UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-3344
Sara Lee Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 36-2089049
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three First National Plaza, Suite 4600, Chicago, Illinois 60602-4260
--------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(312) 726-2600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
On March 30, 2002, the Registrant had 784,494,778 outstanding shares of
common stock $.01 par value, which is the Registrant's only class of common
stock.
The document contains 50 pages.
SARA LEE CORPORATION AND SUBSIDIARIES
-------------------------------------
INDEX
-----
PART I -
ITEM 1 - FINANCIAL STATEMENTS
Preface 3
Condensed Consolidated Balance Sheets -
At March 30, 2002 and June 30, 2001 4
Consolidated Statements of Income -
For the thirteen and thirty-nine weeks ended
March 30, 2002 and March 31, 2001 5
Consolidated Statements of Common Stockholders' Equity -
For the period July 1, 2000 to March 30, 2002 6
Consolidated Statements of Cash Flows -
For the thirty-nine weeks ended March 30, 2002
and March 31, 2001 7
Notes to Consolidated Financial Statements 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 18
PART II -
ITEM 1. - LEGAL PROCEEDINGS 36
ITEM 5. - OTHER INFORMATION 36
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 37
SIGNATURE 38
EXHIBIT 10.1 - Consulting and Retirement Agreement Between Sara
Lee Corporation and Paul J. Lustig 39
EXHIBIT 12.1 - Computation of Ratio of Earnings to Fixed Charges 49
EXHIBIT 12.2 - Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividend Requirements 50
2
PART I
SARA LEE CORPORATION AND SUBSIDIARIES
-------------------------------------
Preface
-------
The consolidated financial statements for the thirteen and thirty-nine weeks
ended March 30, 2002 and March 31, 2001 and the balance sheet as of March 30,
2002 included herein have not been audited by independent public accountants,
but in the opinion of Sara Lee Corporation ("the Corporation"), all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position at March 30, 2002 and the results of operations and the
cash flows for the periods presented herein have been made. The results of
operations for the thirteen and thirty-nine weeks ended March 30, 2002 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Corporation believes the disclosures made are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Corporation's Form 10-K for the year ended June 30, 2001 and
other financial information filed with the Securities and Exchange Commission.
3
SARA LEE CORPORATION AND SUBSIDIARIES
-------------------------------------
Condensed Consolidated Balance Sheets at March 30, 2002 and June 30, 2001
-------------------------------------------------------------------------
(In millions)
-------------
(Unaudited)
March 30, June 30,
2002 2001
------------------- -------------------
ASSETS
------
Cash and equivalents $ 661 $ 548
Trade accounts receivable, less allowances 1,789 1,538
Inventories:
Finished goods 1,591 1,715
Work in process 409 454
Materials and supplies 452 413
------------------- -------------------
2,452 2,582
Other current assets 311 321
Net assets of businesses held for sale 16 94
------------------- -------------------
Total current assets 5,229 5,083
Other non-current assets 199 264
Property, net 3,024 2,146
Trademarks and other identifiable intangibles, net 2,016 1,137
Goodwill, net 3,274 1,537
------------------- -------------------
$ 13,742 $ 10,167
=================== ===================
LIABILITIES AND EQUITY
----------------------
Notes payable $ 1,250 $ 101
Accounts payable 1,181 1,505
Accrued liabilities 2,956 2,872
Current maturities of long-term debt 497 480
------------------- -------------------
Total current liabilities 5,884 4,958
Long-term debt 4,302 2,640
Deferred income taxes 510 244
Other non-current liabilities 935 563
Minority interest in subsidiaries 636 625
ESOP convertible preferred stock 230 238
Unearned deferred compensation (221) (223)
Common stockholders' equity 1,466 1,122
------------------- -------------------
$ 13,742 $ 10,167
=================== ===================
See accompanying Notes to Consolidated Financial Statements. Page 4
SARA LEE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(In millions, except per share data)
(Unaudited)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------ -----------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 4,200 $ 4,044 $ 13,133 $ 12,705
--------- --------- --------- ---------
Cost of sales 2,547 2,519 8,095 7,851
Cost of sales - product line exit costs (3) -- (7) 24
Selling, general and administrative expenses 1,300 1,188 3,938 3,637
Interest expense 70 60 224 211
Interest income (19) (23) (62) (62)
Unusual items - business reshaping:
Gain in connection with initial public offering -- -- -- (105)
Business dispositions and other charges (2) (12) 190 308
--------- --------- --------- ---------
3,893 3,732 12,378 11,864
--------- --------- --------- ---------
Income from continuing operations before income taxes 307 312 755 841
Income taxes 50 71 96 211
--------- --------- --------- ---------
Income from continuing operations 257 241 659 630
Income from discontinued operations, net of income taxes -- -- -- 25
Gain on disposal of discontinued operations, net of income taxes -- -- -- 638
--------- --------- --------- ---------
Net income 257 241 659 1,293
Preferred stock dividends, net of tax 3 3 8 9
--------- --------- --------- ---------
Income available for common stockholders $ 254 $ 238 $ 651 $ 1,284
========= ========= ========= =========
Income from continuing operations per common share
Basic $ 0.32 $ 0.29 $ 0.83 $ 0.75
========= ========= ========= =========
Diluted $ 0.31 $ 0.28 $ 0.80 $ 0.72
========= ========= ========= =========
Net income per common share
Basic $ 0.32 $ 0.29 $ 0.83 $ 1.54
========= ========= ========= =========
Diluted $ 0.31 $ 0.28 $ 0.80 $ 1.48
========= ========= ========= =========
Average shares outstanding
Basic 786 828 784 833
========= ========= ========= =========
Diluted 819 865 818 870
========= ========= ========= =========
Cash dividends per common share $ 0.150 $ 0.145 $ 0.445 $ 0.425
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. Page 5
SARA LEE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Common Stockholders' Equity
For the Period July 1, 2000 to March 30, 2002
(In millions, except per share data)
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
COMMON CAPITAL RETAINED UNEARNED INCOME INCOME
TOTAL STOCK SURPLUS EARNINGS STOCK (LOSS) (LOSS)
-------- ------ ------- -------- -------- ------------- -------------
Balances at July 1, 2000 $ 1,234 $ 8 $ -- $ 2,393 $ (21) $ (1,146)
Net income 1,293 -- -- 1,293 -- -- $ 1,293
Translation adjustments, net of tax (171) -- -- -- -- (171) (171)
Transition adjustment related to change in
accounting for derivative instruments and
hedging activities, net of tax 6 -- -- -- -- 6 6
Net unrealized gain on qualifying cash flow
hedges, net of tax 2 -- -- -- -- 2 2
-------------
Comprehensive income $ 1,130
=============
Cash dividends -
Common ($0.425 per share) (353) -- -- (353) -- --
ESOP convertible preferred ($4.08 per share) (14) -- -- (14) -- --
Stock issuances (cancelations) -
Stock option and benefit plans 86 -- 86 -- -- --
Restricted stock (13) -- -- (34) 21 --
Tax benefit related to incentive stock options 9 -- 9 -- -- --
Reacquired shares (510) -- (78) (432) -- --
ESOP tax benefit, redemptions, and other 14 -- 9 5 -- --
-------- ------ ------- -------- -------- -------------
Balances at March 31, 2001 1,583 8 26 2,858 -- (1,309)
Net income 973 -- -- 973 -- -- $ 973
Translation adjustments, net of tax (92) -- -- -- -- (92) (92)
Minimum pension liability, net of tax (107) -- -- -- -- (107) (107)
Net unrealized gain on qualifying cash flow
hedges, net of tax (13) -- -- -- -- (13) (13)
-------------
Comprehensive income $ 761
=============
Cash dividends -
Common ($.145 per share) (115) -- -- (115) -- --
ESOP convertible preferred ($1.36 per share) (4) -- -- (4) -- --
Stock issuances (cancelations) -
Stock option and benefit plans 18 -- 18 -- -- --
Tax benefit related to incentive stock
options 1 -- 1 -- -- --
Reacquired shares (133) -- (51) (82) -- --
Exchange offer for Coach common stock (998) -- -- (998) -- --
ESOP tax benefit, redemptions and other 9 -- 6 3 -- --
-------- ------ ------- -------- -------- -------------
Balances at June 30, 2001 1,122 8 -- 2,635 -- (1,521)
Net income 659 -- -- 659 -- -- $ 659
Translation adjustments, net of tax 6 -- -- -- -- 6 6
Net unrealized gain on qualifying cash flow
hedges, net of tax (5) -- -- -- -- (5) (5)
-------------
Comprehensive income $ 660
=============
Cash dividends -
Common ($0.445 per share) (349) -- -- (349) -- --
ESOP convertible preferred ($4.08 per share) (13) -- -- (13) -- --
Stock issuances (cancelations) -
Stock option and benefit plans 75 -- 75 -- -- --
Business acquisitions (1) -- (1) -- -- --
Restricted stock 5 -- 5 -- -- --
Reacquired shares (85) -- (85) -- -- --
Acquisition of Earthgrains' ESOP -- -- 30 -- (30) --
Earthgrains stock option conversion 26 -- 26 -- -- --
ESOP tax benefit, redemptions and other 26 -- 16 5 5 --
-------- ------ ------- -------- -------- -------------
Balances at March 30, 2002 $ 1,466 $ 8 $ 66 $ 2,937 $ (25) $ (1,520)
======== ====== ======= ======== ======== =============
Interim period balances are unaudited
See accompanying Notes to Consolidated Financial Statements. Page 6
SARA LEE CORPORATION AND SUBSIDIARIES
-------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
For the Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
-----------------------------------------------------------------
(In millions)
-------------
(Unaudited)
-----------
THIRTY-NINE WEEKS ENDED
-------------------------------------
March 30, March 31,
2002 2001
---------------- ---------------
OPERATING ACTIVITIES -
Income from continuing operations $ 659 $ 630
Adjustments for non-cash charges included in net income:
Depreciation 350 307
Amortization of intangibles 73 155
(Decrease) in deferred income taxes (28) (11)
Other 10 (54)
Unusual items - business reshaping
Business dispositions and other charges 111 332
Gain in connection with initial public offering - (105)
Changes in current assets and liabilities, excluding
businesses acquired and sold (245) (496)
---------------- ----------------
Net cash from operating activities - continuing operations 930 758
Operating cash flows (used in) discontinued operations - (24)
---------------- ----------------
Net cash from operating activities 930 734
---------------- ----------------
INVESTMENT ACTIVITIES -
Purchases of property and equipment (394) (348)
Acquisitions of businesses and investments (1,922) (282)
Dispositions of businesses and investments 23 1,651
Sales of assets 85 41
Other (26) 10
---------------- ----------------
Net cash (used in) from investment activities (2,234) 1,072
---------------- ----------------
FINANCING ACTIVITIES -
