EX-13 4 dex13.htm PORTIONS OF SARA LEE'S 2010 ANNUAL REPORT Portions of Sara Lee's 2010 Annual Report

 

Exhibit 13

 

Financial contents

18

   Financial summary

19

   Financial review

51

   Consolidated statements of income

52

   Consolidated balance sheets

54

   Consolidated statements of equity

55

   Consolidated statements of cash flows

56

   Notes to financial statements

89

   Report of independent registered public accounting firm

90

   Management’s report

91

   Performance graph

92

   Directors and senior corporate officers

93

   Investor information

 

Sara Lee Corporation and Subsidiaries        17


Financial summary

 

Dollars in millions except per share data   Years ended        July 3, 2010 1    June 27, 2009      June 28, 2008      June 30, 2007      July 1, 2006   
   

Results of Operations

            

Continuing operations

            

Net sales

     $10,793      $10,882      $10,949      $  9,964      $  9,371   

Operating income

     918      487      (51   305      211   

Income before income taxes

     795      358      (156   161      (26

Income (loss)

     642      225      (276   258      (18

Income (loss) attributable to Sara Lee

     635      220      (280   256      (18

Effective tax rate

     19.3   37.3   76.6   (60.0 )%    32.6

Income (loss) per share of common stock

            

Basic

     $    0.92      $    0.31      $   (0.39   $     0.35      $   (0.02

Diluted

     0.92      0.31      (0.39   0.34      (0.02

Income (loss) from discontinued operations

     (199   155      236      228      184   

Gain (loss) on sale of discontinued operations

     84           (24   16      401   

Net income (loss)

     527      380      (64   502      568   

Net income (loss) attributable to Sara Lee

     506      364      (79   504      555   

Net income (loss) per share of common stock

            

Basic

     0.74      0.52      (0.11   0.68      0.72   

Diluted

     0.73      0.52      (0.11   0.68      0.72   
   

Financial Position

            

Total assets

     $  8,836      $  9,419      $10,831      $11,755      $14,660   

Total debt

     2,781      2,804      3,164      4,204      5,898   
   

Per Common Share

            

Dividends declared

     $    0.44      $    0.44      $    0.42      $    0.50      $    0.59   

Book value at year-end

     2.25      2.93      3.98      3.51      3.22   

Market value at year-end

     13.99      9.58      12.18      17.40      16.02   

Shares used in the determination of net income per share

            

Basic (in millions)

     688      701      715      741      766   

Diluted (in millions)

     691      703      715      743      768   
   

Other Information – Continuing Operations Only

            

Net cash flow from operating activities

     $     631      $     640      $     385      $     268      $     122   

Net cash from (used in) investing activities

     (34   (267   (170   632      744   

Net cash from (used in) financing activities

     (490   (532   (1,601   (749   757   

Depreciation

     361      351      367      363      351   

Media advertising expense

     217      168      187      177      182   

Total media advertising and promotion expense

     372      309      353      341      338   

Capital expenditures

     375      359      490      568      396   

Common stockholders of record

     65,000      67,000      70,000      76,000      82,000   

Number of employees

     33,000      35,000      37,000      38,000      41,000   
   
1 53-week year.

Note: The amounts above include the impact of certain significant items. Significant items may include, but are not limited to: exit activities, asset and business dispositions, impairment charges, transformation charges, Project Accelerate charges, settlement and curtailment gains or losses and various significant tax matters. Further details of these items are included in the Financial Review on page 22. Operating income is reconciled between the income from each of the corporation’s business segments to income from continuing operations before income taxes in Note 19 of the Consolidated Financial Statements titled, Business Segment Information.

The Consolidated Financial Statements and Notes and the Financial Review should be read in conjunction with the Financial Summary.

 

18        Sara Lee Corporation and Subsidiaries


Financial review

 

This Financial Review discusses the corporation’s results of operations, financial condition and liquidity, risk management activities, and significant accounting policies and critical estimates. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto contained elsewhere in this annual report. The corporation’s fiscal year ends on the Saturday closest to June 30. Fiscal 2010 was a 53-week year, while fiscal years 2009 and 2008 were 52-week years. Unless otherwise stated, references to years relate to fiscal years. The following is an outline of the analysis included herein:

 

 

Business Overview

 

 

Summary of Results

 

 

Review of Consolidated Results

 

 

Operating Results by Business Segment

 

 

Financial Condition

 

 

Liquidity

 

 

Risk Management

 

 

Non-GAAP Financial Measures

 

 

Critical Accounting Estimates

 

 

Issued But Not Yet Effective Accounting Standards

 

 

Forward-Looking Information

Business Overview

Our Business Sara Lee is a global manufacturer and marketer of high-quality, brand name products for consumers throughout the world focused primarily in the meats, bakery and beverage categories. Our major brands include Ball Park, Douwe Egberts, Hillshire Farm, Jimmy Dean, Senseo and our namesake, Sara Lee.

In North America, the company sells a variety of packaged meat products that include hot dogs, corn dogs, breakfast sausages, dinner sausages and deli meats as well as a variety of fresh and frozen baked products and specialty items that include bread, buns, bagels, cakes and cheesecakes. These products are sold through the retail channel to supermarkets, warehouse clubs and national chains. The company also sells a variety of meat, bakery and beverage products to foodservice customers in North America. Internationally, the company sells coffee and tea products in Europe, Brazil, Australia and Asia through the retail and foodservice channels as well as a variety of bakery and dough products to retail and foodservice customers in Europe and Australia.

During fiscal 2010, the corporation received binding offers for the sale of its global body care and European detergents businesses for 1.275 billion, its air care business for 320 million, and its non-Indian insecticides business for 154 million. In addition, it completed the sale of its 51% stake in its Godrej Sara Lee joint venture, an insecticide business in India, for 185 million. Together these businesses represent over 70% of the net sales of the international household and body care businesses. The corporation is also actively marketing for sale its remaining household and body

care businesses and, as a result, the businesses that formerly comprised the International Household and Body Care segment –air care, body care, shoe care and insecticides – are classified as discontinued operations and are presented in a separate line in the Consolidated Statements of Income for all periods presented.

The company is focused on building sustainable, profitable growth over the long term by achieving share leadership in its core categories; innovating around its core products and product categories; expanding into high opportunity geographic markets and strategic joint ventures/partnerships; delivering superior quality and value to our customers; and driving operating efficiencies.

Challenges and Risks As an international consumer products company, we face certain risks and challenges that impact our business and financial performance. The risks and challenges described below have impacted our performance and are likely to impact our future results as well.

The food and consumer products businesses are highly competitive. In many product categories, we compete not only with widely advertised branded products, but also with private label products that are generally sold at lower prices. As a result, from time to time, we may need to reduce the prices for some of our products to respond to competitive pressures. In addition, the general economic weakness has negatively impacted our business. The continued economic uncertainty may also result in increased pressure to reduce the prices for some of our products, limit our ability to increase or maintain prices or lead to a continued shift toward private label products. Any reduction in prices or our inability to increase prices when raw material costs increase could negatively impact profit margins and the overall profitability of our reporting units, which could potentially trigger a goodwill impairment.

Commodity prices directly impact our business because of their effect on the cost of raw materials used to make our products and the cost of inputs to manufacture, package and ship our products. Many of the commodities we use, including beef, pork, coffee, wheat, corn, corn syrup, soybean and corn oils, butter, sugar and energy, have experienced price volatility due to factors beyond our control. The company’s objective is to offset commodity price increases with pricing actions and to offset any operating costs increases with continuous improvement savings.

The company’s business results are also heavily influenced by changes in foreign currency exchange rates. For the most recently completed fiscal year, approximately 40% of net sales and approximately 50% of operating segment income were generated outside of the U.S. As a result, changes in foreign currency exchange rates, particularly the European euro, can have a significant impact on the reported results. A three cent movement in the euro exchange rate is expected to have approximately a one cent impact on the corporation’s diluted earnings per share.


 

Sara Lee Corporation and Subsidiaries        19


Financial review

 

The company’s international operations provide a significant portion of the company’s cash flow from operating activities, which has required and is expected to continue to require the company to repatriate a greater portion of cash generated outside of the U.S. The repatriation of these funds has resulted in higher income tax expense and cash tax payments.

As previously noted, the corporation is currently in the process of divesting the operations that comprise the household and body care business and more than $100 million of related overhead is expected to remain after these businesses have been sold. The corporation estimates that it will recognize charges of approximately $150 million to $200 million, the majority of which is expected to be incurred in 2011, to eliminate this stranded overhead and to expand the business process outsourcing initiative announced in 2009.

Non-GAAP Measures Management measures and reports Sara Lee’s financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). In this report, Sara Lee highlights certain items that have significantly impacted the corporation’s financial results and uses several non-GAAP financial measures to help investors understand the financial impact of these significant items. The non-GAAP financial measures used by Sara Lee in this annual report are adjusted net sales, adjusted operating segment income, and adjusted operating income, which exclude from a financial measure computed in accordance with GAAP the impact of significant items, the receipt of contingent sale proceeds, the impact of acquisitions and dispositions, the impact of the 53rd week and changes in foreign currency exchange rates. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of Sara Lee’s business that, when viewed together with Sara Lee’s financial results computed in accordance with GAAP, provide a more complete understanding of factors and trends affecting Sara Lee’s historical financial performance and projected future operating results, greater transparency of underlying profit trends and greater comparability of results across periods. These non-GAAP financial measures are not intended to be a substitute for the comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

In addition, investors frequently have requested information from management regarding significant items and the impact of the contingent sale proceeds. Management believes, based on feedback it has received during earnings calls and discussions with investors, that these non-GAAP measures enhance investors’ ability to assess Sara Lee’s historical and project future financial performance. Management also uses certain of these non-GAAP financial measures, in conjunction with the GAAP financial measures, to understand, manage and evaluate our businesses, in planning for and forecasting financial results for future periods, and as one factor in determining achievement of incentive compensation. Two of the

three performance measures under Sara Lee’s annual incentive plan are net sales and operating income, which are the reported amounts as adjusted for significant items and possibly other items. Operating income, as adjusted for significant items, also may be used as a component of Sara Lee’s long-term incentive plans. Many of the significant items will recur in future periods; however, the amount and frequency of each significant item varies from period to period. See Non-GAAP Measures Definitions on page 35 of this report for additional information regarding these financial measures.

Summary of Results

The business highlights for 2010 include the following:

•    Net sales for the year were $10.8 billion, virtually unchanged from the prior year, as the favorable impact of the 53rd week and changes in foreign currency exchange rates were offset by the negative impact of business dispositions, lower unit volumes and lower prices due to competitive pressures and a difficult economic environment. Adjusted net sales declined 2.8%.

•    Reported operating income for the year was $918 million, an increase of $431 million, which resulted from a $286 million reduction in impairment charges, improved operating results for the North American Retail and International Beverage business segments and the favorable impact of the 53rd week. Adjusted operating income increased $157 million, or 20.2%.

•    Operating segment income was favorably impacted by the year-over-year reduction in impairment charges as well as lower commodity costs net of pricing actions and cost savings achieved from Project Accelerate and continuous improvement initiatives. These improvements were partially offset by higher spending on media advertising and promotions (MAP) and the negative impact of lower unit volumes.

•    Income from continuing operations attributable to Sara Lee was $635 million, or $0.92 per share on a diluted basis, while net income attributable to Sara Lee was $506 million or $0.73 per share on a diluted basis. The year-over-year improvement reflects improved results for the business segments, which includes the favorable impact of lower impairment charges noted above.

•    Cash from operating activities increased by $52 million due to improved operating results and improved working capital management partially offset by higher cash payments for restructuring actions, taxes and pensions.

•    The corporation announced a revised capital plan that will focus on share repurchases, dividend payouts and pension plan funding while maintaining a solid investment grade credit profile. The company expended $500 million to repurchase 36.4 million shares of its common stock under an accelerated share repurchase program and voluntarily contributed an additional $200 million into its U.S. defined benefit pension plans.


 

20        Sara Lee Corporation and Subsidiaries


Significant Items Affecting Comparability The reported results for 2010, 2009 and 2008 reflect amounts recognized for restructuring actions and other significant amounts that impact comparability.

“Significant items” are income or charges (and related tax impact) that management believes have had or are likely to have a significant impact on the earnings of the applicable business segment or on the total corporation for the period in which the item is recognized, are not indicative of the company’s core operating results and affect the comparability of underlying results from period to period. Significant items may include, but are not limited to: charges for exit activities; transformation program and Project Accelerate costs; impairment charges; pension partial withdrawal liability charges; benefit plan curtailment gains and losses; tax charges on deemed repatriated earnings; tax costs and benefits resulting from the disposition of a business; impact of tax law changes; changes in tax valuation allowances and favorable or unfavorable resolution of open tax matters based on the finalization of tax authority examinations or the expiration of statutes of limitations.

Exit Activities, Asset and Business Dispositions These costs are reported on a separate line of the Consolidated Statements of Income. Exit activities primarily relate to charges taken to recognize severance actions approved by the corporation’s management and the exit of leased facilities or other contractual arrangements. Asset and business disposition activities include costs associated with separating businesses targeted for sale and preparing financial statements for these businesses, as well as gains and losses associated with the disposition of asset groups that do not qualify for discontinued operations reporting. More information on these costs can be found in Note 6 to the Consolidated Financial Statements, “Exit, Disposal and Transformation Activities.”

Project Accelerate Costs Project Accelerate is a series of global cost reduction and efficiency projects initiated in fiscal 2009. The costs include charges associated with the transition of business support services to an outside third party vendor as part of a business process outsourcing initiative announced in 2009 as well as costs associated with the outsourcing of a portion of the North American and European finance processing functions, information systems application development and maintenance as well as indirect procurement activities.

 

The corporation currently expects to recognize more than $300 million of charges related to Project Accelerate, approximately $225 million of which has been recognized through the end of 2010. The remainder is expected to be incurred predominately in 2011. For 2010, the savings resulting from Project Accelerate and other restructuring actions were approximately $180 million, of which $130 million is incremental to the prior year. The corporation anticipates incremental savings related to continuing operations of approximately $90 million to $110 million in 2011. It anticipates annualized savings in the range of $350 million to $400 million by 2012.

Business Transformation Costs In February 2005, the corporation announced a transformation plan designed to improve performance and better position the corporation for long-term growth. The plan involved significant changes in the organization structure, portfolio changes including the disposition of a significant portion of the corporation’s businesses and initiatives to improve operational efficiency.

The costs related to the transformation include costs to retain and relocate existing employees, recruit new employees, third-party consulting costs associated with transformation efforts, and amortization costs for new enterprise-wide software. In addition, these costs include accelerated depreciation, which is incremental depreciation associated with decisions to close facilities at dates sooner than originally anticipated, pursuant to an exit plan. More information on these costs can be found in Note 6 to the Consolidated Financial Statements, “Exit, Disposal and Transformation Activities.”

Impairment Charges These costs are included on a separate line of the Consolidated Statements of Income and represent charges for the impairment of fixed assets, intangible assets, goodwill and investments held by the corporation. More information regarding impairment charges can be found in Note 4 to the Consolidated Financial Statements, “Impairment Charges.”

The reported results were also impacted by certain discrete tax matters that affect comparability. They include audit settlements, contingent tax obligation adjustments, tax on repatriation of prior years’ earnings, valuation allowance adjustments and various other tax matters. The tax impact of the various items is determined using the statutory rates in the individual tax jurisdictions in which the charge was incurred.

The impact of the above items on net income and diluted earnings per share is summarized on the following page.


