General Mills Annual Report 2003

FY2003 Annual Report · General Mills

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2003 Annual Report

75 years of shareholder value creation
General Mills was incorporated in June 1928 and five months later, on November 30, shares of General Mills
(GIS) traded on the New York Stock Exchange for the first time. The closing price that day was 20 cents per
share, adjusted for subsequent stock splits and spin-off distributions. Over the next 75 years, the business envi-
ronment and General Mills’ product portfolio both experienced continuous change. One factor that remained
constant, however, was our focus on delivering superior returns to shareholders. Our business performance
resulted in price increases for GIS stock averaging 7.6 percent per year over the last 75 years. This significantly
outpaced the market, as represented by the Dow Jones Industrial Average (DJIA), and was more than double
the compound annual inflation rate represented by the Consumer Price Index. General Mills and its prede-
cessor firm have paid shareholder dividends without interruption or reduction for 105 years. Of the more than
2,500 companies listed on the New York Stock Exchange today, fewer than 60 have longer dividend records.
As we celebrate our 75th anniversary, we thank shareholders for their investment in our business, and we reaffirm
our commitment to delivering superior growth and returns in the years ahead.

Stock Price Performance 1928–2003
INDEXED: NOVEMBER 30, 1928 = 1.0
(cid:1) General Mills*
(cid:1) Dow Jones Industrial Average

75-YEAR COMPOUND GROWTH RATE

General Mills: 7.6%
Dow Jones Industrial Average: 4.6%
Inflation: 3.2%

250

200

150

100

1928

1943

1958

1973

1988

2003

* Adjusted for Stock Splits and Spin-offs
Sources: Economic History Services (Inflation data) and Dow Jones & Company, Inc.

ON THE COVER

General Mills employees are committed to delivering superior results.
The employees pictured on the cover, and throughout this report, all own
shares of General Mills through our stock-based compensation programs.

20-Year Shareholder Return
(compound growth rates,
price appreciation plus dividends)
May 1983—May 2003

Front (I to r): Skip Lieser, Vice President, Finance; Ernesto Fraire, Director,
International Finance; Ann Simonds, Vice President, Marketing; Ed Hines,
Manager, Consumer Foods Sales; Sharon Pryor, Manager, Information
Systems.

%
4
4
1

%
8
3
1

%
3

2
1

Back (l to r): Mike Nordstrom, Vice President, Real Estate and Facili-
ties; Terri Peterson-Fugh, Manager, Compensation; Randal Baker, Vice
President, Bakeries and Foodservice Operations; Amy Abouelenein,
Manager, Research and Development.

GIS

DJIA S&P
500

TABLE OF CONTENTS

2 LETTER TO SHAREHOLDERS
6 PRODUCT INNOVATION
8 CHANNEL EXPANSION

10 INTERNATIONAL EXPANSION
12 MARGIN EXPANSION
14 FINANCIAL REVIEW
16 CORPORATE DIRECTORY

May 25, 2003
$10,506

May 26, 2002
$7,949

Change

32%

1,863
917

1,995
1,002

2.49
2.43
2.65

369
378
1.10
$
$ 1,631

1,083
458

1,269
579

1.38
1.34
1.70

331
342
$ 1.10
$ 916

72
100

57
73

80
81
56

11
11
–-
78

2003 Financial Highlights

IN MILLIONS, EXCEPT PER SHARE DATA

FISCAL YEAR ENDED
Net Sales
Earnings:

Earnings Before Interest and Taxes
Net Earnings

Earnings Before Identified Items*:

Earnings Before Interest, Taxes and Identified Items*
Net Earnings Before Identified Items*

Earnings Per Share:

Basic
Diluted
Diluted, Before Identified Items*
Average Common Shares Outstanding:

Basic
Diluted

Dividends Per Share
Cash Flow from Continuing Operations

*See the Earnings Highlights on page 14 for a summary of identified items.

Net Sales
(dollars in millions)

6
0
5
0
1

9
4
9
,
7

0
5
4
5

3
7
1
,
5

6
3
7
,
4

4
3
8
4

Diluted EPS
Comparable for Goodwill
Five-year Compound Growth Rate = 12%
(dollars)

5
3

3
4
2

7
0
2

5
7
.
1

5
3

.
1

4
3

.
1

Cash Flow from
Continuing Operations
(dollars in millions)

1
3
6
,
1

6
1
9

5
0
8

3
1
7

5
2
7

0
4
7

Net Earnings
Comparable for Goodwill
(dollars in millions)

7
1
9

7
8
6

5
3
6

1
5
5

7
3
4

8
5
4

To our shareholders:
General Mills delivered strong financial performance in fiscal 2003, our first full year of
operation following the October 2001 acquisition of Pillsbury.

—> Net sales grew 32 percent to $10.5 billion, reflecting good business growth and an
incremental five months of Pillsbury results. On a comparable basis (as if we had
owned Pillsbury for all 12 months of both 2002 and 2003) our sales grew 6 percent.

—> Our profit margin expanded as we captured cost synergies from the acquisition.
—> Net earnings doubled to $917 million.
—> And our earnings per diluted share (EPS) rose 81 percent to $2.43, up from $1.34

reported in 2002.

Results for both 2003 and the prior year included certain costs primarily related to the
Pillsbury acquisition. These costs are the restructuring and other exit costs identified on our
consolidated statements of earnings, and merger-related costs that are included in selling,
general and administrative expenses. Earnings and earnings per share, excluding restructur-
ing and merger-related costs, are measures of performance not defined by generally
accepted accounting principles (GAAP). We separately identify these costs because they rep-
resent expenses associated with an infrequently occurring event, and we believe identifying
them improves the comparability of year-to-year results from operations. You should refer
to the consolidated financial statements and accompanying footnotes in our 10-K report for
a detailed discussion of these costs, which amounted to $85 million after tax in 2003 and
$118 million after tax in 2002. Excluding these restructuring and merger-related costs, our
2003 earnings per diluted share would total $2.65, up 56 percent from $1.70 in 2002. The
table on page 14 of this report provides a reconciliation of our earnings per share with and
without the restructuring and merger-related costs.