Issuances of common stock 75 86
Purchases of common stock (85) (510)
Issuance of equity securities by subsidiary - 122
Borrowings of long-term debt 1,355 1,022
Repayments of long-term debt (476) (317)
Short-term borrowings (repayments), net 908 (1,535)
Payments of dividends (362) (367)
---------------- ----------------
Net cash from (used in) financing activities 1,415 (1,499)
---------------- ----------------
Effect of changes in foreign exchange rates on cash 2 (15)
---------------- ----------------
Increase in cash and equivalents 113 292
Cash and equivalents at beginning of year 548 314
---------------- ----------------
Cash and equivalents at end of quarter $ 661 $ 606
================ ================
COMPONENTS OF CHANGES IN CURRENT ASSETS
AND LIABILITIES:
Decrease (increase) in trade accounts receivable $ 2 $ (14)
Decrease (increase) in inventories 221 (39)
Decrease in other current assets 31 28
(Decrease) in accounts payable (493) (364)
(Decrease) in accrued liabilities (6) (107)
---------------- ----------------
Changes in current assets and liabilities $ (245) $ (496)
================ ================
See accompanying Notes to Consolidated Financial Statements. Page 7
SARA LEE CORPORATION AND SUBSIDIARIES
-------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
1. Computation of Basic and Diluted Earnings Per Share
Net income per share - basic is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Net income per share - diluted reflects the potential dilution that
could occur if options or other contracts to issue common stock were exercised
or converted into common stock. Options to purchase shares of the Corporation's
common stock which have an exercise price in excess of the average market price
of those shares for a reporting period are excluded from the determination of
the diluted earnings per share denominator. For both the thirteen and
thirty-nine week periods ending March 30, 2002, options to purchase 42.7 million
shares of the Corporation's common stock had exercise prices which were greater
than the average market price of those shares during the respective reporting
periods. For the thirteen and thirty-nine week periods ending March 31, 2001,
options to purchase 32.6 million and 33.6 million shares of the Corporation's
common stock had exercise prices which were greater than the average market
price of those shares during the respective reporting periods.
The following is a reconciliation of net income to net income per share - basic
and diluted for the thirteen and thirty-nine weeks ended March 30, 2002 and
March 31, 2001:
Computation of Basic and Diluted Earnings Per Share
(In millions, except per share data)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------ ------------------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
------------ ------------- ------------ -------------
Income from continuing operations $ 257 $ 241 $ 659 $ 630
Income from discontinued operations, net of income
taxes - - - 25
Gain on disposal of discontinued operations, net
of income taxes - - - 638
------------ ------------- ------------ -------------
Net income 257 241 659 1,293
Less dividends on preferred stock, net of tax
benefit (3) (3) (8) (9)
------------ ------------- ------------ -------------
Income available to common stockholders - basic 254 238 651 1,284
Adjustment for assumed conversion of ESOP shares 3 2 7 7
------------ ------------- ------------ -------------
Income available to common stockholders - diluted $ 257 $ 240 $ 658 $ 1,291
============ ============= ============ =============
Average shares outstanding - basic 786 828 784 833
Dilutive effect of stock option and award plans 8 10 9 10
Dilutive effect of ESOP plan 25 27 25 27
------------ ------------- ------------ -------------
Average shares outstanding - diluted 819 865 818 870
============ ============= ============ =============
Earnings per share - basic
Income from continuing operations $ 0.32 $ 0.29 $ 0.83 $ 0.75
============ ============= ============ =============
Income from discontinued operations $ 0.80
=============
Net income $ 0.32 $ 0.29 $ 0.83 $ 1.54
============ ============= ============ =============
Earnings per share - diluted
Income from continuing operations $ 0.31 $ 0.28 $ 0.80 $ 0.72
============ ============= ============ =============
Income from discontinued operations $ 0.76
=============
Net income $ 0.31 $ 0.28 $ 0.80 $ 1.48
============ ============= ============ =============
8
2. Unusual Items
The Corporation's results for the first three quarters of fiscal 2002 were
affected by the Reshaping program initiated in May 2000. This program includes
certain defined exit activities and the disposition of a number of businesses.
No new Reshaping projects have been initiated after December 29, 2001, and at
the present time, no new projects are anticipated for the remainder of fiscal
2002. A discussion of the adjustments made to these plans in the third quarter
of fiscal 2002 and the actions taken since the initiation of the Reshaping
program are as follows:
Third Quarter and Full Fiscal 2002 Exit Plan
--------------------------------------------
During the third quarter of fiscal 2002, certain adjustments were made to
previously recognized charges under the Reshaping program. These adjustments
increased pre-tax income by $5 million, increased net income by $3 million, and
had a neglible effect per diluted share. Of the total pre-tax adjustment, $2
million is reflected on the "business dispositions and other charges" line of
the Consolidated Statement of Income and consists primarily of a reversal of
termination benefits as a result of the departure of 166 employees who
voluntarily left the Corporation in advance of their planned termination date,
therefore forfeiting termination benefits. The effect of this adjustment has
been included in a table presented on page 11, which indicates the location of
all employees affected by the Reshaping program and the status of the planned
actions. In addition, the Corporation also experienced better than expected
results on the exit of certain third party contractual obligations, which
resulted in the reversal of previously recognized charges. Also during the third
quarter, the Corporation completed actions associated with the termination of
certain licensing agreements and the exit of related manufacturing operations.
Inventory related to these operations and licensing agreements was disposed and
resulted in proceeds of $3 million more than originally anticipated in fiscal
2001. As a result, the related credit to earnings is displayed in the same line
of the Consolidated Income Statement as the original charge ("cost of sales -
product line exit costs").
Including the effects of the third quarter, the actions approved by the
Corporation's management for the first three quarters of fiscal 2002 resulted in
a pretax charge of $183 million and a decrease in net income of $111 million, or
$.14 per diluted share. The $183 million pretax charge consists of a $177
million net charge for the cost of defined exit activities and a $6 million
charge related to the net impact of certain planned business dispositions. These
charges decreased operating income in the Corporation's business segments as
follows: Intimates and Underwear - $90 million, Sara Lee Bakery - $51 million,
Sara Lee Meats - $35 million, and Beverage - $7 million. For presentation
purposes, the $6 million charge related to business dispositions and $184
million of the net charge related to defined exit activities are displayed in
the "business dispositions and other charges" line of the Consolidated Statement
of Income. The remaining $7 million credit related to defined exit activities is
displayed in the "cost of sales - product line exit costs" line of the
Consolidated Statement of Income.
Cumulative Exit Plan and Status
-------------------------------
After combining the amounts recognized in fiscal 2001 and the first three
quarters of fiscal 2002, the Corporation's ongoing Reshaping program has reduced
pretax earnings and net income by $737 million and $609 million, respectively.
Of the $737 million pretax charge, $3 million is for actions taken at the
Corporate headquarters and $734 million is related to the following business
segments: Intimates and Underwear - $500 million; Sara Lee Bakery - $110
million; Sara Lee Meats - $105 million; Beverage - $15 million; and Household
Products - $4 million. The components of the $737 million pretax charge are as
follows:
9
Business Dispositions
- $347 million of the charge represents the cost recognized in connection
with the disposition of 18 businesses. As of March 30, 2002, the
disposition of 17 of these businesses had been completed. The remaining
business yet to be disposed is not significant and is located in China.
This sale transaction must receive government approval before the
transaction can be completed. The Corporation expects to complete the
disposal of the business within the next several months.
Exit of Defined Business Activities
- $228 million of the charge is for the cost of severance and other employee
benefits associated with planned personnel reductions. Of this amount, $217
million relates to severance costs recognized in accordance with the
provisions of Emerging Issues Task Force Issue 94-3. The remaining $11
million relates to pension benefit costs determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 88. All
termination actions planned for under the Reshaping program will take place
within one year of the date the respective charge was taken. To date,
including adjustments made for unexpected voluntary departures of employees,
these actions will result in the termination of 20,304 employees. The
specific location of these employees and the status of the planned actions
as of March 30, 2002 are summarized in a table contained on page 11.
- $66 million of the charge is for anticipated losses on the disposal of real
estate and equipment at 21 owned facilities and the disposal of equipment at
a number of leased facilities. The loss recognized is the difference between
the estimated selling price and the carrying value of the assets held for
sale. Selling prices were estimated based on offers received from third
parties or third-party appraisals of real estate held for sale, as well as
the Corporation's prior experience with comparable equipment disposals. The
charge primarily relates to the planned exit of Intimates and Underwear
manufacturing facilities in the United States, Mexico and Europe; 3 domestic
meat-processing plants; and a Beverage facility in Europe. As of March 30,
2002, 14 of the 21 owned facilities had been closed and 7 of the 14 had been
sold. All actions contemplated by the exit plan are expected to be completed
within 12 months of the date of the related charge. The carrying value of
the property and equipment awaiting sale at March 30, 2002 is $16 million
and is recorded on the "Net assets of businesses held for sale" line in the
Consolidated Balance Sheet.