 

Sara Lee Corporation and Subsidiaries        21


Financial review

 

Impact of Significant Items on Income from

Continuing Operations and Net Income

 

           Year ended July 3, 2010           Year ended June 27, 2009           Year ended June 28, 2008  
      
In millions except per share data   

Pretax

Impact

    Net Income    

Diluted EPS

Impact1

   

Pretax

Impact

    Net Income     Diluted EPS
Impact1
   

Pretax

Impact

    Net Income    

Diluted EPS

Impact1

 
   

Significant items affecting comparability of income from continuing operations and net income

                  

Charges for exit activities

   $  (64   $  (43   $(0.06   $(103   $  (73   $(0.10   $  (40   $  (26   $(0.04

Income from (charges for) asset and business disposition activities

   (20   (14   (0.02        (4   (0.01   1             
   

Subtotal

   (84   (57   (0.08   (103   (77   (0.11   (39   (26   (0.03

(Charges) income in cost of sales

                  

Accelerated depreciation

   (8   (5   (0.01                  (1   (1     

Transformation – IT costs

                                 (4   (2     

Curtailment gain

   7      5      0.01      6      4      0.01                  

Pension partial withdrawal liability charge

   (1   (1        (13   (9   (0.01               

(Charges) income in SG&A expenses

                  

Transformation/Accelerate charges – Other

   (23   (16   (0.02   (17   (11   (0.02   (2   (1     

Accelerated depreciation

   (5   (3                                   

Transformation – IT costs

                  (4   (3        (23   (15   (0.02

Curtailment gain

   17      11      0.02      6      4      0.01                  

Mexican tax indemnification charge

   (26   (26   (0.04                              

Gain on property disposition

                  14      10      0.01                  

Pension partial withdrawal liability charge

   (22   (14   (0.02   (18   (11   (0.02               

Balance sheet corrections

                  11      7      0.01                  

Impairment charges

   (28   (19   (0.03   (314   (289   (0.41   (851   (827   (1.16
   

Impact of significant items on income from continuing operations before income taxes

   (173   (125   (0.18   (432   (375   (0.53   (920   (872   (1.22

Significant tax matters affecting comparability

                  

UK net operating loss utilization

        11      0.02                                 

Tax audit settlements/reserve adjustments

        198      0.29           14      0.02           77      0.11   

Tax on unremitted earnings

        (121   (0.18                              

Belgian tax proceeding

        (44   (0.06                              

Tax valuation allowance adjustment

        (5   (0.01                       19      0.03   

Tax credit adjustment

        25      0.04                                 

Deferred tax adjustment on repatriation

        11      0.02                                 

Provision expense corrections

                       (19   (0.03        15      0.02   

Tax benefit on foreign exchange gains

                       29      0.04                  

Other tax adjustments, net

        12      0.02           (3                    
   

Impact on income from continuing operations

   (173   (38   (0.05   (432   (354   (0.51   (920   (761   (1.06

Significant items impacting discontinued operations

                  

Professional fees/other

   (35   (31   (0.04   (4   (2                    

Curtailment gain/(loss)

   (10   (8   (0.01   5      4                       

Competition law charges

   (28   (28   (0.04                              

Transformation/Accelerate charges

   (17   (14   (0.02   (13   (10        (7   (5   (0.01

Tax on unremitted earnings

        (428   (0.62                              

UK valuation allowance release on NOL’s

        40      0.06                                 

Capital loss carryforward benefit

        22      0.03                                 

Deferred tax adjustment on repatriation

        9      0.01                                 

U.K. Pension plan settlement charge

                                 (15   (15   (0.02

Tax audit settlements/reserve adjustments

                                      26      0.04   

Provision expense corrections

                                   (10   (0.01

Gain (loss) on the sale of discontinued operations, net

   158      84      0.12                     (23   (24   (0.03
   

Impact of significant items on net income

   $(105   $(392   $(0.57   $(444   $(362   $(0.51   $(965   $(789   $(1.10
   

 

1

The earnings per share (EPS) impact of individual amounts in the table above are rounded to the nearest $0.01 and may not add to the total.

 

22        Sara Lee Corporation and Subsidiaries


Review of Consolidated Results

The following tables summarize net sales and operating income for 2010 versus 2009, and 2009 versus 2008 and certain items that affected the comparability of these amounts:

2010 versus 2009

 

In millions    2010     2009     Dollar
Change
    Percent
Change
 
   

Net sales

   $10,793      $10,882      $(89   (0.8 )% 
   

Less: Increase/(decrease)
in net sales from

        

Changes in currency rates

   $         –      $    (152   $ 152     

Acquisitions/dispositions

   12      143      (131  

Impact of 53rd week

   197           197     
   

Adjusted net sales

   $10,584      $10,891      $(307   (2.8 )% 
   

Operating income

   $     918      $     487      $ 431      88.6
   

Less: Increase/(decrease)
in operating income from

        

Contingent sale proceeds

   $     133      $     150      $  (17  

Changes in currency rates

        (17   17     

Exit activities, asset and business dispositions

   (84   (103   19     

Transformation/Accelerate charges

   (23   (21   (2  

Accelerated depreciation

   (13        (13  

Impairment charges

   (28   (314   286     

Curtailment gain

   24      12      12     

Pension partial withdrawal liability charge

   (23   (31   8     

Gain on property disposition

        14      (14  

Mexican tax indemnification

   (26        (26  

Balance sheet corrections

        11      (11  

Acquisitions/dispositions

   1      11      (10  

Impact of 53rd week

   25           25     
   

Adjusted operating income

   $     932      $     775      $ 157      20.2
   

2009 versus 2008

 

In millions    2009     2008     Dollar
Change
    Percent
Change
 
   

Net sales

   $10,882      $10,949      $  (67   (0.6 )% 
   

Less: Increase/(decrease)
in net sales from

        

Changes in currency rates

   $         –      $     361      $(361  

Acquisitions/dispositions

   45      130      (85  
   

Adjusted net sales

   $10,837      $10,458      $ 379      3.6
   

Operating income (loss)

   $     487      $      (51   $ 538      NM   
   

Less: Increase/(decrease)
in operating income from

        

Contingent sale proceeds

   $     150      $     130      $   20     

Changes in currency rates

        34      (34  

Exit activities, asset and business dispositions

   (103   (39   (64  

Transformation/Accelerate charges

   (21   (29   8     

Impairment charges

   (314   (851   537     

Curtailment gain

   12           12     

Pension partial withdrawal liability charge

   (31        (31  

Gain on property disposition

   14           14     

Balance sheet corrections

   11           11     

Accelerated depreciation

        (1   1     

Acquisitions/dispositions

   2      1      1     
   

Adjusted operating income

   $     767      $     704      $   63      8.9
   

Net Sales Net sales in 2010 were $10,793 million, a decrease of $89 million, or 0.8% versus 2009. Net sales were impacted by changes in foreign currency exchange rates, particularly the European euro, Brazilian real and Australian dollar, which increased reported net sales by $152 million; dispositions net of acquisition after the beginning of 2009, which reduced net sales by $131 million; and the impact of the 53rd week, which increased net sales by $197 million. Adjusted net sales decreased $307 million, or 2.8% due to lower unit volumes and price reductions in response to lower commodity costs and competitive pressures partially offset by an improved sales mix.

Net sales were $10,882 million in 2009, a decrease of $67 million, or 0.6% versus 2008. Changes in foreign currency exchange rates, particularly the European euro, British pound, Brazilian real and Australian dollar, decreased reported net sales by $361 million. Dispositions net of acquisitions after the beginning of 2008 reduced net sales by $85 million. Adjusted net sales increased $379 million, or 3.6% driven by price increases to offset higher commodity costs and an improved sales mix, partially offset by lower unit volumes.


 

Sara Lee Corporation and Subsidiaries        23


Financial review

 

The following table summarizes the components of the change in sales on a percentage basis versus the prior year:

Net Sales Bridge – Components of Change vs Prior Year

 

   

Volume
(Excl.

53rd
Week)

    Price/
Mix/
Other
   

Impact
of

53rd
Week

    Acq./
Disp.
   

Foreign
Ex-

change

    Total  
   

2010 versus 2009

  (3.7 )%    0.9   1.8   (1.2 )%    1.4   (0.8 )% 

2009 versus 2008

  (2.3 )%    5.9   NA      (0.8 )%    (3.4 )%    (0.6 )% 
   

Operating Income Operating income increased by $431 million, or 88.6% in 2010. The year-over-year net impact of the changes in currency rates, transformation/Accelerate charges, impairment charges and the other factors identified in the preceding table increased operating income by $274 million. The remaining increase of $157 million, or 20.2%, which represents the change in adjusted operating income, was due to lower commodity costs, the benefits of cost saving initiatives, and an improved sales mix partially offset by lower unit volumes and higher MAP spending.

Operating income increased by $538 million in 2009. The year-over-year net impact of the changes in currency rates, transformation/Accelerate charges, impairment charges and the other factors identified in the preceding table increased operating income by $475 million. In addition, the impact of commodity mark-to-market derivative activity decreased operating income by $40 million in 2009 compared to 2008. The remaining increase in operating income of $103 million, or 15.0%, was due to the favorable impact of price increases, the benefits of cost saving initiatives, and a reduction in selling, general and administrative (SG&A) costs, due in part to lower MAP spending partially offset by higher commodity costs, and lower unit volumes.

The changes in the individual components of operating income are discussed in more detail below.

Gross Margin The gross margin, which represents net sales less cost of sales, increased by $257 million in 2010, driven by lower commodity costs, the benefits of cost saving initiatives, the favorable impact of changes in currency exchange rates, an improved sales mix and the impact of the 53rd week, partially offset by the impact of lower unit volumes and lower prices.

The gross margin percent increased from 35.3% in 2009 to 38.0% in 2010 due to gross margin percent improvements for all business segments but primarily at North American Retail, North American Fresh Bakery and International Beverage. The gross margin percent was positively impacted by lower commodity costs, a favorable shift in product mix and continuous improvement savings, which were partially offset by pricing actions and the negative impact of inflation on labor and other employee benefit costs.

 

The gross margin decreased by $97 million in 2009, driven by higher commodity costs, the negative impact of changes in currency exchange rates, and lower unit volumes partially offset by price increases and savings from continuous improvement programs.

The gross margin percent declined from 36.0% in 2008 to 35.3% in 2009 due to gross margin percent declines at North American Fresh Bakery and International Beverage. The gross margin percent was negatively impacted by higher commodity costs, the negative impact of inflation on labor and other employee benefit costs and a shift in product sales mix, which was partially offset by pricing actions.

Selling, General and Administrative Expenses

 

In millions    2010     2009     2008  
   

SG&A expenses in the business segment results

      

Media advertising and promotion

   $   372      $   309      $   353   

Other

   2,544      2,523      2,619   
   

Total business segments

   2,916      2,832      2,972   

Amortization of identifiable intangibles

   49      47      48   

General corporate expenses

      

Other

   237      205      232   

Mark-to-market derivative (gains)/losses

   9      11      (16

Adjustment for noncontrolling interests

   (7   (5   (4
   

Total SG&A

   $3,204      $3,090      $3,232   
   

Total selling, general and administrative (SG&A) expenses in 2010 increased $114 million, or 3.7%. Changes in foreign currency exchange rates, primarily in the European euro, increased SG&A expenses by $31 million, or 1.0%. The remaining increase in SG&A expenses was $83 million, or 2.7%. Measured as a percent of sales, SG&A expenses increased from 28.4% in 2009 to 29.7% in 2010. SG&A expenses as a percent of sales increased in each of the business segments, with the exception of North American Foodservice. The results reflect the impact of higher MAP expenses and the impact of the 53rd week partially offset by the benefits of cost saving initiatives.

Total SG&A expenses reported in 2010 by the business segments increased by $84 million, or 2.9%, versus 2009 primarily due to higher MAP spending, the impact of changes in foreign currency exchange rates, the impact of inflation on wages and employee benefits and the impact of the 53rd week partially offset by the benefits of cost saving initiatives.


 

24        Sara Lee Corporation and Subsidiaries


Amortization of intangibles increased by $2 million in 2010 versus 2009. Total general corporate expenses, which are not allocated to the individual business segments, increased by $30 million due to a $32 million increase in other general expenses partially offset by a $2 million decline in unrealized mark-to-market losses on commodity derivatives. The increase in other general corporate expenses was due to a $26 million tax indemnification charge related to a previously divested business, higher Project Accelerate charges and the year-over-year negative impact of approximately $22 million of gains in 2009 – primarily a non-income related foreign tax refund and a reduction in contingent lease accruals. These increases were partially offset by a pension curtailment gain and lower benefit plan expenses.

The adjustment for noncontrolling interest represents an offset to the noncontrolling interest expense that is included in the SG&A expense reported by the business segments as part of their operating segment income. See Note 1 to the Financial Statements, “Nature of Operations and Basis of Presentation,” for additional information regarding noncontrolling interest.

Total SG&A expenses in 2009 decreased $142 million, or 4.4%. Changes in foreign currency exchange rates, primarily in the European euro, decreased SG&A expenses by $125 million, or 3.8%. The remaining decrease in SG&A expenses was $17 million, or 0.6%. Measured as a percent of sales, SG&A expenses decreased from 29.5% in 2008 to 28.4% in 2009. SG&A expenses as a percent of sales declined in each of the business segments, with the exception of International Bakery, which remained virtually unchanged. The results reflect the favorable impact of cost saving initiatives and lower MAP expenses.

Total SG&A expenses reported in 2009 by the business segments decreased by $140 million, or 4.7%, versus 2008 primarily due to the impact of changes in foreign currency exchange rates, lower MAP spending and the benefits of cost savings initiatives partially offset by the impact of inflation on wages and employee benefits.

Amortization of intangibles decreased by $1 million in 2009 versus 2008. Total general corporate expenses were unchanged. Other general corporate expenses decreased $27 million versus the prior year due to lower pension costs and favorable foreign currency transactions partially offset by increased professional fees for consulting and special project work. General corporate expenses were also favorably impacted by approximately $22 million of gains –primarily a non-income related foreign tax refund and a reduction in contingent lease accruals. The decline in other general corporate expenses was offset by a $27 million increase in unrealized mark-to-market losses on commodity derivatives as the corporation reported $11 million of losses in 2009 compared to gains of $16 million in the prior year.

 

As previously noted, reported SG&A reflects amounts recognized for actions associated with Project Accelerate, the business transformation program and other significant amounts. These amounts include the following:

 

In millions    2010     2009     2008
 

Transformation costs – IT

   $  –      $  4      $23

Transformation/Accelerate costs – other

   23      17      2

Accelerated depreciation

   5          

Curtailment gain

   (17   (6  

Gain on property disposition

        (14  

Tax indemnification charge

   26          

Pension partial withdrawal liability charge

   22      18     

Balance sheet corrections

        (11  
 

Total

   $  59      $  8      $25
 

Information regarding the transformation/Accelerate costs can be found in Note 6 to the Consolidated Financial Statements, “Exit, Disposal and Transformation Activities.”

In 2010 and 2009, the North American Fresh Bakery segment recognized charges to establish estimated partial withdrawal liabilities as a result of the cessation of contributions to two multi-employer pension plans. The corporation also recognized curtailment gains in 2010 and 2009 related to its defined benefit pension plans. Additional information regarding the pension charges and curtailment gains can be found in Note 16 to the Consolidated Financial Statements, “Defined Benefit Pension Plans.”

Exit Activities, Asset and Business Dispositions Exit activities, asset and business dispositions are as follows:

 

In millions    2010    2009     2008  
   

Charges for (income from) exit activities

       

Severance

   $45    $103      $32   

Exit of leased and owned facilities

   14    (1   5   

Other

   5    1      3   

Asset and business dispositions

   20         (1
   

Total

   $84    $103      $39   
   

The net charges in 2010 are $19 million lower than 2009 as a result of a $58 million decline in severance costs related to restructuring actions partially offset by a $20 million charge related to an asset disposition in Spain.

The net charges in 2009 were $64 million higher than 2008 as a result of higher severance costs related to restructuring actions taken in the International Beverage and International Bakery segments.


 

Sara Lee Corporation and Subsidiaries        25


Financial review

 

Impairment Charges In 2010, the corporation recognized a $28 million impairment charge, $15 million of which related to the writedown of manufacturing equipment associated with the North American foodservice bakery reporting unit and $13 million of which related to the writedown of bakery equipment associated with the Spanish bakery reporting unit.

During 2009, the corporation recognized a $314 million non-cash charge primarily for the impairment of goodwill and other long-lived assets associated with the Spanish bakery operations and goodwill associated with the North American foodservice beverage operations as both operations were not expected to generate sufficient profitability to support the remaining goodwill balances.

During 2008, the corporation recognized an $851 million non-cash charge primarily for the impairment of goodwill associated with the North American foodservice bakery and Spanish bakery operations and writedowns of certain other assets in North America.

Additional details regarding these impairment charges are discussed in Note 4 to the Consolidated Financial Statements, “Impairment Charges.”

Receipt of Contingent Sale Proceeds Under the terms of the sale agreement for its cut tobacco business sold in 1999, the corporation was to receive annual cash payments of 95 million euros through July 2009, contingent on tobacco continuing to be a legal product in the Netherlands, Germany and Belgium. Tobacco continued to be a legal product in the required countries through the final payment date in July 2009. The U.S. dollar amounts received in 2010, 2009 and 2008 upon the expiration of the contingency were $133 million, $150 million and $130 million, respectively, based upon respective foreign currency exchange rates on the date of receipt. These amounts were recognized in the corporation’s earnings when received and the payments increased diluted earnings per share from continuing operations in 2010, 2009 and 2008 by $0.19, $0.21 and $0.18, respectively.

Net Interest Expense Net interest expense decreased by $6 million in 2010 to $123 million. The decrease in net interest expense was a result of a $23 million decline in interest expense due to lower interest rates and average debt levels partially offset by a $17 million decrease in interest income resulting from a lower rate of return earned on investments. Net interest expense increased by $24 million in 2009 to $129 million. The increase in net interest expense was a result of a $39 million reduction in interest income resulting from a decline in cash and cash equivalents, a portion of which was used to repay debt. This increase was partially offset by a $15 million decline in interest expense due to lower average debt levels.

