the classification of these shipping costs in cost of sales better reflects the cost of producing and distributing our products and aligns our external financial reporting with the results we use internally to evaluate segment operating performance. The impact of this change in principle was an increase to cost of sales of $119 million in the thirteen weeks ended February 26, 2006 and $359 million in the thirty-nine weeks ended February 26, 2006.
Page 8
We also reclassified certain trade-related costs and customer allowances as cost of sales or selling, general and administrative expense (previously recorded as reductions of net sales); and royalties from a joint venture to after-tax earnings from joint ventures (previously recorded as a reduction of selling, general and administrative expense (SG&A)). The impact of these reclassifications in the thirteen weeks ended February 26, 2006, was an increase to net sales of $17 million, an increase in cost of sales of $27 million, a decrease in SG&A of $7 million, a decrease in income taxes of $2 million and an increase in earnings of joint ventures after taxes of $1 million. The impact of these reclassifications in the thirty-nine weeks ended February 26, 2006, was an increase to net sales of $54 million, an increase in cost of sales of $78 million, a decrease in SG&A of $18 million, a decrease in income taxes of $2 million and an increase in earnings of joint ventures after taxes of $4 million.
We also reclassified certain liabilities, including trade and consumer promotion accruals, from accounts payable to other current liabilities, and we classified certain distributions from joint ventures as operating cash flows (previously reported as investing cash flows). The impact of these reclassifications was a decrease to accounts payable of $443 million at May 28, 2006, and an increase to cash flows from operations of $32 million in the thirty-nine weeks ended February 26, 2006.
(4) Acquisitions
We completed the acquisition of Saxby Bros. Limited, a chilled pastry company in the United Kingdom, for approximately $24 million, of which $21 million was paid in the third quarter of fiscal 2007. This business, which had sales of $24 million in calendar 2006, complements our existing frozen pastry business in the United Kingdom. In addition, we completed an acquisition in Greece for $3 million in the third quarter.
During the first quarter of fiscal 2007, Cereal Partners Worldwide (CPW), our joint venture with Nestlé, completed the acquisition of the Uncle Tobys cereal business in Australia. We funded our 50 percent share of the purchase price by making additional advances to and equity contributions in CPW totaling $135 million (classified as investments in affiliates, net, on the Consolidated Statements of Cash Flows) and by acquiring a 50 percent beneficial interest in certain intellectual property for $58 million (classified as acquisitions on the Consolidated Statements of Cash Flows).
(5) Restructuring and Other Exit Costs
In the third quarter of fiscal 2007, we recorded restructuring and other exit costs of $1 million associated with adjustments to restructuring actions previously announced.
In the third quarter of fiscal 2006, we recorded restructuring and other exit costs of $5 million, consisting of $2 million primarily for severance costs associated with the closure of our frozen dough foodservice plant in Swedesboro, New Jersey; $2 million of restructuring costs at our Allentown, Pennsylvania frozen waffle plant, primarily related to product and production realignment; and $1 million associated with restructuring actions previously announced.
In the first thirty-nine weeks of fiscal 2007, we recorded income related to restructuring and other exit activities of $2 million. We sold our previously closed plant in San Adrian, Spain, resulting in a gain of $8 million. We incurred a $6 million loss associated with the divestiture of our par-baked bread product line, including its plants in Chelsea, Massachusetts and Tempe, Arizona. Net proceeds received for the par-baked product line were $12 million.
In the first thirty-nine weeks of fiscal 2006, we recorded restructuring and other exit costs of $16 million, consisting of $12 million of charges associated with the closure of the plant in Swedesboro, New Jersey, including $10 million of asset impairment charges recorded in the first and second quarters of fiscal 2006; $2 million related to restructuring at the plant in Allentown, Pennsylvania; and $2 million of charges associated with restructuring actions previously announced.
Page 9
(6) Goodwill and Other Intangible Assets
During the third quarter of fiscal 2007 as part of our annual goodwill and brand intangible impairment assessments, we reviewed our goodwill and brand intangible allocations by country within the International segment and our joint ventures. The resulting reallocation of these balances across the countries within this segment and to our joint ventures caused changes in the foreign currency translation of the balances. As a result of these changes in foreign currency translation, we increased goodwill by $136 million, other intangibles by $18 million, deferred income taxes by $9 million, and accumulated other comprehensive income by approximately the net of these amounts.
At the beginning of fiscal 2007, we shifted selling responsibility for several customers from our Bakeries and Foodservice segment to our U.S. Retail segment. Goodwill of $216 million previously reported in our Bakeries and Foodservice segment as of May 28, 2006, has now been recorded in the U.S. Retail segment. The changes in our carrying amount of goodwill for the thirty-nine weeks ended February 25, 2007, were as follows:
In Millions |
| U.S. |
| International |
| Bakeries and |
| Joint |
|
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 28, 2006 |
| $ | 4,960 |
| $ | 138 |
| $ | 1,201 |
| $ | 353 |
| $ | 6,652 |
|
Reclassification for customer |
|
| 216 |
|
| — |
|
| (216 | ) |
| — |
|
| — |
|
Acquisitions |
|
| — |
|
| 26 |
|
| — |
|
| — |
|
| 26 |
|
Divestiture |
|
| — |
|
| — |
|
| (6 | ) |
| — |
|
| (6 | ) |
Other activity, primarily |
|
| — |
|
| (3 | ) |
| — |
|
| 119 |
|
| 116 |
|
Balance at Feb. 25, 2007 |
| $ | 5,176 |
| $ | 161 |
| $ | 979 |
| $ | 472 |
| $ | 6,788 |
|
The changes in our carrying amount of other intangible assets for the thirty-nine weeks ended February 25, 2007, were as follows:
In Millions |
| U.S. |
| International |
| Joint |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 28, 2006 |
| $ | 3,175 |
| $ | 420 |
| $ | 12 |
| $ | 3,607 |
|
Acquisition of Uncle Tobys |
|
| — |
|
| — |
|
| 58 |
|
| 58 |
|
Other activity, primarily foreign |
|
| — |
|
| 19 |
|
| 1 |
|
| 20 |
|
Balance at Feb. 25, 2007 |
| $ | 3,175 |
| $ | 439 |
| $ | 71 |
| $ | 3,685 |
|
Intangibles arising from recent acquisitions are subject to change pending final determination of fair values.
Page 10
(7) Inventories
The components of inventories are as follows:
In Millions |
|
| Feb. 25, |
|
| May 28, |
|
Raw materials, work in process and supplies |
| $ | 241 |
| $ | 226 |
|
Finished goods |
|
| 934 |
|
| 813 |
|
Grain |
|
| 131 |
|
| 78 |
|
Reserve for LIFO valuation method |
|
| (81 | ) |
| (62 | ) |
Total Inventories |
| $ | 1,225 |
| $ | 1,055 |
|
(8) Stockholders’ Equity
The following tables provide detail of total comprehensive income:
In Millions |
| Thirteen Weeks Ended |
| Thirteen Weeks Ended |
| ||||||||||||||
|
| Pretax |
| Tax |
| Net |
| Pretax |
| Tax |
| Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
|
|
|
|
|
| $ | 268 |
|
|
|
|
|
|
| $ | 246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
| $ | 142 |
| $ | — |
| $ | 142 |
| $ | 9 |
| $ | — |
| $ | 9 |
|
Other fair value changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
| 2 |
|
| — |
|
| 2 |
|
| 1 |
|
| — |
|
| 1 |
|
Hedge derivatives |
|
| 31 |
|
| (11 | ) |
| 20 |
|
| (4 | ) |
| 1 |
|
| (3 | ) |
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge derivatives |
|
| 8 |
|
| (3 | ) |
| 5 |
|
| 19 |
|
| (7 | ) |
| 12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
| $ | 183 |
| $ | (14 | ) | $ | 169 |
| $ | 25 |
| $ | (6 | ) | $ | 19 |
|
Total Comprehensive Income |
|
|
|
|
|
|
| $ | 437 |
|
|
|
|
|
|
| $ | 265 |
|
Page 11
In Millions |
| Thirty-nine Weeks Ended |
| Thirty-nine Weeks Ended |
| ||||||||||||||
|
| Pretax |
| Tax |
| Net |
| Pretax |
| Tax |
| Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
|
|
|
|
|
| $ | 920 |
|
|
|
|
|
|
| $ | 868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
| $ | 115 |
| $ | — |
| $ | 115 |
| $ | (1 | ) | $ | — |
| $ | (1 | ) |
Other fair value changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
| 2 |
|
| — |
|
| 2 |
|
| 1 |
|
| — |
|
| 1 |
|
Hedge derivatives |
|
| 16 |
|
| (6 | ) |
| 10 |
|
| (15 | ) |
| 5 |
|
| (10 | ) |
Pension plan minimum liability |
|
| (5 | ) |
| 2 |
|
| (3 | ) |
| — |
|
| — |
|
| — |
|
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge derivatives |
|
| 26 |
|
| (10 | ) |
| 16 |
|
| 27 |
|
| (11 | ) |
| 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
| $ | 154 |
| $ | (14 | ) | $ | 140 |
| $ | 12 |
| $ | (6 | ) | $ | 6 |
|
Total Comprehensive Income |
|
|
|
|
|
|
| $ | 1,060 |
|
|
|
|
|
|
| $ | 874 |
|
The changes in Other Comprehensive Income are primarily non-cash items.
Accumulated Other Comprehensive Income balances, net of tax effects, were as follows:
In Millions |
| Feb. 25, |
| May 28, |
| ||
Foreign currency translation adjustments |
| $ | 323 |
| $ | 208 |
|
Unrealized gain (loss) from: |
|
|
|
|
|
|
|
Securities |
|
| 4 |
|
| 2 |
|
Hedge derivatives |
|
| (31 | ) |
| (57 | ) |
Pension plan minimum liability |
|
| (31 | ) |
| (28 | ) |
Accumulated Other Comprehensive Income |
| $ | 265 |
| $ | 125 |
|
On March 12, 2007, our Board of Directors approved a quarterly dividend of 37 cents per share, payable on May 1, 2007, to shareholders of record on April 10, 2007.