- $19 million of the charge resulted from the decision to terminate product
licensing agreements and exit related manufacturing operations. The $19
million charge was recorded in "cost of sales - product line exit costs" in
the Consolidated Statement of Income and consisted of the following
components: $24 million in the second quarter of fiscal 2001; $2 million in
the fourth quarter of fiscal 2001; ($3) million in the first quarter of
fiscal 2002; ($1) million in the second quarter of fiscal 2002; and ($3)
million in the third quarter of fiscal 2002. The disposition of inventory
related to product licensing agreements and manufacturing operations
resulted in these losses. The loss recognized is the difference between the
value of the inventory realized, based on the actual proceeds received, and
the related carrying value.
- $68 million of the charge is related to certain contractual obligations that
must be satisfied in connection with the exit activities approved by
management. Of this amount, $56 million relates to non-cancelable lease
payments on 36 leased facilities that are being exited. This charge
represents the difference between the non-cancelable obligation after the
facility is exited and the sublease income that is estimated to be received.
As of March 30, 2002, 24 of the leased facilities had been exited. The
remaining $12 million of the charge relates to certain other third party
contractual obligations that must be satisfied, including settlement amounts
to terminate distribution relationships and the remaining obligations due on
product licensing agreements once these activities have ceased.
10
- $9 million of the charge relates to moving and other related expenses for
employees affected by the Reshaping program. These expenses are recognized
by the Corporation in the period the related service is rendered by third
party suppliers. Cash is expended to pay vendors in essentially the same
period as the expense is recognized.
The following table summarizes the charges taken for the approved exit of
business activities and the related status as of March 30, 2002:
Exit Costs Recognized During
------------------------------------------------
Writedown
First Second Third of Assets Accrued
Quarter Quarter Quarter to Net Exit Costs as
(In Millions) Fiscal Fiscal Fiscal Fiscal Realizable Cash of March 30,
------------- 2001 2002 2002 2002 Value Payments 2002
-------- ------- ------- ------- ---------- -------- -------------
Employee termination and
other benefits $ 122 $ 6 $ 101 $ (1) $ -- $ (112) $ 116
Expected losses on
disposals of property
and equipment and other
related costs 37 2 27 -- (66) -- --
Expected losses on
disposal of inventories 26 (3) (1) (3) (19) -- --
Other exit costs -
includes non-cancelable
lease and other
contractual obligations 25 1 43 (1) -- (9) 59
Moving and other related
costs 3 2 4 -- -- (9) --
-------- ------- ------ ------ ---------- -------- ------------
Total exit costs $ 213 $ 8 $ 174 $ (5) $ (85) $ (130) $ 175
======== ======= ====== ====== ========== ======== ============
Of the $390 million of exit costs recognized, $305 million will require the use
of cash and $85 million is a non-cash component. The Corporation expects to fund
the cash costs of this charge from internal sources and proceeds generated from
the sale of businesses.
The following table summarizes the planned employee terminations by location and
business segment, and the status of those actions as of March 30, 2002:
Sara Lee Intimates As of
Sara Lee Bakery Household and March 30,
Meats Group Beverage Products Underwear Corporate 2002
-------- --------- --------- ---------- ----------- ---------- -----------
United States 983 291 -- -- 2,012 20 3,306
Canada -- -- -- -- 101 -- 101
Puerto Rico, Mexico
and Latin America 67 -- -- -- 12,352 -- 12,419
Europe 109 210 91 -- 2,839 -- 3,249
Asia and Africa -- 381 -- 48 800 -- 1,229
-------- ------- --------- ---------- ----------- ---------- -----------
1,159 882 91 48 18,104 20 20,304
======== ======= ========= ========== =========== ========== ===========
As of March 30, 2002
Employees terminated 623 695 76 48 12,850 20 14,312
Employees to be terminated 536 187 15 -- 5,254 -- 5,992
-------- ------- --------- ---------- ----------- ---------- -----------
1,159 882 91 48 18,104 20 20,304
======== ======= ========= ========== =========== ========== ===========
11
3. Adoption of New Accounting Standards For Goodwill and Other Intangible
Assets
On July 1, 2001, the Corporation adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142).
This Statement is required to be applied to all goodwill and other intangible
assets recognized by the Corporation as of July 1, 2001 and it changes the
subsequent accounting for these assets in the following significant respects:
-Accounting standards in place through June 30, 2001 concluded that goodwill
and all other intangible assets were wasting assets and thus amounts
assigned to these assets were amortized in determining net income. SFAS No.
142 does not presume that these assets are wasting assets. Goodwill is not
amortized under the provisions of this statement. Intangible assets are
evaluated to determine if they have finite or indefinite useful lives.
Intangible assets determined to have finite lives are amortized over those
lives and intangible assets that have indefinite useful lives are not
amortized.
-SFAS No. 142 sets forth a number of pertinent factors to be considered in
establishing the useful life of intangible assets that differ from prior
guidelines. These factors include product life cycles, market competitive
and other economic trends, as well as the level of maintenance required to
obtain future cash flows. The useful lives of all intangible assets as of
July 1, 2001 are assessed using these criteria.
In accordance with the adoption provisions of SFAS No. 142, the Corporation has
completed the transitional impairment tests and no impairment was noted. The
following is a reconciliation of net income, basic earnings per share and
diluted earnings per share between the amounts reported by the Corporation in
fiscal 2001 and the adjusted amounts reflecting these new accounting rules.
Thirteen Weeks Thirty-nine Weeks
Ended Ended
-------------- -----------------
March 31, March 31,
(Amounts In Millions, Except Per Share Data) 2001 2001
-------------- -----------------
Net Income:
Reported net income $241 $1,293
Goodwill amortization 23 70
Intangible amortization 5 15
---- ------
Adjusted net income $269 $1,378
==== ======
Basic Earning Per Share:
Reported basic earnings per share $.29 $ 1.54
Goodwill amortization .03 .08
Intangible amortization - .02
---- ------
Adjusted basic earnings per share $.32 $ 1.64
==== ======
Diluted Earnings Per Share:
Reported diluted earnings per share $.28 $ 1.48
Goodwill amortization .03 .08
Intangible amortization - .02
---- ------
Adjusted diluted earnings per share $.31 $ 1.58
==== ======
12
4. Accounting For Sales Incentives
The Emerging Issues Task Force (EITF) of the FASB reached conclusions on a
number of issues related to the measurement, recognition and income statement
classification of a number of items that can be broadly characterized as sales
incentives or promotions. These conclusions are summarized in the following EITF
pronouncements.
- EITF Issue 00-14, "Accounting for Certain Sales Incentives" - This Issue
addresses the recognition, measurement and income statement classification
of sales incentives voluntarily offered by a vendor without charge to
customers such as discounts, coupons, rebates and free products or
services. The Corporation's procedures regarding the recognition and
measurement of these types of sales incentives are in substantial
compliance with this statement. The consensus reached by the EITF does
however require that any cash sales incentives be recognized as a
reduction to revenue and any incentives involving free products must be
classified as cost of sales on the consolidated statement of income.
- EITF Issue 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor Products" - This Issue
addresses the income statement classification of a number of common
incentives offered to businesses that purchase products from the
Corporation and then sell those products to third parties. The incentives
include payments made to retailers to obtain space on store shelves;
agreements to reimburse a retailer for a portion of the cost of product
advertising; and agreements to reimburse retailers for shortfalls in the
selling price of the Corporation's products. The consensus does not modify
the policies followed by the Corporation in the recognition or measurement
of these incentives, but it does require that these incentives be
presented in the income statement as a reduction of revenue.
Beginning in the third quarter of fiscal 2002, the Corporation recognized the
impact of the new EITF guidelines on sales incentives in its financial
statements and restated previously issued financial statements to reflect the
provisions of these guidelines. The net impact from the adoption of these rules
did not impact income from continuing operations, net income or the financial
position of the Corporation, but resulted in the reclassification of certain
selling, general and administrative expenses to cost of sales and net sales.
5. Acquisition of The Earthgrains Company
On August 7, 2001, upon the completion of the initial tender offer period, the
Corporation acquired The Earthgrains Company ("Earthgrains") when approximately
93% of the outstanding Earthgrains' common shares were tendered and accepted by
the Corporation. Following the completion of a subsequent tender offer period,
the Corporation acquired the remaining Earthgrains' common shares. The results
of operations for Earthgrains have been included in the consolidated financial
results of the Corporation since August 8, 2001. Earthgrains is a packaged bread
and refrigerated dough business with operations in the United States and Europe.
The Earthgrains' acquisition provides growth opportunities for our core bakery
and other food businesses by leveraging Earthgrains' direct-store delivery
system in the United States by introducing the Sara Lee brand into the fresh
bread and refrigerated dough business and expanding the direct-store
distribution options for other Sara Lee products. In Europe, Earthgrains also
gives Sara Lee a strong position in the fresh bread and refrigerated dough
business. The anticipated synergies of this business combination with the
Corporation's Sara Lee brand name were a key factor associated with the
determination of the purchase price and related goodwill. The sales and
operating income of the Earthgrains business in the quarter ended March 30, 2002
were $642 million and $32 million, respectively.
Under the terms of the agreement, the Corporation acquired all of the
Earthgrains' common shares for $40.25 per share, or approximately $1.9 billion.
Cash on the Earthgrains' balance sheet on the acquisition date reduced the
purchase price to a net amount of approximately $1.8 billion. In addition, the
Corporation assumed $755 million of Earthgrains' long-term debt.
13
The following is a summary of the preliminary opening balances of the
Earthgrains' balance sheet as of August 7, 2001. These amounts reflect a
preliminary purchase price allocation as the Corporation continues to refine
estimates for certain environmental and other business exit costs.
