General Mills (NYSE:GIS) on Friday (9 November) updated its projections of future financial performance to reflect its acquisition of the worldwide Pillsbury operations from Diageo plc (LSE:DGE.)(NYSE:DEO). This transaction was completed October 31, 2001.

In fiscal 2001, which ended May 27, 2001, General Mills earned $2.28 per diluted share excluding unusual items and goodwill amortization. With Pillsbury added, General Mills estimates that its diluted earnings per share excluding unusual items can grow at a 14 percent compound rate from this $2.28 base over the next three years, to a range of $3.40 to $3.50 per share in fiscal 2004. Beyond 2004, the company reaffirmed its goal of delivering 11 to 15 percent compound annual growth in earnings per share through the year 2010. Cash flow from operations is expected to increase from $737 million reported in fiscal 2001 to $1.6 billion in 2004. General Mills also reaffirmed its plans to maintain the prevailing annual dividend rate of $1.10 per share.

Earnings per share excluding unusual items for the current fiscal year (fiscal 2002) are expected to total between $2.15 and $2.20 per share. This EPS range is below 2001 results due to the significant increase in General Mills shares outstanding. Average diluted shares outstanding are expected to total roughly 342 million in fiscal 2002, up 17 percent from 292 million average diluted shares in fiscal 2001. The company’s diluted shares outstanding are projected to increase to roughly 381 million shares in fiscal 2003, and 387 million in 2004. These figures assume some modest dilution from option exercises. General Mills currently does not plan to repurchase any significant amount of company stock through fiscal 2004.

Earnings per share in fiscal 2003 are expected to increase sharply, to a range of between $2.85 and $2.95 per share, driven in part by the significant cost synergies the company expects to realize by combining the General Mills and Pillsbury businesses. General Mills expects these cost synergies to total $25 million in fiscal 2002, and then increase to $250 million by fiscal 2003 and $400 million annually by 2004.

Fiscal 2002 One-Time Costs

A number of one-time costs are associated with General Mills’ acquisition of Pillsbury, and the associated divestiture of certain businesses and assets to the International Multifoods Company (NYSE: IMC). In fiscal 2002, General Mills expects to incur excess costs to build dessert-product inventory and use contract manufacturers in order to transition from the company’s Toledo, Ohio, desserts plant, which is being sold to IMC. In addition, because the Hungry Jack trademark is being sold to IMC, General Mills will also incur expenses to convert packaging and advertising for several product lines to new materials using different trademarks. These costs, which will flow through General Mills’ cost of sales and SG&A, are estimated at approximately $20 to $25 million in 2002.

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A total of approximately $230 to $250 million of unusual expense is anticipated in 2002. Roughly 60 percent of this total relates to transaction costs such as employee severance and retention payments. The remaining 40 percent of the unusual expense reflects costs associated with reconfiguring General Mills’ U.S. cereal production, a move made necessary by the sale of the Toledo facility.

Capitalized costs associated with the Pillsbury acquisition, such as legal and investment banking fees and certain other severance costs, are expected to total between $170 and $185 million in fiscal 2002.

Balance Sheet Impact

General Mills will account for the acquisition as a purchase, and will consolidate Pillsbury results effective with the acquisition date. The acquisition adds more than $3.5 billion to General Mills shareholders’ equity, reflecting the net issuance to Diageo of 79 million shares. General Mills’ total debt will increase by $6.15 billion, composed of $3.83 billion consideration to Diageo for Pillsbury, and $2.32 billion of additional debt associated with Diageo’s November 1, 2001 exercise of a put option to sell 55 million shares back to General Mills at $42.14 per share. The company expects to gradually reduce its debt levels, with targets of reducing total debt by about $300 million in 2003 and by an additional $800 million in 2004.

General Mills’ balance sheet will also include a $395 million increase in other current liabilities, reflecting the contingent payment that may be made to Diageo in whole or in part on the 18-month anniversary of the close. This possible payment is contingent upon the average trading price of General Mills stock at the 18-month anniversary, and the number of shares Diageo continues to own at that time.

General Mills continues to estimate that goodwill and other intangibles associated with the Pillsbury acquisition will total approximately $9 billion. The company expects that only a small portion of these intangibles will be deemed to have definite lives. Therefore, the great majority of this intangibles balance will not be subject to amortization.

Second Quarter Outlook

General Mills expects second-quarter earnings per share before unusual items to total 61 to 64 cents per share. This compares to earnings per share excluding unusual items and goodwill amortization of 72 cents in the year-ago period. Expectations for the current quarter reflect the impact of higher average shares outstanding, which more than offsets the three-weeks of after-tax earnings contributed by Pillsbury’s businesses. General Mills also expects volume growth for its historical businesses to moderate somewhat in the three final quarters of this year, to the low-single digit range, reflecting ongoing retail inventory reductions and the need for General Mills sales force to prioritize key merchandising programs for the company’s expanded business portfolio.

Commenting on General Mills’ updated financial outlook, Chairman and Chief Executive Officer Steve Sanger said, “With Pillsbury added to our portfolio, we expect our compound annual growth in earnings per share to accelerate, ranging from 11 to 15 percent over the long-term, and averaging better than 14 percent over the next three years. We believe achieving these goals will result in superior returns to General Mills’ shareholders.”

This press release contains forward-looking statements based on management’s current expectations and assumptions. Such statements are subject to certain risks and uncertainties that could cause actual results to differ. In particular, actual performance may be affected by factors relating to the Pillsbury acquisition, such as integration problems; failure to achieve synergies; unanticipated liabilities; increased indebtedness and cost of borrowing; inexperience in new business lines; and changes in the competitive environment. In addition, our future results also could be affected by a variety of factors such as: competitive dynamics in the U. S. ready-to-eat cereal market, including pricing and promotional spending levels by competitors; the impact of competitive products and pricing; product development; actions of competitors other than as described above; acquisitions or disposals of business assets; changes in capital structure; changes in laws and regulations, including changes in accounting standards; customer demand; effectiveness of advertising and marketing spending or programs; consumer perception of health-related issues; economic conditions, including currency and interest rate fluctuations. The company undertakes no obligations to publicly revise any forward-looking statements to reflect future events or circumstances.