Page 12
(9)(11) Earnings Per Share
Basic and diluted earnings per share (EPS)EPS were calculated using the following:
|
| Thirteen Weeks |
| Thirty-nine Weeks |
| ||||||||
In Millions, except per share data |
| Feb. 25, |
| Feb. 26, |
| Feb. 25, |
| Feb. 26, |
| ||||
Net earnings – as reported |
| $ | 268 |
| $ | 246 |
| $ | 920 |
| $ | 868 |
|
Interest on contingently convertible debentures, |
|
| — |
|
| — |
|
| — |
|
| 9 |
|
Net earnings for diluted EPS calculation |
| $ | 268 |
| $ | 246 |
| $ | 920 |
| $ | 877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares – |
|
| 346 |
|
| 355 |
|
| 347 |
|
| 358 |
|
Incremental share effect from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options (a) |
|
| 11 |
|
| 6 |
|
| 11 |
|
| 7 |
|
Restricted stock and restricted stock units (a) |
|
| 2 |
|
| 2 |
|
| 2 |
|
| 2 |
|
Forward purchase contract (b) |
|
| 1 |
|
| — |
|
| 1 |
|
| — |
|
Contingently convertible debentures (c) |
|
| — |
|
| 1 |
|
| — |
|
| 17 |
|
Average number of common shares – |
|
| 360 |
|
| 364 |
|
| 361 |
|
| 384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share – Basic |
| $ | .77 |
| $ | .69 |
| $ | 2.65 |
| $ | 2.42 |
|
Earnings per Share – Diluted |
| $ | .74 |
| $ | .68 |
| $ | 2.55 |
| $ | 2.29 |
|
|
| Quarter Ended |
| |||||
In millions, except per share data |
| Aug. 26, |
| Aug. 27, |
| |||
Net earnings – as reported |
| $ | 288.9 |
| $ | 266.9 |
| |
Capital appreciation paid on Series B-1 interests in GMC (a) |
|
| (8.0 | ) |
| — |
| |
Net earnings for basic and diluted EPS calculations |
| $ | 280.9 |
| $ | 266.9 |
| |
|
|
|
|
|
|
|
| |
Average number of common shares – basic EPS |
|
| 329.9 |
|
| 352.0 |
| |
Incremental share effect from: |
|
|
|
|
|
|
| |
Stock options (b) |
|
| 11.0 |
|
| 9.5 |
| |
Restricted stock, restricted stock units, and other (b) |
|
| 2.6 |
|
| 1.6 |
| |
Forward purchase contract |
|
| 1.4 |
|
|
|
| |
Average number of common shares – diluted EPS |
|
| 344.9 |
|
| 363.1 |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
Earnings per share – basic |
| $ | 0.85 |
| $ | 0.76 |
| |
Earnings per share – diluted |
| $ | 0.81 |
| $ | 0.74 |
|
(a) | See Note 8. |
(b) | Incremental shares from stock options, restricted stock, and restricted stock units are computed by the treasury stock method. |
|
|
|
|
Page 13
(10) Notes Payable and Long-Term Debt
The componentsTable of notes payable at the end of the respective periods were as follows:
In Millions |
| Feb. 25, |
| May 28, |
| ||
U.S. commercial paper |
| $ | 911 |
| $ | 713 |
|
European commercial paper |
|
| 1,142 |
|
| 462 |
|
Financial institutions |
|
| 124 |
|
| 328 |
|
Total Notes Payable |
| $ | 2,177 |
| $ | 1,503 |
|
In January 2007, we issued $1.0 billion of 5.7 percent fixed rate notes due February 15, 2017 and $500 million of floating rate notes due January 22, 2010. The proceeds of these notes were used to retire $1.5 billion of fixed rate notes which matured in February 2007. We had previously entered into $700 million of pay-fixed, forward-starting interest rate swaps with an average fixed rate of 5.7 percent in anticipation of this refinancing and are amortizing the loss deferred to accumulated other comprehensive income of $22 million associated with these derivatives to interest expense on a straight-line basis over the life of the fixed rate notes. We expect to reclassify $2 million of the loss to earnings over the next 12 months.
We have several net investments in foreign subsidiaries that are denominated in Euros. We hedge a portion of these net investments by issuing Euro-denominated commercial paper. As of February 25, 2007, we have issued $393 million of such commercial paper and deferred foreign currency transaction net losses of $2 million and $18 million for the thirteen and thirty-nine weeks ended February 25, 2007, respectively, to accumulated other comprehensive income.
To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding short-term borrowings. As of February 25, 2007, we had a $1.1 billion facility expiring October 2007; a $750 million facility expiring January 2009; and a $1.1 billion facility expiring October 2010.
As of February 25, 2007, our zero coupon convertible debentures (the Debentures) are included in the current portion of long-term debt based on the put rights of the holders. On March 26, 2007, we announced that we are redeeming all of these outstanding Debentures due 2022 on April 25, 2007, for a redemption price equal to the accreted value of the Debentures, which will be $734.45 per $1,000 principal amount at maturity of the Debentures. This redemption price will be settled in cash. As a result of the redemption, holders have the right to convert the Debentures until April 24, 2007. Upon any conversion, we will deliver cash equal to the accreted value of the Debentures delivered for conversion and shares of our common stock for any value above the accreted amount.
In March 2007, we delivered a $30 million guarantee to the trustee of the Cereal Partners U.K. pension plan to guarantee our 50 percent share of that joint venture’s pension funding obligations. This guarantee had an inconsequential fair value.
Contents
(11)(12) Share Repurchases
During the thirteen weeks ended February 25, 2007,first quarter of fiscal 2008, we repurchased 94 thousand shares of common stock for an aggregate purchase price of $5 million. During the thirteen weeks ended February 26, 2006, we repurchased 1.120.9 million shares of common stock for an aggregate purchase price$1,220.4 million, of $55 million.which $1.0 million was included in current liabilities as of August 26, 2007, and settled after the end of the quarter. Also in the first quarter of fiscal 2008, we settled $64.5 million of share repurchase liability as of May 27, 2007.
During the first thirty-nine weeksquarter of fiscal 2007, we repurchased 1714.1 million shares of common stock for an aggregate purchase price$736.5 million, of $895 million. Duringwhich $37.6 million was included in current liabilities as of August 27, 2006, and settled after the end of the quarter. Also in the first thirty-nine weeksquarter of fiscal 2006,2007, we repurchased 17settled $7.5 million shares of common stock for an aggregate purchase priceshare repurchase liability as of $806 million.May 28, 2006.
Page 14
(12)(13) Interest Expense, Net
The components of interest, expense, including distributions to minority interest holders, net were as follows:
|
| Quarter Ended |
| ||||
Expense (income), in millions |
| Aug. 26, |
| Aug. 27, |
| ||
Interest expense |
| $ | 107.0 |
| $ | 96.5 |
|
Distributions paid on preferred stock and interests of subsidiaries |
|
| 13.2 |
|
| 15.8 |
|
Capitalized interest |
|
| (1.2 | ) |
| (0.6 | ) |
Interest income |
|
| (5.7 | ) |
| (6.7 | ) |
Total |
| $ | 113.3 |
| $ | 105.0 |
|
|
| Thirteen Weeks |
| Thirty-nine Weeks |
| ||||||||
In Millions |
| Feb. 25, |
| Feb. 26, |
| Feb. 25, |
| Feb. 26, |
| ||||
Interest expense |
| $ | 100 |
| $ | 92 |
| $ | 296 |
| $ | 270 |
|
Distributions paid on preferred stock |
|
| 16 |
|
| 15 |
|
| 48 |
|
| 45 |
|
Capitalized interest |
|
| — |
|
| — |
|
| (1 | ) |
| (1 | ) |
Interest income |
|
| (9 | ) |
| (7 | ) |
| (21 | ) |
| (20 | ) |
Interest Expense, Net |
| $ | 107 |
| $ | 100 |
| $ | 322 |
| $ | 294 |
|
(13)(14) Statements of Cash Flows
During the first thirty-nine weeksquarter of fiscal 2007,2008, we made cash interest payments of $348$161.3 million, versus $295$143.6 million in the same period last year. DuringAlso, in the first thirty-nine weeksquarter of fiscal 2007,2008, we made income tax payments of $290$37.3 million, versus $237$26.6 million in the same period last year.
(14)(15) Retirement and Other Postretirement Benefit PlansPostemployment Benefits
Components of net pension, other postretirement, and postretirementpostemployment (income) expense for each fiscal period arewere as follows:
|
| Pension Plans |
| Postretirement |
|
| Defined Benefit |
| Other Postretirement |
| Postemployment |
| ||||||||||||||||||||
|
| Thirteen Weeks |
| Thirteen Weeks |
|
| Quarter Ended |
| Quarter Ended |
| Quarter Ended |
| ||||||||||||||||||||
In Millions |
| Feb. 25, |
| Feb. 26, |
| Feb. 25, |
| Feb. 26, |
| |||||||||||||||||||||||
In millions |
| Aug. 26, |
| Aug. 27, |
| Aug. 26, 2007 |
| Aug. 27, |
| Aug. 26, |
| Aug. 27, |
| |||||||||||||||||||
Service cost |
| $ | 18 |
| $ | 19 |
| $ | 4 |
| $ | 5 |
|
| $ | 20.0 |
| $ | 18.3 |
| $ | 4.1 |
| $ | 4.1 |
| $ | 1.2 |
| $ | 1.2 |
|
Interest cost |
|
| 47 |
|
| 42 |
|
| 14 |
|
| 11 |
|
|
| 49.1 |
|
| 46.4 |
|
| 14.7 |
|
| 14.6 |
|
| 0.9 |
|
| 1.0 |
|
Expected return on plan assets |
|
| (84 | ) |
| (80 | ) |
| (7 | ) |
| (6 | ) |
|
| (90.1 | ) |
| (83.8 | ) |
| (7.6 | ) |
| (6.8 | ) |
| — |
|
| — |
|
Amortization of losses |
|
| 3 |
|
| 9 |
|
| 4 |
|
| 5 |
|
|
| 5.6 |
|
| 3.1 |
|
| 3.8 |
|
| 3.9 |
|
| — |
|
| — |
|
Amortization of prior service costs |
|
| 2 |
|
| 1 |
|
| (1 | ) |
| — |
| |||||||||||||||||||
Amortization of prior service costs (credits) |
|
| 1.9 |
|
| 2.0 |
|
| (0.4 | ) |
| (0.4 | ) |
| 0.5 |
|
| 0.5 |
| |||||||||||||
Other adjustments |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3.4 |
|
| 5.0 |
| |||||||||||||
Net (income) expense |
| $ | (14 | ) | $ | (9 | ) | $ | 14 |
| $ | 15 |
|
| $ | (13.5 | ) | $ | (14.0 | ) | $ | 14.6 |
| $ | 15.4 |
| $ | 6.0 |
| $ | 7.7 |
|
Page 1514
|
| Pension Plans |
| Postretirement |
| ||||||||
|
| Thirty-nine Weeks |
| Thirty-nine Weeks |
| ||||||||
In Millions |
| Feb. 25, |
| Feb. 26, |
| Feb. 25, |
| Feb. 26, |
| ||||
Service cost |
| $ | 53 |
| $ | 57 |
| $ | 12 |
| $ | 14 |
|
Interest cost |
|
| 138 |
|
| 125 |
|
| 44 |
|
| 37 |
|
Expected return on plan assets |
|
| (250 | ) |
| (242 | ) |
| (21 | ) |
| (18 | ) |
Amortization of losses |
|
| 9 |
|
| 28 |
|
| 12 |
|
| 14 |
|
Amortization of prior service costs |
|
| 6 |
|
| 4 |
|
| (1 | ) |
| (1 | ) |
Net (income) expense |
| $ | (44 | ) | $ | (28 | ) | $ | 46 |
| $ | 46 |
|
(16) Income Taxes
(15) Operating SegmentsEffective Tax Rate
Our consolidated effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we operate. The effective tax rate for the first quarter of fiscal 2008 was 32.8 percent compared to 35.8 percent for the first quarter of fiscal 2007. The 3.0 percentage point decrease is primarily due to discrete foreign tax credits in the first quarter of $7.2 million and a 1.1 percentage point increase in foreign and other tax credits. We also had a beneficial discrete tax impact of $7.0 million relating to international deferred foreign income taxes resulting from tax rate changes that were largely offset by a similar adjustment to deferred state income taxes from tax rate changes in Michigan.