Preliminary Opening Balance Sheet
(Amounts in millions)
Assets
------
Cash and marketable securities $ 86
Accounts receivable 246
Inventory 74
Other current assets 36
------
Total current assets 442
------
Property, plant and equipment 856
Other non-current assets 110
Identifiable intangibles 862
Goodwill 1,693
------
Total Assets $3,963
======
Liabilities and Equity
----------------------
Accounts and notes payable $ 406
Accrued liabilities 219
------
Total current assets 625
------
Long-term debt 748
Other non-current liabilities 681
Equity 1,909
------
Total liabilities and equity $3,963
======
Presented below are the pro forma financial results prepared under the
assumption that the acquisition of Earthgrains had been completed at the
beginning of fiscal year 2001. These pro forma financial results include the
following significant assumptions:
- The acquisition has been accounted for under the provisions of Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS
No. 141) and, accordingly, the purchase method has been used. The purchase
price allocation is preliminary at this point. $862 million of intangibles
have been identified and these primarily consist of trademarks, owned and
licensed brands, customer relationships and distribution management system
software with a weighted average life of 31 years. Goodwill of $1,693
million has been recognized in connection with this transaction.
- The Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
as of the beginning of fiscal year 2002. Under the provisions of this
Statement, intangible assets with an indefinite life and goodwill are no
longer amortized after the date of adoption. Therefore, in the pro forma
results, no amortization of intangible assets with an indefinite life or
goodwill is included in the pro forma results for fiscal year 2002 periods.
The pro forma results for fiscal year 2001
14
periods include amortization of intangible assets with an indefinite life
and goodwill. If the amortization of intangible assets with an indefinite
life and goodwill had been excluded from fiscal year 2001 results,
amortization expense would have been reduced in the thirteen weeks and
thirty-nine weeks ended March 31, 2001 by $39 million and $116 million,
respectively.
- The acquisition price of approximately $1.8 billion was funded with the
issuance of $1.0 billion of 6.25% fixed rate long-term debt and $.8
billion of short-term floating rate debt. The short-term floating rate
debt had a weighted average interest rate during the first quarter of
fiscal 2001 and 2002 of 6.0% and 3.6%, respectively. An increase of 0.125%
in the average short-term interest rate would result in a change to
interest expense of $1 million on an annual basis.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ----------------------------
(In millions, except March 30, March 31, March 30, March 31,
per share data) 2002 2001 2002 2001
-------------------- --------- --------- --------- ---------
Net Sales $4,200 $4,688 $13,415 $14,587
Net Income 257 221 660 565
Earnings per share - Basic $ 0.32 $ 0.26 $ 0.83 $ 0.67
- Diluted 0.31 0.25 0.81 0.65
6. Sale of PYA/Monarch
On December 4, 2000, the Corporation sold its PYA/Monarch foodservice
distribution business and received cash proceeds of $1,559 million. The
disposition resulted in a gain before income taxes of $1,126 million and an
after-tax gain of $638 million. The PYA/Monarch foodservice operation
constituted a reportable business segment of the Corporation and this gain has
been recognized in the discontinued operations section of the accompanying
consolidated financial statements.
7. Gain on Initial Public Offering of Coach
Gains and losses resulting from the issuance of common stock by a subsidiary of
the Corporation are recognized in earnings in the period realized. In October
2000, the Corporation's Coach subsidiary completed an initial public offering of
19.5% (8,487,000 shares) of its common stock resulting in a gain of $105
million. The gain increased income from continuing operations in the nine months
ended March 31, 2001 by $105 million. After deduction of underwriting fees and
offering costs, the Corporation received proceeds of $122 million from the sale
of these shares.
Following the offering, the Corporation owned 80.5% (35,026,333 shares) of the
outstanding common stock of Coach. In January 2001, the Corporation announced
its intention to enter into a transaction in which it would offer to exchange
its remaining 80.5% ownership interest in Coach for shares of Sara Lee common
stock. This transaction was completed on April 4, 2001, and resulted in the
Corporation exchanging the 35,026,333 Coach shares it held for 41,402,285 shares
of Sara Lee common stock.
The proceeds received by the Corporation from the initial public offering were
not subject to income tax. Further, the Corporation did not provide deferred
income taxes on the gain realized from the sale transaction since the exchange
offering is expected to qualify as a tax-free distribution.
On the April 4, 2001 exchange date, the market value of the Coach shares
disposed of was $998 million. The Corporation recognized a gain on the disposal
of the Coach shares in the fourth quarter of
15
fiscal 2001 and reduced the number of outstanding shares of its common stock by
41 million shares as a result of the exchange transaction.
8. Derivative Reporting
As of June 30, 2001, the accumulated derivative loss in Accumulated Other
Comprehensive Income was $5 million. As of March 30, 2002, the accumulated
derivative loss in Accumulated Other Comprehensive Income was $10 million.
During the nine months ended March 30, 2002, $10 million of accumulated net
derivative losses were deferred into Accumulated Other Comprehensive Income, and
$5 million of accumulated net derivative losses were reclassified from
Accumulated Other Comprehensive Income into earnings since the related hedged
item was realized during the quarter. At March 30, 2002, the maximum maturity
date of any cash flow hedge was approximately 1.3 years, excluding derivative
hedges related to the payment of variable interest on existing financial
instruments. The Corporation expects to reclassify into earnings during the next
twelve months net losses from Accumulated Other Comprehensive Income of
approximately $9 million, at the time the underlying hedged transaction is
realized.
Other disclosures related to hedge ineffectiveness, gains and losses excluded
from the assessment of hedge effectiveness, and gains and losses resulting from
the disqualification of hedge accounting have been omitted due to the
insignificance of these amounts. During the nine months ended March 30, 2002,
net losses of $58 million arising from effective hedges of net investments have
been reflected in the cumulative translation adjustments account within
stockholders' equity.
9. Issued But Not Yet Effective Accounting Standards
Accounting for the Impairment or Disposal of Long-Lived Assets -
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144) was issued in August
2001 and will become effective for the Corporation beginning in fiscal 2003.
Prior period financial statements will not be restated upon the adoption of this
Statement. This Statement establishes a number of rules for the recognition,
measurement and display of long-lived assets which are impaired and either held
for sale or continuing use within the business. In addition, the Statement
broadly expands the definition of a discontinued operation to individual
reporting units or asset groupings for which identifiable cash flows exist. The
recognition of discontinued operations will become more common as a result of
these new guidelines.
16
10. Segment Information
The following is a summary of sales and operating income by business segment for
the thirteen weeks ended March 30, 2002 and March 31, 2001.
THIRTEEN WEEKS ENDED
------------------------------------------------------------------
Sales Operating Income
----------------------------- --------------------------------
March 30, March 31, March 30, March 31,
(In millions) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Sara Lee Meats $ 869 $ 881 $ 78 $ 88
Sara Lee Bakery 774 186 29 5
Beverage 601 698 102 123
Household Products 464 491 78 79
Intimates and Underwear 1,495 1,789 167 162
------ ------- ------ ------
Total business segments 4,203 4,045 454 457
Intersegment sales (3) (1) -- --
------ ------- ------ ------
Total sales and operating
companies income 4,200 4,044 454 457
Amortization of goodwill
and trademarks -- -- (21) (48)
Unallocated corporate expenses -- -- (75) (60)
Net interest expense -- -- (51) (37)
------ ------- ------ ------
Net sales and income from continuing
operations before income taxes $4,200 $4,044 $ 307 $ 312
====== ====== ====== ======
The following is a summary of sales and operating income by business segment for
the thirty-nine weeks ended March 30, 2002 and March 31, 2001.
THIRTY-NINE WEEKS ENDED
-------------------------------------------------------------------
Sales Operating Income
----------------------------- ---------------------------------
March 30, March 31, March 30, March 31,
(In millions) 2002 2001 2002 2001
---------- ---------- ---------- -----------
Sara Lee Meats $ 2,803 $ 2,787 $ 219 $ 213
Sara Lee Bakery 2,173 651 67 (63)
Beverage 1,897 2,137 314 363
Household Products 1,428 1,390 233 229
Intimates and Underwear 4,840 5,817 354 536
------- ------- ------ ------
Total business segments 13,141 12,782 1,187 1,278
Intersegment sales (8) (77) -- --
------- ------- ------ ------
Total sales and operating
companies income 13,133 12,705 1,187 1,278
Amortization of goodwill
and trademarks -- -- (52) (142)
Unallocated corporate expenses -- -- (218) (146)
Net interest expense -- -- (162) (149)
------- ------- ------ ------
Net sales and income from continuing
operations before income taxes $13,133 $12,705 $ 755 $ 841
======= ======= ====== ======
11. Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
17
SARA LEE CORPORATION AND SUBSIDIARIES
-------------------------------------
Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently issued by the Securities
and Exchange Commission ("SEC"), requires all registrants to outline critical
accounting policies or methods used in the preparation of the financial
statements. Included in the footnotes to the financial statements in the fiscal
2001 annual report is a summary of all significant accounting policies used in
the preparation of the Corporation's consolidated financial statements. The
Corporation does not have any individual accounting policy that is critical to
the preparation of the consolidated financial statements. The Corporation
follows the accounting methods and practices as required by the United States
Generally Accepted Accounting Principles (U.S. GAAP). The following is a summary
of the more significant accounting policies and methods including those that
require management's subjective and complex judgments, including management
estimates regarding the effects of matters that are inherently uncertain.
Revenue Recognition - The Corporation recognizes revenue when title and risk of
loss pass to the customer. At the time of sale, management records appropriate
provisions for any uncollectible accounts based upon available information and
historical sales and collectibility history.
Marketing Costs - The Corporation records marketing, advertising and promotion
costs as an expense in the period such costs relate. The Corporation does not
defer the recognition of any marketing or promotion amounts on its consolidated
balance sheets with respect to these costs. Marketing expenditures are expensed
as the costs are incurred. Advertising expenditures are expensed when the
advertising first appears. Consumer and trade promotion costs are expensed in
the period when these programs are offered, based on estimates of utilization
and redemption rates that are developed from historical experience. Fees paid to
a reseller of our products for shelf space or other agreed upon product
placements are expensed as incurred.
