General Mills (GIS)

Thirty-nine Week Results

For the thirty-nine weeks ended February 26, 2006, we reported diluted earnings per share of $2.29, up 18 percent from $1.94 per share earned in the same period last year. Earnings after tax were $868 million in the first thirty-nine weeks of fiscal 2006, up 11 percent from $780 million last year.

Net sales for the thirty-nine weeks ended February 26, 2006 grew 3 percent to $8.80 billion, driven by 2 percentage points of unit volume growth, primarily in International and U.S. Retail, and 2 percentage points of growth from pricing and product mix across all of our businesses. Promotional spending increased by 1 percentage point and foreign currency exchange effects were flat compared to the same period in fiscal 2005.

Cost of sales was up $66 million in the first thirty-nine weeks versus last year. This increase in cost of sales was primarily due to unit volume increases, as manufacturing efficiencies largely offset cost increases due to inflation. Also, the year-over-year change in cost of sales was favorably impacted by a decrease in expense from accelerated depreciation associated with exit activities of $14 million, as described below, and $5 million of product recall costs incurred in fiscal 2005. Cost of sales as a percent of net sales decreased from 60.6 percent to 59.5 percent.

SG&A expense was up $168 million in the first thirty-nine weeks versus last year. SG&A as a percent of net sales in the first thirty-nine weeks increased from 21.4 percent last year to 22.7 percent this year. The increase in SG&A from the first thirty-nine weeks of fiscal 2005 is largely the result of a $69 million increase in customer freight expense, primarily due to increased fuel costs; a $37 million increase in consumer marketing spending; and increases in employee benefit costs, including incentives.

Net interest expense for the first thirty-nine weeks totaled $294 million, lower than last year’s expense for the first thirty-nine weeks of $345 million, primarily as the result of last year’s debt pay down and the maturation of interest rate swaps.

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. In the first thirty-nine weeks of fiscal 2005, we recorded restructuring and other exit costs of $46 million, consisting of $40 million of charges associated with supply chain initiatives to further increase asset utilization and reduce manufacturing and sourcing costs, and $6 million of charges associated with restructuring actions previously announced.

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The effective tax rate was 35.3 percent for the first thirty-nine weeks of fiscal 2006. This compares to 38.0 percent in the first thirty-nine weeks of fiscal 2005. The effective tax rate in fiscal 2005 included $45 million of taxes related to the redemption of our interest in SVE in the third quarter of fiscal 2005, partially offset by a $9 million benefit from the resolution of certain tax issues.

Earnings after tax from joint ventures totaled $54 million in the first thirty-nine weeks, compared to $73 million a year earlier. Earnings from SVE were $26 million in the first thirty-nine weeks of fiscal 2005. Unit volume and net sales for CPW were up 5 percent. Net sales for our Häagen-Dazs ice cream joint ventures in Asia declined 6 percent from the fiscal 2005 first thirty-nine weeks due to an unseasonably cold winter and increased competitive pressure in Japan. 8^th Continent achieved 16 percent net sales growth in the first thirty-nine weeks.

Average diluted shares outstanding decreased by 25 million from the first thirty-nine weeks of fiscal 2005 due to the repurchase of a significant portion of our contingently convertible debentures in October 2005, the completion of a consent solicitation related to the remaining convertible debentures in December 2005 and the repurchases of 17 million shares during fiscal 2006, partially offset by the issuance of shares upon stock option exercises.

Thirty-nine Week Results

Net sales for the thirty-nine weeks ended February 27, 2005 grew 3 percent to $8.53 billion. Unit volume contributed 2 points, favorable pricing and product mix provided 3 points of benefit, and foreign exchange added 1 point. Higher promotional spending in the period, primarily in our U.S. Retail segment, subtracted 3 points.

Cost of sales was up $256 million in the first thirty-nine weeks versus last year. Cost of sales as a percent of sales increased from 59.3 percent to 60.6 percent. This primarily reflects increased raw material and energy costs. Two smaller factors are the $16 million of accelerated depreciation expense associated with our restructuring actions described in Note Two above, and $5 million of expenses associated with the first-quarter recall of two new Pop Secret popcorn flavors. We expect to record an additional $7 million of expense in cost of sales, primarily accelerated depreciation expense, during the next two quarters associated with the restructuring actions taken at our Cincinnati and Iowa City plants.

Selling, general and administrative expense as a percent of sales in the first thirty-nine weeks decreased from 22.4 percent last year to 21.4 percent this year. SG&A expense for the first thirty-nine weeks totaled $1,828 million, down $29 million versus a year ago. Last year’s SG&A included $34 million of merger-related costs associated with the integration of Pillsbury. Excluding these costs, this year’s first thirty-nine weeks SG&A expense is $5 million higher than last year. This increase includes $6 million of expense associated with termination benefits for 135 employees related to changes made in various administrative organizations to capture productivity savings.

In the first thirty-nine weeks of fiscal 2005, we recorded restructuring and other exit costs of $46 million associated with restructuring actions previously announced, compared to restructuring and other exit costs of $14 million recorded in the first thirty-nine weeks of fiscal 2004. Additional restructuring charges related to previous fiscal 2005 supply chain initiatives of approximately $4 million are expected to be recognized during the next two quarters. These initiatives are described in more detail in Note Two above, and are expected to contribute future productivity savings as we increase asset utilization and reduce manufacturing and sourcing costs.

Interest expense for the first thirty-nine weeks of the fiscal year totaled $345 million, 10 percent below last year’s first thirty-nine weeks due to lower debt levels and $12 million of interest income from the resolution of certain tax issues in the third quarter. For the first thirty-nine weeks of the fiscal year, the effective tax rate was 38 percent compared to 35 percent last year, due largely to the impact of the $45 million of SVE-related tax, partially offset by $9 million from the resolution of certain tax issues in this year’s second quarter.

Reported net earnings were $780 million in the first thirty-nine weeks of fiscal 2005 as compared to $777 million last year. Diluted shares outstanding decreased from 412 million last year to 409 million shares. Basic earnings per share of $2.10 for the first thirty-nine weeks ended February 27, 2005, were up 1 percent from $2.08 a year earlier. Diluted earnings per share of $1.94 for the first thirty-nine weeks of fiscal 2005 were also up 1 percent from the $1.92 per share earned in the same period last year.

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