GIS

General Mills Inc. 10-K Summary: Fiscal Year Ended May 31, 2009

Business Context and Reporting Period

General Mills, Inc. is a leading global manufacturer and marketer of branded consumer foods, operating in three segments: U.S. Retail, International, and Bakeries and Foodservice. The company manufactures products in 15 countries and markets them in over 100 countries. This report covers the fiscal year ended May 31, 2009, which consisted of 53 weeks (compared to 52 weeks in the prior year).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 8% year-over-year, driven by 2 percentage points of volume growth and 8 percentage points from net price realization and mix. This was offset by a 2 percentage point negative impact from foreign currency exchange.
• Profitability: Segment operating profit grew 10% to $2.64 billion. Gross margin as a percentage of net sales decreased slightly by 10 basis points due to input cost inflation, partially offset by cost savings and price realization.
• Unusual Items: Diluted EPS included a $0.22 net loss from mark-to-market valuation of commodity positions, a $0.11 gain from divestitures, a $0.08 gain from an insurance settlement (Argentina facility fire), and a $0.15 charge from an unfavorable court decision on an uncertain tax matter.
• Divestitures: The company recorded a net gain of $85 million from divestitures, primarily from the sale of the Pop-Secret microwave popcorn product line ($129 million gain), partially offset by losses on the sale of frozen unbaked bread dough assets and bread concentrates.
• Restructuring: Restructuring, impairment, and exit costs totaled $42 million, including the closure of a plant in Brazil and the discontinuation of a product line in Tennessee.

Guidance, Outlook, and Risks

Outlook: Management expects fiscal 2010 net sales to be comparable to fiscal 2009 as reported, assuming challenging economic conditions and unfavorable foreign currency effects. Input cost inflation is expected to moderate. The company plans to increase consumer marketing support by high single digits and expects capital expenditures of approximately $630 million.

Capital Allocation: The company intends to continue share repurchases and dividends. On June 29, 2009, the Board approved a dividend increase to an annual rate of $1.88 per share.

Key Risks:

• Commodity Prices: Volatility in raw material costs (grains, oils, dairy) and energy prices impacts margins. The company uses derivatives to manage risk, but mark-to-market accounting creates earnings volatility.
• Customer Concentration: Wal-Mart accounted for 21% of consolidated net sales and 29% of U.S. Retail sales in fiscal 2009.
• Tax Matters: An unfavorable U.S. appellate court decision reversed a prior tax benefit, resulting in a $53 million expense. The IRS is also challenging tax benefits related to the sale of minority interests in the General Mills Cereals, LLC subsidiary.
• Pension Obligations: Significant actuarial losses in defined benefit plans ($1.2 billion) reduced stockholders' equity and accumulated other comprehensive income.

Investor Verification Checklist

• Verify the impact of the $53 million tax charge and the ongoing IRS dispute regarding the General Mills Cereals, LLC transaction on future effective tax rates.
• Monitor the company's ability to pass on input cost inflation to consumers without eroding volume, given the competitive retail environment.
• Review the status of the $1.2 billion actuarial loss in pension plans and the potential for increased future funding requirements.
• Assess the sustainability of the 8% sales growth given the 53-week fiscal year (which added ~1.5 percentage points) and the expectation of flat sales in fiscal 2010.
• Confirm the execution of the $630 million capital expenditure plan, specifically the rebuilding of the Argentina pasta facility.