Our U.S. retail businesses led operating performance in 2003. Net sales for these
businesses grew 25 percent to exceed $7.4 billion, and operating profits grew 66 percent to
$1.8 billion pretax. On a comparable basis, net sales grew 6 percent. Comparable unit volume
increased 4 percent, led by gains from Big G cereals, Yoplait yogurt, Betty Crocker dinner
mixes and Progresso ready-to-serve soups. Consumer retail sales of our major retail product
lines rose 5 percent and our composite market share increased slightly for the year. As
shown in the table on page three, our major brands hold leading positions in attractive, fast-
growing retail food categories.

It was a difﬁcult year for our Bakeries and Foodservice division. Sales for this
business segment increased 42 percent to $1.8 billion. However, operating profits and com-
parable unit volume were essentially unchanged from the prior year. In part, this reflected a
difficult U.S. foodservice industry environment. Poor business trends for a number of our
customers restrained our volume growth. In addition, price increases that we implemented
to offset higher commodity costs took longer than planned to realize. Beyond these issues,
profits for Bakeries and Foodservice were hindered by our own manufacturing realignment
activities. As we complete the integration of the General Mills and Pillsbury supply chains, we
are relocating manufacturing of various product lines from one plant to another, and the
short-term disruption has been particularly pronounced for this division. We expect these
manufacturing shifts to continue to restrain Bakeries and Foodservice results through the
first half of 2004, but then begin contributing to longer-term growth.

PAGE 2

International business results in 2003 were very good overall. Net sales for our
wholly owned international businesses grew 67 percent to reach $1.3 billion. In addition,
our proportionate share of international joint venture revenues increased to more than
$990 million. Comparable unit volume rose 2 percent, as we posted gains in every geo-
graphic region but Latin America, where volumes fell 20 percent due to difficult macro-
economic conditions. If you set Latin America aside, our comparable international unit
volume increased 6 percent. Operating profits for the wholly owned businesses doubled to
$91 million pretax. And our share of joint venture profits, which are included in our income
statement on an after-tax basis, nearly doubled to reach $61 million.

We achieved our goal of realizing $350 million in cumulative acquisition cost
synergies in 2003. In addition to these savings, our supply chain fixed cost rate per case
improved as our unit volumes grew. These factors contributed to an increase in our profit
margin. After-tax earnings as a percent of sales rose from 5.8 percent in 2002 to 8.7 percent
in 2003.

General Mills’ good performance in 2003 resulted in superior returns to share-
holders. For the fiscal year, the market price of General Mills stock increased just over 3 per-
cent, and dividends of $1.10 per share represented a yield of more than 2 percent, for a
6 percent total return to shareholders. In contrast, the S&P 500 Index delivered a negative
12 percent return to investors over the same period. We outperformed our peer companies
by an even greater margin — total return for the S&P Consumer Staples Index was a negative
15 percent.

This outperformance isn’t a one-year phenomenon. Total return to General Mills share-
holders has exceeded the market’s return over the last five years, and over the last 20 years,
as well. In fact, as the chart on the inside front cover of this report shows, GIS has outpaced
the market for most of our 75-year history as a publicly held company.

Leading Market Positions

DOLLARS IN MILLIONS, FISCAL 2003
Ready-to-eat Cereals
Refrigerated Yogurt
Mexican Products
Frozen Vegetables
Refrigerated Dough
Ready-to-serve Soup
Dessert Mixes
Frozen Baked Goods
Microwave Popcorn
Frozen Hot Snacks
Dry Dinners
Fruit Snacks

Source: ACNielsen, plus Wal-Mart projections

Category
Sales
$7,700
2,910
2,140
2,120
1,610
1,560
1,480
870
860
820
690
590

Category
Sales
Growth

Our Retail
Sales
Growth

Our
Dollar
Share

32%
37
15
20
71
26
37
21
20
23
59
62

14
2
8
1
6
–3
21
1
5
11
4

13
5
2
3
6
2
7
7
1
–
8

PAGE 3

Rank
2
1
2
1
1
2
1
1
2
2
1
1

Shareholder Return
Fiscal 2003
(price appreciation plus
reinvested dividends)

%
6

%
2
1
-

%
5
1
-

S
I
G

P
&
S

0
0
5

s
e
p
a
t
S

r
e
m
u
s
n
o
C
P
&
S

Cost Synergies
and Productivity
(dollars in millions)
(cid:1) 04–06 Cumulative Supply
Chain Productivity
(cid:1) Acquisition Cost Synergies

5
7
7

%
6
+

5
7
4

0
5
3

5
2

04 04–06

t
e
g
r
a
T

e
t
a
m

i
t
s
E

We believe we are strongly positioned to deliver superior growth and share-
holder returns in the years ahead. We’ve established specific growth goals for the three-
year period through 2006. Those goals are:

—> 5 to 6 percent compound annual growth in net sales.
—> At least 11 percent compound growth in earnings per share.
—> Increasing cash flow from operations, sufficient to support the capital investment needs
of our growing businesses while reducing debt by a cumulative $2 billion over the three-
year period.

We expect ﬁscal 2004 to give us an excellent start toward these goals. We have a
strong lineup of product news and innovation planned for the year. In addition, 2004 is a
53-week fiscal period, so we’ll have the benefit of an extra selling week in the fourth quarter.
We expect operating profit to grow faster than sales, due in part to an additional $125 million
of acquisition synergies we plan to realize this year. This would bring our cumulative annual-
ized acquisition synergies to $475 million. Our 2004 plans do include some additional
Pillsbury merger-related and restructuring costs. We are currently estimating those at
approximately 10 to 15 cents per share. We expect our EPS growth in 2004 should meet or beat
our 11 percent longer-term growth target, both including and excluding the restructuring and
merger-related costs.

We plan to drive our growth in 2004 and beyond by focusing on the same four

strategies that fueled our past performance. Those strategies are:

—> Product innovation, which drives unit volume and market share gains.
—> Channel expansion, to ensure our products are available everywhere people buy food,

from dollar stores to delicatessens.

—> International expansion, to build our brands in fast-growing markets around the world.
—> Margin expansion, to grow our earnings faster than sales.