Employee Benefit Plans - The Corporation and its subsidiaries provide a range of
benefits to its employees and retired employees, including pensions and
postretirement health care benefits. The Corporation records expenses related to
these plans based upon calculations specified in U.S. GAAP, which includes
various actuarial assumptions, such as discount rates, assumed rates of return,
compensation increases, turnover rates and health care cost trend rates. The
Corporation reviews its actuarial assumptions on an annual basis and makes
modifications to the assumptions based on current rates and trends when it is
deemed appropriate to do so. The Corporation retains outside actuaries who
review the Corporation's assumptions and prepare the actuarial calculations. The
effect of any modifications is generally recorded or amortized over future
periods.
Asset Impairment - Long-term assets are evaluated for impairment on the basis of
undiscounted cash flows whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impaired asset
is written down to its estimated fair value based on the most recent valuation
information available. Estimated fair market value is generally measured by
discounting estimated future cash flows developed by management. Long-lived
assets that are to be disposed of are recorded at the lower of the carrying
value or the fair value less the cost to sell the business. Assumptions used in
determining projected cash flows are consistent with internal forecasts.
Goodwill and Intangible Assets with Indefinite Lives - These assets are tested
for impairment at least annually using a two-step process that begins with an
estimation of the fair value of the reporting unit.
18
The first test is a screen for potential impairments, and the second step
measures the amount of any impairment. These tests utilize fair value amounts
that are developed by discounting estimated future cash flows developed by
management. Assumptions used in determining projected cash flows are consistent
with internal forecasts.
Income Taxes - Sara Lee's tax returns are subject to audit by various domestic
and foreign tax authorities. As part of these audits, the Corporation's tax
positions can be questioned. The effective tax rate of the Corporation and the
tax bases of our assets and liabilities reflect our best estimates of the
ultimate outcome of various tax audits in the jurisdictions that the Corporation
operates in.
Commitments and Contingencies - The Corporation is subject to various claims and
contingencies related to lawsuits and environmental matters. We recognize
liabilities for contingencies and commitments when a loss is probable and can be
estimated.
Results of Operations
The following is a discussion of the results of operations for the third quarter
and first nine months of fiscal 2002 compared with the third quarter and first
nine months of fiscal 2001, and a discussion of the changes in financial
condition during the first nine months of fiscal 2002.
Adoption of Accounting Standards For the Recording and Reporting of Sales
Incentives - As is more thoroughly described in Note 9 to the Consolidated
Financial Statements, at the beginning of the third quarter of fiscal 2002, the
Corporation was required to adopt new accounting rules related to the
measurement, recognition and presentation of certain sales incentives offered to
the company's customers. These new accounting rules apply to certain sales
incentives such as discounts, coupons, rebates and certain payments made to
retailers for shelf space or reimbursement of advertising costs. These
accounting rules generally require these incentives to be reflected as a
reduction in revenue on the income statement rather than as a selling, general
and administrative expense. Upon adoption of these rules at the beginning of
this quarter, all prior financial statement results have been restated to
reflect the impact of this change. Previously reported sales for the third
quarter and first nine months of fiscal year 2001 were reduced by $264 million
and $815 million respectively. In addition, previously reported sales for the
first six months of fiscal year 2002 were reduced by $575 million to conform to
the new accounting standards. The adoption of these accounting standards had no
impact on the Corporation's income from continuing operations, net income or
financial position.
Items Affecting Comparability of the Third Quarter Fiscal 2002 with Third
-------------------------------------------------------------------------
Quarter Fiscal 2001
-------------------
There are three significant items affecting the comparability of the
Consolidated Statements of Income and segment operating results. A description
of these items follows:
Business Reshaping - The Corporation's results for the third quarter of fiscal
2002 and 2001 were affected by the Reshaping program initiated in May 2000 as
follows:
- In the third quarter of fiscal 2002, no new reshaping projects were
initiated, but the Corporation completed certain projects that were
initiated in prior quarters. Reshaping actions completed during the
quarter were executed for amounts that were more favorable than previously
estimated, resulting in an increase in pretax income and net income of $5
million and $3 million, respectively. The impact of these reshaping
actions did not have a significant impact on earning per share as diluted
earnings per share both including and excluding the reshaping benefit was
$.31 in the third quarter of fiscal 2002. The $5 million pretax reshaping
benefit resulted from the completion of certain defined exit activities
more favorably than estimated. These actions were reflected in the
Intimates and Underwear segment. The net pretax benefit is displayed on
the following lines in the Consolidated Statement of Income - a $3 million
benefit in "Cost of sales - product line exit costs",
19
and a $2 million benefit in "Business dispositions and other charges".
These actions and the related financial impacts are referred to as unusual
items in this discussion of fiscal 2002 operating results.
- In the third quarter of fiscal 2001, the Corporation approved plans to
dispose of certain non-core businesses and exit a number of defined
business activities. The Corporation also completed a number of actions
related to the Reshaping program during the quarter. As a result of these
decisions and actions, the Corporation recognized a $21 million pretax
gain related to the disposition of non-core businesses and a $9 million
charge for the costs associated with certain defined exit activities,
resulting in a net $12 million pretax gain. These activities increased net
income and diluted earnings per share in the third quarter of fiscal 2001
by $5 million and $.01, respectively. The $12 million pretax gain from
these activities increased operating income in the third quarter in the
Corporation's business segments as follows: Sara Lee Meats - income of $18
million; Sara Lee Bakery - income of $2 million; Household Products - a
charge of $1 million; and Intimates and Underwear - a charge of $7
million. The net pretax gain is displayed in the "Business Dispositions
and Other Charges" line of the Consolidated Statements of Income. These
actions and the related financial impacts are referred to as unusual items
in this discussion of fiscal 2001 operating results.
- A complete description of the business reshaping activities in the third
quarter of fiscal 2002 and the cumulative activity from the initiation of
the program is presented in Note 2 to the Consolidated Financial
Statements.
- Operating income in the third quarter of fiscal 2002 was favorably
impacted by $24 million of cost savings associated with completed exit
activities.
Adoption of New Accounting Standards - As is more completely disclosed in Note 3
to the Consolidated Financial Statements, the Corporation adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" as of July 1, 2001. Under the provisions
of SFAS No. 142, goodwill is no longer amortized after the date of adoption.
Intangible assets as of the date of adoption are evaluated to determine if they
have finite or indefinite useful lives. Intangible assets determined to have
finite lives are amortized over those lives and intangible assets that have
indefinite useful lives are not amortized. SFAS No. 142 does not permit the
restatement of previously issued financial statements, but does require the
disclosure of prior results adjusted to exclude amortization expense related to
goodwill and intangible assets which are no longer being amortized. Basic and
diluted earnings per share for the third quarter of fiscal 2001, adjusted to
exclude amounts no longer being amortized under the provisions of SFAS No. 142,
were $.32 and $.31, respectively.
Acquisition of Earthgrains - Under the terms of the purchase agreement, as is
more completely disclosed in Note 4 to the Consolidated Financial Statements,
the Corporation acquired Earthgrains' common stock for $40.25 per share, or
approximately $1.9 billion. Cash on the Earthgrains' balance sheet on the
acquisition date reduced the purchase price to a net amount of approximately
$1.8 billion. In addition, the Corporation assumed $755 million of Earthgrains'
long-term debt. In the third quarter of fiscal 2002, the sales and operating
income of Earthgrains was $642 million and $32 million, respectively.
Prior to the acquisition of Earthgrains, the Corporation's Bakery operations
primarily consisted of products sold under the Sara Lee name (existing bakery
business). The operations of the existing bakery business along with the
Corporation's packaged meats business constituted the Sara Lee Foods segment.
Subsequent to completing the Earthgrains' acquisition, the Corporation's
management created the Sara Lee Bakery Group that consists of the Earthgrains'
business and the Corporation's existing bakery business. The combined Bakery
businesses constitute a reportable segment and are
20
now separately reported from the Sara Lee Meats segment. Prior year results have
been restated to conform to the new management and segment organization.
Operating results by business segment in the third quarter of fiscal 2002
compared with the third quarter of fiscal 2001 are as follows. These amounts
include the impact of business reshaping, the adoption of new accounting
standards regarding business combinations and the amortization of intangibles
and the Earthgrains' acquisition.
THIRTEEN WEEKS ENDED
-----------------------------------------------------------------------
(Unusual Items Allocated to Industry Segments) Sales Operating Income
--------------------------------- ---------------------------------
March 30, March 31, March 30, March 31,
(In millions) 2002 2001 2002 2001
------------- --------------- -------------- --------------- --------------
Sara Lee Meats $ 869 $ 881 $ 78 $ 88
Sara Lee Bakery 774 186 29 5
Beverage 601 698 102 123
Household Products 464 491 78 79
Intimates and Underwear 1,495 1,789 167 162
--------- --------- -------- ---------
Total business segments 4,203 4,045 454 457
Intersegment sales (3) (1) -- --
--------- --------- -------- --------
Total sales and operating
companies income 4,200 4,044 454 457
Amortization of goodwill
and trademarks -- -- (21) (48)
Unallocated corporate expenses -- -- (75) (60)
Net interest expense -- -- (51) (37)
--------- --------- -------- --------
Net sales and income from continuing
operations before income taxes $ 4,200 $ 4,044 $ 307 $ 312
========= ========= ======== ========
Consolidated Results - Third Quarter of Fiscal 2002 Compared with Third Quarter
of Fiscal 2001
Continuing Operations - Consolidated net sales increased 3.9% over the year ago
quarter. Businesses acquired net of businesses sold subsequent to the start of
the third quarter of the prior fiscal year increased reported sales by 10.3%.
