| GENERAL MILLS INC ITEM 1A RISK FACTORS Various risks and uncertainties could affect our business |
| Any of the risks described below or elsewhere in this report or our other filings with the SEC could materially adversely affect our business, financial condition and results of operations |
| Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect our business, financial condition and results of operations in the future |
| Therefore, the following is not intended to be a complete discussion of all potential risks or uncertainties |
| The food categories in which we participate are very competitive, and if we are not able to compete effectively, our results of operations would be adversely affected |
| The food categories in which we participate are very competitive |
| Our principal competitors in these categories all have substantial financial, marketing and other resources |
| We also compete with private label products offered by supermarkets, mass merchants and other retailers such as club stores |
| Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences |
| If our large competitors were to decrease their pricing or were to increase their promotional spending, we could choose to do the same, which could adversely affect our margins and profitability |
| If we did not do the same, our revenues and market share could be adversely affected |
| Our market share and revenue growth could also be adversely impacted if we are not successful in introducing innovative products in response to changing consumer demands or by new product introductions of our competitors |
| If we are unable to build and sustain brand equity by offering recognizably superior product quality, we may be unable to maintain premium pricing over private label products |
| We may be unable to maintain our profit margins in the face of a consolidating retail environment |
| Our five largest customers in our US Retail segment together accounted for approximately 47 percent of that segment’s net sales for fiscal 2006 |
| The loss of any large customer for an extended length of time could adversely affect our sales and profits |
| In addition, as the retail grocery trade continues to consolidate and mass market retailers become larger, our large retail customers may seek to use their position to improve their profitability through improved efficiency, lower pricing and increased promotional programs |
| If we are unable to use our scale, marketing expertise, product innovation and category leadership positions to respond to these demands, our profitability or volume growth could be negatively impacted |
| Price changes for the commodities we depend on for raw materials and packaging may adversely affect our profitability |
| The raw materials used in our business include cereal grains, sugar, dairy products, vegetables, fruits, meats, vegetable oils, and other agricultural products as well as paper and plastic packaging materials, operating supplies and energy |
| These items are largely commodities that experience price volatility caused by external conditions such as weather and product scarcity, commodity market fluctuations, currency fluctuations and changes in governmental agricultural programs |
| Commodity price changes may result in unexpected increases in raw material, packaging and energy costs |
| If we are unable to increase productivity to offset these increased costs or increase our prices as a result of consumer sensitivity to pricing or otherwise, we may experience reduced margins and profitability |
| We do not fully hedge against changes in commodity prices and the hedging procedures that we do use may not always work as we intend |
| If we are not efficient in our production, our profitability could suffer as a result of the highly competitive environment in which we operate |
| Our future success and earnings growth depends in part on our ability to be efficient in the production and manufacture of our products in highly competitive markets |
| Our ability to gain additional efficiencies may become more difficult over time as we take advantage of existing opportunities |
| Our failure to reduce costs through productivity gains or by eliminating redundant costs resulting from acquisitions could adversely affect our profitability and also weaken our competitive position |
| Further, many productivity initiatives involve complex reorganization of 7 _________________________________________________________________ [34]Table of Contents manufacturing facilities and production lines |
| Such manufacturing realignment may result in the interruption of production which may negatively impact product volume and margins |
| Disruption of our supply chain could adversely affect our business |
| Our ability to make, move and sell products is critical to our success |
| Damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes or other reasons could impair our ability to manufacture or sell our products |
| Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single location, could adversely affect our business and results of operations, as well as require additional resources to restore our supply chain |
| We may be unable to anticipate changes in consumer preferences and trends, which may result in decreased demand for our products |
| Our success depends in part on our ability to anticipate the tastes and eating habits of consumers and to offer products that appeal to their preferences |
| Consumer preferences change from time to time and can be affected by a number of different trends |
| Our failure to anticipate, identify or react to these changes and trends, and to introduce new and improved products on a timely basis, could result in reduced demand for our products, which would in turn cause our revenues and profitability to suffer |