We continue to believe that adding Pillsbury has made each of these growth strategies
better. We think our mix of retail categories offers great opportunities for product and mar-
keting innovation. We see exciting opportunities to expand distribution of our leading brands
in fast-growing new retail channels, including natural and organic stores, and club stores. In
addition, we’ve strengthened our opportunities to capture a growing share of away-from-
home food sales.

With the addition of the Pillsbury international businesses, we now generate more than
$1 billion of our net reported sales in markets outside the United States. Through our wholly
owned operations and our joint ventures, we expect to show continued strong growth in
international sales and profits. And finally, we expect to drive margin expansion through a con-
tinuous focus on productivity savings. For our supply chain operations alone, productivity over
the next three years is targeted at a cumulative $300 million pretax.

The following pages of this report to shareholders discuss these four critical growth driv-
ers in more detail. We have confidence that these proven strategies will lead to superior
results in the years ahead.

PAGE 4

—>
left to right
STEVE SANGER
STEVE DEMERITT
RAY VIAULT

There is one last critical factor that increases our conﬁdence in General Mills’
future prospects. It is the strength of General Mills’ people and our company’s
unique culture. General Mills has a long history of success, and our values are strong. We care
a lot about our company’s culture — and we work hard on it — because it is key to recruiting and
retaining top people.

We’re convinced our pay-for-performance and stock-based compensation programs are
fundamental to our company culture and our superior performance record. For nearly all
employees, annual cash compensation is variable, and ties directly to annual ratings of both
personal and business unit performance. To underscore the importance of sustained business
growth and returns, we’ve sponsored long-term compensation plans designed to make employ-
ees at every level of the company holders of General Mills stock. These programs have included
four all-employee stock option grants. The most recent of those, in 2002, reached more than
26,000 employees. This annual report features 42 of our colleagues from around the company.
Their combined direct holdings of GIS exceed 22,500 shares. Factor in stock options, and their
ownership interest exceeds 500,000 shares. In total, we estimate employees and directors hold
nearly 7 percent of our stock. We believe this compensation philosophy promotes business
actions in the long-term best interest of the company and all its shareholders.

Our performance-based culture, our portfolio of leading consumer brands and our
focused growth strategies have combined to produce superior returns for General Mills
shareholders over an extended period of time. All of us at General Mills today are committed
to delivering results that will build on this track record in the years ahead.

Sincerely,

S T E P H E N W. S A N G E R

S T E P H E N R . D E M E R I T T

R AY M O N D G . V I A U LT

Chairman of the Board and
Chief Executive Officer

July 31, 2003

Vice Chairman

PAGE 5

GROWTH DRIVERS:

PRODUCT INNOVATION

CHANNEL EXPANSION

INTERNATIONAL EXPANSION

MARGIN EXPANSION

brands in demand

Product innovation drives our sales growth. Improvements on
our established brands, new flavors and new product lines gen-
erate volume and market share gains. Our most successful inno-
vations meet consumer needs for foods that are healthy, quick
and easy to make, and taste great.

Our Yoplait and Colombo yogurt lines combine health bene-
fits with great taste and convenience. Our yogurt shipments
grew 14 percent in 2003 with the introduction of new flavors and
products, such as Nouriche yogurt smoothies. Yoplait Nouriche
offers all the nutrition of a meal and has captured nearly a
30 percent share of the $170 million yogurt beverage category
since reaching national distribution in March.

Soymilk is another fast-growing category with great health
benefits. Category sales are projected to reach $1 billion over the
next three years, with refrigerated varieties leading that growth.
8th Continent refrigerated soymilk, the first product from our soy
joint venture with DuPont, became available nationally in June 2003.
Nature Valley granola bars have been a healthy, portable
snack for nearly 30 years. This year, we added a yogurt coating
to chewy granola bars and saw sales on the entire Nature Valley
line increase 50 percent.

When it comes to convenience, Pillsbury dough products
give consumers baked-from-scratch taste without the work.
Pillsbury is the leading brand in the $1.6 billion refrigerated

dough category. In fiscal 2003, new flavors helped drive growth
on crescent rolls and Grands! biscuits and sweet rolls. Sales on
our Ready to Bake! cookies were up double digits thanks to the
success of Big Deluxe Classics cookies.

Pillsbury’s fastest-growing dough business is in the freezer
case. Sales for Pillsbury Home Baked Classics frozen dinner rolls,
biscuits and sweet rolls grew 21 percent in 2003, outpacing the
$870 million category’s growth. We are increasing our distribu-
tion on this line and will add new varieties in 2004.

Progresso ready-to-serve soup offers heat-and-eat conve-
nience, and sales grew 6 percent in 2003. We’re currently intro-
ducing a new Rich & Hearty line designed to appeal to adults
who want a heartier, more filling soup.

Innovation on new and established products drove 7 percent
unit volume growth for Big G cereals this year. Berry Burst
Cheerios, introduced in January, is our strongest new cereal
introduction ever. Established brands, such as Cheerios and
Cocoa Puffs, posted good volume gains thanks to innovative pro-
motions and advertising. And volume on Big G Milk ’n Cereal Bars,
which make the nutrition of a cereal breakfast portable, grew
35 percent. We’ve just introduced a new line of Oatmeal Crisp bars.
We’ll keep the innovation coming with 81 new U.S. retail
products in the first half of 2004 alone. Consumer-focused
brand innovation gives us great opportunities for future growth.

U.S. Retail Unit Volume Growth

Innovations that keep our established brands growing and create successful
new products are the key to driving unit volume growth. Unit volume for our
U.S. retail businesses has grown steadily in recent years, averaging more than
3 percent on a comparable basis.

(cid:1) As Reported
(cid:1) Comparable Basis

+4%

+6%

+4%

–1%

+4%

+35%

+23%

Our product portfolio provides
great opportunities to innovate. A
variety of people — from consumer
insights to marketing to sales —
contributed to the successful
launch of Berry Burst Cheerios last
January. In just six months, Berry
Burst Cheerios has grown to be the
seventh largest brand in our cereal
portfolio. A research and develop-
ment team added new varieties to
our Pillsbury Home Baked Classics
line of frozen baked goods, which
gives consumers fresh, warm rolls
in 12 minutes from freezer to oven.