Uncertain Tax Positions
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN) 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (FIN 48), as of the beginning of fiscal 2008. Prior to adoption, our policy was to establish reserves that reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were recognized as changes to the effective income tax rate in the period of resolution. FIN 48 requires application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions. FIN 48 permits us to recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change.
As a result of adoption, we recorded a $218.1 million reduction to accrued taxes, a $151.9 million reduction to goodwill, a $57.8 million increase to additional paid-in capital and an $8.4 million increase to retained earnings at the beginning of fiscal 2008. In addition, we had gross unrecognized tax benefit liabilities of $546.3 million of which $264.8 million would impact the effective tax rate if recognized. Approximately $11.3 million of the unrecognized tax benefit liabilities are expected to be paid within the next 12 months and were classified in other current liabilities on the Consolidated Balance Sheets as of August 26, 2007. The remaining amount of our unrecognized tax benefit liabilities are now classified in other liabilities. We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. Upon adoption, we had accrued interest and penalties of $97.9 million.
The following is a rollforward of our total gross unrecognized tax benefit liabilities for the first quarter of fiscal 2008:
In millions |
|
|
| |
Balance as of May 28, 2007 |
| $ | 546.3 |
|
Tax positions related to current year: |
|
|
|
|
Additions |
|
| 20.8 |
|
Reductions |
|
| — |
|
Tax positions related to prior years: |
|
|
|
|
Additions |
|
| 26.6 |
|
Reductions |
|
| (0.5 | ) |
Settlements |
|
| — |
|
Lapses in statutes of limitations |
|
| (7.6 | ) |
|
|
|
|
|
Balance as of August 26, 2007 |
| $ | 585.6 |
|
We do not reasonably expect any significant changes to the estimated amount of liability associated with our uncertain tax positions which arose prior to fiscal 2008.
Page 15
Annually we file more than 350 income tax returns in approximately 100 global taxing jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash.
The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (federal and state) and Canada. With limited exceptions, we are no longer subject to United States federal examinations by the Internal Revenue Service (IRS) for fiscal years before 2002. The IRS recently concluded field examinations for our 2002 and 2003 fiscal years. A payment of $24.4 million was made during the first quarter of fiscal 2008 to cover the additional tax liability plus interest related to all agreed adjustments for this audit cycle. The IRS also proposed additional adjustments for the 2002-2003 audit cycle including several adjustments to the tax benefits associated with the sale of minority interests in our GMC subsidiary. We believe we have meritorious defenses and intend to vigorously defend our position. Our potential liability for this matter is significant and, notwithstanding our reserves against this potential liability, an unfavorable resolution could have a material adverse impact on our results of operations and cash flows from operations. We do not expect the amount of our tax reserves for these issues to change in the next 12 months. The IRS initiated its audit of our fiscal 2004 through 2006 tax years during the first quarter of fiscal 2008.
Various examinations by United States state taxing authorities could be conducted for any open tax year, which vary by jurisdiction, but are generally from 3 to 5 years. Currently, several state examinations are in progress. The Canada Revenue Agency is conducting an audit of our income tax returns in Canada for fiscal years 2003 (which is our earliest tax year still open for examination) through 2005. We do not anticipate that any United States state tax or Canadian tax adjustments will have a significant impact on our financial position or results of operations.
(17) Business Segment Information
We operate exclusively in the consumer foods industry, with multipleindustry. We have three operating segments organized generally by product categories. We aggregate our operating segments into three reportable segments by type of customer and geographic region as follows: U.S. Retail; International;Retail, International, and Bakeries and Foodservice.
Our U.S. Retail segment reflects business with a wide variety of grocery stores, mass merchandisers, clubmembership stores, specialty stores,natural food chains, and drug, dollar, and discount chains operating throughout the United States. Our major product categories in this business segmentthe United States are ready-to-eat cereals, meals,refrigerated yogurt, ready-to-serve soup, dry dinners, shelf stable and frozen vegetables, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, microwave popcorn, and a wide variety of organic products snacks, yogurt,including soup, granola bars, and organic foods. cereal.
Our International segment is largely made up of retail businesses outside of the United States. In Canada, our major product categories are ready-to-eat cereals, shelf stable and frozen vegetables, dry dinners, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza snacks, and grain, fruit and savory snacks. In markets outside the United States including a retailand Canada, our product categories include super-premium ice cream, granola and grain snacks, shelf stable and frozen vegetables, dough products, and dry dinners. Our International segment also includes products manufactured in the United States for export internationally, primarily in Caribbean and Latin American markets, as well as products we manufacture for sale to our joint ventures internationally. Revenues from export activities are reported in the region or country where the end customer is located.
Page 16
In our Bakeries and Foodservice segment, we sell branded cereals, snacks, dinner and side dish products, refrigerated and soft-serve frozen yogurt, frozen dough products, branded baking mixes, and custom food items. Our customers include foodservice distributors and operators, convenience stores, vending machine operators, quick service chains and other restaurants, and business in Canada that largely mirrors our U.S. Retail product mix, and foodservice businesses outside ofschool cafeterias in the United States and Canada. Our BakeriesIn addition, mixes and Foodservice segment consists ofunbaked and fully baked frozen dough products are marketed throughout the United States and Canada to retail, supermarket, and wholesale bakeries, commercial and noncommercial foodservice distributors and operators, restaurants, and convenience stores.bakeries.
Our management reviewsOperating profit for the operating results to evaluate segment performance. Segment operating profitsegments excludes generalunallocated corporate expenses (variances to planned corporate overhead expenses, variances to planned domestic employee benefits and stock-basedincentives, all stock compensation costs, annual contributions to the General Mills Foundation, and other items that are not part of our measurement of segment operating performance, including gains and losses from commodity derivatives entered into after May 27, 2007, until passed back to our operating segments in accordance with our internal hedge documentation as theydiscussed in Note 6), and restructuring, impairment, and other exit costs because these items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by executive management. Under our supply chain organization, our manufacturing, warehouse, and distribution 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 neither maintained nor available by operating segment. Our operating segment results were as follows:
At the beginning of fiscal 2007, we shifted selling responsibility for several customers from our Bakeries and Foodservice segment to U.S. Retail. All prior year amounts have been restated for comparative purposes. For the thirteen weeks ended February 26, 2006, net sales of $10 million and operating profit of $4 million previously reported in our Bakeries and Foodservice segment have now been recorded in the U.S. Retail segment. For the first thirty-nine weeks of fiscal 2006, net sales of $40 million and operating profit of $16 million previously reported in our Bakeries and Foodservice segment have now been recorded in the U.S. Retail segment.
|
| Quarter Ended |
| ||||
In millions |
| Aug. 26, |
| Aug. 27, |
| ||
|
|
|
|
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
U.S. Retail |
| $ | 2,031.7 |
| $ | 1,910.0 |
|
International |
|
| 599.4 |
|
| 505.6 |
|
Bakeries and Foodservice |
|
| 440.9 |
|
| 444.8 |
|
Total |
| $ | 3,072.0 |
| $ | 2,860.4 |
|
|
|
|
|
|
|
|
|
Operating profit: |
|
|
|
|
|
|
|
U.S. Retail |
| $ | 473.3 |
| $ | 447.3 |
|
International |
|
| 71.0 |
|
| 55.9 |
|
Bakeries and Foodservice |
|
| 34.0 |
|
| 29.0 |
|
Total segment operating profit |
|
| 578.3 |
|
| 532.2 |
|
|
|
|
|
|
|
|
|
Corporate unallocated expense |
|
| 53.7 |
|
| 43.3 |
|
Restructuring, impairment, and other exit costs (income) |
|
| 14.5 |
|
| (1.9 | ) |
Operating profit |
| $ | 510.1 |
| $ | 490.8 |
|
Page 16
|
| Thirteen Weeks |
| Thirty-nine Weeks |
| ||||||||
In Millions |
| Feb. 25, |
| Feb. 26, |
| Feb. 25, |
| Feb. 26, |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail |
| $ | 2,108 |
| $ | 2,016 |
| $ | 6,460 |
| $ | 6,211 |
|
International |
|
| 510 |
|
| 444 |
|
| 1,560 |
|
| 1,362 |
|
Bakeries and Foodservice |
|
| 436 |
|
| 417 |
|
| 1,361 |
|
| 1,276 |
|
Total |
| $ | 3,054 |
| $ | 2,877 |
| $ | 9,381 |
| $ | 8,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail |
| $ | 447 |
| $ | 423 |
| $ | 1,490 |
| $ | 1,387 |
|
International |
|
| 42 |
|
| 36 |
|
| 160 |
|
| 149 |
|
Bakeries and Foodservice |
|
| 33 |
|
| 18 |
|
| 118 |
|
| 85 |
|
Total Segment Operating Profit |
|
| 522 |
|
| 477 |
|
| 1,768 |
|
| 1,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate unallocated expense |
|
| 35 |
|
| 19 |
|
| 118 |
|
| 58 |
|
Restructuring and other |
|
| 1 |
|
| 5 |
|
| (2 | ) |
| 16 |
|
Operating Profit |
| $ | 486 |
| $ | 453 |
| $ | 1,652 |
| $ | 1,547 |
|
(16)(18) New Accounting Pronouncements
In the first quarter of fiscal 2007,2008, we adopted Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Accounting Standards Board’s (FASB) StatementStatements” (SAB 108). SAB 108 provides interpretive guidance on the process and diversity in practice of quantifying financial statement misstatements resulting in the potential carryover of improper amounts on the balance sheet. The Securities and Exchange Commission believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The adoption of SAB 108 did not have a material impact on our results of operations or financial condition.