 

Income Tax Expense The effective tax rate on continuing operations in 2010, 2009 and 2008 was impacted by a number of significant items that are shown in the reconciliation of the corporation’s effective tax rate to the U.S. statutory rate in Note 18 to the Consolidated Financial Statements. Additional information regarding income taxes can be found in “Critical Accounting Estimates” within Management’s Discussion and Analysis.

 

In millions

 

  

2010

 

   

2009

 

   

2008

 

 
   

Continuing operations

      

   Income before income taxes

   $795      $358      $(156

   Income tax expense (benefit)

   153      133      120   

   Effective tax rates

   19.3   37.3   76.6
   

2010 vs. 2009 In 2010, the corporation recognized tax expense on continuing operations of $153 million, or an effective tax rate of 19.3%, compared to tax expense of $133 million, or an effective tax rate of 37.3%, in 2009. The significant components impacting the change in the corporation’s 2010 effective tax rate are as follows:

•   Remittance of Foreign Earnings – The 2010 effective tax rate was 7 percentage points higher than 2009 primarily due to a tax charge of $145 million related to current year foreign earnings that are no longer indefinitely reinvested. Of this total, $121 million was a charge in connection with the corporation’s third quarter decision to no longer reinvest overseas earnings primarily attributable to existing overseas cash and the book value of the household and body care businesses. The corporation expects to incur charges in future fiscal years from the remittance of foreign earnings. See the discussion of Repatriation of Foreign Earnings and Income Taxes in the Liquidity section of Management’s Discussion and Analysis for more information.

•   Finalization of Tax Reviews and Audits and Changes in Estimate on Tax Contingencies – The 2010 effective tax rate was 16 percentage points lower than 2009 due to a $156 million increase in tax benefits resulting from the resolution of tax audits, the expiration of statutes of limitations, and changes in estimate on tax contingencies in various countries and various state and local jurisdictions. Currently, the corporation believes that it is reasonably possible that the liability for unrecognized tax benefits will decrease by approximately $0 to $25 million within the next 12 months from a variety of uncertain tax positions as a result of the resolution of audits and the expiration of statutes of limitations in several jurisdictions. A majority of this decrease would impact the corporation’s effective tax rate. For a summary of open audit years by significant jurisdiction and other critical estimates surrounding the finalization of tax reviews and audits, see Income Taxes under Critical Accounting Estimates included in Management’s Discussion and Analysis.


 

26        Sara Lee Corporation and Subsidiaries


•   Receipt of Contingent Sales Proceeds – In 2010, the corporation recognized a tax benefit of $47 million related to its receipt of non-taxable contingent sales proceeds pursuant to the sale terms of its European cut tobacco business in 1999, compared to a $53 million benefit in 2009. The 2010 payment represented the final payment under the sales agreement and, as a result, this is the final year the corporation will recognize a tax rate reduction related to the contingent sales proceeds.

•   Foreign Earnings – The 2010 effective tax rate was 8 percentage points higher than 2009 as a result of a change in the corporation’s global mix of earnings, the tax characteristics of the corporation’s income, and the benefit from certain foreign jurisdictions that have lower tax rates. As specifically highlighted in Part I. Item 1A. Risk Factors, of the corporations Form 10-K, the corporation expects that its effective tax rate will be impacted in future fiscal years as a result of its global mix of earnings.

2009 vs. 2008 In 2009, the corporation recognized tax expense on continuing operations of $133 million, or an effective tax rate of 37.3%, compared to tax expense of $120 million in 2008, or an effective tax rate of 76.6%. The significant components impacting the change in the corporation’s 2009 effective tax rate are as follows:

•   Goodwill Impairment – The 2009 effective tax rate was 153 percentage points lower than the prior year as a result of a $548 million reduction in non-deductible goodwill impairments recognized during the year.

•   Remittance of Foreign Earnings – The 2009 effective tax rate was 56 percentage points lower than the prior year as a result of a $63 million reduction in tax charges related to the repatriation of earnings from certain foreign subsidiaries.

•   Finalization of Tax Reviews and Audits and Changes in Estimate on Tax Contingencies – The 2009 effective tax rate was 55 percentage points higher than the prior year as a result of an $74 million reduction in benefits resulting from the resolution of tax audits, the expiration of statutes of limitations, and changes in estimate on tax contingencies, in various countries and various state and local jurisdictions.

•   Receipt of Contingent Sales Proceeds – The corporation recognized a tax benefit of $53 million related to its receipt of non-taxable contingent sales proceeds pursuant to the sale terms of its European cut tobacco business in 1999, compared to a $46 million benefit in 2008. The 2009 effective tax rate was 15% lower as a result of this income. In 2008 the effective tax rate reduction was 29%.

 

•   Foreign Earnings – The 2009 effective tax rate was 8 percentage points lower than 2008 as a result of a $ 44 million change in the corporation’s global mix of earnings, the tax characteristics of the corporation’s income, and the benefit from certain foreign jurisdictions that have lower tax rates.

Income (Loss) from Continuing Operations and Diluted Earnings Per Share (EPS) from Continuing Operations Income from continuing operations in 2010 was $642 million, an increase of $417 million over the prior year. The improvement was due to a $270 million after tax decline in impairment charges and improved business segment results. Income from continuing operations in 2009 was $225 million, which was $501 million higher than 2008 due to a $538 million after tax reduction in impairment charges.

      The net income (loss) from continuing operations attributable to Sara Lee, which excludes the results of noncontrolling interests, was income of $635 million in 2010 and $220 million in 2009 and a net loss of $280 million in 2008.

      Diluted EPS from continuing operations was $0.92 in 2010 and $0.31 in 2009 versus a loss of $0.39 in 2008. The diluted EPS from continuing operations in each succeeding year was favorably impacted by lower average shares outstanding as the corporation has been repurchasing shares of its common stock as part of an ongoing share repurchase program. The corporation repurchased 36.4 million shares in 2010, 11.4 million shares in 2009 and 19.7 million shares in 2008.

Discontinued Operations The results of the corporation’s household and body care and Mexican meats businesses, which have been classified as discontinued operations, are summarized below:

 

 

In millions   2010     2009     2008  
   

Net sales

  $ 2,126      $ 2,000      $ 2,502   
   

Income from discontinued operations before income taxes

  $ 254      $ 245      $ 317   

Income tax expense on income discontinued operations

    (453     (90     (81

Gain (loss) on disposition of discontinued operations before income taxes

    158               (23

Income tax (expense) benefit on disposition of discontinued operations

    (74            (1
   

Net income (loss) from discontinued operations

  $ (115   $ 155      $ 212   
   

 

Sara Lee Corporation and Subsidiaries        27


Financial review

 

Income (Loss) from Discontinued Operations before Income Taxes Net sales for discontinued operations were $2.1 billion in 2010, compared to $2.0 billion in the prior year, a 6.3% increase. The sales growth was primarily driven by strength in the insecticides, shoe care and body care core categories, as well as the additional 53rd week and favorable foreign currency exchange rates. On a constant currency basis and excluding the impact of the 53rd week, net sales increased 2.4%. Pretax income in 2010 was $254 million, an increase of $9 million or 3.0% compared to 2009. The increase was driven by higher net sales, positive manufacturing results and favorable foreign currency exchange rates, which were partially offset by higher significant charges, MAP spending and other SG&A costs. Pretax income in 2010 was also benefited by $33 million due to the cessation of depreciation and amortization in accordance with the accounting rules for assets held for sale. Discontinued operations reported a loss of $199 million in fiscal 2010, due to $453 million of income tax expense. The increase in tax expense was related to the deemed repatriation of overseas earnings, attributable to the existing overseas cash and book value of the International Household and Body Care businesses.

Net sales for discontinued operations were $2.0 billion in fiscal 2009, compared to $2.5 billion in the prior year, a 20.0% decrease. The sales decline was primarily driven by the unfavorable impacts of foreign currency exchange rates and the impact of the divestiture of the Mexican meats business in fiscal 2008. On a constant currency basis and excluding the impact of divestitures, net sales decreased $40 million or 2.0%. Pretax income in 2009 was $245 million, a decrease of $72 million or 22.4% compared to fiscal 2008. The decrease was driven by lower unit volumes and higher raw material and manufacturing costs, which were partially offset by lower MAP expenses and savings from continuous improvement programs. Discontinued operations reported net income of $155 million in fiscal 2009 as compared to $236 million in 2008. The decrease was primarily related to the decline in pretax income noted above.

The operating results of discontinued operations in 2008 include a $15 million charge related to the settlement of a pension plan in the U.K. associated with the European Branded Apparel business. Further details regarding this charge can be found in Note 5 to the Consolidated Financial Statements, “Discontinued Operations.”

Gain (Loss) on Sale of Discontinued Operations In 2010, the corporation completed the disposition of its insecticide business in India, which had been part of the household and body care business, and recognized a pretax gain of $150 million and an after tax gain of $78 million. In 2008, the corporation completed the disposition of its Mexican meats business and recognized a pretax loss of $23 million and after tax loss of $24 million. Further details regarding these transactions are included in Note 4 to the Consolidated Financial Statements, “Discontinued Operations.”

 

Consolidated Net Income and Diluted Earnings Per Share (EPS) Net income was $527 million in 2010, an increase of $147 million over the prior year. The increase in net income was due to a $417 million increase in income from continuing operations as a result of a reduction in after tax impairment charges on a year-over-year basis partially offset by a $270 million reduction in income from discontinued operations due to the tax provision related to the repatriation of foreign earnings. Net income was $380 million in 2009 as compared to a net loss of $64 million in 2008. The increase in net income was due to a $538 million reduction in after tax impairment charges on a year-over-year basis.

The net income (loss) attributable to Sara Lee was income of $506 million in 2010 and $364 million in 2009 and a net loss of $79 million in 2008.

Diluted EPS were $0.73 in 2010 as compared to $0.52 in 2009. Diluted EPS was a net loss of $0.11 in 2008. The diluted EPS in each succeeding year was favorably impacted by lower average shares outstanding due to an ongoing share repurchase program.

Operating Results by Business Segment

The corporation’s structure is currently organized around five business segments, which are described below.

North American Retail sells a variety of packaged meat and frozen bakery products to retail customers in North America. It also includes the Senseo retail coffee business in the U.S. Products include hot dogs and corn dogs, breakfast sausages, breakfast convenience items which include sandwiches and bowls, smoked and dinner sausages, premium deli and luncheon meats, bacon, cooked hams and frozen pies, cakes, cheesecakes and other desserts. The major brands include Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee and State Fair.

North American Fresh Bakery sells a wide variety of fresh bakery products to retail and institutional customers in North America including bread, buns, bagels, rolls, muffins, specialty bread and cakes. The major brands include Sara Lee, Earth Grains, Colonial, Rainbo, Holsum, IronKids, Mother’s, Sunbeam, Sun-Maid, San Luis Sourdough and Heiner’s, some of which are used under licensing arrangements.

North American Foodservice sells a variety of meat, bakery and beverage products to foodservice customers in North America including hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, cooked and dry hams, beef, turkey, bread, pastry, bagels, rolls, muffins, frozen pies, cakes, cheesecakes, roast & ground and liquid coffee, cappuccinos, lattes and hot and iced teas. The segment also sells refrigerated dough products to certain customers. Sales are made in the foodservice channel to distributors, restaurants, hospitals and other large institutions and in the retail channel, sales are made to supermarkets and national chains.


 

28        Sara Lee Corporation and Subsidiaries


International Beverage sells coffee and tea products in certain markets around the world, including Europe, Australia and Brazil. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to distributors. The segment also offers direct delivery to restaurants and warehouses through its direct delivery system. In Europe, some of the more prominent brands are Douwe Egberts, Senseo, Maison du Café, Marcilla, Merrild and Pickwick, while in South America, significant brands include Café Caboclo and Café Pilão.

International Bakery sells a variety of bakery and dough products to retail and foodservice customers in Europe and Australia. Products include a variety of bread, buns, rolls, specialty bread, refrigerated dough and frozen desserts. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains and in the foodservice channel to distributors and other institutions. The major brands under which International Bakery sells its products include Bimbo, CroustiPate, Ortiz, BonGateaux and Sara Lee.

The following is a summary of results by business segment:

 

In millions    2010     2009     2008  
   

Net sales

      

North American Retail

   $ 2,818      $ 2,767      $ 2,613   

North American Fresh Bakery

     2,128        2,200        2,028   

North American Foodservice

     1,873        2,092        2,186   

International Beverage

     3,221        3,062        3,238   

International Bakery

     785        795        934   
   

Total business segments

     10,825        10,916        10,999   

Intersegment sales

     (32     (34     (50
   

Net sales

   $ 10,793      $ 10,882      $ 10,949   
   

The following tables summarize the components of the percentage change in net sales as compared to the prior year.

Net Sales Bridge – Components of Change 2010 vs 2009

 

    Volume
(Excl.
53rd
Week)
    Price/
Mix/
Other
    Impact
of
53rd
Week
    Acq./
Disp.
   

Cur-

rency

    Total  
   

North

  American

  Retail

  (5.5 )%    5.5 %    1.8 %     %    %    1.8 % 

North

  American

  Fresh

  Bakery

  (3.1   (2.6   2.4                (3.3

North

  American

  Foodservice

  (10.0   4.3      1.6      (6.6   0.2      (10.5

International

  Beverage

  1.4      (2.2   1.6      0.4      4.0      5.2   

International

  Bakery

  (2.3   (3.5   1.5           3.0      (1.3
   

Total

  business

  segments

  (3.7 )%    0.9 %    1.8 %    (1.2 )%    1.4 %    (0.8 )% 
   

 

Net Sales Bridge – Components of Change 2009 vs 2008

 

    Volume     Price/
Mix/
Other
    Acq./
Disp.
    Currency     Total  
   

North American Retail

  (2.0 )%    7.9 %     %     %    5.9  % 

North American Fresh Bakery

  3.2      5.3                8.5   

North American Foodservice

  (4.2   5.1      (4.9   (0.3   (4.3

International Beverage

  (2.8   5.3      1.2      (9.1   (5.4

International Bakery

  (11.6   5.1      (1.3   (7.1   (14.9
   

Total business segments

  (2.3 )%    5.9 %    (0.8 )%    (3.4 )%    (0.6 )% 
   

Operating segment income (loss) and income (loss) from continuing operations before income taxes for 2010, 2009 and 2008 are as follows:

 

In millions    2010     2009     2008  
   

Income (loss) from continuing operations before income taxes

      

North American Retail

   $ 346      $ 253      $ 149   

North American Fresh Bakery

     44        26        55   

North American Foodservice

     125        36        (324

International Beverage

     592        493        551   

International Bakery

     (14     (194     (346
   

Total operating segment income

     1,093        614        85   

Amortization of intangibles

     (49     (47     (48

General corporate expenses

      

Other

     (249     (217     (244

Mark-to-market derivative gains/(losses)

     (17     (18     22   

Adjustment for noncontrolling interest

     7        5        4   

Contingent sale proceeds

     133        150        130   
   

Total operating income (loss)

     918        487        (51

Interest expense, net

     123        129        105   
   

Income (loss) from continuing operations before income taxes

   $ 795      $ 358      $ (156
   

A discussion of each business segment’s sales and operating segment income is presented on the following pages.


 

Sara Lee Corporation and Subsidiaries        29


Financial review

 

The corporation uses derivative financial instruments to manage its exposure to commodity prices. A commodity derivative not declared a hedge in accordance with the accounting rules is accounted for under mark-to-market accounting with changes in fair value recorded in the Consolidated Statements of Income. The corporation includes these unrealized mark-to-market gains and losses in general corporate expenses until such time that the exposure being hedged affects the earnings of the business segment. At that time, the cumulative gain or loss previously recorded in general corporate expenses for the derivative instrument will be reclassified into the business segment’s results.

The change in unit volumes for each business segment excludes the impact of acquisitions and dispositions, and the impact of the 53rd week.

The amortization of intangibles in the table relates to trademarks and customer relationships. It does not include software amortization, a portion of which is recognized in the earnings of the segments and a portion is recognized as part of general corporate expenses.

Total general corporate expenses, which are not allocated to the individual business segments, were $266 million in 2010, an increase of $31 million over the prior year. The unrealized mark-to-market losses incurred on commodity derivative contracts were virtually unchanged year-over-year. Other general corporate expenses increased $32 million versus the prior year due primarily to a $26 million tax indemnification charge as well as an $10 million increase in restructuring related charges, in the current year, and the negative impact of $22 million of gains in the prior year, which were partially offset by lower fringe benefit costs and the impact of headcount reductions.