SUSAN HEDDLESON
Senior R&D Manager

Innovation
on established

brands and
116 new

products

drove6%

comparable sales growth

for our U.S. retail businesses.

OLIVIER PERRIN
Senior R&D Scientist

PHIL PROFFITT
Senior Consumer Insights Manager

GINNY GILES
Retail Sales Supervisor

NICK KOKALES
Senior Retail
Customer Manager

TOM NIENTIMP
Marketing Manager

MARK HINDMAN
System Engineer

JAN FUNKE
Ingredients Manager

PAGE 7

In our Bakeries and Foodservice
division, sales and research and
development employees worked
with Dunkin’ Donuts to develop
a scone specifically for their
3,700 stores in the United States.
Members of our sales and market-
ing teams are bringing point-of-
sale merchandising ideas to our
foodservice customers. Since their
introduction in June 2002, sales of
the Doughboy’s Best branded cook-
ies to foodservice operators have
been growing steadily.

JOE CONRAD
Business Manager

LAURA HANSEN
Senior R&D Manager

Today, 30%

of our retail sales come from

nontraditional

grocery outlets,

and foodservice channels

account for another

$1.8billion

in revenues.

TOM PIPER
Marketing Manager

MARK SIRACUSA
Sales Manager

MARK BROWNELL
Associate Marketing Manager

ALAN KAPLAN
Sales Territory Manager

CATHON THREAT
Sales Segment Manager

PAGE 8

GROWTH DRIVERS:

PRODUCT INNOVATION

CHANNEL EXPANSION

INTERNATIONAL EXPANSION

MARGIN EXPANSION

more outlets for growth

Consumers today are buying groceries in a lot of new places.
Food and beverage sales at club stores, general merchandise
chains and natural food stores grew at double-digit rates this
past year, significantly outpacing sales in traditional grocery
stores. We’re finding lots of opportunities for our brands in these
new retail channels.

Food sales in natural and organic stores grew to over
$4.5 billion in 2002. We compete in this channel with the
Muir Glen and Cascadian Farm brands, which hold the No. 1 or
No. 2 dollar share positions in eight categories. In fiscal 2004,
we’re adding a number of new products, including three new
varieties of Cascadian Farm cereals. Introduced just last year,
Cascadian Farm has already become the second best-selling
cereal line in natural food stores.

Consumers can grab a Nature Valley granola bar or a Totino’s
pizza at a variety of convenience stores, where our sales have
been growing rapidly in recent years. In 2003, we introduced more
products, including Pop•Secret Caramel Nut Popcorn and Nature
Valley Apple Cinnamon Trail Mix bars, into convenience stores.
With this expanded portfolio, our sales in this channel increased
14 percent.

We’ve developed new product sizes and packaging formats
that are well-suited for dollar and club stores. For example, we’re

selling smaller-sized pouches of several of our baking mixes in
dollar stores. And a special flavor of Betty Crocker brownie mix
with Hershey’s® chocolate is coming to club stores.

Sales of food eaten away from home are growing, too. Over
the past 15 years, foodservice industry sales have grown at a
5 percent compound rate, faster than retail food sales. And that
trend is expected to continue over the long term.

Our Bakeries and Foodservice business, with $1.8 billion in
sales, is well-positioned to take advantage of that growth. We’re
using our baking technology to develop products for a variety of
outlets, from grocery store bakeries to quick service restaurants.
We’ve been a key supplier of bagels to Dunkin’ Donuts, and we
recently developed a scone specifically for this national chain.

Our new foodservice cereal cup package is larger and stur-
dier, perfect for breakfasts in school cafeterias. This fiscal year,
we also put cereal in a pouch to feed the military. We see great
opportunities to expand this easy-to-serve packaging to other
foodservice products.

With this level of innovation, our Bakeries and Foodservice
division is highly respected in the industry. In a recent national sur-
vey of foodservice operators, General Mills was ranked No. 3 out of
100 food manufacturers. We see many opportunities to build our
business in a variety of growing retail and foodservice channels.

Retail Outlet Sales Growth
(three-year compound growth through December 2002)

Consumers today are making food purchases in a variety of
outlets. Food and beverage sales in these new channels are
growing at double-digit rates. We are expanding distribution of
our brands in many of these growing channels.

Dollar Format Stores

Mass Merchandisers
and Supercenters

Natural/Organic
Stores

Club Stores

Drug and
Discount Stores

17%

15%

14%

31%

Source: ACNielsen Household Panel Data, SPINS (Natural/Organic Stores)

GROWTH DRIVERS:

PRODUCT INNOVATION

CHANNEL EXPANSION

INTERNATIONAL EXPANSION

MARGIN EXPANSION

a world of opportunities

Today you can find our products in many countries around the
world where food sales are growing faster than in the United
States. Old El Paso Mexican foods, Green Giant vegetables,
Bugles snacks and Häagen-Dazs ice cream are popular inter-
national products with great growth potential. We market these
brands around the world through either our consolidated busi-
nesses or joint ventures.

Sales for our consolidated international operations grew
4 percent in 2003 on a comparable basis. Our business in Canada,
which doubled in size with the Pillsbury acquisition, achieved a
3 percent comparable unit volume gain. We hold the No. 1 or No. 2
dollar share position in eight retail categories in Canada, and
achieved a record dollar share of the cereal category in 2003.

In Asia, our unit volume increased 6 percent, driven by good
growth for Wanchai Ferry dumplings in China and Old El Paso
dinner kits in Australia. Unit volume in Europe grew 4 percent
this year. Old El Paso dinner kits and Green Giant vegetables
posted solid volume gains in a variety of European markets.
Despite difficult economic conditions in Latin America, our
total consolidated international business still met its profit tar-
gets for the year.

growth in 2003. And CPW’s share of the combined markets in
which it competes rose to 22 percent, with good performance by
both established and new cereals. CPW also has a growing
breakfast bar business in several European markets and added
to this line in France with Fitness breakfast bars, which are based
on a popular CPW adult cereal brand. Our share of net sales for
CPW grew to $472 million in 2003.