Page 17
Also in the first quarter of fiscal 2008, we adopted SFAS No. 155, “Hybrid Instruments” (SFAS 155). SFAS 155 amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Accounting Standards No. 151, “Inventory Costs – An AmendmentAssets and Extinguishments of ARB No. 43, Chapter 4” (SFAS 151).Liabilities.” SFAS 151 clarifies the accounting155 is effective for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).all financial instruments acquired or issued after May 27, 2007. The adoption of SFAS 151No. 155 did not have any impact on our results of operations or financial condition.
In September 2006, the FASB ratified the consensus of Emerging Issues Task Force Issue No. 06-5, ”Accounting for Purchases of Life Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4” (EITF 06-5). EITF 06-5 requires that a policyholder consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract on a policy by policy basis. We adopted EITF 06-5 in the first quarter of fiscal 2008, and it did not have any impact on our results of operations or financial condition.
Page 1718
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the fiscal year ended May 28, 2006, and the Form 8-K filed on January 16,27, 2007, for important background regarding, among other things, our key business drivers. Significant trademarks and service marks used in our business are set forth in italics herein.
CONSOLIDATED RESULTS OF OPERATIONS
Thirteen-WeekFirst Quarter Results
For the first quarter ended February 25, 2007,of fiscal 2008, we reported diluted earnings per share of $0.74,$0.81, up 99.4 percent from $0.68$0.74 per share earned in the same period last year. Earnings after taxNet earnings were $268$288.9 million in the thirdfirst quarter of fiscal 2007,2008, up 98.2 percent from $246$266.9 million last year. Net sales for the thirteen weeks ended February 25, 2007first quarter of fiscal 2008 grew 67.4 percent to $3.05$3.1 billion and total segment operating profit increased 98.7 percent to $522$578.3 million (see page 2827 for a discussion of this measure not defined by generally accepted accounting principles (GAAP)).
Net sales growth during the thirdfirst quarter of fiscal 2008 was the result of 3.0 points of combined segment volume growth, 3.2 points of growth from pricing and product mix, and 1.2 points of favorable foreign currency exchange. During the first quarter of fiscal 2008, volume growth was recorded in our U.S. Retail and International operating segments, while Bakeries and Foodservice volumes declined, including the effects of divested product lines in fiscal 2007.
Components of net sales growth | U.S. | International | Bakeries and | Combined |
Volume growth (a) | 3.3 pts | 8.7 pts | -4.9 pts | 3.0 pts |
Price/product mix | 3.1 pts | 2.8 pts | 4.0 pts | 3.2 pts |
Foreign currency exchange | NA | 7.0 pts | NA | 1.2 pts |
Net sales growth | 6.4 pts | 18.5 pts | -0.9 pts | 7.4 pts |
(a) Measured in tons based on the stated weight of our product shipments.
Cost of sales increased $119.1 million from the first quarter of fiscal 2007 was the resultto $1,915.8 million. Higher volume drove $48.7 million of 5 points of volume growththis increase. Changes in mix and 2 points of growth from price increases and a product mix that included higher priced items. Volume growth was recorded in all of our reportable segments.
Components of Net Sales Growth | U.S. | International | Bakeries | Total |
Unit Volume Growth | +5 pts | +6 pts | +1 pts | +5 pts |
Price/Product Mix | Flat | +7 pts | +5 pts | +2 pts |
Trade and Coupon Promotion Expense | -1 pts | -3 pts | -2 pts | -1 pts |
Foreign Currency Exchange | NA | +4 pts | NA | +1 pts |
Net Sales Growth | 5% | 15% | 5% | 6% |
Table may not add due to rounding. |
Gross margins (defined as net sales lessinput cost inflation increased cost of sales) increased over 80 basis points fromsales by $85.5 million. In addition, we recorded $15.1 million of mark to market gains on our open commodity derivatives in the thirdfirst quarter last year to 35.1 percent of sales. Gross margins improved despite higher input costs, reflecting favorable product mix, pricing and productivity.fiscal 2008.
SG&A increased $57Selling, general, and administrative (SG&A) expenses were up $56.8 million in the first quarter of fiscal 2008 versus the same period a year ago.in fiscal 2007. SG&A expenses as a percent of net sales in the quarterfiscal 2008 increased 8050 basis points from last yearfiscal 2007 to 19.220.6 percent. This increase was primarily driven primarily by a $13 million increase in stock-based compensation expense ($9 million of which was an incremental effect from the adoption of SFAS 123R) and a 1210.5 percent increase in consumer marketing expense.expense, $10.8 million of costs associated with the remarketing of the Class A and Series B-1 Interests of GMC, and higher compensation and benefit expenses.
In
Page 19
Restructuring, impairment, and other exit costs (income) were $14.5 million for the thirdfirst quarter of fiscal 2008, comprised of the following:
Expense (income), in millions |
|
|
| |
Closure of Allentown, Pennsylvania frozen waffle plant |
| $ | 10.1 |
|
Closure of Trenton, Ontario frozen dough plant |
|
| 8.5 |
|
Restructuring of production scheduling and discontinuation of cake product line at Chanhassen, Minnesota plant |
|
| 3.0 |
|
Gain on sale of previously closed Vallejo, California plant |
|
| (7.1 | ) |
Total |
| $ | 14.5 |
|
Due to declining financial results, we decided to exit our frozen waffle product line (retail and foodservice) and to close our frozen waffle plant in Allentown, Pennsylvania, affecting 111 employees. We recorded $3.9 million of employee severance charges and a $6.2 million non-cash impairment charge against long-lived assets at the plant.
We completed an analysis of the viability of our Bakeries and Foodservice frozen dough facility in Trenton, Ontario, and will close the facility, affecting 470 employees. We recorded a $8.5 million charge for employee severance expenses and curtailment charges associated with a defined benefit pension plan.
We also approved the restructuring of our production scheduling and the discontinuation of our cake product line at our Chanhassen, Minnesota, Bakeries and Foodservice plant. These actions affected 125 employees, and we recorded a charge for employee severance expenses of $3.0 million. These actions, including the sale of equipment, are expected to be completed by the end of fiscal 2008.
Collectively, the total charge we expect to incur with respect to these impairment and restructuring actions is approximately $65.0 million, of which approximately $45.0 million is expected to be recognized in fiscal 2008.
We also completed the sale of our previously closed Vallejo, California plant. We received $10.6 million in proceeds and recorded a gain of $7.1 million.
Restructuring, impairment, and other exit costs (income) for the first quarter of fiscal 2007 we recorded restructuring and other exit costs of $1 million associated with adjustments to restructuring actions previously announced. In the third quarter of fiscal 2006, we recorded restructuring and other exit costs of $5 million, consisting of $2 million primarily for severance costs associated with the closure of our frozen dough foodservice plant in Swedesboro, New Jersey; $2totaled $1.9 million of restructuring costs at our Allentown, Pennsylvania frozen waffle plant, primarily related to product and production realignment; and $1 million associated with restructuring actions previously announced.income as follows:
Page 18
As part of our long range planning process, we are evaluating our plans for certain long-lived assets. Depending upon the outcome of those evaluations, we may take additional impairment or restructuring charges in fiscal 2007.
Expense (income), in millions |
|
|
| |
Gain on sale of previously closed plant in San Adrian, Spain |
| $ | (8.6 | ) |
Impairment of long-lived assets and associated goodwill related to par-baked bread line, including its plants in Chelsea, Massachusetts and Tempe, Arizona |
|
| 6.2 |
|
Charges associated with restructuring actions previously announced |
|
| 0.5 |
|
Total |
| $ | (1.9 | ) |
As a result of the factors discussed above, our operating profit increased $33 million to $486 million, or 7 percent, from the third quarter last year.
InterestNet interest expense for the quarter totaled $107$113.3 million, a $7an $8.3 million increase from the third quarter last year. The increase reflects higher interest rates versus last year and changes in the mix of debt.
The effective tax rate was 33.5 percent for the thirdfirst quarter of fiscal 2007, compared2007. Average interest bearing instruments increased $765.3 million causing a $12.0 million increase in net interest expense, while average interest rates decreased 20 basis points causing a $3.7 million decrease in net interest expense. Average debt balances have increased to 34.7 percentfund higher share repurchases and our repurchases of the Series B-1 interests of GMC and the Series A preferred stock of GM Capital in August 2007.
Page 20
The effective income tax rate for the thirdfirst quarter of fiscal 2006. The effective tax rate in the third quarter of fiscal 2007 reflects the year-to-date impact of a change in the annual effective tax rate from2008 was 32.8 percent compared to 35.8 percent to 35.5 percent, along with a discrete tax benefit of $4 million primarily from research and development tax credits.
Earnings after tax from joint ventures totaled $16 million in the third quarter, compared to $16 million from a year earlier. Net sales for CPW were up 22 percent. This included contributions from the Uncle Tobys business in Australia acquired by CPW in the first quarter of fiscal 2007. The 3.0 percentage point decrease is primarily due to discrete foreign tax credits in the first quarter of $7.2 million and a 1.1 percentage point increase in foreign and other tax credits. We also had a beneficial discrete tax impact of $7.0 million relating to international deferred foreign income taxes resulting from tax rate changes that were largely offset by a similar adjustment to deferred state income taxes from tax rate changes in Michigan.
After-tax earnings from joint ventures increased $3.3 million from the first quarter of fiscal 2007, third quarter also included a $4 million after-tax reduction in CPW’s net earnings as a resultto $22.4 million. Net sales for Cereal Partners Worldwide (CPW) increased 25.7 percent driven by higher volume, including 8.1 points of its previously announced restructuring project ingrowth from the United Kingdom.acquisition of Uncle Tobys, and 7 points of favorable foreign exchange. Net sales for our Häagen-Dazs ice cream joint ventures in Asia increased 12 percent from the 2006 third quarter.matched prior-year levels as an increase in sales volume was offset by unfavorable foreign exchange. 8th Continent, our soy products joint venture, with DuPont, recorded a 515.6 percent net sales decrease in the quarter.first quarter of fiscal 2008, driven by decreased sales volume.
Average diluted shares outstanding decreased by 418.2 million fromin the thirdfirst quarter of fiscal 20062008, from the same period a year ago due primarily to the repurchase of 1932.2 million shares of our stock. The repurchases werecommon stock since the end of the first quarter of fiscal 2007, partially offset by the issuance of shares upon stock option exercises, the vesting of restricted stock units and the incremental effect of stock options, which increased due to share price appreciation and the adoption of SFAS 123R in fiscal 2007.
Thirty-nine Week Results
For the thirty-nine weeks ended February 25, 2007, we reported diluted earnings per share of $2.55, up 11 percent from $2.29 per share earned in the same period last year. Earnings after tax were $920 million for the first thirty-nine weeks of fiscal 2007, up 6 percent from $868 million last year. Net sales for the thirty-nine weeks ended February 25, 2007 grew 6 percent to $9.38 billion and total segment operating profit increased 9 percent to $1.77 billion (see page 28 for a discussion of this measure not defined by GAAP).