Total general corporate expenses were $235 million in 2009, an increase of $13 million over the prior year. This increase was driven by the $40 million year-over-year change in unrealized mark-to-market gains/(losses) incurred on commodity derivative contracts primarily related to energy. Other general corporate expenses decreased $27 million versus the prior year due to lower pension costs and favorable foreign currency transactions partially offset by increased professional fees for consulting and special project work. General corporate expenses were also favorably impacted by approximately $22 million related to certain items – primarily a non-income related foreign tax refund and a reduction in contingent lease accruals.

 

The adjustment for noncontrolling interest represents an offset to the noncontrolling interest expense that is included in the operating segment income of the North American Fresh Bakery business segment. As a result of the adjustment, the amount reported for operating income includes amounts attributable to both Sara Lee and noncontrolling interests. See Note 1 to the Financial Statements, “Nature of Operations and Basis of Presentation,” for additional information regarding noncontrolling interest.

The impact of the costs related to exit activities and asset and business dispositions, transformation and Project Accelerate costs, impairment charges and other significant items on the corporation’s business segments and general corporate expenses are summarized as follows:

Summary of Significant Items by Business Segment

 

In millions    2010     2009    2008
 

North American Retail

   $ (3   $    $ 34

North American Fresh Bakery

     22        37      3

North American Foodservice

     26        106      436

International Beverage

     12        27      14

International Bakery

     60        245      409
 

Impact on the business segments

     117        415      896

General corporate expenses

     56        17      24
 

Impact on income from continuing operations before income taxes

   $ 173      $ 432    $ 920
 

The most significant charges in the above table relate to impairment charges. In 2009, impairment charges of $107 million and $207 million were recognized in North American Foodservice and International Bakery, respectively. In 2008, impairment charges of $431 million and $400 million were recognized in North American Foodservice and International Bakery, respectively. Additional information regarding the amount and nature of the above charges is provided in the individual business segment discussions that follow.


 

30        Sara Lee Corporation and Subsidiaries


North American Retail

 

In millions    2010     2009     Dollar
Change
    Percent
Change
    2009     2008     Dollar
Change
   Percent
Change
 
   

Net sales

   $2,818      $2,767      $51      1.8 %    $2,767      $2,613      $154    5.9 % 
   

Less: Increase/(decrease) in net sales from
Impact of 53rd week

   52           52                    
    

Adjusted net sales

   $2,766      $2,767      $ (1   0.0 %    $2,767      $2,613      $154    5.9 % 
   

Operating segment income

   $   346      $   253      $93      36.9 %    $   253      $   149      $104    70.4 % 
   

Less: Increase/(decrease) in
operating segment income from
Exit activities, asset and business dispositions

   $      (4   $       –      $ (4     $       –      $    (13   $  13   

Transformation/Accelerate charges

                         (1   1   

Pension curtailment gain

   7           7                    

Impairment charge

                         (20   20   

Impact of 53rd week

   5           5                    
    

Adjusted operating segment income

   $   338      $   253      $85      33.7 %    $   253      $   183      $  70    38.7 % 
   

Gross margin %

   33.4 %    28.8 %      4.6 %    28.8 %    28.4 %       0.4 % 
   

 

2010 versus 2009 Net sales increased by $51 million, or 1.8%. The increase was due to the impact of the 53rd week in 2010 as adjusted net sales were virtually unchanged. Sales increased as a result of an improved sales mix driven in part by higher sales in the breakfast sandwich, breakfast sausage, branded lunchmeat and smoked sausage categories partially offset by the continuing exit of the lower margin commodity hog business and the impact of the exit of the kosher meat business in the third quarter of the prior year. Pricing actions, net of trade promotions decreased net sales by approximately 2%. The overall unit volume decline of 5.5% was due to the continuing exit of the commodity hog business and the exit of the kosher meat business. Unit volumes, excluding the planned exit from the commodity meat and kosher meat businesses, increased 2.7% due to higher volumes for breakfast sandwiches and sausages, smoked sausages and sliced meats, which more than offset volume declines for frozen bakery products.

Operating segment income increased by $93 million, or 36.9% due in part to a pension curtailment gain and the impact of the 53rd week, net of the negative impact of the change in exit activities and asset and business dispositions, which increased operating segment income by $8 million. Adjusted operating segment income increased by $85 million, or 33.7%, due to lower commodity costs, an improved sales mix, and savings from continuous improvement programs, partially offset by increased trade promotions and higher MAP and other SG&A costs.

 

2009 versus 2008 Net sales increased by $154 million, or 5.9%. The increase in net sales was driven by pricing actions to offset higher commodity and other raw material costs, which increased net sales by approximately 6%, as well as an improved sales mix. The improved sales mix related to a shift to higher-priced branded products within the hot dogs, breakfast sausage and deli categories as well as the introduction of new value-added products. These improvements were partially offset by the negative impact of the exit of the kosher meat business, the phasing out of the commodity meats business and a decline in unit volumes. Unit volumes declined 2.0%, as volume growth in breakfast sausage, sliced meats, hot dogs, corn dogs, and smoked sausage were offset by declines in retail deli meat and frozen bakery products. Unit volume declines were also the result of planned SKU rationalization, other margin improvement initiatives and the continuing planned exit of the commodity meats business.

Operating segment income increased by $104 million, or 70.4%. The net impact of the change in exit activities, asset and business dispositions, transformation/Accelerate charges and impairment charges increased operating segment income by $34 million. Adjusted operating segment income increased $70 million, or 38.7%, due to the favorable impact of pricing actions; savings from continuous improvement programs; and an improved product mix; which were partially offset by higher commodity, labor and fuel costs and lower unit volumes.


 

Sara Lee Corporation and Subsidiaries        31


Financial review

North American Fresh Bakery

 

In millions    2010     2009     Dollar
Change
    Percent
Change
    2009     2008     Dollar
Change
    Percent
Change
 
   

Net sales

   $2,128      $2,200      $  (72   (3.3 )%    $2,200      $2,028      $172      8.5  % 
   

Less: Increase/(decrease) in net sales from
Impact of 53rd week

   52           52                      
     

Adjusted net sales

   $2,076      $2,200      $(124   (5.7 )%    $2,200      $2,028      $172      8.5  % 
   

Operating segment income

   $     44      $     26      $   18      71.7  %    $     26      $     55      $ (29   (54.1 )% 
   

Less: Increase/(decrease) in
operating segment income from
Exit activities, asset and business dispositions

   $       –      $      (5   $     5        $      (5   $      (3   $   (2  

Transformation/Accelerate charges

        (1   1        (1        (1  

Accelerated depreciation

   (2        (2                   

Pension partial withdrawal liability charge

   (23   (31   8        (31        (31  

Pension curtailment gain

   3           3                      

Impact of 53rd week

   6           6                      
     

Adjusted operating segment income

   $     60      $     63      $    (3   4.2  %    $     63      $     58      $    5      7.2  % 
   

Gross margin %

   47.4 %    45.3 %      2.1  %    45.3 %    47.2 %      (1.9 )% 
   

 

2010 versus 2009 Net sales decreased by $72 million, or 3.3%, while adjusted net sales, which excludes the impact of the 53rd week, declined $124 million, or 5.7%. The sales decline was due to a decline in unit volumes and price reductions, in response to lower commodity costs and competitive pressure, which decreased net sales by approximately 3%. Unit volumes decreased 3.1% due to lower unit volumes for branded and non-branded fresh bakery products. The lower volumes were due to increased competitive pressure and continuing weak economic conditions.

Operating segment income increased by $18 million, or 71.7%. The change in pension partial withdrawal liability charges, a pension curtailment gain, Accelerate charges, the impact of the 53rd week, accelerated depreciation and exit activities and asset and business dispositions increased operating segment income by $21 million. Adjusted operating segment income decreased by $3 million, or 4.2%, due to lower volumes and an unfavorable sales mix shift to lower margin non-branded products, partially offset by the favorable impact of lower costs for key ingredients net of pricing actions, savings from continuous improvement programs and lower SG&A costs driven by lower sales commissions and fuel costs.

 

2009 versus 2008 Net sales increased by $172 million, or 8.5%. The increase in net sales was primarily attributable to positive pricing actions to cover higher wheat and other input costs, which increased net sales by approximately 6%, and an increase in unit volumes. Unit volumes increased 3.2% due to higher unit volumes for both branded and non-branded fresh bakery products. The increase in branded products was due in part to increased promotional activity. The increase in non-branded unit volumes was due to a net gain in new private label customers versus the prior year and an increasing shift to private label due to the weak economic conditions partially offset by a decline in sales to restaurant and institutional customers.

Operating segment income decreased by $29 million, or 54.1%. Operating segment income was negatively impacted by a $31 million charge to recognize a partial withdrawal liability related to a multi-employer pension plan as well as an increase in exit activities and transformation/Accelerate charges. Adjusted operating segment income increased by $5 million, or 7.2%, due to the benefit of price increases, unit volume gains, and savings from continuous improvement programs. These increases were partially offset by higher costs for key ingredients and wages; an unfavorable sales mix shift to lower margin private label products; higher SG&A costs driven by higher sales commissions, and higher labor, other employee benefits and administrative costs; and the negative impact of gains from the early termination of certain commodity contracts in the prior year.


 

32        Sara Lee Corporation and Subsidiaries


North American Foodservice

 

In millions    2010     2009     Dollar
Change
    Percent
Change
    2009     2008     Dollar
Change
    Percent
Change
 
   

Net sales

   $1,873      $2,092      $(219   (10.5 )%    $2,092      $2,186      $ (94   (4.3 )% 
   

Less: Increase/(decrease) in net sales from
Changes in foreign currency exchange rates

   $       –      $      (3   $     3        $       –      $       5      $   (5  

Dispositions

        142      (142          108      (108  

Impact of 53rd week

   32           32                      
     

Adjusted net sales

   $1,841      $1,953      $(112   (5.7 )%    $2,092      $2,073      $  19      0.9  % 
   

Operating segment income (loss)

   $   125      $     36      $   89      NM      $     36      $  (324   $360      NM  % 
   

Less: Increase/(decrease) in
operating segment income (loss) from
Exit activities, asset and business dispositions

   $    (10   $       1      $  (11     $       1      $      (5   $    6     

Accelerated depreciation

   (7        (7                   

Impairment charge

   (15   (107   92        (107   (431   324     

Pension plan curtailment gain

   6           6                      

Disposition

        11      (11          2      (2  

Impact of 53rd week

   2           2                      
     

Adjusted operating segment income

   $   149      $   131      $   18      13.9  %    $   142      $   110      $  32      29.0  % 
   

Gross margin %

   25.6 %    25.5 %      0.1  %    25.5 %    24.9 %      0.6  % 
   

 

2010 versus 2009 Net sales decreased by $219 million, or 10.5%. Business dispositions after the start of 2009, which include the DSD beverage business and a sauces and dressings business, reduced net sales by $142 million, while the change in foreign currency exchange rates and the impact of the 53rd week increased net sales by $35 million. Adjusted net sales decreased by $112 million, or 5.7%, due to unit volume declines partially offset by a favorable sales mix shift. Pricing actions had virtually no impact on the change in net sales. Overall net unit volumes declined 10.0% due to the loss of a large non-core bakery contract and demand softness resulting from the continued weak economic conditions. Bakery volumes declined due primarily to the loss of a low-margin, high-volume pizza ingredient business, which offset increases in refrigerated dough products. Meat volumes declined, driven in part by the planned exit of certain lower margin meat business. Beverage volumes are down due to declines in roast and ground coffee. The recent loss of some coffee concentrate business is not expected to significantly impact volumes but is expected to have a negative impact on the year-over-year profit comparisons in the beverage category beginning in 2011.

Operating segment income increased by $89 million. The net impact of the change in impairment charges, pension curtailment gain and exit activities, asset and business dispositions, accelerated depreciation, and the impact of the 53rd week increased operating segment income by $82 million. Dispositions after the start of 2009 reduced operating segment income by $11 million. Adjusted operating segment income increased by $18 million, or 13.9%, due to the favorable impact of lower commodity costs net of pricing actions, continuous improvement savings, an improved shift in sales mix and lower distribution and fuel costs, partially offset by lower unit volumes.

 

2009 versus 2008 Net sales decreased by $94 million, or 4.3%. Changes in foreign currency exchange rates, primarily the Canadian dollar, decreased net sales by $5 million. Dispositions after the start of 2008 reduced net sales by $108 million. Adjusted net sales increased by $19 million, or 0.9% due to higher product pricing to cover the increase in key raw material costs across all categories. The positive pricing actions increased sales by approximately 5%. These increases were partially offset by unit volume declines for beverage, meat and bakery products. Overall net unit volumes decreased 4.2%. The decline in beverage volumes was driven by softness in traditional roast and ground and other coffee products due to competitive and economic pressures, while the decline in meat volumes was driven in part by the planned exit of certain lower margin business as well as demand softness. A slight decline in volumes for bakery products was driven by volume softness in foodservice pizza dough offset by growth in refrigerated dough and frozen bakery products.

Operating segment income increased by $360 million due to a $324 million reduction in impairment charges. A $107 million impairment charge related to goodwill associated with the beverage business was recorded in the current year and a $431 million impairment charge related to goodwill and fixed assets in the food-service bakery and beverage businesses was recorded in the prior year. The net impact of the change in exit activities, asset and business dispositions increased operating segment income by $6 million. Dispositions after the start of 2008 reduced operating segment income by $2 million. Adjusted operating segment income increased by $32 million, or 29.0% due to the favorable impact of pricing actions, continuous improvement savings and lower SG&A costs, partially offset by higher commodity and labor costs and lower unit volumes.


 

Sara Lee Corporation and Subsidiaries        33


Financial review

International Beverage

 

In millions    2010     2009     Dollar
Change
    Percent
Change
    2009     2008     Dollar
Change
    Percent
Change
 
   

Net sales

   $3,221      $3,062      $159      5.2  %    $3,062      $3,238      $(176   (5.4 )% 
   

Less: Increase/(decrease) in net sales from

                

Changes in foreign currency exchange rates

   $       –      $  (124   $124        $       –      $   286      $(286  

Acquisitions/dispositions

   12      1      11        45      8      37     

Impact of 53rd week

   48           48                      
     

Adjusted net sales

   $3,161      $3,185      $ (24   (0.8 )%    $3,017      $2,944      $   73      2.5  % 
   

Operating segment income

   $   592      $   493      $  99      20.0  %    $   493      $   551      $  (58   (10.5 )% 
   

Less: Increase/(decrease) in
operating segment income from
Changes in foreign currency exchange rates

   $       –      $    (17   $  17        $       –      $     41      $  (41  

Exit activities, asset and business dispositions

   (12   (50   38        (50   (4   (46  

Transformation/Accelerate charges

        (3   3        (3   (9   6     

Curtailment gain

        12      (12     12           12     

Accelerated depreciation

                         (1   1     

Gain on property disposition

        14      (14     14           14     

Acquisitions/dispositions

   1           1        2           2     

Impact of 53rd week

   17           17                      
     

Adjusted operating segment income

   $   586      $   537      $  49      8.8  %    $   518      $   524      $    (6   (1.0 )% 
   

Gross margin %

   42.8 %    40.1 %      2.7  %    40.1 %    41.6 %      (1.5 )% 
   

 

2010 versus 2009 Net sales increased by $159 million, or 5.2%. The impact of changes in foreign currency exchange rates, particularly in the European euro and Brazilian real, increased reported net sales by $124 million, while the 53rd week increased net sales by $48 million. Acquisitions net of dispositions made after the start of 2009, increased net sales by $11 million. Adjusted net sales decreased by $24 million, or 0.8%, due to lower green coffee export sales, increased trade promotions and an unfavorable shift in sales mix, partially offset by an increase in unit volumes. Pricing actions, which included increased trade promotion activity, reduced net sales by approximately 1%. Unit volumes increased 1.4% due to volume growth in single serve coffee, traditional roast and ground and instants, while overall coffee concentrate volumes were virtually unchanged. Retail volumes in Europe decreased due to volume declines in traditional roast and ground coffee due in part to competitive pressures from private label and hard discounters as well as weak economic conditions throughout Europe, which was partially offset by increases in single serve coffee volumes primarily in France and Germany. The volume declines in Europe were offset by improved volumes in Brazil. Unit volumes in the foodservice channel in Europe decreased due to continued weak economic conditions in Europe.

Operating segment income increased by $99 million, or 20.0%. Changes in foreign currency exchange rates increased operating segment income by $17 million. The net change in exit activities asset and business dispositions, transformation/Accelerate charges, a curtailment gain, a gain on a prior year property sale, the impact of the 53rd week and acquisitions increased operating segment income by $33 million. Adjusted operating segment income increased by $49 million, or 8.8%, due to lower commodity costs including the impact of hedging gains, the increase in unit volumes, and the benefits of continuous improvement programs, partially offset by the negative impact of pricing actions and higher MAP spending.