Snack Ventures Europe (SVE), our joint venture with
PepsiCo, posted 8 percent volume growth. Southern and
Eastern European markets drove this increase, with the fastest
growth generated in Russia. SVE continues to show good growth
potential as the per capita salty snack consumption in many
European markets is still well below that of the United States.
Our proportionate share of net sales from SVE grew to $350 mil-
lion this year.

We participate in several Häagen-Dazs ice cream joint ven-
tures, the largest of which is in Japan. Our proportionate share of
sales for these joint ventures grew to $167 million this year, and we
continue to increase our market share in this growing category.
The Crispy Sandwich ice cream treat developed in Japan continues
to do well, and we plan to introduce it in other markets in 2004.

Our international joint ventures had another year of good
sales and unit volume gains. Cereal Partners Worldwide (CPW),
our joint venture with Nestlé, posted 7 percent unit volume

Around the world, we’re taking advantage of growing mar-
kets and expanding our reach with products that appeal to a
variety of international tastes.

International Net Sales
(dollars in millions, excluding exited ventures)

Food sales in many international markets are growing faster than in the
United States. We sell our products in 100 countries around the world through
our consolidated international businesses and various joint ventures.

222

221

257

263

625

847

652

873

648

905

665

928

778

776

1,554

1,300

992

2,292

(cid:1) Consolidated Businesses
(cid:1) Proportionate Share of Joint Ventures

COLLEEN KARGEL
Senior R&D Scientist

CARLOTTA ROSEBROCK
Packaging Design Manager

PHIL BOWDEN
Marketing Manager, Australia

Sales for our brands
outside the

United States

exceeded

$2.2billion

in 2003,

KRISTIN STANLEY
International Finance Director

SAMIR BEHL
International Marketing Vice President

including our share

of joint venture revenues.

Employees in our International operations
are building brands that suit local tastes
around the world. Old El Paso is a popular,
global brand. Our marketing staff has adapted
these Mexican dinner kits to appeal to con-
sumers from Australia to Sweden. Research
and development employees create exotic
flavor combinations, such as Lychee Cream
& Ginger, for Häagen-Dazs ice cream sold in
European and Asian markets.

ERIC HARCOURT
R&D Engineer

PAGE 11

A cross-functional team from our sales,
supply chain and information systems
functions created one distribution net-
work that allows us to ship a full mix
of our nonrefrigerated products to our
customers. Team members determined
the most efficient geographical layout
for our distribution facilities, and linked
them with one common computer sys-
tem. And they did it on time, under
budget and without any disruption in
service to our customers.

KRISTI WEDEL
Plant Distribution
Manager

SHEILA HUNTLEY
Senior Customer Service
Facility Manager

MARK IORIO
Senior Accounts
Operations Manager

BRAD PENTZ
Customer Service
Facilities Manager

NICK HOLMAN
Supply Chain
Manager

The combination of
General Mills
and Pillsbury

is expected

to generate

$475million

in synergy savings,

LAURIE HIGHLAND
Logistics Manager

CONNIE CADDEN
Logistics Manager

plus ongoing productivity gains.

BOB PETERSON
Information Systems Manager

KATHLEEN McCABE
Information Systems
Consultant

LINDA MARCOTTE
Senior Information
Systems Analyst

PAUL TEXLEY
Senior Information
Systems Analyst

MARY EHRLICHMANN
Information Systems Trainer

PAGE 12

GROWTH DRIVERS:

PRODUCT INNOVATION

CHANNEL EXPANSION

INTERNATIONAL EXPANSION

MARGIN EXPANSION

cost savings ahead

We expect cost savings from continuous productivity initiatives
to help drive our earnings growth. In fiscal 2003, we improved
our margins due to cost savings achieved by combining Pillsbury
and General Mills. By streamlining many parts of our organiza-
tion, we reached our target of $350 million in cumulative acqui-
sition synergies. And we’re not done yet. Our goal in fiscal 2004
is to achieve an additional $125 million in annualized synergies,
along with ongoing productivity savings.

Synergy cost savings in 2003 came from a variety of places
across the company. For example, we eliminated redundancies
and leveraged our existing resources in consumer insights and
other marketing support areas to bring work done externally
into General Mills.

Our U.S. retail sales organization contributed significantly
to our cost savings. We eliminated duplicate systems and
now have one order, invoice and payment system for our
customers. We nearly doubled the number of retail represen-
tatives who are in stores daily working with retailers, making
sure our products are available on store shelves. Yet, by focus-
ing on profitable volume growth, we improved our cases sold
per employee by 15 percent. And we increased baseline, or
nondiscounted, sales volume while reducing our overall trade
promotion cost per case.

Our supply chain also took steps to increase productivity
and achieve synergy savings. Pillsbury was one of the largest
buyers of flour in the United States. Today, we are our own sup-
plier of much of the wheat flour used in Pillsbury dough prod-
ucts. We streamlined our manufacturing operations, moving
14 percent of our production capacity to different plants to
improve efficiency. We brought manufacturing previously done
at external locations into General Mills’ expanded manufacturing
base. And there’s more to come. Over the next 10 years, we
expect to deliver a cumulative $800 million pretax in supply
chain productivity savings.

We’ve built a distribution network where we can combine
shipments of General Mills and Pillsbury shelf-stable products,
and we’re doing the same thing with our refrigerated and frozen
products. This configuration is more efficient for our customers,
as a wider variety of products arrives on fewer trucks. It’s also
cost effective for us, since this more efficient use of distribution
resources allowed us to reduce our number of distribution cen-
ters from 32 to 19, resulting in significant cost savings.

The combination of Pillsbury and General Mills provides
strong opportunities for cost synergy and productivity savings
in the years ahead. We believe our focus on increasing
productivity in all areas of the company positions us well for
continued margin improvement.

Sources of Acquisition Synergies
(percentage of cumulative $475 million target)

The combination of General Mills and Pillsbury provided a great opportunity
for synergy cost savings companywide. In 2003, we reached our interim goal
of $350 million in cumulative savings by eliminating redundancies in our sup-
ply chain and marketing activities, as well as reducing our selling, general and
administrative costs.