The weakening of key foreign currencies, particularly the euro, in relation to
the U.S. dollar, had the effect of reducing reported sales by 2.0% in the
quarter. Thus, on a comparable basis, excluding the impact of acquisitions,
dispositions and changes in foreign currency exchange rates, sales decreased
4.4%. Comparable sales growth in Household Products was offset by sales declines
in Sara Lee Meats, Bakery, Beverage and Intimates and Underwear.
In the third quarter of fiscal 2002, the gross profit margin was 39.4% as
compared to 37.7% in the comparable period of the prior year. Reduced gross
profit margins in the Intimates and Underwear and Household Products businesses
were offset by improved gross profit margins in the Corporation's other business
segments.
Selling, general and administrative (SG&A) expenses increased 9.6% over the same
quarter last year due principally to increased spending on systems and
technology development and costs associated with centralizing certain
manufacturing and administrative functions. When measured as a percentage of
sales, SG&A expenses were 31.0% in the third quarter of fiscal 2002 and 29.3% in
the comparable period of the prior fiscal year.
Excluding unusual items, operating income (defined as pretax income before
interest, intangible amortization and unallocated corporate expenses) increased
0.9% versus the comparable period of the prior year. Businesses acquired net of
businesses sold subsequent to the start of the third quarter of the prior fiscal
year increased operating income by 3.7%. The weakening of key foreign currencies
versus the U.S. dollar had the effect of decreasing operating income by
approximately 1.1%. As a
21
result, on a comparable basis, excluding the impact of business acquisitions,
dispositions and changes in foreign currency exchange rates, operating income
declined 1.7%. On a comparable basis, operating income declined in the Sara Lee
Bakery, Beverage and Household Products segments and increased in the Sara Lee
Meats and Intimates and Underwear segments. The higher level of operating income
reflects improved gross profit margins offset by increased levels of selling,
general and administrative expenses in the quarter.
Net interest expense increased $14 million to $51 million due to higher
outstanding borrowing levels in the quarter from the year ago period. The
increased debt levels resulted from the Corporation's acquisition of Earthgrains
in the first quarter. Unallocated corporate expenses, which are costs not
directly attributable to specific business segment operations, increased $15
million to $75 million in the quarter. This increase is primarily attributable
to company-wide spending on systems and information technology, increased
benefit plan costs and unfavorable foreign currency comparisons with the prior
year. Trademark and goodwill amortization decreased from $48 million in fiscal
2001 to $21 million in the current year's quarter as a result of the adoption of
SFAS No. 142 as of July 1, 2001.
The effective tax rate in the quarter decreased from 22.9% in last year's third
quarter to 16.2% of pretax income in the third quarter of fiscal 2002. Excluding
the unusual items, the comparative effective tax rate fell from 21.7% to 15.9%.
The reduction during the quarter is the result of the elimination of
non-deductible goodwill, the favorable completion of certain tax audits in
several foreign countries including the Netherlands, the United Kingdom, France
and Germany, and increased earnings in certain foreign jurisdictions with lower
tax rates.
Consolidated Net Income - Consolidated net income was $257 million in the third
quarter of 2002 as compared to $241 million in the comparable period of the
prior year, an increase of 6.8%. Diluted earnings per share was $.31 in the
third quarter of fiscal 2002 compared to $.28 in the prior year quarter, an
increase of 10.7%. Both of these amounts include unusual items. Excluding the
unusual items, diluted earnings per share increased 14.8% from $.27 in the third
quarter of fiscal 2001 to $.31 in the third quarter of fiscal 2002. This
increase reflects the reduction in the number of diluted shares outstanding and
improved profitability during the quarter. As previously indicated, the
quarter's results were impacted by unusual items during the current and prior
year quarter. The following table summarizes the impact of unusual items
relating to the business reshaping activities and the impact of the SFAS No. 142
adoption on net income and diluted EPS.
THIRTEEN WEEKS ENDED
---------------------------------
March 30, March 31, %
(In Millions Except Per Share Data) 2002 2001 Change
----------------------------------- ------------- ------------ -----------
Net income $ 257 $ 241 6.8%
Exclude unusual items relating to business
reshaping, net of tax (3) (5) (44.0)
----------- ----------- -----------
Net income excluding unusual items 254 236 8.0
Adjust prior year for change in accounting for
amortization of goodwill and intangibles -- 28 NM
----------- ----------- -----------
Net income adjusted for amortization change and
excluding unusual items $ 254 $ 264 (3.6)%
=========== =========== ===========
Diluted EPS $ 0.31 $ 0.28 10.7%
Excluding unusual charges relating to business
reshaping -- (.01) NM
----------- ----------- -----------
Diluted EPS - excluding unusual items 0.31 0.27 14.8
22
Adjust prior year for change in accounting for
amortization of goodwill and intangibles -- 0.03 NM
------------ ------------ ----------
Diluted EPS - adjusted for amortization
change and excluding unusual items $ 0.31 $ 0.30 3.3%
============ ============ ==========
Operating Results by Business Segment - Third Quarter of Fiscal 2002 Compared
with Third Quarter of Fiscal 2001
The following discussion comparing segment performance for the third quarter of
fiscal 2002 with the third quarter of fiscal 2001 excludes the unusual items
described above. Operating results by business segment in the third quarter of
fiscal 2002 compared to fiscal 2001, excluding unusual items are as follows.
THIRTEEN WEEKS ENDED
--------------------------------------------------------------------
(Unusual Items Not Allocated to Industry Segments) Sales Operating Income
------------------------------ -------------------------------
March 30, March 31, March 30, March 31,
(In millions) 2002 2001 2002 2001
------------- ----------- ----------- ----------- ------------
Sara Lee Meats $ 869 $ 881 $ 78 $ 70
Sara Lee Bakery 774 186 29 3
Beverage 601 698 102 123
Household Products 464 491 78 80
Intimates and Underwear 1,495 1,789 162 169
----------- ---------- ----------- -----------
Total business segments 4,203 4,045 449 445
Intersegment sales (3) (1) -- --
----------- ---------- ----------- -----------
Total sales and operating
companies income 4,200 4,044 449 445
Amortization of goodwill
and trademarks -- -- (21) (48)
Unallocated corporate expenses -- -- (75) (60)
Business dispositions and other charges -- -- 5 12
Net interest expense -- -- (51) (37)
----------- ---------- ----------- -----------
Net sales and income from continuing
operations before income taxes $ 4,200 $ 4,044 $ 307 $ 312
=========== ========== =========== ===========
Net sales in the Sara Lee Meats segment decreased 1.3% to $869 million from $881
million in the prior year quarterly period. Excluding acquisitions and
dispositions completed subsequent to the start of the third quarter of the
previous fiscal year, net sales decreased 1.4% while unit volumes declined by
2%. The impact of foreign currency changes during the period decreased net sales
by 0.8%. Therefore, excluding the impact of acquisitions, dispositions and
changes in foreign currencies, sales in the Sara Lee Meats segment decreased
0.6%.
Operating income in Sara Lee Meats increased 12.2% in the quarter primarily due
to lower raw material costs during the quarter and increased sales of higher
margin products. Excluding acquisitions and dispositions completed subsequent to
the start of the third quarter of the previous fiscal year, operating income
increased 8.1%. The impact of foreign currency changes during the quarter
decreased operating income by 0.9%. On a comparable basis, excluding the impact
of acquisitions, dispositions and changes in foreign currencies, operating
income increased 9.0%.
The Corporation acquired Earthgrains in the first quarter of 2002 and
consolidated the existing bakery operations with Earthgrains to create the Sara
Lee Bakery Group. The consolidated results of operations of the Bakery Group
include Earthgrains' results from August 8, 2001. Including the acquisition
results, reported net sales in the third quarter of 2002 increased by $588
million from $186 million to $774 million. Excluding the impact of acquisitions
and divestitures, net sales and unit volumes
23
declined 10.5% and 6%, respectively, from the prior year quarter as low growth
product lines were eliminated. Excluding acquisitions, divestitures and changes
in foreign currency, net sales declined by 10.3%.
Operating income in the Sara Lee Bakery segment improved by $26 million from $3
million in the prior year comparable period to $29 million in the current
quarter. Operating income improved as a result of increased gross margins due to
the acquisition of Earthgrains. Excluding the Earthgrains' acquisition, other
dispositions and changes in foreign currency, operating income fell from $7
million in the prior year quarter to a loss of $3 million in the current
quarter.
Net sales in the Beverage segment declined 14.1% reflecting lower unit volumes,
the impact of changes in foreign currency and reduced green coffee commodity
prices that led to lower prices to consumers. Excluding acquisitions completed
subsequent to the start of the third quarter of the previous fiscal year, net
sales decreased 15.3% while unit volumes for roasted coffee and coffee
concentrates, the segments' primary business, declined 13%. Excluding
acquisitions and the impact of changes in foreign currency, net sales were down
12.6% compared to the prior year quarter.
Operating income for the Beverage segment decreased 16.9% due to base unit
volume declines, the impact of the lower commodity coffee costs, the negative
impacts of foreign currency movements and increased advertising and promotions
costs. Excluding the impact of acquisitions during the year, operating income
declined 18.6%. The weakness of the U.S. dollar in the quarter decreased
reported operating income by 3.1%. Thus, excluding acquisitions and the impact
of foreign currencies, operating income declined 15.5%.
Net sales in the Household Products segment decreased 5.4% and operating income
decreased 2.7%. There were no acquisitions or dispositions impacting the
reported results, however the quarter results were negatively impacted by the
political and economic turmoil in Argentina. Excluding the results of the
Argentina operations, operating income increased 7% in the quarter compared to
the prior year quarter. Excluding the impact of changes in foreign currencies,
sales and operating income in Household Products increased 0.4% and decreased
1.9%, respectively. Unit volumes for this segment's four core categories - shoe
care, body care, insecticides and air fresheners - decreased 1% overall in the
quarter, with strength in the air fresheners and insecticide categories offset
by declines in body care and shoe care.