Net sales growth during the first thirty-nine weeks of fiscal 2007 was primarily the result of 4 points of volume growth and 2 points of growth from price increases and a product mix that included higher priced items. Volume growth was recorded in all of our reportable segments.
Components of Net Sales Growth | U.S. | International | Bakeries | Total |
Unit Volume Growth | +3 pts | +7 pts | +2 pts | +4 pts |
Price/Product Mix | Flat | +6 pts | +7 pts | +2 pts |
Trade and Coupon Promotion Expense | +1 pts | -3 pts | -2 pts | Flat |
Foreign Currency Exchange | NA | +4 pts | NA | +1 pts |
Net Sales Growth | 4% | 15% | 7% | 6% |
Table may not add due to rounding. |
Gross margins for the first thirty-nine weeks increased 40 basis points compared to the first thirty-nine weeks last year, to 36.4 percent of sales. Gross margins improved despite higher input costs, reflecting favorable product mix, pricing and productivity.
Page 19
SG&A was up $146 million in the first thirty-nine weeks versus the same period a year ago. SG&A as a percent of net sales in the first thirty-nine weeks increased 50 basis points from last year to 18.8 percent. This increase was driven primarily by a $72 million increase in stock-based compensation expense ($61 million of which was an incremental effect from the adoption of SFAS 123R) and a 6 percent increase in consumer marketing expense.
In the first thirty-nine weeks of fiscal 2007, we recorded income related to restructuring and other exit costs of $2 million. We sold our previously closed plant in San Adrian, Spain, resulting in a gain of $8 million. We incurred a $6 million loss associated with the divestiture of our par-baked bread product line, including its plants in Chelsea, Massachusetts and Tempe, Arizona. The carrying value of the par-baked assets sold, including goodwill, was $18 million.
In the first thirty-nine weeks of fiscal 2006, we recorded restructuring and other exit costs of $16 million, consisting of $12 million of charges associated with the closure of the plant in Swedesboro, New Jersey, including $10 million of asset impairment charges recorded in the first and second quarters of fiscal 2006; $2 million related to the restructuring at the plant in Allentown, Pennsylvania; and $2 million of charges associated with restructuring actions previously announced.
As part of our long range planning process, we are evaluating our plans for certain long-lived assets. Depending upon the outcome of those evaluations, we may take additional impairment or restructuring charges in fiscal 2007.
As a result of the factors discussed above, our operating profit increased $105 million or 7 percent, to $1.65 billion in the first thirty-nine weeks of fiscal 2007.
Interest expense for the first thirty-nine weeks totaled $322 million, a $28 million increase from the first thirty-nine weeks last year. The increase primarily reflects higher interest rates versus last year and changes in the mix of debt.
The effective tax rate was 35.2 percent for the first thirty-nine weeks of fiscal 2007, compared to an effective tax rate of 35.3 percent for the first thirty-nine weeks of fiscal 2006. The effective tax rate in the first thirty-nine weeks of fiscal 2007 reflects the year-to-date impact of a change in the annual effective tax rate from 35.8 percent to 35.5 percent, along with a discrete tax benefit of $4 million primarily from research and development tax credits.
Earnings after tax from joint ventures totaled $58 million in the first thirty-nine weeks, compared to $57 million a year earlier. Net sales for CPW were up 16 percent. This included contributions from the Uncle Tobys business in Australia acquired by CPW in the first quarter of fiscal 2007. The first thirty-nine weeks of fiscal 2007 also included a $7 million after-tax reduction in CPW’s net earnings as a result of its previously announced restructuring project under way in the United Kingdom. Net sales for our Häagen-Dazs ice cream joint ventures in Asia increased 3 percent from the first thirty-nine weeks of fiscal 2006. 8th Continent, our soy products joint venture with DuPont, recorded flat net sales in the first thirty-nine weeks of fiscal 2007.
Average diluted shares outstanding decreased by 23 million from the first thirty-nine weeks of fiscal 2006 due primarily to the repurchase of a significant portion of our contingently convertible debentures in October 2005 and the completion of a consent solicitation related to the remaining convertible debentures in December 2005. As a result of these actions, no shares of common stock underlying the debentures will be considered outstanding after December 12, 2005, for purposes of calculating our diluted earnings per share, unless our average share price for the period is above the accreted value of the debentures. In addition, we have repurchased 19 million shares of our stock since the third quarter of fiscal 2006, 17 million of which were repurchased in the first thirty-nine weeks of fiscal 2007. The repurchases were partially offset by the issuance of shares uponannual stock option exercises,awards, and the vesting of restricted stock units, and the adoption of SFAS 123R.units.
Page 20SEGMENT OPERATING RESULTS
U.S. Retail Segment Results
Net sales for our U.S. Retail operations were up 56.4 percent in the thirdfirst quarter of fiscal 20072008, to $2.11 billion, driven by 5 percent volume growth. Volume growth was recorded in all our U.S. Retail divisions except Big G Cereals, which was flat for the third quarter of fiscal 2007. Operating profits for the quarter improved 6 percent from $423 million last year to $447 million this year.
For the first thirty-nine weeks of fiscal 2007, net sales for our U.S. Retail operations were $6.46 billion, up 4 percent from last year, driven by 3 point volume growth and a 1 point$2,031.7 million. This growth in net price realization (definedsales was the result of a 3.3 percentage point increase in volume on a tonnage basis, led by strong growth in our Snacks business, as the impactwell as increases in our Baking Products, Meals, and Pillsbury divisions. The volume increase was largely driven by higher levels of listconsumer marketing spending and promoted price changes netnew product innovation, resulting in higher sales to key customers. Price and product mix drove 3.1 points of trade and other promotion costs). Volume growth was recorded in all our growth.
U.S. Retail divisions except Baking Products, which was down slightly for the first thirty-nine weeks of fiscal 2007. Operating profits for the period improved 7 percent from $1.39 billion last year to $1.49 billion this year.Net Sales Percentage Change by Division
U.S. Retail Net Sales Growth – Fiscal 2007 vs. 2006 |
| ||||
|
| 3rd Quarter |
| 39 Weeks |
|
Baking Products |
| 11% |
| 1% |
|
Meals |
| 10 |
| 6 |
|
Yoplait |
| 9 |
| 8 |
|
Snacks |
| 8 |
| 7 |
|
Pillsbury USA |
| 3 |
| 2 |
|
Big G Cereals |
| -4 |
| Flat |
|
Small Planet Foods |
| 15 |
| 21 |
|
Total U.S. Retail |
| 5% |
| 4% |
|
% Change | |||
Big G | 5.3 | % | |
Meals | 6.2 | ||
Pillsbury | 5.9 | ||
Snacks | 16.0 | ||
Yoplait | 3.4 | ||
Baking Products | 6.8 | ||
Small Planet Foods | (3.7 | ) | |
Total | 6.4 | % |
ForBig G cereals recorded a 5.3 percent net sales increase reflecting introductory shipments of new products, improved levels of non-promoted sales, and the thirteen weeks ended February 25, 2007, Baking Productseffect of pricing and package size changes on established cereal brands. The Meals division recorded a 6.2 percent net sales increase, led by Progresso ready-to-serve soups and dry dinners. Pillsbury net sales grew by 5.9 percent, led by strength in Totino’s pizza and hot snacks and Toaster Strudel. Snacks division net sales grew 11 percent reflecting unit volume growth in non-measured channels (defined as channels not covered by nationally recognized market research firms). Net sales for the Meals division grew 1016.0 percent led by double-digit growth forstrong performance in ProgressoNature Valley soups along with gains for Helper dinner mixes andGreen Giant vegetables. Yoplait division net sales rose 9 percent as Yoplait Light yogurt varieties and Yoplait Kids yogurt continued to generate growth. The Snacks division posted an 8 percent net sales gain including introductory volume for the new Fiber One barsgrain snacks and continuing growth for Nature ValleyBetty Crocker snack bars. Sales for Pillsbury USA division rose 3fruit snacks, offset by declines in the salty snacks and popcorn categories. Yoplait recorded net sales growth of 3.4 percent led by the Light varieties and multipack segments of the core refrigerated dough products, Totino’s frozen pizza rolls and Toaster Strudel pastries. Big G Cereals net sales were down 4 percent due to year-over-year differences in the timing of price promotion activity, and unit volume was flat. Net sales for our Small Planet Foods organic business grew 15 percent incup product line, as well as pricing actions taken during the quarter.
In addition, atPage 21
Operating profits for the beginningfirst quarter of fiscal 2007, we shifted responsibility for several customers2008, improved 5.8 percent to $473.3 million from our Bakeries$447.3 million in the same period a year ago. Volume growth increased operating profit by $27.6 million. Increased supply chain costs of $31.5 million and Foodservice segment to our U.S. Retail segment. All prior year amounts have been reclassified for comparative purposes. See Notes 6consumer marketing expenses of $19.1 million were offset by favorable price and 15 to our consolidated financial statements.product mix.
International Segment Results
Net sales for our International segment were up 1518.5 percent in the thirdfirst quarter of fiscal 20072008 to $510$599.4 million. This growth was driven by an 8.7 point increase was primarily the result of a 6 percent unitin sales volume, increase, a 7 point contribution from pricing and product mix and a 4 point contribution from the effect7.0 points of favorable foreign currency. These increases were partially offset by an increaseexchange, and 2.8 points of price and product mix. Sales volumes increased across all of our geographic regions, especially in trade promotion spending. Operating profits of $42 million for the quarter were 17 percent above last year. Operating profits also reflected increased marketing expense to support new product introductions.Europe and Latin America.
Page 21International Net Sales Percentage Change by Geographic Region
% Change | |||
Europe | 16.7 | % | |
Canada | 10.7 | ||
Asia/Pacific | 17.4 | ||
Latin America and South Africa | 42.4 | ||
Total | 18.5 | % |
For
Net sales in Europe grew 16.7 percent reflecting continued strong performance from Old El Paso and Nature Valley across the first thirty-nine weeks of fiscal 2007,region, and especially in the United Kingdom. Net sales in Canada increased 10.7 percent, led by Nature Valley grain snacks, Old El Paso products, Pillsbury pizza snacks and cereals. In the Asia/Pacific region, net sales grew by 17.4 percent led by strong growth for our International segment were $1.56 billion, up 15 percent. Unit volumeHäagen-Dazs in China. Latin America and South Africa net sales increased 42.4 percent led by market share gains and pricing actions taken in key countries.
Operating profits for the first thirty-nine weeks was up 7 points over the prior year, pricing and product mix contributed 6 pointsquarter of fiscal 2008, improved 27.0 percent to net sales growth and 4 additional points were contributed by the effect of favorable foreign currency. These increases were partially offset by an increase in trade promotion spending. Operating profits for thirty-nine weeks grew to $160$71.0 million from $55.9 million in fiscal 2007, up 7 percentthe same period a year ago, with foreign currency exchange contributing 8.3 points of that growth. The growth was also driven by a $14.4 million increase from $149 million last year.higher volumes resulting from increases in consumer marketing spending. Net price realization offset supply chain and administrative cost increases.