 

2009 versus 2008 Net sales decreased by $176 million, or 5.4%. The impact of foreign currency rate changes, particularly the European euro, Brazilian real, Australian dollar, and British pound, decreased reported net sales by $286 million. Acquisitions net of dispositions after the start of 2008 increased sales by $37 million. Adjusted net sales increased by $73 million, or 2.5% due to price increases to offset higher commodity costs, a favorable sales mix shift, and increased green coffee export sales in Brazil, which were partially offset by lower unit volumes. Pricing actions represented approximately 2% of the overall increase in net sales. Unit volumes decreased 2.8% due to declines in the retail channel in both Europe and Brazil. Retail volumes in Europe decreased due to volume declines in traditional roast and ground due in part to competitive pressures from private label and hard discounters as well as the weak economic conditions throughout Europe, partially offset by growth in single serve coffee in France and Germany. Unit volumes declined in Brazil due in part to price increases. Unit volumes in the foodservice channel decreased slightly due in part to a decline in liquid coffee concentrates.

Operating segment income decreased by $58 million, or 10.5%. Changes in foreign currency exchange rates decreased operating segment income by $41 million. The net impact of the change in exit activities, asset and business dispositions, transformation/ Accelerate charges, and accelerated depreciation decreased operating segment income by $39 million. Operating results were favorably impacted by a $12 million curtailment gain related to postretirement benefit plan changes and a $14 million gain on the disposition of property. Adjusted operating segment income decreased $6 million, or 1.0% , due to the impact of higher green coffee costs, the decline in unit volumes and higher manufacturing costs, partially offset by pricing actions, a favorable shift in sales mix, and the benefits of continuous improvement programs.


 

34        Sara Lee Corporation and Subsidiaries


International Bakery

 

In millions    2010     2009     Dollar
Change
    Percent
Change
    2009     2008     Dollar
Change
    Percent
Change
 
   

Net sales

   $785      $ 795      $ (10   (1.3 )%    $ 795      $ 934      $(139   (14.9 )% 
   

Less: increase/(decrease) in net sales from

                

Changes in foreign currency exchange rates

   $    –      $  (25   $  25        $     –      $   70      $  (70  

Disposition

                         14      (14  

Impact of 53rd week

   13           13                      
     

Adjusted net sales

   $772      $ 820      $ (48   (5.8 )%    $ 795      $ 850      $  (55   (6.5 )% 
   

Operating segment income (loss)

   $ (14   $(194   $180      92.9  %    $(194   $(346   $ 152      44.0  % 
   

Less: Increase/(decrease) in
operating segment income (loss) from
Changes in foreign currency exchange rates

   $    –      $    (1   $    1        $     –      $     4      $    (4  

Exit activities, asset and business dispositions

   (46   (37   (9     (37   (7   (30  

Transformation/Accelerate charges

   (1   (1          (1   (2   1     

Impairment charge

   (13   (207   194        (207   (400   193     

Disposition

                         (1   1     

Impact of 53rd week

   1           1                      
     

Adjusted operating segment income

   $  45      $   52      $   (7   (13.0 )%    $   51      $   60      $    (9   (14.9 )% 
   

Gross margin %

   38.6 %    37.5 %      1.1  %    37.5 %    37.7 %      (0.2 )% 
   

 

2010 versus 2009 Net sales decreased by $10 million, or 1.3%. The impact of changes in foreign currency exchange rates in the European euro and Australian dollar increased reported net sales by $25 million, while the impact of the 53rd week increased net sales by $13 million. Adjusted net sales decreased by $48 million, or 5.8%, as a result of the negative impact of price reductions in response to lower commodity costs and competitive pressures, which decreased net sales by approximately 4%. Sales were also negatively impacted by lower unit volumes and an unfavorable sales mix. Net unit volumes decreased 2.3% due to a decline in branded fresh bread volumes in Spain due in part to the weak economic conditions and competitive pressures. These volume declines were partially offset by increased volumes in Australia and increased refrigerated dough volumes in Europe.

Operating segment loss decreased by $180 million, or 92.9%. The net change in foreign currency exchange rates, exit activities, asset and business dispositions, impact of the 53rd week and impairment charges increased operating segment income by $187 million. Adjusted operating segment income decreased by $7 million, or 13.0%, due to the negative impact of pricing actions, lower unit volumes, and an unfavorable sales mix shift to lower margin products partially offset by lower commodity costs and continuous improvement savings.

 

2009 versus 2008 Net sales decreased by $139 million, or 14.9%. The impact of foreign currency rate changes, particularly the European euro and the Australian dollar, decreased reported net sales by $70 million. A disposition subsequent to the start of 2008 reduced net sales by $14 million. Adjusted net sales decreased by $55 million, or 6.5%, due to the result of unit volume declines. The impact of unit volume declines were only partially offset by price increases in response to higher commodity costs, which increased net sales by approximately 6%. Net unit volumes decreased 11.6% due to a decline in fresh bread volumes in Spain as a result of lower branded sales, due in part to economic and competitive pressures, as well as the loss of some private label contracts; a decrease in refrigerated dough volumes in Europe due to lower export sales; and a small volume decline in Australia due in part to the planned exit of certain lower margin business.

Operating segment loss decreased by $152 million, or 44.0% due to a $193 million reduction in impairment charges. An impairment charge of $207 million was recorded in 2009 as compared to an impairment charge of $400 million in 2008. The net change in exit activities, asset and business dispositions, and transformation/Accelerate charges decreased operating segment income by $29 million, while a disposition subsequent to the start of 2008 increased operating segment income by $1 million. Changes in foreign currency rates decreased operating segment income by $4 million. Adjusted operating segment income decreased $9 million, or 14.9%, as the impact of lower unit volumes, higher costs associated with key raw materials, and an unfavorable sales mix shift were only partially offset by price increases, continuous improvement savings and lower SG&A costs due to cost control efforts.


 

Sara Lee Corporation and Subsidiaries        35


Financial review

Financial Condition

The corporation’s cash flow statements include amounts related to discontinued operations through the date of disposal. The discontinued operations had a significant impact on the cash flows from operating, investing and financing activities in each fiscal year.

Cash from Operating Activities The cash from operating activities generated by continuing and discontinued operations is summarized in the following table:

 

     2010    2009    2008
 

Cash from operating activities

        

Continuing operations

   $ 631    $ 640    $ 385

Discontinued operations

     321      260      221
 

Total

   $ 952    $ 900    $ 606
 

2010 versus 2009 The increase in cash from operating activities of $52 million in 2010 was due primarily to improved operating results and better working capital management with respect to accounts payable and accounts receivable, which were partially offset by an increase in cash payments for restructuring actions and taxes as well as higher contributions to pension plans as compared to the prior year.

2009 versus 2008 The increase in cash from operating activities of $294 million in 2009 was due to a $451 improvement in the cash used to fund working capital needs. In 2009, $119 million of cash was generated from lower working capital levels as opposed to $332 million of cash used in the prior year to fund working capital needs. The year-over-year improvements were in accounts receivable, inventories, accrued liabilities as well as a reduction in cash tax payments, partially offset by an increase in cash used for accounts payable. The overall improvement in working capital was due in part to a strong focus on minimizing working capital levels. The benefits generated from lower working capital levels were partially offset by a $131 million increase in cash contributions to pension plans as compared to the prior year.

Cash used in Investment Activities Net cash used in investment activities is split between continuing and discontinued operations as follows:

 

     2010     2009     2008  
   

Cash used in investment activities

      

Continuing operations

   $ (34   $ (267   $ (170

Discontinued operations

     (18     (19     (26
   

Total

   $ (52   $ (286   $ (196
   

 

2010 versus 2009 The cash used in investment activities in 2010 declined by $234 million from the prior year due primarily to a $151 million increase in cash proceeds received from the disposition of businesses and a $112 million reduction in cash used in derivative transactions.

The corporation received $204 million in 2010, primarily related to the sale of its insecticide business in India. In 2009, it received $53 million, of which $42 million was related to the disposition of its DSD foodservice operations.

In 2010, $26 million of cash was used for derivative transactions, as compared to $138 million in 2009, primarily driven by hedges of foreign currency exposures.

The corporation spent $385 million for the purchase of property, equipment, computer software and intangibles in 2010 as compared to $379 million in 2009. The slightly higher level of spending in 2010 was to expand meat production capacity in North American Retail and to implement new software to improve North American operations. The corporation expects capital expenditures for property and equipment to be approximately $400 - $450 million in 2011, an increase over 2010 due to an increase in projected expenditures related to expanded meat production capacity in North American Retail.

The amount of contingent sale proceeds received in 2010, was $17 million lower than the prior year due to the impact of foreign currency exchange rates as the corporation received 95 million in both years.

2009 versus 2008 The cash used in investment activities in 2009 increased by $90 million over the prior year due to a $234 million increase in cash used for derivative transactions partially offset by a $136 million reduction in capital expenditures for property, equipment and software.

In 2009, $138 million of cash was used for derivative transactions, as compared to $96 million of cash received from derivative transactions in 2008. The increase in cash used was due in part to an increase in the number of mark-to-market derivative transactions and an increase in cash paid on the settlement of foreign exchange contracts, the majority of which were related to hedges of foreign currency balance sheet exposures.

In 2009, the corporation incurred $379 million of expenditures for property, equipment and software as compared to $515 million in 2008. The year-over-year decrease was due to reduced spending for information technology assets.

In 2009, the corporation expended $10 million as part of the consideration paid for the acquisition of a coffee business in Brazil. In 2008, the corporation did not expend any funds to make any business acquisitions.


 

36        Sara Lee Corporation and Subsidiaries


During 2009, the corporation completed the disposition of its DSD foodservice operations and received $42 million. It also received 95 million or $150 million in contingent proceeds from the previous sale of the corporation’s tobacco product line. The increase versus the prior year was due to a change in foreign currency exchange rates. During 2008, the corporation completed the disposition of its meat operations in Mexico and received $55 million.

Cash used in Financing Activities The net cash used in financing activities is split between continuing and discontinued operations as follows:

 

     2010     2009     2008  
   

Cash used in financing activities

      

Continuing operations

   $ (490   $ (532   $ (1,602

Discontinued operations

     (311     (235     (209
   

Total

   $ (801   $ (767   $ (1,811
   

The cash used in the financing activities of the discontinued operations primarily represents the net transfers of cash with the corporate office as most of the cash of these businesses has been retained as a corporate asset.

2010 versus 2009 The cash used in financing activities in 2010 increased by $34 million over the prior year due primarily to a $397 million increase in cash used to repurchase shares of the corporation’s common stock partially offset by a $357 million reduction in the net repayment of both long-term and short-term debt.

The corporation expended $500 million in 2010 to repurchase 36.4 million shares of its common stock under an accelerated share repurchase program as part of a new capital structure plan. During 2009, the corporation repurchased 11.4 million shares of common stock for $103 million.

In 2010, the corporation had net repayments of other debt and financings less than 90 days of $6 million, which was a $357 million reduction from the $363 million in net repayments in 2009. The corporation utilized a combination of cash on hand, short-term borrowings and new borrowings of long-term debt to repay maturing long-term debt. The long-term debt maturing during 2009 was repaid using cash on hand and a new 2-year financing arrangement for 285 million at Euribor plus 1.75% that was entered into in January 2009.

Dividends paid during 2010 were $308 million as compared to $302 million in 2009. The annualized dividend rate per share was $0.44 per share for both years.

 

2009 versus 2008 The net cash used in financing activities during 2009 was $1,044 million lower than the previous year due primarily to a $842 million reduction in the net repayment of other debt and financing less than 90-day maturities as well as a $212 million reduction in the repurchase of common stock.

The corporation had net repayments of other debt and financings less than 90-day maturities during 2009 of $363 million as compared to net repayments of $1,205 million during 2008. The corporation utilized a combination of cash on hand, short-term borrowings and new borrowings of long-term debt to repay maturing long-term debt. The long-term debt maturing during 2009 was repaid using cash on hand and a new 2-year financing arrangement for 285 million at Euribor plus 1.75% that was entered into in January 2009.

During 2009, the corporation repurchased 11.4 million shares of its common stock for $103 million. In 2008, the corporation repurchased 19.7 million shares of its common stock for $315 million.

Dividends paid during 2009 were $302 million as compared to $296 million in 2008.

Liquidity

Notes Payable Notes payable increased from $20 million at June 27, 2009 to $47 million at July 3, 2010. At the end of 2010, the corporation had cash and cash equivalents on the balance sheet of $955 million, which was $4 million higher than the balance at June 27, 2009.

Anticipated Business Dispositions/Use of Proceeds Sara Lee made substantial progress toward divesting its International Household and Body Care businesses in fiscal 2010. The company announced and closed transactions for the divestiture of the Indian insecticides business to Godrej for 185 million in the fourth quarter of 2010 and the air care business to Procter & Gamble for 320 million in early fiscal 2011. The company is also working on the announced divestiture of the global body care business to Unilever for 1.275 billion and on the announced divestiture of the non-Indian insecticides business to SC Johnson for 153.5 million. Both proposed transactions are expected to close in calendar year 2010, and are subject to customary closing conditions and regulatory clearances. Sara Lee is also confident it will be able to successfully divest the remaining household businesses, primarily its global shoe care and Asian cleaning businesses, based on interest from various parties. The corporation increased its net investment hedges in 2010 in order to offset the euro exposure associated with 1.6 billion of proceeds anticipated to be generated by the divestiture of its air care and body care businesses.


 

Sara Lee Corporation and Subsidiaries        37


Financial review

During 2010, Sara Lee announced a revised capital plan that focuses on share repurchase, dividend pay-out and the funded status of the company’s pension plans, while maintaining a solid investment grade credit profile.

As part of this capital plan, the company plans to buy back $2.5 to $3 billion of shares of its common stock over a three-year period. Through a $500 million accelerated share repurchase (ASR) program that was announced in March 2010, which was completed in the first quarter of 2011, Sara Lee bought back approximately 36 million shares of common stock. Sara Lee plans to repurchase $1.0 to $1.5 billion of shares in fiscal 2011, of which $500 to $800 million are expected to be repurchased in the remainder of calendar year 2010. Approximately $2.5 billion remains authorized for share repurchase by the board of directors, in addition to the 13.5 million share authorization remaining under the prior program.

In addition, Sara Lee’s board of directors intends to maintain and gradually increase the corporation’s current $0.44 per share annualized dividend.

The previously announced $200 million voluntary cash contribution to the company’s pension plans was made in the fourth quarter of fiscal 2010.

The company continues to evaluate the best opportunities for value creation and investment of cash, including potential acquisitions or other investments in the company’s growth.

Debt The corporation’s total long-term debt decreased $50 million in 2010, to $2,734 million at July 3, 2010. Long-term debt maturing during 2010 of $25 million was repaid using cash on hand. A new 2-year financing arrangement for 300 million at 2.25% was entered into in March 2010 that replaced previous Euribor financing held by the corporation. The corporation’s total remaining long-term debt of $2,734 million is due to be repaid as follows: $16 million in 2011, $1,545 million in 2012, $532 million in 2013, $26 million in 2014, $74 million in 2015 and $541 million thereafter. Debt obligations due to mature in the next year are expected to be satisfied with cash on hand, cash from operating activities or with additional borrowings.

From time to time, the corporation opportunistically may repurchase or retire its outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the corporation’s liquidity requirements, contractual restrictions and other factors. The amounts involved could be material.

 

Including the impact of swaps, which are effective hedges and convert the economic characteristics of the debt, the corporation’s long-term debt and notes payable consist of 69.7% fixed-rate debt as of July 3, 2010, as compared with 70.1% as of June 27, 2009. The decrease in fixed-rate debt at the end of 2010 versus the end of 2009 is due to the repayment of long-term fixed rate debt that matured during the period. The corporation monitors the interest rate environments in the geographic regions in which it operates and modifies the components of its debt portfolio as necessary to manage interest rate and foreign currency risks.

Pension Plans As shown in Note 16 to the Consolidated Financial Statements, titled “Defined Benefit Pension Plans,” the funded status of the corporation’s defined benefit pension plans is defined as the amount the projected benefit obligation exceeds the plan assets. The underfunded status of the plans is $530 million at the end of fiscal 2010 as compared to $466 million at the end of fiscal 2009.

The corporation expects to contribute approximately $110 million of cash to its pension plans in 2011 as compared to $332 million in 2010 and $306 million in 2009. The 2011 contributions are for pension plans of continuing operations and pension plans where the corporation has agreed to retain the pension liability after certain business dispositions were completed. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which the company operates, the timing of cash tax benefits for amounts funded and arrangements made with the trustees of certain foreign plans. As a result, the actual funding in 2011 may be materially different from the estimate.