Intimates and Underwear net sales declined 16.4% over the year ago quarter as
the prior year quarter includes sales from certain non-core businesses that were
disposed. Excluding the impact of acquisitions and dispositions, sales declined
5.0%. The impact of exchange rate changes during the quarter reduced reported
sales during the quarter by 1.3%. As a result, on a comparable basis, sales
decreased 3.7%. Unit volumes in this segment, excluding acquisitions and
dispositions, increased 1% from the comparable prior year quarter. This net
increase consisted of a 2% unit volume decrease at Knit Products, offset by a 4%
unit volume increase in both Intimates and Worldwide Legwear. The impact of
recent acquisitions on unit volume changes was not significant during the
quarter.
Intimates and Underwear operating income decreased 4.5% in the quarter.
Excluding the impact of acquisitions and dispositions since the start of the
prior year quarter, operating income increased 10.9%. The improvement in
operating income performance was driven by increased unit volumes and the
benefits of cost savings from the Corporation's Reshaping program. Changes in
foreign currencies did not have a material impact on operating income in the
quarter.
24
Items Affecting Comparability of the First Nine Months of Fiscal 2002 with First
--------------------------------------------------------------------------------
Nine Months of Fiscal 2001
--------------------------
There are three items affecting the comparability of the Consolidated Statements
of Income and segment operating results. A description of these items follows:
Business Reshaping - The Corporation's results for the first nine months of
fiscal 2002 and 2001 were affected by the Reshaping program initiated in May
2000 as follows:
- In the first nine months of fiscal 2002, the ongoing Reshaping program
includes certain defined exit activities and the disposition of a number
of businesses. The actions approved by the Corporation's management
resulted in a pretax charge of $183 million and a reduction in net income
of $111 million, or $.14 per diluted share. The $183 million pretax charge
consists of a $177 million net charge for the cost of defined exit
activities and a $6 million charge related to the net impact of certain
planned business dispositions. The net pretax charge is recognized in the
results of the operating segments as follows: Sara Lee Meats - a charge of
$35 million; Sara Lee Bakery - a charge of $51 million; Beverage - a
charge of $7 million; and Intimates and Underwear - a charge of $90
million. The net pretax charge is displayed in the following lines of the
Consolidated Statements of Income - a $190 million charge is reflected on
the "Unusual items - business dispositions and other charges" line and a
$7 million credit is reflected on the "Cost of sales - product line exit
costs". These actions and the related financial impacts are referred to as
unusual items in this discussion of fiscal 2002 operating results.
- In the first nine months of fiscal 2001, management approved a plan to
dispose of certain non-core businesses and exit a number of defined
business activities. As a result, during the first nine months of 2001,
the Corporation recognized the following:
o A $332 million pretax charge related to certain defined exit
activities and the disposal of a number of businesses. The $332
million charge consists of a $211 million charge related to the
anticipated losses on the disposition of businesses and a $121
million charge related to the cost of certain defined exit
activities. The charge reduced net income by $312 million and
diluted earnings per share by $.36. The pretax charge reduced the
operating income in the quarter ended in the Corporation's
business segments as follows: Sara Lee Meats - a charge of $53
million; Sara Lee Bakery - a charge of $56 million; Beverage - a
charge of $2 million; Household Products - a charge of $3
million; and Intimates and Underwear - a charge of $218 million.
The net pretax charge is displayed in the following lines of the
Consolidated Statements of Income - a $308 million charge is
reflected on the "Unusual items - business dispositions and
other charges" line and a $24 million charge is reflected on the
"Cost of sales - product line exit costs".
o In October 2000, the Corporation's Coach subsidiary, which was
part of the Intimates and Underwear segment, completed an initial
public offering of 19.5% of its common stock, resulting in a gain
of $105 million in the second quarter of 2001.
o The Corporation sold its PYA/Monarch foodservice business for a
pretax gain of $1,126 million, an after-tax gain of $638 million,
or $.73 per diluted share in the second quarter of fiscal 2001.
o These actions and the related financial impacts are referred to
as unusual items in this discussion of fiscal 2001 operating
results.
- A complete description of the business reshaping activities from the
initiation of the program is presented in Note 2 to the Consolidated
Financial Statements.
25
- The ongoing exit activities associated with the Reshaping plan to date are
intended to improve the competitive structure of the Corporation and are
expected to result in savings of $230 million in 2003. Operating income
was favorably impacted during the first nine month of fiscal 2002 by $63
million of cost savings associated with completed exit activities.
Adoption of New Accounting Standards - As is more completely disclosed in Note 3
to the Consolidated Financial Statements, the Corporation adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" as of July 1, 2001. Under the provisions
of SFAS No. 142, goodwill is no longer amortized after the date of adoption.
Intangible assets as of the date of adoption are evaluated to determine if they
have finite or indefinite useful lives. Intangible assets determined to have
finite lives are amortized over those lives and intangible assets that have
indefinite useful lives are not amortized. SFAS No. 142 does not permit the
restatement of previously issued financial statements, but does require the
disclosure of prior results adjusted to exclude amortization expense related to
goodwill and intangible assets which are no longer being amortized. Basic and
diluted earnings per share for the first nine months of fiscal 2001, adjusted to
exclude amounts no longer being amortized under the provisions of SFAS No. 142,
were $1.64 and $1.58, respectively.
Acquisition of Earthgrains - Under the terms of the purchase agreement, as is
more completely disclosed in Note 4 to the Consolidated Financial Statements,
the Corporation acquired Earthgrains' common stock for $40.25 per share, or
approximately $1.9 billion. Cash on the Earthgrains' balance sheet on the
acquisition date reduced the purchase price to a net amount of approximately
$1.8 billion. In addition, the Corporation assumed $755 million of Earthgrains'
long-term debt. The sales and operating income of Earthgrains from the date of
acquisition are $1,706 million and $104 million, respectively.
Prior to the acquisition of Earthgrains, the Corporation's Bakery operations
primarily consisted of products sold under the Sara Lee name (existing bakery
business). The operations of the existing bakery business along with the
Corporation's packaged meats business constituted the Sara Lee Foods segment.
Subsequent to completing the Earthgrains' acquisition, the Corporation's
management created the Sara Lee Bakery Group that consists of the Earthgrains'
business and the Corporation's existing bakery business. The combined Bakery
businesses constitute a reportable segment and are now separately reported from
the Sara Lee Meats segment. Prior year results have been restated to conform to
the new management and segment organization.
Operating results by business segment for the first nine months of fiscal 2002
compared with the first nine months of fiscal 2001 are as follows. These amounts
include the impact of business reshaping, the adoption of new accounting
standards regarding business combinations and the amortization of intangibles
and the Earthgrains' acquisition.
26
THIRTY-NINE WEEKS ENDED
-----------------------------------------------------------------
(Unusual Items Allocated to Industry segments) Sales Operating Income
------------------------------ ------------------------------
March 30, March 31, March 30, March 31,
(In millions) 2002 2001 2002 2001
------------- --------- --------- --------- ---------
Sara Lee Meats $ 2,803 $ 2,787 $ 219 $ 213
Sara Lee Bakery 2,173 651 67 (63)
Beverage 1,897 2,137 314 363
Household Products 1,428 1,390 233 229
Intimates and Underwear 4,840 5,817 354 536
------- ------- ------ ------
Total business segments 13,141 12,782 1,187 1,278
Intersegment sales (8) (77) -- --
------- ------- ------ ------
Total sales and operating
companies income 13,133 12,705 1,187 1,278
Amortization of goodwill
and trademarks -- -- (52) (142)
Unallocated corporate expenses -- -- (218) (146)
Net interest expense -- -- (162) (149)
------- ------- ------ ------
Net sales and income from continuing
operations before income taxes $13,133 $12,705 $ 755 $ 841
======= ======= ====== ======
Consolidated Results - First Nine Months of Fiscal 2002 Compared with First Nine
Months of Fiscal 2001
Continuing Operations - Consolidated net sales increased 3.4% over the year ago
comparable period. Businesses acquired net of businesses sold subsequent to the
start of the third quarter of the prior fiscal year increased reported sales by
7.1%. The strengthening of key foreign currencies during the nine-month period
in relation to the U.S. dollar, particularly the euro, had the effect of
reducing reported sales by 1.1%. Thus, on a comparable basis, excluding the
impact of acquisitions, dispositions and changes in foreign currency exchange
rates, sales decreased 2.6%. Comparable sales growth in Sara Lee Meats and
Household Products were offset by sales declines in Bakery, Beverage and
Intimates and Underwear.
In the first nine months of fiscal 2002, the gross profit margin was 38.4% as
compared to 38.2% in the comparable period of the prior year. Reduced gross
profit margins in the Intimates and Underwear and Household Products were offset
by improved gross profit margins in Sara Lee Meats, Bakery and Beverage
segments.
Selling, general and administrative (SG&A) expenses increased 8.3% over the same
period last year due principally to increased spending on systems and technology
development and costs associated with centralizing certain manufacturing and
administrative functions. When measured as a percentage of sales, SG&A expenses
were 30.0% in the first nine months of fiscal 2002 and 28.6% in the comparable
period of the prior fiscal year.
Excluding unusual items, operating income (defined as pretax income before
interest, intangible amortization and unallocated corporate expenses) declined
8.9% versus the comparable nine-month period of the prior year. Businesses
acquired net of businesses sold subsequent to the start of the prior fiscal year
increased operating income by 1.9%. The strengthening of key foreign currencies
versus the U.S. dollar had the effect of reducing operating income by
approximately 0.7%. As a result, on a comparable basis, excluding the impact of
business acquisitions, dispositions and changes in foreign currency exchange
rates, operating income declined 10.1%. On a comparable basis, operating income
declined in the Sara Lee Meats, Beverage and Intimates and Underwear segments
and increased in
27
the Bakery and Household Products segments. The lower level of operating income
reflects increased levels of selling, general and administrative expenses in the
period.