(cid:1)
(cid:1)
(cid:1)

34%

36%

30%

(cid:1) Supply Chain
(cid:1) Marketing and Selling
(cid:1) General and Administrative

Financial Review

This summary provides a broad overview of our recent financial per-
formance and future expectations. It is not intended to provide all the
information required for a comprehensive financial presentation. For
a complete presentation of General Mills’ financial results, including
the consolidated financial statements, Management’s Discussion and
Analysis (MD&A), and accompanying notes and schedules, refer to our
2003 Annual Report on Form 10-K.

Our consolidated businesses are divided into three primary seg-
ments: U.S. Retail, Bakeries and Foodservice, and International. We also
operate joint ventures with various partners and report our proportion-
ate share of each venture’s earnings on an after-tax basis. The acquisi-
tion of The Pillsbury Company on Oct. 31, 2001, significantly affects
comparisons for our results of operations, as 2003 includes a full year
of Pillsbury results and 2002 includes Pillsbury for just seven months.

Earnings Highlights Net sales rose 32 percent in 2003 to
$10.5 billion, with higher unit volume accounting for 30 points of that
gain. Promotional spending, which is deducted from gross sales, grew
slower than unit volume, and this efficiency contributed the remaining
2 points of net sales growth. On a comparable basis, net sales increased
6 percent and worldwide unit volume rose 3 percent.

Net Sales Detail

IN MILLIONS

FISCAL YEAR
Big G Cereals
Meals
Pillsbury USA
Baking Products
Snacks
Yogurt/Organic Foods/Other

Total U.S. Retail
Bakeries and Foodservice

Canada
Rest of World

Total International

Consolidated Total

2003
$ 1,998
1,702
1,438
549
788
932
7,407
1,799
383
917
1,300
$10,506

2002
$1,866
1,144
793
567
722
815
5,907
1,264
283
495
778
$7,949

Cost of goods sold fell slightly as a percent of sales, from 59 percent
in fiscal 2002 to 58 percent in 2003. This improvement was primarily due
to volume growth, which resulted in better absorption of fixed costs, and
synergies from the Pillsbury acquisition.

Selling, general and administrative costs as a percent of sales also
improved, decreasing from 26 percent in fiscal 2002 to 24 percent in
fiscal 2003. This improvement primarily reflects cost synergies realized
from the Pillsbury acquisition.

Earnings before interest and taxes (EBIT) rose 72 percent to $1.9 bil-
lion. Total interest expense of $547 million in fiscal 2003 was up 31 per-
cent from 2002, reflecting 12 months of higher debt resulting from the
acquisition. However, the increase in interest expense was mitigated by
favorable rates and successful debt refinancing activities, discussed in
the section below titled “Capital Structure.” We expect interest expense
in 2004 to decline to between $500 and $530 million as we begin
reducing our debt balance.

Our effective tax rate fell from 35.8 percent in 2002 to 35.0 percent
in 2003. After-tax earnings from joint ventures totaled $61 million, up
from $33 million in 2002. Total earnings after tax doubled to $917 mil-
lion. Average diluted shares outstanding were 378 million, up 11 percent
from 342 million in fiscal 2002 due to the full-year impact of shares
issued to Diageo as part of the acquisition. Diluted earnings per share
totaled $2.43 in 2003 compared to $1.34 earned in 2002.

General Mills recorded certain costs in 2003 and 2002 relating to the
Pillsbury acquisition. These items are the restructuring and other exit
costs segregated on the consolidated statements of earnings, and
merger-related costs (including consulting, system conversions, reloca-
tion, training and communications) included in selling, general and
administrative expense. These expenses totaled $186 million pretax,
$118 million after tax, or 35 cents per diluted share in 2002, and $132 mil-
lion pretax, $85 million after tax, or 22 cents per diluted share in 2003.

Excluding identified items, our net earnings grew 73 percent to
$1.0 billion, and our diluted EPS grew 56 percent to $2.65. Earnings and
earnings per share excluding restructuring, other exit and merger-
related costs are measures of performance that are not defined by gen-
erally accepted accounting principles (GAAP) and should be viewed in
addition to, and not in lieu of, our net earnings and diluted earnings per
share as reported on a GAAP basis. The accompanying table reconciles
the reported results with the results excluding identified items.

Reconciliation of GAAP and Non-GAAP Measures

IN MILLIONS, EXCEPT PER SHARE DATA

FISCAL YEAR

2003

2002

Net Earnings
Restructuring and Other
Exit Costs, After Tax

Merger-related Costs,* After Tax
Adoption of SFAS 133
EAT Excluding Restructuring,
Other Exit and Merger-
related Costs

Earnings Before Taxes and

Joint Ventures

Interest, Net
Earnings Before Interest
and Taxes (EBIT)

Restructuring and Other Exit Costs
Merger-related Costs*
EBIT Excluding Restructuring,
Other Exit and Merger-
related Costs

$ 917

Diluted EPS
$2.43

$ 458

Diluted EPS
$1.34

40
45
–

0.11
0.12
–

84
34
3

0.25
0.10
0.01

$1,002

$2.65

$ 579

$1.70

$1,316
547

$1,863
62
70

$ 667
416

$1,083
134
52

$1,995

$1,269

*Included in selling, general and administrative expenses

Cash Flow Highlights In fiscal 2003, General Mills’ cash flow from
operating activities grew 78 percent to $1.6 billion. We used some of
that cash to support the growth of our business. Capital investment for
fixed assets and intangibles totaled $750 million, including expenditures
associated with the acquisition and integration of Pillsbury. We expect
capital expenditures in fiscal 2004 to fall to approximately $650 million
as integration activities are completed.

PAGE 14

Cash returned to shareholders as dividends in 2003 totaled
$406 million, a payout ratio of 45 percent of diluted earnings per share.
We intend to maintain the annual dividend rate of $1.10 per share in
2004, but expect to increase dividends longer term as our earnings grow.
During fiscal 2003, General Mills paid Diageo $273 million under the
Contingent Value Right (CVR) agreement that was part of the Pillsbury
transaction. The CVR guaranteed Diageo a certain value for its 79 mil-
lion shares of General Mills stock 18 months after the close of the acqui-
sition; the $273 million payout was well below the maximum possible
payment of $395 million. General Mills also paid $89 million to Diageo
for three-year call options on 29 million General Mills shares. These
options were purchased in conjunction with a General Mills convertible
bond offering discussed below.