During 2006, the corporation entered into an agreement with the plan trustee to fully fund certain U.K. pension obligations by 2015. The anticipated 2011 contributions reflect the amounts agreed upon with the trustees of these U.K. plans. Under the terms of this agreement, the corporation will make annual pension contributions of 32 million British pounds to the U.K. plans through 2015. Subsequent to 2015, the corporation has agreed to keep the U.K. plans fully funded in accordance with local funding standards. If at any time prior to January 1, 2016, Sara Lee Corporation ceases having a credit rating equal to or greater than all three of the following ratings, the annual pension funding of these U.K. plans will increase by 20%: Standard & Poor’s minimum credit rating of “BBB-,” Moody’s Investors Service minimum credit rating of “Baa3” and FitchRatings minimum credit rating of “BBB -.” The corporation’s credit ratings are currently above these levels and are discussed below in this Liquidity section.


 

38        Sara Lee Corporation and Subsidiaries


The corporation participates in various multi-employer pension plans that provide retirement benefits to certain employees covered by collective bargaining agreements (MEPP). Participating employers in a MEPP are jointly responsible for any plan underfunding. MEPP contributions are established by the applicable collective bargaining agreements; however, the MEPPs may impose increased contribution rates and surcharges based on the funded status of the plan and the provisions of the Pension Protection Act, which requires substantially underfunded MEPPs to implement rehabilitation plans to improve funded status. The corporation believes that its contributions to MEPPs may increase by approximately 12% to 15% through 2011 due to increased contribution rates and surcharges MEPPs are expected to impose under the Pension Protection Act. Factors that could impact funded status of a MEPP include investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions.

In addition to regular contributions, the corporation could be obligated to pay additional contributions (known as a complete or partial withdrawal liability) if a MEPP has unfunded vested benefits. These withdrawal liabilities, which would be triggered if the corporation ceases to make contributions to a MEPP with respect to one or more collective bargaining units, would equal the corporation’s proportionate share of the unfunded vested benefits based on the year in which liability is triggered. The corporation believes that certain of the MEPPs in which it participates have unfunded vested benefits, and some are significantly underfunded. Withdrawal liability triggers could include the corporation’s decision to close a plant or the dissolution of a collective bargaining unit. Due to uncertainty regarding future withdrawal liability triggers, we are unable to determine the amount and timing of the corporation’s future withdrawal liability, if any, or whether the corporation’s participation in these MEPPs could have any material adverse impact on its financial condition, results of operations or liquidity. Disagreements over potential withdrawal liability may lead to legal disputes. The corporation currently is involved in litigation with one MEPP and it is probable that the outcome of this litigation may result in a partial withdrawal liability of approximately $22 million, of which the corporation has established an accrual.

The corporation’s regular scheduled contributions to MEPPs totaled $50 million in 2010, $49 million in 2009 and $48 million in 2008. The corporation incurred withdrawal liabilities of approximately $23 million in 2010, $31 million in 2009 and an immaterial amount in 2008.

 

Repatriation of Foreign Earnings and Income Taxes The corporation anticipates that it will continue to repatriate a portion of its foreign subsidiary’s future earnings. The tax expense associated with any return of foreign earnings will be recognized as such earnings are realized. However, the corporation pays the liability upon completing the repatriation action. The repatriation of foreign sourced earnings is not the only source of liquidity for the corporation. In addition to cash flow derived from operations, the corporation has access to the commercial paper market, a $1.85 billion revolving credit facility, and access to public and private debt markets as a means to generate liquidity sufficient to meet its U.S. cash flow needs.

In 2010 the tax expense for repatriating a portion of 2010 and prior year earnings to the U.S. is $145 million, with the majority of these taxes expected to be paid after 2010. This amount includes a tax charge in connection with the corporation’s third quarter decision to no longer reinvest overseas earnings primarily attributable to existing overseas cash and the book value of the household and body care businesses.

Cash and Equivalents, Short-Term Investments and Cash Flow The corporation’s cash balance of $955 million at the end of 2010 was invested in interest-bearing bank deposits that are redeemable on demand by the corporation. A significant portion of cash and equivalents are held by the corporation’s subsidiaries outside of the U.S. A portion of these balances will be used to fund future working capital and other funding requirements.

The corporation has also recognized amounts for transformation and other restructuring charges and at the end of 2010 recognized a liability of approximately $105 million that relates primarily to future severance and other lease and contractual payments. These amounts will be paid when the obligation becomes due, and the corporation expects a significant portion of these amounts will be paid in 2011. The anticipated 2011 payments of cash taxes and severance associated with previously recognized exit activities will have a significant negative impact on cash from operating activities.

Dividend The corporation’s annualized dividend amounts per share were $0.44 in 2010 and 2009 and $0.42 in 2008. Future dividends are determined by the corporation’s Board of Directors and are not guaranteed.


 

Sara Lee Corporation and Subsidiaries        39


Financial review

 

Credit Facilities and Ratings  The corporation has a $1.85 billion five-year revolving credit facility available which management considers sufficient to satisfy its operating requirements. This facility expires in December 2011 and the pricing under this facility is based upon the corporation’s current credit rating. At July 3, 2010, the corporation did not have any borrowings outstanding under this facility and the facility does not mature or terminate upon a credit rating downgrade. The corporation’s debt agreements and credit facility contain customary representations, warranties and events of default, as well as, affirmative, negative and financial covenants with which the corporation is in compliance. One financial covenant includes a requirement to maintain an interest coverage ratio of not less than 2.0 to 1.0. The interest coverage ratio is based on the ratio of EBIT to consolidated net interest expense with consolidated EBIT equal to net income plus interest expense, income tax expense, and extraordinary or non-recurring non-cash charges and gains. For the 12 months ended July 3, 2010, the corporation’s interest coverage ratio was 7.8 to 1.0.

The corporation’s credit ratings by Standard & Poor’s, Moody’s Investors Service and FitchRatings, as of July 3, 2010, were as follows.

 

      Senior
Unsecured
Obligations
   Short-term
Borrowings
   Outlook

Standard & Poor’s

   BBB    A-2    Stable

Moody’s

   Baa1    P-2    Stable

FitchRatings

   BBB    F-2    Stable

Changes in the corporation’s credit ratings result in changes in the corporation’s borrowing costs. The corporation’s current short-term credit rating allows it to participate in a commercial paper market that has a number of potential investors and a historically high degree of liquidity. A downgrade of the corporation’s short-term credit rating would place the corporation in a commercial paper market that would contain significantly less market liquidity than it currently operates in with a rating of “A-2,” “P-2,” or “F-2.” This would reduce the amount of commercial paper the corporation could issue and raise its commercial paper borrowing cost and would require immediate payment or the posting of collateral on the derivative instruments in net liability positions in accordance with ISDA rules. See Note 15, “Financial Instruments” for more information. To the extent that the corporation’s operating requirements were to exceed its ability to issue commercial paper following a downgrade of its short-term credit rating, the corporation has the ability to use available credit facilities to satisfy operating requirements, if necessary.

 

Off-Balance Sheet Arrangements  The off-balance sheet arrangements that are reasonably likely to have a current or future effect on the corporation’s financial condition are lease transactions for facilities, warehouses, office space, vehicles and machinery and equipment.

Leases  The corporation has numerous operating leases for manufacturing facilities, warehouses, office space, vehicles and machinery and equipment. Operating lease obligations are scheduled to be paid as follows: $80 million in 2011, $57 million in 2012, $42 million in 2013, $28 million in 2014, $21 million in 2015 and $69 million thereafter. The corporation is also contingently liable for certain long-term leases on property operated by others. These leased properties relate to certain businesses that have been sold. The corporation continues to be liable for the remaining terms of the leases on these properties in the event that the owners of the businesses are unable to satisfy the lease liability. The minimum annual rentals under these leases are as follows: $22 million in 2011, $17 million in 2012, $14 million in 2013, $12 million in 2014, $12 million in 2015 and $28 million thereafter.

Future Contractual Obligations and Commitments  During 2007, the corporation exited a U.S. meat production plant that included a hog slaughtering operation. Certain purchase contracts for the purchase of live hogs at this facility were not exited or transferred after the closure of the facility. Under the terms of these contracts, which are open through June 2012, the corporation will continue to purchase these live hogs and therefore, the corporation has entered into a hog sales contract under which these hogs will be sold to another slaughter operator. The corporation’s purchase price of these hogs is generally based on the price of corn products, and the corporation’s selling price for these hogs is generally based on USDA posted hog prices. Divergent movements in these indices will result in either gains or losses on these hog transactions. Expected losses from the sale of these hogs are recognized when the loss is probable of occurring. At the end of 2010, based on current market pricing, the corporation deemed that it was not probable that material future near-term losses would occur. The contractual commitment for these purchases is included in the table below.

The corporation has no material unconditional purchase obligations as defined by the accounting principles associated with the Disclosure of Long-Term Purchase Obligations. The following table aggregates information on the corporation’s contractual obligations and commitments:


 

40 Sara Lee Corporation and Subsidiaries


          Payments Due by Fiscal Year
In millions    Total    2011    2012    2013    2014    2015    Thereafter

Long-term debt

   $ 2,734    $ 16    $ 1,545    $ 532    $ 26    $ 74    $ 541

Interest on debt obligations1

     907      140      81      58      44      34      550

Operating lease obligations

     297      80      57      42      28      21      69

Purchase obligations2

     2,895      1,434      605      312      243      229      72

Other long-term liabilities3

     434      73      76      78      67      63      77

Subtotal

     7,267      1,743      2,364      1,022      408      421      1,309

Contingent lease obligations4

     105      22      17      14      12      12      28

Total5

   $ 7,372    $ 1,765    $ 2,381    $ 1,036    $ 420    $ 433    $ 1,337

 

1

Interest obligations on floating rate debt instruments are calculated for future periods using interest rates in effect at the end of 2010. See Note 12 to the Consolidated Financial Statements for further details on the corporation’s long-term debt.

2

Purchase obligations include expenditures to purchase goods and services in the ordinary course of business for production and inventory needs (such as raw materials, supplies, packaging, manufacturing arrangements, storage, distribution and union wage agreements); capital expenditures; marketing services; information technology services; and maintenance and other professional services where, as of the end of 2010, the corporation has agreed upon a fixed or minimum quantity to purchase, a fixed, minimum or variable pricing arrangement and the approximate delivery date. Future cash expenditures will vary from the amounts shown in the table above. The corporation enters into purchase obligations when terms or conditions are favorable or when a long-term commitment is necessary. Many of these arrangements are cancelable after a notice period without a significant penalty. Additionally, certain costs of the corporation are not included in the table since at the end of 2010 an obligation did not exist. An example of these includes situations where purchasing decisions for these future periods have not been made at the end of 2010. Ultimately, the corporation’s decisions and cash expenditures to purchase these various items will be based upon the corporation’s sales of products, which are driven by consumer demand. The corporation’s obligations for accounts payable and accrued liabilities recorded on the balance sheet are also excluded from the table.

3

Represents the projected 2011 pension contribution and the projected payment for long-term liabilities recorded on the balance sheet for deferred compensation, restructuring costs, deferred income, sales and other incentives. The 2011 projected pension contribution and subsequent years through 2016 include an annual pension contribution of 32 million British pounds related to the terms of an agreement to fully fund certain U.K. pension obligations. The corporation has employee benefit obligations consisting of pensions and other postretirement benefits, including medical; other than the projected 2011 pension contribution and the U.K. funding amounts, noted previously, pension and postretirement obligations including any contingent amounts that may be due related to multi-employer pension plans, have been excluded from the table. A discussion of the corporation’s pension and postretirement plans, including funding matters, is included in Notes 16 and 17 to the Consolidated Financial Statements. The corporation’s obligations for employee health and property and casualty losses are also excluded from the table. Finally, the amount does not include any reserves for income taxes because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes. See Note 18 to the corporation’s consolidated financial statements regarding income taxes for further details.

4

Contingent lease obligations represent leases on property operated by others that only become an obligation of the corporation in the event that the owners of the businesses are unable to satisfy the lease liability. A significant portion of these amounts relates to leases operated by Coach, Inc. At July 3, 2010, the corporation has not recognized a contingent lease liability on the Consolidated Balance Sheets.

5

Contractual commitments and obligations identified under the accounting rules associated with accounting for contingencies are reflected and disclosed on the Consolidated Balance Sheets and in the related notes. Amounts exclude any payments related to deferred tax balances including any tax related to future repatriation of foreign earnings. See Note 18 to the corporation’s Consolidated Financial Statements regarding income taxes for further details.

 

Guarantees  The corporation is a party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts entered into by the corporation under which the corporation agrees to indemnify a third party against losses arising from a breach of representations and covenants related to such matters as title to assets sold, the collectibility of receivables, specified environmental matters, lease obligations assumed and certain tax matters. In each of these circumstances, payment by the corporation is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow the corporation to challenge the other party’s claims. In addition, the corporation’s obligations under these agreements may be limited in terms of time and/or amount, and in some cases the corporation may have recourse against third parties for certain payments made by the corporation. It is not possible to predict the maximum potential amount of

future payments under certain of these agreements, due to the conditional nature of the corporation’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the corporation under these agreements have not had a material effect on the corporation’s business, financial condition or results of operations. The corporation believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the corporation’s business, financial condition or results of operations.

In 2010, the corporation recognized a $26 million charge for a tax indemnification related to the corporation’s direct selling business that was divested in 2006. In October 2009, the Spanish tax administration upheld the challenge made by its local field examination team against tax positions taken by the corporation’s Spanish subsidiaries. The corporation is currently appealing the Court’s decision and has obtained a bank guarantee of $80 million as security against all allegations.


 

Sara Lee Corporation and Subsidiaries 41


Financial review

 

The material guarantees for which the maximum potential amount of future payments can be determined, include the corporation’s contingent liability on leases on property operated by others that is described above, and the corporation’s guarantees of certain third-party debt. These debt guarantees require the corporation to make payments under specific debt arrangements in the event that the third parties default on their debt obligations. The maximum potential amount of future payments that the corporation could be required to make in the event that these third parties default on their debt obligations is approximately $14 million. At the present time, the corporation does not believe it is probable that any of these third parties will default on the amount subject to guarantee.

Risk Management

Geographic Risks  The corporation maintains a presence in a large number of nations in the world. This includes geographic locations where the corporation has a direct economic presence through owned manufacturing or distribution facilities, or companies where Sara Lee maintains a direct equity investment. The corporation also has an indirect economic presence in many geographic locations through third-party suppliers who provide inventory, distribution services or business process outsourcing services. In most cases, alternative sources of supply are available for inventory products that are manufactured or purchased from these foreign locations. However, the general insurance coverage that is maintained by the corporation does not cover losses resulting from acts of war or terrorism. As a result, a loss of a significant direct or indirect manufacturing or distribution location could impact the corporation’s operations, cash flows and liquidity.

Foreign Exchange, Interest and Commodity Risks  The corporation is exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices. To mitigate the risk from interest rate, foreign currency exchange rate and commodity price fluctuations, the corporation enters into various hedging transactions that have been authorized pursuant to the corporation’s policies and procedures. The corporation does not use financial instruments for trading purposes and is not a party to any leveraged derivatives.

Foreign Exchange  The corporation primarily uses foreign currency forward and option contracts to hedge its exposure to adverse changes in foreign currency exchange rates. The corporation’s exposure to foreign currency

exchange rates exists primarily with the European euro, British pound, Brazilian real, Danish krone, Hungarian forint, Russian ruble and Australian dollar against the U.S. dollar. Hedging is accomplished through the use of financial instruments as the gain or loss on the hedging instrument offsets the gain or loss on an asset, a liability or a basis adjustment to a firm commitment. Hedging of anticipated transactions is accomplished with financial instruments as the realized gain or loss on the hedge occurs on or near the maturity date of the anticipated transactions.

Interest Rates  The corporation uses interest rate swaps to modify its exposure to interest rate movements, reduce borrowing costs and to lock in interest rates on anticipated debt issuances. The corporation’s net exposure to interest rate risk consists of floating-rate instruments that are benchmarked to U.S. and European short-term money market interest rates. Interest rate risk management is accomplished through the use of swaps to modify interest payments under these instruments.

Commodities  The corporation is a purchaser of certain commodities such as beef, pork, coffee, wheat, corn, corn syrup, soybean and corn oils, butter, sugar, natural gas and diesel fuel. The corporation generally buys these commodities based upon market prices that are established with the vendor as part of the purchase process. In circumstances where commodity derivative instruments are used, there is a high correlation between the commodity costs and the derivative instrument.

Risk Management Activities  The corporation maintains risk management control systems to monitor the foreign exchange, interest rate and commodity risks, and the corporation’s offsetting hedge positions. The risk management control system uses analytical techniques including market value, sensitivity analysis and value at risk estimations.