Bakeries and Foodservice Segment Results
At the beginning of fiscal 2007, we shifted selling responsibility for several customers from our Bakeries and Foodservice segment to U.S. Retail. All prior year amounts have been restated for comparative purposes. Third quarter netNet sales for our Bakeries and Foodservice segment increased 5declined 0.9 percent to $436$440.9 million in the first quarter of fiscal 2008. The decrease in net sales was driven mainly by 5a 4.9 point decline in volume, mainly in the distributors and restaurants customer segment, and included the effects of divested frozen pie and par-baked bread product lines. The volume impact on net sales was largely offset by 4.0 points of favorable pricingbenefit from price and product mixmix.
Bakeries and 1 pointFoodservice Net Sales Percentage Change by Customer Segment
% Change | |||
Distributors and restaurants | (3.4 | )% | |
Bakery channels | 1.1 | ||
Convenience stores and vending | 4.0 | ||
Total | (0.9 | )% |
Page 22
Table of volume growth, partially offset by an increase in trade promotion spending. Contents
Operating profits for the segment reached $33$34.0 million, up 83 percent from $18$29.0 million in last year’s thirdthe first quarter as favorable netof fiscal 2007. The business was able to offset input cost inflation with a combination of pricing realization (defined asactions, sourcing productivity, and manufacturing improvements. Through previously announced restructuring actions and new product innovation, the impactbusiness has shed a significant amount of listlow-margin product sales and promoted price changes net of trade and other promotion costs) andintroduced higher volumes were partially offset by higher commodity and fuel costs.margin new products. In addition, the operating segment has continued to experience manufacturing efficiencies, further contributing to widening margins.
Unallocated Corporate Expenses
For the first thirty-nine weeks of fiscal 2007, net sales for our Bakeries and Foodservice segment increased 7 percent to $1.36 billion, driven primarily by a 7 point increase in pricing and product mix and 2 points of volume growth, offset partially by an increase in trade promotion spending. Operating profits for the segment were $118 million, up 39 percent from $85 million last year.
Corporate Unallocated Expense
Corporate unallocated expense increased from $19 million in the third quarter of fiscal 20062008, unallocated corporate expenses were $53.7 million compared to $35$43.3 million infor the thirdfirst quarter of fiscal 2007, primarily the result of a $13 million increase in stock compensation costs ($9 million associated with the adoption of SFAS 123R).
In the first thirty-nine weeks of fiscal 2007, corporate unallocated expense was $118 million, an increase of $60 million from the same period a year ago.2007. The increase is primarily due to $10.8 million of costs related to the resultremarketing of increased stock compensation coststhe Class A and Series B-1 interests in GMC and $3.0 million of $72 million ($61 million associated with the adoption of SFAS 123R), offset by variances in actual administrative and employee benefit costs versus the amount we allocate to our operations.net expenses on commodity derivatives.
LIQUIDITY AND CAPITAL RESOURCES
During the first thirty-nine weeksquarter of fiscal 2007, operating activities2008, our operations provided $20.4 million of cash compared to providing $110.6 million of $1.15 billion. This compares to cash provided by operations in the first thirty-nine weeksquarter of fiscal 2006 of $1.23 billion.2007. The $90.2 million decrease in cash providedgenerated from operations was driven primarily by operationschanges in the first thirty-nine weekslevels of fiscal 2007 compared to lastaccrued interest and compensation-related liabilities year is primarily the result of a $99 million higher use of working capital partially offset by increased non-cash stock compensation expense of $72 million. The higher use of working capital affecting our cash flow from operations resulted from increases in accounts receivable due to increases from higher sales levels and prices; and increases in inventories versus the same period a year ago because of commodity market conditions, primarily in the grain markets (our grain inventories increased from $78 million at May 28, 2006 to $131 million at February 25, 2007, compared to an increase from $73 million to $101 million over the same period in fiscal 2006).year.
During the first thirty-nine weeksquarter of fiscal 2008, $378.8 million of cash was used to increase inventories, generally consistent with the increase in the first quarter of fiscal 2007, investments for land, buildingsmainly due to inflation in wheat prices and equipment totaled $249 million compared to $191 millionhigher levels of finished goods inventory driven by our cereal package resizing initiative and growth in the first thirty-nine weeks last year. We expect to spend approximately $425 to $450 million for capital projects in fiscal 2007.granola snacks business.
Page 22
DuringCash used by investing activities decreased $189.0 million from the first thirty-nine weeksquarter of fiscal 2007 CPW completedmainly due to the acquisition of the Uncle Tobys cereal business by our CPW joint venture in Australia. We fundedthat quarter. In addition, we received $10.6 million on the sale of our 50 percentVallejo, California plant during the first quarter of fiscal 2008.
Financing activities provided $23.8 million of cash in the first quarter of fiscal 2008. Cash flows from notes payable of $2,297.2 million were primarily used to finance share repurchases and our repurchases of the Series B-1 interests in GMC and the Series A preferred stock of GM Capital.
On August 7, 2007, we repurchased for a net amount of $843.0 million all of the outstanding Series B-1 Interests in GMC as part of a required remarketing of those interests. The purchase price by making additional advancesreflected the Series B-1 Interests’ original capital account balance of $835.0 million and $8.0 million of capital account appreciation attributable and paid to andthe third party holder of the Series B-1 Interests. The capital appreciation paid to the third party holder of the Series B-1 Interests was recorded as a reduction to retained earnings, a component of stockholders’ equity, contributions in CPW totaling $135 million (classified as investments in affiliates, net, on the Consolidated Statements of Cash Flows)Balance Sheets, and by acquiring a 50 percent beneficial interestreduced net earnings available to common stockholders in certain intellectual property for $58 million (classified as acquisitions on the Consolidated Statements of Cash Flows).our basic and diluted earnings per share (EPS) calculations.
We also completedand the acquisitionthird party holder of Saxby Bros. Limited, a chilled pastry company inall of GMC’s Class A Interests agreed to reset, effective on June 28, 2007, the United Kingdom for approximately $24preferred rate of return applicable to the Class A Interests to the sum of 3 month LIBOR plus 65 basis points. On June 28, 2007, we sold $92.3 million of additional Class A Interests to the same third party. There was no gain or loss associated with these transactions. As of August 26, 2007, the carrying value of all outstanding Class A Interests on our Consolidated Balance Sheets was $242.3 million, and the capital account balance of the Class A Interests, upon which $21preferred distributions are calculated, was $248.1 million.
On June 28, 2007, we repurchased for $150.0 million all of the outstanding Series A preferred stock of our subsidiary General Mills Capital, Inc. using proceeds from the sale of the Class A Interests and commercial paper. There was paid inno gain or loss associated with this repurchase.
Page 23
During the thirdfirst quarter of fiscal 2008, we repurchased 20.9 million shares of common stock for $1,220.4 million. As of August 26, 2007, we had unpaid obligations associated with our share repurchases totaling $1.0 million included in other current liabilities. We settled these obligations shortly after the end of our fiscal quarter. Also in the first quarter of fiscal 2008, we settled $64.5 million of share repurchase liability as of May 27, 2007.
On June 25, 2007, we announced that our Board of Directors approved an increase in our quarterly dividend to 39 cents per share, payable on August 1, 2007, to stockholders of record on July 10, 2007. This business, which had salesThe previous quarterly dividend rate of $2437 cents per share was established with the February 1, 2007 payment. During the first quarter of fiscal 2008, we paid $132.1 million in calendar 2006, complements our existing frozen pastry business in the United Kingdom. In addition, we completed an acquisition in Greece for $3dividends compared to $125.7 million in the third quarter.same period last year.
CAPITAL RESOURCES
Our total debt balances werecapital structure was as follows:
In Millions |
|
| Feb. 25, |
|
| May 28, |
|
| Aug. 26, |
| May 27, |
| ||
Notes payable |
| $ | 2,177 |
| $ | 1,503 |
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| $ | 3,560.6 |
| $ | 1,254.4 |
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Current portion of long-term debt |
|
| 845 |
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| 2,131 |
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| 1,946.5 |
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| 1,734.0 |
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Long-term debt |
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| 3,165 |
|
| 2,415 |
|
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| 3,003.8 |
|
| 3,217.7 |
|
Total Debt |
| $ | 6,187 |
| $ | 6,049 |
| |||||||
Total debt |
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| 8,510.9 |
|
| 6,206.1 |
| |||||||
Minority interests |
|
| 242.3 |
|
| 1,138.8 |
| |||||||
Stockholders’ equity |
|
| 4,458.7 |
|
| 5,319.1 |
| |||||||
Total capital |
| $ | 13,211.9 |
| $ | 12,664.0 |
|
Our notes payable balance increased $674 million from May 28, 2006 to February 25, 2007, primarily to refinance the payment at maturity of $500 million of our long-term debt in October 2006, share repurchases and our higher level of working capital during the first thirty-nine weeks of fiscal 2007.
As of February 25, 2007, our zero coupon convertible debentures (the Debentures) are included in the current portion of long-term debt based on the put rights of the holders. On March 26, 2007, we announced that we are redeeming all of these outstanding Debentures due 2022 on April 25, 2007, for a redemption price equal to the accreted value of the Debentures, which will be $734.45 per $1,000 principal amount at maturity of the Debentures. This redemption price will be settled in cash. As a result of the redemption, holders have the right to convert the Debentures until April 24, 2007. Upon any conversion, we will deliver cash equal to the accreted value of the Debentures delivered for conversion and shares of our common stock for any value above the accreted amount.
Commercial paper is a continuing source of short-term financing. We issue commercial paper in the United States, Canada, and Europe. Our commercial paper borrowings are supported by fee-paid committed credit lines consisting of a $1.1 billion facility expiring in October 2007, a $750 million facility expiring in January 2009, and a $1.1 billion facility expiring in October 2010. On August 3, 2007, we entered into a credit facility with an aggregate revolving commitment of $750 million that is scheduled to expire on December 6, 2007. As of February 25,August 26, 2007, we had no outstanding borrowings under these facilities.
In JanuaryOur credit facilities, certain of our long-term debt agreements, and our minority interests contain restrictive covenants. As of August 26 2007, we issued $1.0 billion of 5.7 percent fixed rate notes due February 15, 2017 and $500 million of floating rate notes due January 22, 2010. The proceedswere in compliance with all of these notes were used to retire $1.5 billion of fixed rate notes which matured in February 2007. We had previously entered into $700 million of pay-fixed, forward-starting interest rate swaps with an average fixed rate of 5.7 percent in anticipation of this refinancing and are amortizing the loss deferred to accumulated other comprehensive income of $22 million associated with these derivatives to interest expense on a straight-line basis over the life of the fixed rate notes. We expect to reclassify $2 million of the loss to earnings over the next 12 months.covenants.
