General Mills (GIS)

Twenty-six Week Results

For the twenty-six weeks ended November 26, 2006, we reported diluted earnings per share of $1.81, up 13 percent from $1.60 per share earned in the same period last year. Earnings after tax were $652 million for the first twenty-six weeks of fiscal 2007, up 5 percent from $622 million last year. Net sales for the twenty-six weeks ended November 26, 2006 grew 6 percent to $6.33 billion and total segment operating profit increased 9 percent to $1.25 billion (see page 23 for a discussion of this measure not defined by GAAP).

Net sales growth during the first twenty-six weeks of fiscal 2007 was the result of 3 points of volume growth, 2 points of growth from price increases and a product mix that included higher priced items, and 1 point of favorable foreign currency exchange. Volume growth was recorded in all of our operating segments.

Gross margins for the first twenty-six weeks increased 20 basis points compared to the first twenty-six weeks last year, to 37.0 percent of sales. Gross margins improved despite higher input costs, reflecting favorable product mix, pricing and productivity.

SG&A was up $89 million in the first twenty-six weeks versus the same period a year ago. SG&A as a percent of net sales in the first twenty-six weeks increased 40 basis points from last year to 18.7 percent. This increase was driven primarily by a $59 million increase in stock-based compensation expense ($52 million of which was an incremental effect from the adoption of SFAS 123R) and a 4 percent increase in consumer marketing expense.

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In the first twenty-six weeks of fiscal 2007, we recorded income related to restructuring and other exit activities of $3 million. We sold our previously closed plant in San Adrian, Spain, resulting in a gain of $9 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 twenty-six weeks of fiscal 2006, we recorded restructuring and other exit costs of $11 million, consisting of $10 million of charges related to an asset impairment recognized at our Swedesboro, New Jersey plant and $1 million of charges associated with restructuring actions previously announced. The restructuring actions previously announced also resulted in certain associated expenses, primarily adjustments to the depreciable life of the assets necessary to reflect the shortened asset lives which coincided with final production dates. These associated expenses were recorded as a cost of sales and totaled $2 million in the first twenty-six weeks of fiscal 2006.

As a result of the factors discussed above, our operating profit increased $72 million or 7 percent, to $1.16 billion in the first twenty-six weeks of fiscal 2007.

Interest expense for the first twenty-six weeks totaled $215 million, a $21 million increase from the first twenty-six weeks last year. The increase primarily reflects higher interest rates versus last year.

The effective tax rate was 35.9 percent for the first twenty-six weeks of fiscal 2007, compared to an effective tax rate of 35.4 percent for the first twenty-six weeks of fiscal 2006.

Earnings after tax from joint ventures totaled $42 million in the first twenty-six weeks, compared to $41 million a year earlier. Net sales for CPW were up 13 percent. This included contributions from the Uncle Tobys business in Australia acquired by CPW in the first quarter of fiscal 2007. The first twenty-six weeks of fiscal 2007 also included a $3 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 declined 1 percent from the first twenty-six weeks of fiscal 2006. 8^th Continent, our soy products joint venture with DuPont, recorded a 3 percent net sales increase in the first twenty-six weeks of fiscal 2007.

Average diluted shares outstanding decreased by 33 million from the second quarter 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 20 million shares of our stock since the second quarter of fiscal 2006, 17 million of which were repurchased in the first twenty-six weeks of fiscal 2007. The repurchases were partially offset by the issuance of shares upon stock option exercises and the vesting of restricted stock units.

Twenty-six Week Results

For the twenty-six weeks ended November 27, 2005, we reported diluted earnings per share of $1.60, up 18 percent from $1.36 per share earned in the same period last year. Earnings after tax were $622 million in the first half of fiscal 2006, up 13 percent from $550 million last year. Net sales for the twenty-six weeks ended November 27, 2005 grew 3 percent to $5.94 billion, and segment operating profits increased 7 percent to $1.15 billion.

Net sales growth during the first half of fiscal 2006 was the result of 2 points of volume growth, primarily in International and U.S. Retail, and 1 point of growth from net price realization and product mix across all of our businesses. Promotional spending and foreign currency exchange effects were flat compared to the same period in fiscal 2005.