Value at Risk  The value at risk estimations are intended to measure the maximum amount the corporation could lose from adverse market movements in interest rates and foreign currency exchange rates, given a specified confidence level, over a given period of time. Loss is defined in the value at risk estimation as fair market value loss. As a result, foreign exchange gains or losses that are charged directly to translation adjustments in common stockholders’ equity are included in this estimate. The value at risk estimation utilizes historical interest rates and foreign currency exchange rates from the past year to estimate the volatility and correlation of these rates in the future. The model uses the vari-


 

42 Sara Lee Corporation and Subsidiaries


ance-covariance statistical modeling technique and includes all interest rate-sensitive debt and swaps, foreign exchange hedges and their corresponding underlying exposures. Foreign exchange value at risk includes the net assets invested in foreign locations. The estimated value at risk amounts shown below represent the potential loss the corporation could incur from adverse changes in either interest rates or foreign currency exchange rates for a one-day period. The average value at risk amount represents the simple average of the quarterly amounts for the past year. These amounts are not significant compared with the equity, historical earnings trend or daily change in market capitalization of the corporation.

 

In millions   Amounts   Average   Time
Interval
  Confidence
Level
 

Value at risk amounts

       

2010

       

Interest rates

  $ 11   $ 12   1 day   95

Foreign exchange

    21     23   1 day   95

2009

       

Interest rates

  $ 26   $ 29   1 day   95

Foreign exchange

    29     43   1 day   95

Interest rate value at risk decreased from 2009 due to the general decrease in short-term rate volatilities as the financial markets have stabilized over the course of 2010. Interest rate value at risk has become more weighted to short-term rates as a significant portion of the corporation’s long-term debt is due within two years. Foreign exchange value at risk amounts are down primarily due to decreased levels of volatilities in exchange rates between the U.S. dollar and the euro, the Brazilian real and British pound sterling.

Sensitivity Analysis  For commodity derivative instruments held, the corporation utilizes a sensitivity analysis technique to evaluate the effect that changes in the market value of commodities will have on the corporation’s commodity derivative instruments. This analysis includes the commodity derivative instruments and, thereby, does not consider the underlying exposure. At the end of 2010 and 2009, the potential change in fair value of commodity derivative instruments, assuming a 10% change in the underlying commodity price, was $2 million and $13 million, respectively. This amount is not significant compared with the earnings and equity of the corporation.

 

Non-GAAP Financial Measures Definitions

The following is an explanation of the non-GAAP financial measures presented in this annual report. “Adjusted net sales” excludes from net sales the impact of businesses acquired or divested after the start of the fiscal period and excludes the impact of an additional week in those fiscal years with 53 weeks versus 52 weeks. It also adjusts the previous year’s sales for the impact of any changes in foreign currency exchange rates. “Adjusted operating segment income” for a specified business segment or discontinued operation excludes from operating segment income the impact of significant items recognized by that portion of the business during the fiscal period and businesses acquired or divested after the start of the fiscal period. It also adjusts for the impact of an additional week in those fiscal years that include a 53rd week. It also adjusts the previous year’s operating segment income for the impact of any changes in foreign currency exchange rates. “Adjusted operating income” excludes from operating income the impact of significant items recognized during the fiscal period, contingent sale proceeds, if any, and businesses acquired or divested after the start of the fiscal period. It also adjusts for the impact of an additional week in those fiscal years that include a 53rd week. It also adjusts the previous year’s operating segment income for the impact of any changes in foreign currency exchange rates.

Critical Accounting Estimates

The corporation’s summary of significant accounting policies is discussed in Note 2 to the Consolidated Financial Statements. The application of certain of these policies requires significant judgments or a complex estimation process that can affect the results of operations and financial position of the corporation, as well as the related footnote disclosures. The corporation bases its estimates on historical experience and other assumptions that it believes are most likely to occur. If actual amounts are ultimately different from previous estimates, the revisions are included in the corporation’s results of operations for the period in which the actual amounts become known, and, if material, are disclosed in the financial statements. The disclosures below also note situations in which it is reasonably likely that future financial results could be impacted by changes in these estimates and assumptions. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of management.


 

Sara Lee Corporation and Subsidiaries 43


Financial review

 

Sales Recognition and Incentives  Sales are recognized when title and risk of loss pass to the customer. Reserves for uncollectible accounts are based upon historical collection statistics, current customer information, and overall economic conditions. These estimates are reviewed each quarter and adjusted based upon actual experience. The reserves for uncollectible trade receivables are disclosed and trade receivables due from customers that the corporation considers highly leveraged are presented in Note 15 to the Consolidated Financial Statements, titled “Financial Instruments and Risk Management Interest Rate and Currency Swaps.” The corporation has a significant number of individual accounts receivable and a number of factors outside of the corporation’s control that impact the collectibility of a receivable. It is reasonably likely that actual collection experience will vary from the assumptions and estimates made at the end of each accounting period.

The Notes to the Consolidated Financial Statements specify a variety of sales incentives that the corporation offers to resellers and consumers of its products. Measuring the cost of these incentives requires, in many cases, estimating future customer utilization and redemption rates. Historical data for similar transactions are used in estimating the most likely cost of current incentive programs. These estimates are reviewed each quarter and adjusted based upon actual experience and other available information. The corporation has a significant number of trade incentive programs and a number of factors outside of the corporation’s control impact the ultimate cost of these programs. It is reasonably likely that actual experience will vary from the assumptions and estimates made at the end of each accounting period.

Inventory Valuation  Inventory is carried on the balance sheet at the lower of cost or market. Obsolete, damaged and excess inventories are carried at net realizable value. Historical recovery rates, current market conditions, future marketing and sales plans and spoilage rates are key factors used by the corporation in assessing the most likely net realizable value of obsolete, damaged and excess inventory. These factors are evaluated at a point in time and there are inherent uncertainties related to determining the recoverability of inventory. It is reasonably likely that market factors and other conditions underlying the valuation of inventory may change in the future.

Impairment of Property  Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may

not be recoverable. Such events include significant adverse changes in the business climate, the impact of significant customer losses, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously recognized impairment loss is not allowed.

There are inherent uncertainties associated with these judgments and estimates and it is reasonably likely that impairment charges can change from period to period. Note 4 to the Consolidated Financial Statements discloses the impairment charges recognized by the corporation and the factors which caused these charges. It is also reasonably likely that the sale of a business can result in the recognition of an impairment that differs from that anticipated prior to the closing date. Given the corporation’s ongoing efforts to improve operating efficiency, it is reasonably likely that future restructuring actions could result in decisions to dispose of other assets before the end of their useful life and it is reasonably likely that the impact of these decisions would result in impairment and other related costs including employee severance that in the aggregate would be significant.

Trademarks and Other Identifiable Intangible Assets  The primary identifiable intangible assets of the corporation are trademarks and customer relationships acquired in business combinations and computer software. Identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the corporation is based upon a number of factors, including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows. As of July 3, 2010, the net book value of trademarks and other identifiable intangible assets was $504 million, of which $450 million is being amortized. The anticipated amortization over the next five years is $219 million.


 

44 Sara Lee Corporation and Subsidiaries


Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate elements of property. Identifiable intangible assets not subject to amortization are assessed for impairment at least annually, in the fourth quarter, and as triggering events may arise. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. The fair value of the intangible asset is measured using the royalty savings method. In making this assessment, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time.

There are inherent assumptions and estimates used in developing future cash flows requiring management’s judgment in applying these assumptions and estimates to the analysis of intangible asset impairment including projecting revenues, interest rates, the cost of capital, royalty rates and tax rates. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments. Note 4 to the Consolidated Financial Statements sets out the impact of charges taken to recognize the impairment of intangible assets and the factors which led to changes in estimates and assumptions.

Goodwill  Goodwill is not amortized but is subject to periodic assessments of impairment and is discussed further in Note 3. Goodwill is assessed for impairment at least annually, in the fourth quarter, and as triggering events may arise. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Reporting units are business components one level below the operating segment level for which discrete financial information is available and reviewed by segment management. In evaluating the recoverability of goodwill, it is necessary to estimate the fair value of the reporting units. In making this assessment, management relies on a number of factors to discount anticipated future cash flows including operating results,

business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. The fair value of reporting units is estimated based on a weighting of two models – a discounted cash flow model and a market multiple model. The discounted cash flow model uses management’s business plans and projections as the basis for expected future cash flows for the first three years and a 2% residual growth rate thereafter. The market multiple approach employs market multiples of revenues or earnings for companies comparable to the corporation’s operating units. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for our reporting units. A separate discount rate derived from published sources was utilized for each reporting unit and, on a weighted average basis, the discount rate used was 10.2%.

The majority of goodwill impairments recognized by the corporation in the past several years relate to goodwill attributable to the Earthgrains bakery acquisition in 2002. Three reporting units that continue to carry significant Earthgrains goodwill balances at the end of 2010 include North American foodservice bakery with $476 million, North American fresh bakery with $288 million, and International Bakery France with $162 million. Although we currently believe the operations can support the value of goodwill reported, these entities are the most sensitive to changes in inherent assumptions and estimates used in determining fair value. These three reporting units represent approximately 75% of the corporation’s remaining goodwill balance. Holding all other assumptions constant at the test date, a 100 basis point increase in the discount rate used for these three reporting units would reduce the enterprise value between 12% and 15% indicating no potential impairment. These three reporting units have estimated fair values in excess of net asset carrying values in the range of 36% to 63% as of the test date.

There are inherent assumptions and estimates used in developing future cash flows requiring management’s judgment in applying these assumptions and estimates to the analysis of goodwill impairment including projecting revenues and profits, interest rates, the cost of capital, tax rates, the corporation’s stock price, and the allocation of shared or corporate items. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates can change in future periods. These changes can result in future impairments. Note 4 to the Consolidated Financial Statements sets out the impact of charges taken to recognize the impairment of goodwill and the factors which led to changes in estimates and assumptions.


 

Sara Lee Corporation and Subsidiaries 45


Financial review

 

Self-Insurance Reserves  The corporation purchases third-party insurance for workers’ compensation, automobile and product and general liability claims that exceed a certain level. The corporation is responsible for the payment of claims under these insured limits, and consulting actuaries are utilized to estimate the obligation associated with incurred losses. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. Consulting actuaries make a significant number of estimates and assumptions in determining the cost to settle these claims and many of the factors used are outside the control of the corporation. Accordingly, it is reasonably likely that these assumptions and estimates may change and these changes may impact future financial results.

Income Taxes  Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. Federal and state income taxes are provided on that portion of foreign subsidiaries income that is expected to be remitted to the U.S. and be taxable.

The corporation’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the corporation operates. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the corporation transacts business. We establish reserves for income taxes when, despite the belief that our tax positions are fully supportable, we believe that our position may be challenged and possibly disallowed by various tax authorities. The corporation’s recorded estimates of liability related to income tax positions are based on management’s judgments made in consultation with outside tax and legal counsel, where appropriate, and are based upon the expected outcome of proceedings with worldwide tax authorities in consideration of applicable tax statutes and related interpretations and precedents. We also provide interest on these reserves at the appropriate statutory interest rates and these charges are also included in the corporation’s effective tax rate. The ultimate liability incurred by the corporation may differ from its estimates based on a number of factors, including the application of relevant legal precedent, the corporation’s success in supporting its filing positions with tax authorities, and changes to, or further interpretations of, law.

 

The corporation’s tax returns are routinely audited by federal, state, and foreign tax authorities. Reserves for uncertain tax positions represent a provision for the corporation’s best estimate of taxes expected to be paid based upon all available evidence recognizing that over time, as more information is known, these reserves may require adjustment. Reserves are adjusted when (a) new information indicates a different estimated reserve is appropriate; (b) the corporation finalizes an examination with a tax authority, eliminating uncertainty regarding tax positions taken; or (c) a tax authority does not examine a tax year within a given statute of limitations, also eliminating the uncertainty with regard to tax positions for a specific tax period. The actual amounts settled with respect to these examinations were the result of discussions and settlement negotiations involving the interpretation of complex income tax laws in the context of our fact patterns. Any adjustment to a tax reserve impacts the corporation’s tax expense in the period in which the adjustment is made.

As a global commercial enterprise, the corporation’s tax rate from period to period can be affected by many factors. The most significant of these factors are changes in tax legislation, the corporation’s global mix of earnings, the tax characteristics of the corporation’s income, the timing and recognition of goodwill impairments, acquisitions and dispositions, adjustments to the corporation’s reserves related to uncertain tax positions, changes in valuation allowances, and the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable. It is reasonably possible that the following items can have a material impact on income tax expense, net income and liquidity in future periods:

•    The spin off of the Hanesbrands business that was completed in 2007 has resulted in an increase in the corporation’s effective tax rate as the operations that were spun off had, historically, a lower effective tax rate than the remainder of the business and generated a significant amount of operating cash flow. The elimination of this cash flow has required the corporation to remit a greater portion of the future foreign earnings to the U.S. than has historically been the case and resulted in higher levels of tax expense and cash taxes paid. The tax provision associated with the repatriation of foreign earnings for both continuing and discontinued operations in fiscal years 2010, 2009, and 2008 was $574 million, $58 million, and $118 million, respectively. In 2010, the tax expense for


 

46 Sara Lee Corporation and Subsidiaries


repatriation of foreign earnings was significantly higher due to the corporation’s decision to no longer reinvest overseas earnings primarily attributable to existing overseas cash and the book value of the household and body care businesses. In its determination of which foreign earnings are permanently reinvested, the corporation considers numerous factors, including the financial requirements of the U.S. parent company, the financial requirements of its foreign subsidiaries, and the tax consequences of remitting the foreign earnings to the U.S. Variability in the corporation’s effective tax rate will occur over time as a result of these and other factors which could materially change the estimated cost of future repatriation actions.

•    Tax legislation in the jurisdictions in which the corporation does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the corporation’s tax assets and obligations will need to be measured and recognized in the financial statements.

•    The corporation has ongoing U.S. and foreign tax audits for various tax periods. The U.S. federal tax years from 2007 onward remain subject to audit. Fiscal years remaining open to examination in the Netherlands include 2003 forward. Other foreign jurisdictions remain open to audits ranging from 1999 forward. With few exceptions, the corporation is no longer subject to state and local income tax examinations by tax authorities for years before 2003. The tax reserves for uncertain tax positions recorded in the financial statements reflect the expected finalization of worldwide examinations. The corporation regularly reviews its tax positions based on the individual facts, circumstances, and technical merits of each tax position. If the corporation determines it is more likely than not that it is entitled to the economic benefits associated with a tax position, it then considers the amounts and probabilities of the outcomes that could be realized upon ultimate settlement with a taxing authority, taking into consideration all available facts, circumstances, and information. The corporation believes that it has sufficient cash resources to fund the settlement of these audits.

As a result of audit resolutions, expirations of statutes of limitations, and changes in estimate on tax contingencies in 2010 and 2009, the corporation recognized tax benefits of $177 million and $21 million, respectively. However, audit outcomes and the timing of audit settlements

are subject to significant uncertainty. The corporation estimates reserves for uncertain tax positions, but is not able to control or predict the extent to which tax authorities will examine specific periods, the outcome of examinations, or the time period in which examinations will be conducted and finalized. Favorable or unfavorable past audit experience in any particular tax jurisdiction is not indicative of the outcome of future examinations by those tax authorities. Based on the nature of uncertain tax positions and the examination process, management is not able to predict the potential outcome with respect to tax periods that have not yet been examined or the impact of any potential reserve adjustments on the corporation’s tax rate or net earnings trends. As of the end of 2010, the corporation believes that it is reasonably possible that the liability for unrecognized tax benefits will decrease by approximately $0 to $25 million over the next 12 months.

•    Facts and circumstances may change that cause the corporation to revise the conclusions on its ability to realize certain net operating losses and other deferred tax attributes. The corporation regularly reviews whether it will realize its deferred tax assets. Its review consists of determining whether sufficient taxable income of the appropriate character exists within the carryback and carryforward period available under respective tax statutes. The corporation considers all available evidence of recoverability when evaluating its deferred tax assets; however, the corporation’s most sensitive and critical factor in determining recoverability of deferred tax assets is the existence of historical and projected profitability in a particular jurisdiction. As a result, changes in actual and projected results of the corporation’s various legal entities can create variability, as well as changes in the level of the corporation’s gross deferred tax assets, which could result in increases or decreases in the corporation’s deferred tax asset valuation allowance.

As a multinational company, the corporation cannot predict with reasonable certainty or likelihood future results considering the complexity and sensitivity of the assumptions above.

Note 18 to the Consolidated Financial Statements, titled “Income Taxes,” sets out the factors which caused the corporation’s effective tax rate to vary from the statutory rate and certain of these factors result from finalization of tax audits and review and changes in estimates and assumptions regarding tax obligations and benefits.