We have $845 million$1.9 billion of long-term debt maturing in the next 12 months and classified as current.current, including $1.25 billion that may mature in fiscal 2008 based on the put rights of the note holders. We also have $1.1 billionclassified $138.6 million of subsidiary preferred stock (classifiedlong-term debt as Minority Interestscurrent based on our Consolidated Balance Sheets) that will be remarketed between June, 2007 and October, 2007.intention to redeem the debt within the next 12 months. We believe that cash flows from operations, together with available short- and long-term debt or structured financing, will be adequate to meet our liquidity and capital needs for at least the next 12 months.
Page 23On August 29, 2007, we completed the sale of $700.0 million of 5.65 percent fixed-rate notes due September 10, 2012. The proceeds of the notes were used to repay outstanding commercial paper. Interest on the notes is payable semi-annually in arrears. The notes may be redeemed at our option at any time for a specified make-whole amount. The notes are senior unsecured and unsubordinated obligations and contain a change of control provision, as defined in the instruments governing the notes.
We have several net investments in foreign subsidiaries that are denominated in Euros. We hedge a portionan effective shelf registration statement on file with the Securities and Exchange Commission (SEC) covering the sale of these net investments by issuing Euro-denominated commercial paper. Asdebt securities, common stock, preference stock, depository shares, securities warrants, purchase contracts, purchase units, and units. Following the completion of February 25, 2007, we have issued $393 millionthe aforementioned note issuance, $3.0 billion remained available under the shelf registration for future use.
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Contents
In October 2004, Lehman Brothers Holdings, Inc. (Lehman Brothers) issued $750 million$750.0 of notes whichthat are mandatorily exchangeable for shares of our common stock. In connection with the issuance of those notes, an affiliate of Lehman Brothers entered into a forward purchase contract with us, under which we are obligated to deliver to such affiliate between 1414.3 million and 1717.1 million shares of our common stock, subject to adjustment under certain circumstances. TheseWith the completion of the remarketing of the Series B-1 limited membership interests of GMC in August 2007, we will deliver shares will be deliverable by us(14.3 million shares assuming the price of our stock on August 26, 2007) of our common stock to Lehman Brothers in October 2007 in exchange for theand Lehman Brothers will deliver to us $750 million in cash. We expect to use the cash or, in certain circumstances, securities of an affiliate of Lehman Brothers.to repay outstanding debt.
In March 2007, we delivered a $30 million guarantee to the trustee of the Cereal Partners U.K. pension plan to guarantee our 50 percent share of that joint venture’s pension funding obligations. This guarantee had an inconsequential fair value.OFF BALANCE-SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There were no other material changes outside the ordinary course of our business in our contractual obligations or off-balance-sheet arrangements during the thirty-nine week period ended February 25, 2007.
On March 12, 2007, our Board of Directors approved a quarterly dividend of 37 cents per share, payable on May 1, 2007, to shareholders of record on April 10, 2007. The quarterly dividend rate of 37 cents per share was established with the February 1, 2007 payment. During the first thirty-nine weeksquarter of fiscal 2007, we paid $377 million in dividends.
On December 11, 2006, our Board of Directors approved2008, except for a new authorization for us to repurchase up to 75data contract that we entered into in June. We have contractual obligations of $155.2 million sharesover the eight year life of our common stock. This replaces the prior authorization which permitted us to repurchase shares up to a treasury share balance of 170 million. Purchases under the new authorization can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans and accelerated repurchase programs. The authorization has no pre-established termination date. Since December 11, 2006, we have repurchased 94 thousand shares.
During the first thirty-nine weeks of fiscal 2007, we repurchased 17 million shares of common stock for $895 million. This compares to our repurchase of 17 million shares of common stock for $806 million in the first thirty-nine weeks of fiscal 2006.this contract.
SIGNIFICANT ACCOUNTING ESTIMATES
Our significant accounting estimatespolicies are described in Note 12 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 28, 2006, as amended by Amendment No. 1 on Form 10-K/A filed January 8, 2007, and Form 8-K filed on January 16,27, 2007. The accounting policies used in preparing our interim fiscal 20072008 Consolidated Financial Statements are the same as those described in our Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A filed January 8, 2007, and Form 8-K filed on January 16, 2007, except for the change in accounting principle for stock-based compensation as discussed in Note 2Notes 16 and 18 to thethese Consolidated Financial Statements included in this Form 10-Q,for the change in accounting principle for certain shipping costs as discussed in Note 3 to the Consolidated Financial Statements included in this Form 10-Q, and the reclassifications also discussed in Note 3 to the Consolidated Financial Statements included in this Form 10-Q. In addition, at the beginning of fiscal 2007, we shifted responsibility for several customers from our Bakeries and Foodservice segment to our U.S. Retail segment. All prior year amounts have been reclassified for comparative purposes. See Notes 6 and 15.
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During the third quarter of fiscal 2007, we changed the timing of our annual goodwill impairment testing from the first day of our fiscal year to December 1. During fiscal 2007, we performed this annual impairment test on May 29, 2006, and again on December 1, 2006. This accounting change is preferable in the circumstances because moving the date of our annual goodwill impairment testing into the third quarter better aligns this impairment test with the timing of the presentation of our strategic plan to the Board of Directors.ended August 26, 2007.
Our significant accounting estimates are those that have meaningful impact on the reporting of our financial condition and results of operations. These estimates include our accounting for tradepromotional expenditures, intangible assets, stock compensation, income taxes, and consumer promotion activities; valuation of stock-based compensation awards; goodwill and other intangible asset impairments; income taxes; anddefined benefit pension, and other postretirement, and postemployment benefits. Except for changes in these estimates as disclosed below, the assumptions and methodologies used in the determination of those estimates as of August 26, 2007, are the same as those described in our Annual Report on Form 10-K for the fiscal year ended May 27, 2007.
Trade and Consumer Promotion ActivitiesStock Compensation
We report sales net of certain coupon and trade promotion costs. The consumer coupon costs recorded as a reduction of sales are based on the estimated redemption value of those coupons, as determined by historical patterns of coupon redemption and consideration of current market conditions such as competitive activity in those product categories. The trade promotion costs include payments to customers to perform merchandising activities on our behalf, such as advertising or in-store displays, discounts to our list prices to lower retail shelf prices, and payments to gain distribution of new products. The cost of these activities is recognized as the related revenue is recorded, which generally precedes the actual cash expenditure. The recognition of these costs requires estimation of customer participation and performance levels. These estimates are made based on the quantity of customer sales, the timing and forecasted costs of promotional activities, and other factors. Differences between estimated expenses and actual costs are normally insignificant and are recognized as a change in management estimate in a subsequent period.
Our unit volume in the last week of each quarter is consistently higher than the average for the preceding weeks of the quarter. In comparison to the average daily shipments in the first 12 weeks of a quarter, the final week of each quarter has approximately two to four days’ worth of incremental shipments (based on a five-day week), reflecting increased promotional activity at the end of the quarter. This increased activity includes promotions to assure that our customers have sufficient inventory on hand to support major marketing events or increased seasonal demand early in the next quarter, as well as promotions intended to help achieve interim unit volume targets. In the third quarter of fiscal 2005, 2006, and 2007, we were slightly below the two to four day range. If, due to quarter-end promotions or other reasons, our customers purchase more product in any reporting period than end-consumer demand will require in future periods, our sales level in future reporting periods could be adversely affected.
Valuation of Stock-Based Compensation Awards
We have various stock-based compensation programs under which awards, including stock options, restricted stock, and restricted stock units, may be granted to employees and non-employee directors. Stock option grants are made at 100 percent or more of the fair market value of our stock at the date of grant. These awards generally vest over four years and have a ten-year and one-month term. The expense recorded in our Consolidated Financial Statements beginning in fiscal 2007 is based on the fair value of the awards.
We estimate the fair value of each option on the grant date using the Black-Scholes option-pricing model, which requires us to make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. We estimate our future stock price volatility using the historical volatility over the expected term of the option. If all other assumptions were held constant,option, excluding time periods of volatility we believe a one percentage point increase or decreasemarketplace participant would exclude in their estimate of our stock price volatility. For the fiscal 2008 grants, we have excluded historical volatility for fiscal 2002 and prior, primarily because volatility driven by the acquisition of Pillsbury does not reflect what we believe to be expected future volatility. We also have considered, but did not use, implied volatility in our current period volatility assumption would increase or decreaseestimate as trading activity in options on our stock, especially those with tenors of greater than 6 months, is insufficient to provide a reliable measure of expected volatility. Our method of selecting the grant-date fair value ofother valuation assumptions is explained on pages 58 and 59 in our fiscal 2007 option grants by approximately 4 percent, or $2 million, in the thirty-nine weeks ended February 25, 2007.
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Goodwill and Other Intangible Assets
Goodwill represents the difference between the purchase prices of acquired companies and the related fair values of net assets acquired. Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Impairment testing is performed for each of our reporting units. We compare the carrying amount of goodwill for a reporting unit with its fair value and if the carrying amount of goodwill exceeds its fair value, impairment has occurred. Our estimates of fair value are determined basedAnnual Report on a discounted cash flow model using inputs from our annual long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions and other factors.
Finite and indefinite-lived assets, primarily intangible assets associated with the Pillsbury, Totino’s, Progresso, Green Giant, Old El Paso and Häagen-Dazs brands, are also tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In December 2006, we completed our fiscal 2007 assessment of our brand intangibles as of December 1, 2006. Our estimate of the fair value of the brands was based on a discounted cash flow model using inputs which included: (1) projected revenues from our annual long-range plan, (2) assumed royalty rates which could be payable if we did not own the brands, and (3) a discount rate. All brand intangibles had fair values in excess of their carrying values by at least 20 percent, exceptForm 10-K for the Pillsbury brand, which we estimated had a fair value less than three percent higher than its carrying value. This brand comprises nearly one-half of our total indefinite-lived intangible assets.
If the growth rate for the global revenue from all uses of the Pillsbury brand decreases 50 basis points from the current planned growth rate, fair value would be reduced by approximately $165 million, assuming all other components of the fair value estimate remain unchanged. If the assumed royalty rate for all uses of the Pillsbury brand decreases by 50 basis points, fair value would be reduced by approximately $130 million, assuming all other components of the fair value estimate remain unchanged. If the applicable discount rate increases by 50 basis points, fair value of the Pillsbury brand would be reduced by approximately $175 million, assuming all other components of the fair value estimate remain unchanged.fiscal year ended May 27, 2007.