$1.5 billion of zero-coupon 2% convertible debentures. The debentures
are convertible after three years into a total of 29 million shares of
General Mills common stock. In order to prevent share dilution in the
event of conversion, we purchased call options from Diageo for 29 mil-
lion shares. If the owners of the debentures exercise their rights of con-
version, we could exercise our options to purchase Diageo’s shares so
that total shares outstanding remain constant.

Our stockholders’ equity grew to $4.2 billion in 2003 due to an
increase in retained earnings, and our equity market capitalization as of
May 25, 2003, was $17.2 billion, based on a price of $46.56 per share and
369 million basic shares outstanding. Our total market capitalization,
including adjusted debt, minority interests and equity capital, grew from
$25.7 billion in 2002 to $26.2 billion in 2003.

Capital Structure The table below summarizes General Mills’ capi-
tal structure. In fiscal 2003, our total debt as defined by GAAP declined
by approximately $582 million to $8.9 billion. Internally we measure
total adjusted debt, a broader definition that includes the debt equiva-
lent of lease expense, tax benefit leases and minority interests, and is
net of marketable investments and most of our cash balance. Free cash
flow allowed us to reduce adjusted debt plus minority interests to $9.0
billion at the end of 2003. As we complete the integration of Pillsbury,
we expect our free cash flow to increase, and have set a target to pay
down a cumulative $2 billion of our total adjusted debt over the next
three years, including at least $450 million in fiscal 2004.

The goal of our debt reduction plan is to return to a mid-A rating for
our corporate debt. Currently, Standard and Poor’s Corporation has rat-
ings of “BBB+” on our publicly held long-term debt and “A-2” on our
commercial paper. Moody’s Investors Services, Inc., has ratings of
“Baa2” on our long-term debt and “P-2” for our commercial paper. Fitch
Ratings, Inc., rates our long-term debt “BBB+” and our commercial
paper “F-2.” Dominion Bond Rating Service in Canada currently rates
General Mills as “A-low.” We have access to credit facilities totaling $2.2
billion, but currently have no outstanding balance drawn on these lines.

Capital Structure

IN MILLIONS
Notes Payable
Current Portion of Long-term Debt
Long-term Debt
Total Debt

Deferred Income Taxes — Tax Leases
Leases — Debt Equivalent
Certain Cash and Cash Equivalents
Marketable Investments, at Cost

Adjusted Debt
Minority Interests

Adjusted Debt plus Minority Interests

Stockholders’ Equity
Total Capital

May 25, 2003
$ 1,236
105
7,516
$ 8,857
68
550
(623)
(142)
$ 8,710
300
$ 9,010
4,175
$13,185

May 26, 2002
$ 3,600
248
5,591
$ 9,439
71
423
(894)
(135)
$ 8,904
153
$ 9,057
3,576
$12,633

Since closing the Pillsbury acquisition, we have refinanced approxi-
mately $6 billion of short-term debt with longer-term debt at favorable
rates. In fiscal 2003, we refinanced roughly $2 billion of that total:
$135 million of core index five-year notes at 3.875%, $350 million of
3.9% five-year bonds, $72 million of retail notes at various rates, and

Pension/Postretirement Beneﬁts The table below summarizes key
information relating to our pension and postretirement benefit plans.
Together these plans contributed a net $48 million pretax income exclud-
ing curtailments, or 8 cents per diluted share, in 2003. For 2004, we have
reduced our assumed rate of return on assets to 9.6 percent for all plans.
Based on our current assumptions, we expect pension and postretirement
plans to represent combined net expense of approximately $12 million
pretax, or 2 cents per diluted share, in 2004. For a complete discussion of
our plan assumptions, see Note 14 in our Form 10-K.

Pension and Postretirement Beneﬁt Summary

IN MILLIONS

FISCAL YEAR-END AMOUNTS
Ending Fair Value of Plan Assets
Ending Obligations
Funded Status of Plans
Unrecognized Amounts
Net Amount Recognized

Pension Plans

2003
$2,541
2,765
$ (224)
1,262
$1,038

2002
$2,671
2,100
$ 571
380
$ 951

Postretirement
Benefit Plans

2003
$ 202
814
$(612)
329
$(283)

2002
$ 233
611
$ (378)
137
$ (241)

FISCAL YEAR TOTALS
Net (Income) Expense

FISCAL YEAR ASSUMPTIONS
Discount Rate — Expenses
Discount Rate — Obligations
Rate of Return on Plan Assets
Salary Increases
Annual Increase in Cost of Benefits

(82)

$ (85)

$ 40

$ 25

2003

2002

2003
7.50% 7.75% 7.50% 7.75%
6.00
10.4
4.4
–

6.00
10.0
–
8.3

7.50
10.4
4.4
–

7.50
10.0
–
8.3

Forward-looking Statements This report to shareholders contains
forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995 that are based on manage-
ment’s current expectations and assumptions. These forward-looking
statements, including the statements in this Financial Review and in the
Letter to Shareholders, are subject to certain risks and uncertainties
that could cause actual results to differ materially from the potential
results discussed in the forward-looking statements. Refer to the infor-
mation set forth under the heading “Cautionary Statement Relevant to
Forward-looking Information for the Purpose of ‘Safe Harbor’ Provisions
of the Private Securities Litigation Reform Act of 1995,” in Item One of
our fiscal 2003 Form 10-K Annual Report, for factors that could impact
our future results.

PAGE 15

A Long-standing Commitment to Corporate Governance
General Mills’ corporate governance practices have evolved over many years. The board of directors and management draw on
these practices to pursue the company’s strategic objectives and to drive long-term shareholder value creation. All board com-
mittees, except the Executive Committee, are composed of independent directors, each of whom stands for re-election annually
and serves no more than 15 years. Together, the board and management implement General Mills’ compensation
programs, which are closely linked to business performance and are designed to align employee and shareholder interests.
For more information on our corporate governance practices, see our 2003 Proxy Statement.