Cost of sales was up $15 million in the first half versus last year. Cost of sales increased $31 million primarily due to unit volume increases, as manufacturing efficiencies largely offset cost increases due to inflation. Cost of sales decreased by $16 million versus last year as the result of an $11 million year-over-year decrease in expense from accelerated depreciation associated with exit activities, as described below, and $5 million of product recall costs incurred in fiscal 2005. Cost of sales as a percent of sales decreased from 60.3 percent to 58.7 percent.

Selling, general and administrative expense was up $94 million in the first half versus last year. SG&A as a percent of sales in the first half increased from 21.7 percent last year to 22.6 percent this year. The increase in SG&A from the first half of fiscal 2005 is primarily the result of an increase in customer freight costs of $47 million over a year ago, largely due to increased fuel costs, and an increase in consumer marketing spending, primarily advertising, of $32 million over last year.

Interest expense for the first half totaled $193 million, lower than last year’s first half amount of $238 million, primarily as the result of last year’s debt pay down and the maturation of interest rate swaps.

In the first twenty-six weeks of fiscal 2006, we recorded restructuring and other exit costs of $11 million, consisting of $10 million of charges related to an asset impairment recognized at one of our production plants and $1 million of charges associated with restructuring actions previously announced. This compares to restructuring and other exit costs of $43 million recorded in the first half of fiscal 2005. The costs associated with previously announced restructuring actions included in cost of sales also decreased during the first half of fiscal 2006 to $2 million, down from $13 million in the first half of fiscal 2005.

The effective tax rate was 35.5 percent for the first half of fiscal 2006. This compares to 33.7 percent in the first half of fiscal 2005. The increase in the tax rate from fiscal 2005 is primarily the result of the resolution of certain tax items last year.

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Earnings after tax from joint ventures totaled $39 million in the first half, compared to $50 million a year earlier. Earnings from SVE were $18 million in the first half of fiscal 2005. Net sales for CPW were up 6 percent. Net sales for our Häagen-Dazs ice cream joint ventures in Asia grew 2 percent from the fiscal 2005 first half. 8^th Continent achieved 18 percent net sales growth in the first half.

Average diluted shares outstanding decreased by 18 million from the first half of fiscal 2005 due to the impact of our fiscal 2006 repurchase of 16 million shares, our repurchase of shares from Diageo plc in October 2004, and the repurchase of our contingently convertible debentures in October 2005, partially offset by the issuance of shares upon stock option exercises.

Twenty-six Week Results

Net sales for the twenty-six weeks ended November 28, 2004 grew 3 percent to $5.75 billion. As noted in the table above, 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 $199 million in the first-half versus last year. Cost of sales as a percent of sales increased from 58.6 percent to 60.3 percent. This primarily reflects increased raw material and energy costs. Two smaller factors are the $13 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.

Selling, general and administrative expense (SG&A) as a percent of sales in the first-half decreased from 22.7 percent last year to 21.7 percent this year. SG&A expense for the first-half totaled $1,248 million, down $20 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 half SG&A expense is $14 million higher than last year. This increase includes $6 million of expense associated with termination benefits for 135 employees for changes we have made in various administrative organizations to capture productivity savings.

First-half results for fiscal 2005 included restructuring and other exit costs, described in Note Two above. In the first half of fiscal 2005, we recorded restructuring and other exit costs of $43 million associated with restructuring actions previously announced, compared to restructuring and other exit costs of $9 million recorded in the first half of fiscal 2004. These initiatives are expected to contribute future productivity savings as we increase asset utilization and reduce manufacturing and sourcing costs.

Interest expense for the first half totaled $238 million, 9 percent below last year’s first half due to lower debt levels. For the first half, the effective tax rate was 34 percent compared to 35 percent last year as a result of the resolution of certain issues in this year’s second quarter.

Reported net earnings were $550 million in the first half of fiscal 2005 as compared to $535 million last year. Diluted shares outstanding decreased slightly from 383 million last year to 382 million shares. Basic earnings per share of $1.47 for the first half ended November 28, 2004, were up 2 percent from $1.44 a year earlier. Diluted earnings per share of $1.44 for the first half of fiscal 2005 were up 3 percent from the $1.40 per share earned in the same period last year.