Income Taxes
Our consolidatedWe adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN) No 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (FIN 48), as of the beginning of fiscal 2008. Prior to adoption, our policy was to establish reserves that reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were recognized as changes to the effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictionsperiod of resolution. FIN 48 requires application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions. FIN 48 permits us to recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. It further requires that a change in which we operate and involves management judgment asrelated to the expected ultimate resolution of any tax issues. We accrue liabilities in current income taxes payable for potential assessments related to uncertain tax positions be recognized in a varietyearnings in the quarter of such change.
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Annually we file more than 350 income tax returns in approximately 100 global taxing jurisdictions. Historically, our assessmentsA number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the ultimatefinal outcome or the timing of resolution of any particular uncertain tax issues have been reasonably accurate. The current open tax issues are not dissimilarposition, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest, in size or substance from historical items, except forlight of changing facts and circumstances. Settlement of any particular position would usually require the accounting for losses recorded as partuse of our acquisition of The Pillsbury Company. Management currently believes that the ultimate resolution of these matters, including the accounting for losses recorded as part of our acquisition of The Pillsbury Company, will not have a material effect on our business, financial condition, results of operations, or liquidity.
Pension and Other Postretirement Benefitscash.
The accountingnumber of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (federal and state) and Canada. With limited exceptions, the Company is no longer subject to United States federal examinations by the Internal Revenue Service (IRS) for pensionfiscal years before 2002. The IRS recently concluded field examinations for our 2002 and other postretirement liabilities requires2003 fiscal years. A payment of $24.4 million was made during the estimationfirst quarter of fiscal 2008 to cover the additional tax liability plus interest related to all agreed adjustments for this audit cycle. The IRS also proposed additional adjustments for the 2002-2003 audit cycle including several critical factors. The assumptions usedadjustments to the tax benefits associated with the sale of minority interests in our GMC subsidiary. We believe we have meritorious defenses and intend to vigorously defend our position. Our potential liability for this matter is significant and, notwithstanding our reserves against this potential liability, an unfavorable resolution could have a material adverse impact on our results of operations and cash flows from operations. We do not expect the amount of our tax reserves for these issues to change in the determination of those liabilities are described on pages 22 and 23next 12 months. The IRS initiated its audit of our Annual Reportfiscal 2004 through 2006 tax years during the first quarter of fiscal 2008.
Various tax examinations by United States state taxing authorities could be conducted for any open tax year, which vary by jurisdiction, but are generally from 3 to 5 years. Currently, several state examinations are in progress. The Canada Revenue Agency is conducting an audit of our income tax returns in Canada for fiscal years 2003 (which is our earliest tax year still open for examination) through 2005. We do not anticipate that any United States state tax or Canadian tax adjustments will have a significant impact on Form 10-K for the year ended May 28, 2006, as amended by Amendment No. 1 on Form 10-K/A filed January 8, 2007, and Form 8-K filed on January 16, 2007.our financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2007, the FASB approved the issuance of Emerging Issues Task Force Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). EITF 06-11 requires that tax benefits from dividends paid on unvested restricted shares be charged directly to stockholders’ equity instead of benefiting income tax expense. EITF 06-11, which will be effective for us in the first quarter of fiscal 2009, is expected to increase our effective income tax rate by approximately 20 basis points.
In February 2007, the FASB issued FASB StatementSFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB StatementSFAS No. 115” (SFAS 159). This Statementstatement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statementstatement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statementstatement is effective for fiscal years beginning after November 15, 2007, which for us is the first quarter of fiscal 2009. We do not believe that the adoption of SFAS 159 will have a material impact on our results of operations or financial condition.
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In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans” (an amendment of FASB Statements No. 87, 88, 106, and 132R) (SFAS 158). SFAS 158 requires an employer to recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions), and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in our comprehensive income and as a separate component of stockholders’ equity. SFAS 158 is effective for us in the fourth quarter of fiscal 2007. We are evaluating the impact of SFAS 158159 on our results of operations and financial condition and estimate that we will record a reduction to accumulated other comprehensive incomecondition.
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Contents
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123R and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007, which for us is the first quarter of fiscal 2009. We are evaluating the impact of SFAS 157 on our results of operations and financial condition.
In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides interpretive guidance on the process and diversity in practice of quantifying financial statement misstatements resulting in the potential carryover of improper amounts on the balance sheet. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for us in the first quarter of fiscal 2008. We do not believe that the adoption of SAB 108 will have a material impact on our results of operations or financial condition.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies when tax benefits should be recorded in financial statements, requires certain disclosures of uncertain tax matters and indicates how any tax reserves should be classified in a balance sheet. FIN 48 is effective for us in the first quarter of fiscal 2008. We are evaluating the impact of FIN 48 on our results of operations and financial condition.
In June 2006, the FASB ratified the consensus of Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). EITF 06-3 concluded that the presentation of taxes imposed on revenue-producing transactions (sales, use, value added and excise taxes) on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy that should be disclosed pursuant to Accounting Principles Board Opinion No. 22. EITF 06-3 is effective for us in the fourth quarter of fiscal 2007. We do not believe that the adoption of EITF 06-3 will have a material impact on our results of operations and financial condition.
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NON-GAAP MEASURES
We have included in this MD&A a measure of financial performance that is not defined by GAAP. This non-GAAP measure should be viewed in addition to, and not in lieu of, the comparable GAAP measure.
Total Segment Operating Profit
This non-GAAP measure is used in internal management reporting and as a component of the Board of Directors’ rating of our performance for management and employee incentive compensation. Management and the Board of Directors believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate segment performance. A reconciliation of this measure to the relevant GAAP measure, operating profit, is included in Note 1517 to the Consolidated Financial Statements included in this Form 10-Q.
Core working capital. Accounts receivable plus inventories less accounts payable, all as of the last day of our fiscal period.
Derivatives. Financial instruments that we use to manage our risk arising from changes in commodity prices, interest rates, foreign exchange rates, and stock prices.
Generally Accepted Accounting Principles (GAAP). Guidelines, procedures, and practices that we are required to use in recording and reporting accounting information in our audited financial statements.
Goodwill. The difference between the purchase price of acquired companies and the related fair values of net assets acquired.
Gross margin. Net sales less cost of sales.
Hedge accounting. Special accounting for qualifying hedges allows changes in a hedging instrument’s fair value to offset corresponding changes in the hedged item in the same reporting period. Hedge accounting is only permitted for certain hedging instruments and hedged items, only if the hedging relationship is highly effective, and only prospectively from the date a hedging relationship is formally documented.
Interest bearing instruments. Notes payable, long term debt, including current portion, minority interests, cash and cash equivalents and certain interest bearing investments classified within prepaid expenses and other current assets and other assets.
LIBOR. London Interbank Offered Rate
Minority interests. Preferred stock and interests of subsidiaries held by third parties.
Net price realization. The impact of list and promoted price increases, net of trade and other promotion costs.
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Segment operating profit margin. Segment operating profit divided by net sales.
Total debt. Notes payable and long-term debt, including current portion.
Translation adjustments. The impact of the conversion of our foreign affiliates’ financial statements to U.S. dollars for the purpose of consolidating our financial statements.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our management’s current expectations and assumptions. We and our representatives also may from time to time make written or oral forward-looking statements, including statements contained in our filings with the SEC and in our reports to stockholders.
The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “plan,” “project” or similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those currently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date made.statements.
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that could affect our financial performance and could cause our actual results forin future periods to differ materially from any current opinions or statements expressed with respect to future periods in any current statements.
Our future results could be affected by a variety of factors, such as:
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You should also consider the risk factors that we identify on pages 75 through 10 of our Annual Report on Form 10-K for the fiscal year ended May 28, 2006,27, 2007, which could also affect our future results.
We undertake no obligation to publicly revise any forward-looking statements to reflect future events or circumstances.circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk during the thirty-nine weeks ended February 25, 2007.first quarter of fiscal 2008. For additional information, see Item 7A of our Annual Report on Form 10-K for the fiscal year ended May 28, 2006.27, 2007.
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Item 4. Controls and Procedures.
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of February 25,August 26, 2007, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
During the thirteen weeks ended February 25, 2007, we implemented policies and procedures requiring a separate annual impairment assessment of brand intangibles, as required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Previously, we had conducted our impairment assessment of goodwill and other indefinite-lived intangible assets on a combined basis. Except for this change to our annual impairment assessment, thereThere were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the thirteen weeksour fiscal quarter ended February 25,August 26, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
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The following table sets forth information with respect to shares of our common stock that we purchased during the three fiscal monthsperiods ended February 25,August 26, 2007.
Period |
| Total Number of Shares Purchased (a) |
| Average Price Paid Per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Programs (b) |
| Maximum Number of Shares that may yet be Purchased under the Programs (b) |
| |
Nov. 28, 2006 – |
| 21,107 |
| $ | 56.64 |
| 21,107 |
| — |
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Jan. 1, 2007 – |
| 40,200 |
| $ | 57.02 |
| 40,200 |
| — |
|
Jan. 29, 2007 – |
| 32,336 |
| $ | 57.49 |
| 32,336 |
| — |
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Total |
| 93,643 |
| $ | 57.10 |
| 93,643 |
| 74,906,357 |
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Period |
| Total |
| Average |
| Total Number |
| Maximum |
| |
May 28, 2007 – July 1, 2007 |
| 7,050,581 |
| $ | 59.86 |
| 7,050,581 |
| 59,656,088 |
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July 2, 2007 – July 29, 2007 |
| 9,468,948 |
| $ | 58.04 |
| 9,468,948 |
| 50,187,140 |
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July 30, 2007 – Aug. 26, 2007 |
| 4,418,815 |
| $ | 56.30 |
| 4,418,815 |
| 45,768,325 |
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|
Total |
| 20,938,344 |
| $ | 58.28 |
| 20,938,344 |
| 45,768,325 |
|
| (a) | The total number of shares purchased includes: (i) |
| (b) | On December 11, 2006, our Board of Directors approved and we announced |
Page 30
|
|
| Fourth Amended and Restated Limited Liability Company Agreement of General Mills Cereals, LLC, dated as of August, 1, 2007, by and among GM Cereals Operations, Inc., |
|
|
| Exhibit 10.1 | General Mills Separation Pay and Benefits Program for Officers |
Exhibit 10.2 |
|
| |
Exhibit | Computation of Ratio of Earnings to Fixed |
| |
|
|
Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of |
| |
Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of |
| |
Exhibit 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of |
| |
Exhibit 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of |
Page 3130
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 |
|
|
|
|
|
|
|
| S. S. Marshall |
Date |
|
|
|
|
|
|
|
| K. L. Thome |
Page 3231
Exhibit No. | Description |
10.1 | General Mills Separation Pay and Benefits Program for Officers |
|
|
|
|
| Computation of Ratio of Earnings to Fixed |
|
|
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of |