 

Sara Lee Corporation and Subsidiaries 47


Financial review

 

Stock Compensation  The corporation issues restricted stock units (RSUs) and stock options to employees in exchange for employee services. See Note 9 to the Consolidated Financial Statements regarding stock-based compensation for further information on these awards. The cost of RSUs and stock option awards is equal to the fair value of the award at the date of grant, and compensation expense is recognized for those awards earned over the service period. Certain of the RSUs vest based upon the employee achieving certain defined performance measures. During the service period, management estimates the number of awards that will meet the defined performance measures. With regard to stock options, at the date of grant, the corporation determines the fair value of the award using the Black-Scholes option pricing formula. Management estimates the period of time the employee will hold the option prior to exercise and the expected volatility of the corporation’s stock, each of which impacts the fair value of the stock options. The corporation believes that changes in the estimates and assumptions associated with prior non-performance based grants and stock option grants are not reasonably likely to have a material impact on future operating results. However, changes in estimates and assumptions related to previously issued performance based RSUs may have a material impact on future operating results.

Defined Benefit Pension Plans  See Note 16 to the Consolidated Financial Statements, titled “Defined Benefit Pension Plans,” for information regarding plan obligations, plan assets and the measurements of these amounts, as well as the net periodic benefit cost and the reasons for changes in this cost.

Pension costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. The assumptions used in developing the required estimates include the following key factors: discount rates, salary growth, expected return on plan assets, retirement rates and mortality.

In determining the discount rate, the corporation utilizes a yield curve based on high-quality fixed-income investments that have a AA bond rating to discount the expected future benefit payments to plan participants. Salary increase assumptions are based on historical experience and anticipated future management actions. In determining the long-term rate of return on plan assets, the corporation assumes that the historical long-term compound growth rate of equity and fixed-income securities will predict the future returns of similar investments in the plan

portfolio. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality. Results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic benefit cost in future periods.

Net periodic benefit costs for the corporation’s defined benefit pension plans were $115 million in 2010, $67 million in 2009 and $97 million in 2008, and the projected benefit obligation was $4,727 million at the end of 2010 and $4,218 million at the end of 2009. The corporation currently expects its net periodic benefit cost for 2011 to be approximately $50 million, a $65 million decrease over 2010 due primarily to a reduction in service cost due to plan freezes in the U.S., a reduction in interest rates, and an increase in expected return on assets due to higher plan assets at the end of 2010 as compared to the prior year.

The following information illustrates the sensitivity of the net periodic benefit cost and projected benefit obligation to a change in the discount rate and return on plan assets. Amounts relating to foreign plans are translated at the spot rate at the close of 2010. The sensitivities reflect the impact of changing one assumption at a time and are specific to base conditions at the end of 2010 and treat the household and body care businesses as discontinued operations. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and that the effects of changes in assumptions are not necessarily linear.

 

                Increase/(Decrease) in  
Assumption           Change    2011
Net Periodic
Benefit Cost
    2010
Projected
Benefit
Obligation
 

Discount rate

   1   increase    $ (36   $ (590
   1   decrease      32        674   

Asset return

   1   increase      (41       
     1   decrease      41          

The corporation’s defined benefit pension plans had a net unamortized actuarial loss of $1,143 million in 2010 and $883 million in 2009. The unamortized actuarial loss is reported in the “Accumulated other comprehensive loss” line of the Consolidated Balance Sheet. The increase in the net actuarial loss in 2010 was primarily due to a 120 basis point reduction in the weighted average discount rate partially offset by actual asset performance in excess of the asset return assumption.


 

48 Sara Lee Corporation and Subsidiaries


As indicated above, changes in the bond yields, expected future returns on assets, and other assumptions can have a material impact upon the funded status and the net periodic benefit cost of defined benefit pension plans. It is reasonably likely that changes in these external factors will result in changes to the assumptions used by the corporation to measure plan obligations and net periodic benefit cost in future periods.

Issued but not yet Effective Accounting Standards

Following is a discussion of recently issued accounting standards that the corporation will be required to adopt in a future period.

Consolidation of Variable Interest Entities  In June 2009, the FASB issued an update to the guidance for determining whether an entity is a variable interest entity (VIE) and who is the primary beneficiary of the VIE. The new guidance will also require ongoing reassessments of the primary beneficiary of a VIE and new expanded disclosures surrounding the nature of the VIE and an entity’s involvement with the VIE. The new guidance is effective for the corporation in the first quarter of fiscal 2011. The corporation does not believe the new guidance will have a material impact on the consolidated financial statements.

Revenue Arrangements with Multiple Deliverables  In September 2009, new accounting guidance was issued concerning accounting for revenue arrangements with multiple deliverables. The guidance requires companies to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable, even though such deliverables are not sold separately. It also eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize a portion of the overall arrangement fee that is attributable to items that have already been delivered. The guidance also establishes a selling price hierarchy for determining the selling price of a deliverable and expands disclosures for multiple-deliverable revenue arrangements. The new guidance is required to be adopted by the corporation for revenue arrangements entered into or materially modified at the beginning of 2011. The corporation is currently evaluating the provisions of this guidance and has not determined the impact of adoption at this time.

 

Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses  On July 21, 2010 new accounting guidance was issued that significantly expands the disclosure requirements related to financing receivables and the related allowance for credit losses. Specifically, the new guidance requires, among other things, disclosure of: i) a rollforward of the allowance for credit losses along with the balance of the allowance reserve and the related financing receivable; ii) the reasons for the changes in the allowance for credit losses; iii) the aging of past due financing receivables at period end by customer class; iv) the nature of credit risk inherent in the financing receivables; and v) how the risk is analyzed and assessed in estimating the allowance for credit losses. The new guidance is to be implemented in several steps with the first implementation required in the second quarter of 2011. Trade accounts receivable with contractual maturities of one year or less that arose from the sales of goods or services are excluded from the new guidance so the corporation believes this new guidance will not result in significant new disclosures.

Forward-Looking Information

This document contains certain forward-looking statements, including the anticipated costs and benefits of restructuring, transformation and Project Accelerate actions, access to credit markets and the corporation’s credit ratings, the planned extinguishment of debt, the funding of pension plans, potential payments under guarantees and amounts due under future contractual obligations and commitments, projected capital expenditures, cash tax payments, pension settlement amounts and effective tax rates. In addition, from time to time, in oral statements and written reports, the corporation discusses its expectations regarding the corporation’s future performance by making forward-looking statements preceded by terms such as “expects,” “projects,” “anticipates” or “believes.” These forward-looking statements are based on currently available competitive, financial and economic data, as well as management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Consequently, the corporation wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could cause Sara Lee’s actual results to differ from such forward-looking statements are factors relating to:


 

Sara Lee Corporation and Subsidiaries 49


Financial review

 

•    Sara Lee’s share repurchase and other capital plans, such as (i) future opportunities that the Board may determine present greater potential value to shareholders than the current capital plans and targets, including without limitation potential acquisitions, joint ventures or other corporate transactions, and investments in Sara Lee’s business; (ii) future operating or capital needs that require a more significant outlay of cash than currently anticipated; or (iii) future changes in facts or circumstances that may impact the anticipated accounting treatment of such activities;

•    Sara Lee’s relationship with its customers, such as (iv) a significant change in Sara Lee’s business with any of its major customers, such as Walmart, its largest customer, including changes in how such customers manage their suppliers and the level of inventory these customers maintain; and (v) credit and other business risks associated with customers operating in a highly competitive retail environment;

•    The consumer marketplace, such as (vi) significant competition, including advertising, promotional and price competition; (vii) changes in consumer behavior due to economic conditions, such as a shift in consumer demand toward private label; (viii) fluctuations in the cost of raw materials, Sara Lee’s ability to increase or maintain product prices in response to fluctuations in cost and the impact on Sara Lee’s profitability; (ix) the impact of various food safety issues and regulations on sales and profitability of Sara Lee products; and (x) inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance;

•    Sara Lee’s international operations, such as (xi) impacts on reported earnings from fluctuations in foreign currency exchange rates, particularly the euro; (xii) Sara Lee’s generation of a high percentage of its revenues from businesses outside the United States and costs to remit these foreign earnings into the U.S. to fund Sara Lee’s domestic operations, share repurchase plans, dividends, debt service and corporate costs; (xiii) the impact on Sara Lee’s business of its receipt of binding offers to purchase a large portion of its H&BC business, its intent to divest the remainder of that business and any inability to complete these transactions or to divest the remaining H&BC businesses on favorable terms; and (xiv) difficulties and costs associated with complying with U.S. laws and regulations, such as Foreign Corrupt Practices Act, applicable to entities with overseas operations, and different regulatory structures and unexpected changes in regulatory environments overseas, including

without limitation potentially negative consequences from changes in anti-competition and tax laws; and (xv) Sara Lee’s ability to continue to source production and conduct manufacturing and selling operations in various countries due to changing business conditions, political environments, import quotas and the financial condition of suppliers;

•    Previous business decisions, such as (xvi) Sara Lee’s ability to generate margin improvement through cost reduction and efficiency initiatives, including Project Accelerate and the outsourcing of significant portions of our financial transaction processing, global IT, and global indirect procurement activities; (xvii) Sara Lee’s ability to achieve planned cash flows from capital expenditures and acquisitions and the impact of changing interest rates and the cost of capital on the discounted value of those planned cash flows, which could impact future impairment analyses; (xviii) credit ratings issued by the three major credit rating agencies, the impact of Sara Lee’s capital plans and targets on such credit ratings and the impact these ratings and changes in these ratings may have on Sara Lee’s cost to borrow funds, access to capital/debt markets, and ability to complete the planned share repurchase; (xix) Sara Lee’s plan to refinance significant outstanding indebtedness in the next two years and the impact of potential changes in the credit environment; (xx) Sara Lee’s plan to repurchase a significant amount of its common stock and the impact of such repurchases on its earnings, cash flow and credit ratings; (xxi) the settlement of a number of ongoing reviews of Sara Lee’s income tax filing positions in various jurisdictions and inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which Sara Lee transacts business; and (xxii) changes in the expense for and contingent liabilities relating to multi-employer pension plans in which Sara Lee participates; and

•    Uncertainty relating to our chief executive officer position and the fact that Sara Lee’s board has initiated a process to identify a permanent successor.

In addition, the corporation’s results may also be affected by general factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, taxes and laws and regulations in markets where the corporation competes. Sara Lee undertakes no obligation to publicly update any forwardlooking statements, whether as a result of new information, future events or otherwise.


 

50 Sara Lee Corporation and Subsidiaries


Consolidated statements of income

 

Dollars in millions except per share data    Years ended    July 3, 2010     June 27, 2009     June 28, 2008  

Continuing Operations

      

Net sales

   $ 10,793      $ 10,882      $ 10,949   

Cost of sales

     6,692        7,038        7,008   

Selling, general and administrative expenses

     3,204        3,090        3,232   

Net charges for exit activities, asset and business dispositions

     84        103        39   

Impairment charges

     28        314        851   

Contingent sale proceeds

     (133     (150     (130

Operating income (loss)

     918        487        (51

Interest expense

     147        170        185   

Interest income

     (24     (41     (80

Income (loss) from continuing operations before income taxes

     795        358        (156

Income tax expense

     153        133        120   

Income (loss) from continuing operations

     642        225        (276

Discontinued Operations

      

Income (loss) from discontinued operations, net of tax expense of $453, $90 and $81

     (199     155        236   

Gain on sale of discontinued operations, net of tax expense of $74, nil and $1

     84               (24

Net income (loss)

     527        380        (64

Less: Income from noncontrolling interests, net of tax

      

Continuing operations

     7        5        4   

Discontinued operations

     14        11        11   

Net income (loss) attributable to Sara Lee

   $ 506      $ 364      $ (79

Amounts attributable to Sara Lee

      

Net income (loss) from continuing operations

   $ 635      $ 220      $ (280

Net income (loss) from discontinued operations

     (129     144        201   

Net income (loss) attributable to Sara Lee

   $ 506      $ 364      $ (79

Income (loss) from continuing operations per share of common stock

      

Basic

   $ 0.92      $ 0.31      $ (0.39

Diluted

   $ 0.92      $ 0.31      $ (0.39

Net income (loss) per share of common stock

      

Basic

   $ 0.74      $ 0.52      $ (0.11

Diluted

   $ 0.73      $ 0.52      $ (0.11

The  accompanying Notes to Financial Statements are an integral part of these statements.

     

   

 

Sara Lee Corporation and Subsidiaries 51


Consolidated balance sheets

 

Dollars in millions except per share data    July 3, 2010     June 27, 2009  

Assets

    

Cash and equivalents

   $ 955      $ 951   

Trade accounts receivable, less allowances of $69 in 2010 and $72 in 2009

     1,187        1,272   

Inventories

    

Finished goods

     406        443   

Work in process

     31        32   

Materials and supplies

     309        291   
     746        766   

Current deferred income taxes

     262        213   

Other current assets

     400        250   

Assets held for sale

     260        378   

Total current assets

     3,810        3,830   

Other noncurrent assets

     134        245   

Property

    

Land

     87        94   

Buildings and improvements

     1,338        1,365   

Machinery and equipment

     3,256        3,334   

Construction in progress

     211        183   
     4,892        4,976   

Accumulated depreciation

     2,822        2,776   

Property, net

     2,070        2,200   

Trademarks and other identifiable intangibles, net

     504        587   

Goodwill

     1,261        1,295   

Deferred income taxes

     225        298   

Noncurrent assets held for sale

     832        964   
     $ 8,836      $ 9,419   

 

The accompanying Notes to Financial Statements are an integral part of these statements.

 

52 Sara Lee Corporation and Subsidiaries


Dollars in millions except per share data    July 3, 2010     June 27, 2009  

Liabilities and Stockholders’ Equity

    

Notes payable

   $ 47      $ 20   

Accounts payable

     1,005        1,004   

Accrued liabilities

    

Payroll and employee benefits

     601        642   

Advertising and promotion

     289        287   

Income taxes payable and current deferred taxes

     8        22   

Other accrued liabilities

     504        538   

Current maturities of long-term debt

     16        46   

Liabilities held for sale

     253        287   

Total current liabilities

     2,723        2,846   

Long-term debt

     2,718        2,738   

Pension obligation

     530        595   

Deferred income taxes

     548        106   

Other liabilities

     792        1,051   

Noncurrent liabilities held for sale

     10        13   

Equity

    

Sara Lee common stockholders’ equity:

    

Common stock: (authorized 1,200,000,000 shares; $0.01 par value)

    

Issued and outstanding – 662,118,377 shares in 2010 and 695,658,110 shares in 2009

     7        7   

Capital surplus

     17        17   

Retained earnings

     2,472        2,721   

Unearned stock of ESOP

     (97     (104

Accumulated other comprehensive income (loss)

     (912     (605

Total Sara Lee common stockholders’ equity

     1,487        2,036   

Noncontrolling interest

     28        34   

Total equity

     1,515        2,070   
     $ 8,836      $ 9,419   

The accompanying Notes to Financial Statements are an integral part of these statements.

 

Sara Lee Corporation and Subsidiaries 53


Consolidated statements of equity

 

           Sara Lee Common Stockholders’ Equity        
Dollars in millions    Total     Common
Stock
   Capital
Surplus
    Retained
Earnings
    Unearned
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
 

Balances at June 30, 2007

   $ 2,607      $ 7    $      $ 3,413      $ (123   $ (754   $ 64   

Net income (loss)

     (64                 (79                   15   

Translation adjustments, net of tax of $14

     686                                  686          

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $(14)

     25                                  25          

Pension/Postretirement activity, net of tax of $(4)

     192                                  192          
                           

Comprehensive income

   $ 839                 $ 15   
                           

GAAP adoption – tax contingencies

     13                    13                        

Dividends on common stock

     (300                 (300                     

Dividends paid on noncontrolling interest/Other

     (9                                      (9

Disposition of noncontrolling interest

     (44                                      (44

Stock issuances – restricted stock

     25             25                               

Stock option and benefit plans

     9             9                               

Share repurchases and retirement

     (315          (27     (288                     

ESOP tax benefit, redemptions and other

     12                    1        11                 

Balances at June 28, 2008

     2,837        7      7        2,760        (112     149        26   

Net income

     380                    364                      16   

Translation adjustments, net of tax of $(31)

     (563                               (561     (2

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $16

     (30                               (30       

Pension/Postretirement activity, net of tax of $93

     (164                               (164       

Other comprehensive income activity, net of tax of nil

     (4                               (2     (2
                           

Comprehensive income (loss)

   $ (381              $ 12   
                           

Dividends on common stock

     (310                 (310                     

Dividends paid on noncontrolling interest/Other

     (4                                      (4

Stock issuances – restricted stock

     29             29                               

Stock option and benefit plans

     4             4                               

Share repurchases and retirement

     (103          (25     (78                     

Pension/Postretirement – adjustment to change in measurement date, net of tax of $7

     (13                 (16            3          

ESOP tax benefit, redemptions and other

     11             2        1        8                 

Balances at June 27, 2009

     2,070        7      17        2,721        (104     (605