GIS

General Mills, Inc. 10-K Summary: Fiscal Year Ended May 29, 2005

Business Context and Reporting Period

This report covers the fiscal year ended May 29, 2005. General Mills is a leading producer of packaged consumer foods operating in three reportable segments: U.S. Retail (69% of net sales), Bakeries and Foodservice (16%), and International (15%). The company markets major brands including Cheerios, Betty Crocker, Pillsbury, Yoplait, and Häagen-Dazs. During the period, the company completed the integration of the Pillsbury acquisition and terminated its Snack Ventures Europe joint venture with PepsiCo.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2% year-over-year. On a 52-week comparable basis, sales grew 3%, driven by a 2% unit volume increase and 4% price/product mix gains, partially offset by a 3% increase in trade promotion expenses.
• Profitability: Diluted EPS grew 18% to $3.08. This growth was significantly aided by a $499 million pre-tax gain from divestitures (Snack Ventures Europe and Lloyd's barbecue business) and a reduction in interest expense due to debt paydowns.
• Margin Pressure: Gross margin decreased by 130 basis points to 39%. This was primarily due to approximately $170 million in increased commodity costs. While price increases were implemented, they did not fully offset the cost increases in the U.S. Retail segment, where gross margin fell 200 basis points.
• Debt Reduction: Total debt decreased by $2.0 billion to $6.2 billion. The company repurchased $760 million of its 6% Notes due in 2012, incurring $137 million in repurchase costs.
• Segment Performance:
  • U.S. Retail: Sales were flat. Big G Cereals volume declined 5% due to price gaps versus competitors, while Yoplait volume grew 11%.
  • International: Sales grew 11% and operating profit grew 44%, driven by volume growth in Asia/Pacific and favorable foreign currency impacts.
  • Bakeries and Foodservice: Sales declined 1% due to volume softness in foodservice distributors, though operating profit increased slightly.

Guidance, Outlook, and Risks

Outlook: Management expects commodity prices to continue rising, though at a slower pace than in 2005. Energy costs and salary/benefit expenses are also expected to increase. The company plans to offset these costs through realized price increases and productivity savings. The primary focus for fiscal 2006 is restoring growth in the U.S. cereal business and renewing earnings growth in the Bakeries and Foodservice segment.

Dividends: The Board announced a 6% dividend increase to an annual rate of $1.32 per share, effective August 1, 2005.

Risks and Contingencies:

• Commodity Costs: Significant exposure to grains, sugar, dairy, and energy prices.
• Customer Concentration: Wal-Mart Stores, Inc. accounted for approximately 16% of consolidated net sales.
• Legal/Regulatory: The SEC investigation into sales practices and accounting was terminated in June 2005 with no enforcement action recommended. The company faces various environmental cleanup liabilities but believes the aggregate exposure is not material.
• Accounting Changes: Adoption of EITF 04-8 reduced diluted EPS by $0.19 in fiscal 2005 due to contingently convertible debt.

Investor Verification Checklist

• Verify the sustainability of the 18% EPS growth, noting the significant one-time $499 million gain from divestitures.
• Monitor the trajectory of commodity costs and the company's ability to pass these costs to consumers without further volume erosion, particularly in the Big G Cereals category.
• Review the $1.7 billion debt reduction plan and the company's commitment to resume open-market share repurchases in fiscal 2006.
• Assess the impact of the new accounting standard (SFAS 123(R)) on future stock-based compensation expenses, effective fiscal 2007.
• Confirm the status of the $168 million in guarantees issued for unconsolidated affiliates, primarily Cereal Partners Worldwide.