| Similarly, demand for our products could be affected by consumer concerns regarding the health effects of ingredients such as trans fats, sugar, processed wheat or other product ingredients or attributes |
| We may be unable to grow our market share or add products that are in faster growing and more profitable categories |
| The food industry’s growth potential is constrained by population growth |
| Our success depends in part on our ability to grow our business faster than populations are growing in the markets that we serve |
| One way to achieve that growth is to enhance our portfolio by adding innovative new products in faster growing and more profitable categories |
| Our future results will also depend on our ability to increase market share in our existing product categories |
| If we do not succeed in developing innovative products for new and existing categories, our growth may slow, which could adversely affect our profitability |
| Customer demand for our products may be limited in future periods as a result of increased purchases in response to promotional activity |
| Our unit volume in the last week of each quarter is consistently higher than the average for the preceding weeks of the quarter |
| In comparison to the average daily shipments in the first 12 weeks of a quarter, the final week of each quarter has approximately two to four days’ worth of incremental shipments (based on a five-day week), reflecting increased promotional activity at the end of the quarter |
| This increased activity includes promotions to assure that our customers have sufficient inventory on hand to support major marketing events or increased seasonal demand early in the next quarter, as well as promotions intended to help achieve interim unit volume targets |
| If, due to quarter-end promotions or other reasons, our customers purchase more product in any reporting period than end-consumer demand will require in future periods, our sales level in future reporting periods could be adversely affected |
| Economic downturns could cause consumers to shift their food purchases from our higher priced premium products to lower priced items, which could adversely affect our results of operations |
| The willingness of consumers to purchase premium branded food products depends in part on local economic conditions |
| In periods of economic uncertainty, consumers tend to purchase more private label or other economy brands |
| In those circumstances, we could experience a reduction in sales of higher margin products or a shift in our product mix to lower margin offerings |
| In addition, as a result of economic conditions or otherwise, we may be unable to raise our prices as a result of increased consumer sensitivity to pricing |
| Any of these events could have an adverse effect on our results of operations |
| Our international operations are subject to political and economic risks |
| In fiscal 2006, approximately 16 percent of our consolidated net sales were generated outside of the United States |
| We are accordingly subject to a number of risks relating to doing business internationally, any of which could significantly harm our business |
| These risks include: • political and economic instability; • exchange controls and currency exchange rates; • foreign tax treaties and policies; and • restrictions on the transfer of funds to and from foreign countries |
| 8 _________________________________________________________________ [35]Table of Contents Our financial performance on a US dollar denominated basis is subject to fluctuations in currency exchange rates |
| These fluctuations could cause our results of operations to vary materially from period to period |
| From time to time, we enter into agreements that are intended to reduce the effects of our exposure to currency fluctuations, but these agreements may not be effective in significantly reducing our exposure |
| Concerns with the safety and quality of food products could cause consumers to avoid our products |
| We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain food products or ingredients |
| Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions |
| If our food products become adulterated or misbranded, we might need to recall those items and may experience product liability claims if consumers are injured |
| We may need to recall some of our products if they become adulterated or misbranded |
| We may also be liable if the consumption of any of our products causes injury |
| A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory and lost sales due to the unavailability of product for a period of time |
| We could also suffer losses from a significant product liability judgment against us |
| A significant product recall or product liability case could also result in adverse publicity, damage to our reputation and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of our brands |
| New regulations or regulatory-based claims could adversely affect our business |
| Food production and marketing are highly regulated by a variety of federal, state, local and foreign agencies |
| Changes in laws or regulations that impose additional regulatory requirements on us could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected |
| In addition, we advertise our products and could be the target of claims relating to false or deceptive advertising under federal, state and foreign laws and regulations |
| We have a substantial amount of indebtedness, which could limit financing and other options and in some cases adversely affect our ability to pay dividends |
| As of May 28, 2006, we had total debt and minority interests of approximately dlra7dtta2 billion |
| The agreements under which we have issued indebtedness do not prevent us from incurring additional unsecured indebtedness in the future |