Board of Directors

Stephen R. Demeritt
Vice Chairman,
General Mills, Inc.(1)

Livio D. DeSimone
Retired Chairman of the Board
and Chief Executive Officer, 3M
(diversified manufacturer)(1,2,3*,6)
St. Paul, Minnesota

William T. Esrey
Chairman Emeritus,
Sprint Corporation
(telecommunication
systems)(1,3,4*,5)
Overland Park, Kansas

BOARD COMMITTEES:

Raymond V. Gilmartin
Chairman of the Board,
President and Chief Executive
Officer, Merck & Company, Inc.
(pharmaceuticals)(2,3,5*)
Whitehouse Station, New Jersey

Judith Richards Hope
Partner, Paul, Hastings,
Janofsky & Walker LLP
(attorneys)(1,4,5,6*)
Washington, D.C.

Robert L. Johnson
Founder and Chief Executive Officer,
Black Entertainment Television,
a subsidiary of Viacom, Inc.
(media and entertainment)(4,5,6)
Washington, D.C.

John M. Keenan
Chief Executive Officer,
Grand Cru Consulting, Ltd.
London, England

Heidi G. Miller
Executive Vice President and
Chief Financial Officer,
Bank One Corporation(2,3,4)
New York, New York

Hilda Ochoa-Brillembourg
Founder, President and
Chief Executive Officer,
Strategic Investment Group
(investment management)
Arlington, Virginia

Stephen W. Sanger
Chairman of the Board and
Chief Executive Officer,
General Mills, Inc.(1*)

1. Executive 2. Audit 3. Compensation 4. Finance 5. Corporate Governance 6. Public Responsibility
*Denotes Committee Chair

A. Michael Spence
Professor Emeritus and
Former Dean,
Graduate School of Business,
Stanford University, and
Partner, Oak Hill
Venture Partners(1,2*,3,5)
Stanford, California

Dorothy A. Terrell
Partner,
First Light Capital
(venture capital)(2,4,6)
Boston, Massachusetts

Raymond G. Viault
Vice Chairman,
General Mills, Inc.(1)

Paul S. Walsh
Chief Executive Officer,
Diageo plc
(premium alcoholic beverages)
London, England

Senior Management

Y. Marc Belton
Senior Vice President,
Yoplait-Colombo, Canada
and New Business

Peter J. Capell
Senior Vice President;
President, Snacks Unlimited

Randy G. Darcy
Senior Vice President,
Chief Technical Officer

Rory A. Delaney
Senior Vice President,
Strategic Technology
Development

Stephen R. Demeritt
Vice Chairman

Ian R. Friendly
Senior Vice President;
President, Big G Cereals

**Retires Jan. 1, 2004
†Retires Jan. 31, 2004

David P. Homer
Vice President;
President, Baking Products

James A. Lawrence
Executive Vice President,
Chief Financial Officer

John T. Machuzick
Senior Vice President;
President,
Bakeries and Foodservice

Siri S. Marshall
Senior Vice President,
Corporate Affairs,
General Counsel and Secretary

Christopher D. O’Leary
Senior Vice President;
President, Meals

S. Paul Oliver**
Senior Vice President

Michael A. Peel
Senior Vice President,
Human Resources and
Corporate Services

Kendall J. Powell
Senior Vice President;
Chief Executive Officer,
Cereal Partners Worldwide

Lucio Rizzi
Senior Vice President;
President, International

Peter B. Robinson
Senior Vice President;
President, Pillsbury USA

Jeffrey J. Rotsch
Senior Vice President;
President, Consumer Foods Sales

Stephen W. Sanger
Chairman of the Board and
Chief Executive Officer

Christina L. Shea
Senior Vice President;
President,
General Mills Foundation

Christi L. Strauss
Vice President;
President, General Mills Canada

Austin P. Sullivan Jr.†
Senior Vice President,
Corporate Relations

Kenneth L. Thome
Senior Vice President,
Financial Operations

David B. VanBenschoten
Vice President, Treasurer

Raymond G. Viault
Vice Chairman

Robert F. Waldron
Vice President;
President, Yoplait-Colombo

PAGE 16

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Shareholder Information

General Mills
World Headquarters
Number One General Mills
Boulevard
Minneapolis, MN 55426-1348
Phone: (763) 764-7600

Internet
For corporate reports and com-
pany news, visit our Web site at:
www.generalmills.com

Markets
New York Stock Exchange
Trading Symbol: GIS

Transfer Agent, Registrar,
Dividend Payments and
Dividend Reinvestment Plan
Wells Fargo Bank Minnesota, N.A.
161 North Concord Exchange
P.O. Box 64854
St. Paul, MN 55164-0854
Phone: (800) 670-4763 or
(651) 450-4084
E-mail:
stocktransfer@WellsFargo.com
Account access via Web site:
www.shareowneronline.com

Independent Auditor
KPMG LLP
4200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402-3900
Phone: (612) 305-5000

Investor Inquiries
Contact the Investor Relations
department at (800) 245-5703
or (763) 764-3202.

Notice of Annual Meeting
The annual meeting of General
Mills shareholders will be held
at 11 a.m., Central Daylight Time,
Monday, Sept. 22, 2003, at the
Children’s Theatre Company,
2400 Third Avenue South,
Minneapolis, Minnesota.

Corporate Citizenship Report
General Mills’ 2003 Corporate
Citizenship Report details the
company’s many community
service and philanthropic activi-
ties. To receive a copy, write to:
General Mills Community Action
P.O. Box 1113
Minneapolis, MN 55440-1113

Printed on paper containing at least 10 percent post-consumer waste.

Holiday Gift Boxes

General Mills Gift Boxes are a
part of many shareholders’
December holiday traditions.
To request an order form, call
us toll free at (866) 209-9309
or write, including your name,
street address, city, state, zip code
and phone number (including
area code) to:

2003 Holiday Gift Box Offer
General Mills, Inc.
P.O. Box 5082
Stacy, MN 55078-5082

Please contact us after
Sept. 1, 2003.

General Mills
P.O. Box 1113
Minneapolis, MN 55440-1113