| Our level of indebtedness may limit our: • ability to obtain additional financing for working capital, capital expenditures or general corporate purposes, particularly if the ratings assigned to our debt securities by rating organizations were revised downward; and • flexibility to adjust to changing business and market conditions and may make us more vulnerable to a downturn in general economic conditions |
| There are various financial covenants and other restrictions in our debt instruments and minority interests |
| If we fail to comply with any of these requirements, the related indebtedness and minority interests (and other unrelated indebtedness) could become due and payable prior to its stated maturity |
| A default under our debt instruments and minority interests may also significantly affect our ability to obtain additional or alternative financing |
| If our subsidiary General Mills Cereals, LLC (GMC) fails to make required distributions to the holders of the B-1 interests of GMC, we will be restricted from paying any dividends (other than dividends in the form of shares of common stock) or other distributions on shares of our common stock and may not repurchase or redeem shares of our common stock until such distributions are paid |
| Our ability to make scheduled payments on or to refinance our debt and other obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business and other factors beyond our control |
| Volatility in the securities markets, interest rates and other factors or changes in our employee base could substantially increase our pension and postretirement costs |
| We sponsor a number of defined benefit plans for employees in the United States, Canada and various foreign locations, including pension, retiree health and welfare, severance and other post-employment plans |
| Our major pension plans are funded, with trust assets invested in a diversified portfolio |
| Changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns and the market value of plan assets can affect the funded status of our pension and postretirement plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans |
| Although the aggregate fair value of our pension and postretirement plan assets exceeded the aggregate pension and postretirement benefit obligations as of May 28, 2006, a significant increase in future funding requirements could have a negative impact on our results of operations or cash flows from operations |
| 9 _________________________________________________________________ [36]Table of Contents If other potentially responsible parties (PRPs) are unable to contribute to remediation costs at certain contaminated sites, our costs for remediation could be material |
| We are subject to various federal, state, local and foreign environmental and health and safety laws and regulations |
| Under certain of these laws, namely the Comprehensive Environmental Response, Compensation and Liability Act and its state counterparts, liability for investigation and remediation of hazardous substance contamination at currently or formerly owned or operated facilities or at third-party waste disposal sites is joint and several |
| We currently are involved in active remediation efforts at certain sites where we have been named a PRP If other PRPs at these sites are unable to contribute to remediation costs, we could be held responsible for all or their portion of the remediation costs, and those costs could be material |
| We cannot assure you that our costs in relation to these environmental matters or compliance with environmental laws in general will not exceed our reserves or otherwise have an adverse effect on our business and results of operations |
| An impairment in the carrying value of goodwill or other intangibles could negatively affect our consolidated results of operations and net worth |
| Goodwill represents the difference between the purchase prices of acquired companies and the related fair values of net assets acquired |
| Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that an impairment may have occurred |
| Impairment testing is performed for each of our reporting units |
| We compare the carrying amount of goodwill for a reporting unit with its fair value and if the carrying amount of goodwill exceeds its fair value, an impairment has occurred |
| The costs of patents, copyrights and other intangible assets with finite lives are amortized over their estimated useful lives |
| Intangibles with indefinite lives, principally brands, are carried at cost |
| Finite and indefinite-lived intangible assets are tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable |
| An impairment loss would be recognized when fair value is less than the carrying amount of the intangible |
| Our estimates of fair value are determined based on a discounted cash flow model using inputs from our annual long-range planning process |
| We also make estimates of discount rates, perpetuity growth assumptions and other factors |
| As of May 28, 2006, we had dlra10dtta3 billion of goodwill and other intangible assets |
| Events and conditions that could result in an impairment include changes in the industries in which we operate, including competition and advances in technology; a significant product liability or intellectual property claim; or other factors leading to reduction in expected sales or profitability |
| Should the value of goodwill or other intangible assets become impaired, our consolidated net earnings and net worth may be materially adversely affected by a non-cash charge |
| Resolution of uncertain income tax matters could adversely affect our cash flows from operations |
| We accrue income tax liabilities for potential assessments related to uncertain tax positions in a variety of taxing jurisdictions |
| An unfavorable resolution of these matters, including the accounting for losses recorded as part of the Pillsbury transaction, could have a material adverse effect on our cash flows from operations |