Net interest expense for the nine-month period increased $13 million to $162
million from $149 million in the comparable prior year period reflecting
increased debt levels. The increased debt levels resulted from the Corporation's
acquisition of Earthgrains in the first quarter. Unallocated corporate expenses,
which are costs not directly attributable to specific business segment
operations, increased $72 million to $218 million in the nine-month period. This
increase is primarily attributable to company wide spending on systems and
information technology, increased benefit plan costs and unfavorable foreign
currency comparisons with the prior year. Trademark and goodwill amortization
decreased from $142 million in the first nine months of fiscal 2001 to $52
million in the current year as a result of the adoption of SFAS No. 142 as of
July 1, 2001.
The effective tax rate for the first nine months decreased from 25.1% to 12.7%
of pretax income from continuing operations, including unusual items in both
years. Excluding the unusual items, the comparative effective tax rate fell from
21.7% to 18.0% primarily from the elimination of non-deductible goodwill, the
favorable completion of certain tax audits in several foreign countries and
increased earnings in certain foreign jurisdictions with lower tax rates.
Including unusual items, income from continuing operations was $659 million in
the first nine months of fiscal 2002 as compared to $630 million in the
comparable period of the prior year, an increase of 4.7%. Diluted earnings per
share from continuing operations was $.80 in the first nine months of fiscal
2002, 11.1% higher than the $.72 recognized in fiscal year 2001. These amounts
were impacted by a number of events during the first nine months and in the
prior year comparable period. The following table summarizes the impact of
unusual items relating to the business reshaping activities and the impact of
the SFAS No. 142 adoption on income from continuing operations and diluted
earnings per share ("EPS").
28
THIRTY-NINE WEEKS ENDED
-----------------------------
March 30, March 31, %
(In Millions Except Per Share Data) 2002 2001 Change
--------- --------- ------
Income from continuing operations $ 659 $ 630 4.7 %
Exclude gain in connection with initial public
offering, net of tax -- (105) NM
Exclude unusual charges relating to business reshaping,
net of tax 111 312 (64.5)
----- ------ -----
Income from continuing operations excluding unusual items 770 837 (8.0)
Adjust prior year for change in accounting for
amortization of goodwill and intangibles -- 85 NM
----- ------ -----
Income from continuing operations adjusted for
amortization change and excluding unusual items $ 770 $ 922 (16.4)%
===== ====== =====
Diluted EPS - continuing operations $0.80 $ 0.72 11.1 %
Exclude gain in connection with initial public offering -- (0.12) NM
Exclude unusual charges relating to business reshaping 0.14 0.36 (61.1)
----- ------ -----
Diluted EPS - continuing operations excluding unusual items 0.94 0.96 (2.1)
Adjust prior year for change in accounting for
amortization of goodwill and intangibles -- 0.10 NM
----- ------ -----
Diluted EPS - continuing operations adjusted for
amortization change and excluding unusual items $0.94 $ 1.06 (11.3)%
===== ====== =====
Discontinued Operations - The first nine months of fiscal 2001 includes both $25
million of net income from the operations of the PYA/Monarch foodservice
businesses and a gain of $638 million from the sale of this business. The
PYA/Monarch business has been accounted for as a discontinued operation. The
gain on the sale of the PYA/Monarch business added $.73 per diluted share for
the first nine months of 2001.
Consolidated Net Income - Consolidated net income for the first nine months of
fiscal 2002 was $659 million as compared to $1,293 million in the comparable
period of the prior year, a decrease of 49.0%. Diluted earnings per share was
$.80 in the first nine months of 2002 compared to $1.48 in the comparable prior
year period. Both the current year and prior amounts include unusual items,
including the $638 million gain on the sale of the PYA/Monarch business.
Excluding unusual items, diluted net income per share dropped from $.99 in the
first nine months of 2001 to $.94 in the first nine months of 2002, a decrease
of 5.1%. This decrease reflects the reduction in the number of diluted shares
outstanding offset by a larger reduction in net income. As previously indicated,
these amounts were impacted by a number of events during the current nine-month
period and the comparable prior year period. The following table summarizes the
impact of unusual items relating to the business reshaping activities and the
impact of the SFAS No. 142 adoption on net income and diluted EPS.
29
THIRTY-NINE WEEKS ENDED
-----------------------
March 30, March 31, %
(In Millions Except Per Share Data) 2002 2001 Change
----------------------------------- --------- --------- ---------
Net income $ 659 $ 1,293 (49.0) %
Exclude gain on disposal of discontinued operations,
net of tax -- (638) NM
Exclude gain in connection with initial public
offering, net of tax -- (105) NM
Exclude unusual charges relating to business reshaping,
net of tax 111 312 (64.5)
--------- --------- ---------
Net income excluding unusual items 770 862 (10.7)
Adjust prior year for change in accounting for
amortization of goodwill and intangibles -- 85 NM
--------- --------- ---------
Net income adjusted for amortization change and
excluding unusual items $ 770 $ 947 (18.7) %
========= ========= =========
Diluted EPS $ 0.80 $ 1.48 (45.9) %
Exclude gain on disposal of discontinued operations,
net of tax -- (0.73) NM
Exclude gain in connection with initial public offering -- (0.12) NM
Exclude unusual charges relating to business reshaping 0.14 0.36 (61.1)
--------- --------- ---------
Diluted EPS - excluding unusual items 0.94 0.99 (5.1)
Adjust prior year for change in accounting for
amortization of goodwill and intangibles -- 0.10 NM
--------- --------- ---------
Diluted EPS - adjusted for amortization change and
excluding unusual items $ 0.94 $ 1.09 (13.8) %
========= ======== =========
30
Operating Results By Business Segment - First Nine Months of Fiscal 2002
Compared with First Nine Months of Fiscal 2001
The following discussion comparing business segment performance for the first
nine months of fiscal 2002 with the first nine months of fiscal 2001 excludes
the unusual items. Operating results by business segment in the first nine
months of fiscal 2002 compared to fiscal 2001, excluding unusual items are as
follows.
THIRTY-NINE WEEKS ENDED
----------------------------------------------------
Sales Operating Income
(Unusual items not allocated to Industry segments) ----------------------- -----------------------
March 30, March 31, March 30, March 31,
(In millions) 2002 2001 2002 2001
------------- --------- --------- --------- ---------
Sara Lee Meats $ 2,803 $ 2,787 $ 254 $ 266
Sara Lee Bakery 2,173 651 118 (7)
Beverage 1,897 2,137 321 365
Household Products 1,428 1,390 233 232
Intimates and Underwear 4,840 5,817 444 649
--------- --------- --------- ---------
Total business segments 13,141 12,782 1,370 1,505
Intersegment sales (8) (77) -- --
--------- --------- --------- ---------
Total sales and operating
companies income 13,133 12,705 1,370 1,505
Amortization of goodwill
and trademarks -- -- (52) (142)
Unallocated corporate expenses -- -- (218) (146)
Gain in connection with initial public offering -- -- -- 105
Business dispositions and other charges -- -- (183) (332)
Net interest expense -- -- (162) (149)
--------- --------- --------- ---------
Net sales and income from continuing
operations before income taxes $ 13,133 $ 12,705 $ 755 $ 841
========= ========= ========= =========
Net sales for the first nine months of fiscal 2002 in the Sara Lee Meats segment
increased 0.6% compared to the prior year period. Excluding acquisitions and
dispositions completed subsequent to the start of the previous fiscal year, net
sales increased 2.1% while unit volumes declined 1%. The impact on sales of
foreign currency changes during the period was not significant.
Operating income in Sara Lee Meats for the first nine months of 2002 declined
4.3% due to increased media advertising and promotion spending. Excluding
acquisitions and dispositions completed subsequent to the start of the previous
fiscal year, operating income declined 5.7%. The impact on operating income of
foreign currency changes during the period was not significant.
The Corporation acquired Earthgrains in the first quarter of 2002 and
consolidated the existing bakery operations with Earthgrains to create the Sara
Lee Bakery Group. The consolidated results of operations of the Bakery Group
include Earthgrains results from August 8, 2001. Including the Earthgrains'
acquisition, reported net sales for the first nine months for 2002 increased by
$1,522 million from $651 million to $2,173 million. Excluding the impact of
acquisitions and divestitures, net sales declined 8.4% from the prior year
period as low growth product lines were eliminated. Unit volumes declined 4%
during the first nine months of 2002 again due to the elimination of low growth
product lines. Excluding acquisitions, divestitures and changes in foreign
currency, net sales declined by 7.7%.
Operating income in the Sara Lee Bakery segment improved by $125 million from a
loss of $7 million in the prior year nine-month period to $118 million in the
first nine months of fiscal 2002. Operating income improved as a result of
increased gross margins due to the elimination of low profit product lines and
the results of Earthgrains. Excluding the Earthgrains acquisition, other
dispositions and changes in
31
foreign currency, operating income increased from $8 million in the first nine
months of fiscal 2001 to $14 million in the first nine months of fiscal 2002.
Net sales in the Beverage segment for the first nine months of 2002 declined
11.2% reflecting reduced green coffee commodity prices that led to lower
consumer prices. Excluding the impact of acquisitions, net sales for the nine
month period declined 11.6%. The strengthening of the U.S. dollar in relation to
foreign currencies decreased reported sales for the first nine months of 2002 by
1.9%. Thus, excluding the impact of acquisitions and changes in foreign
currencies, net sales declined 9.7%. Unit volumes for roasted coffee and coffee
concentrates, the segment's primary business, declined 6% in the first nine
months of 2002.
Operating income for the Beverage segment decreased 12.1% due to base unit
volume declines, the impact of the lower commodity coffee costs and increased
media advertising and promotions costs. Excluding acquisitions, operating income
declined 12.7% compared to the prior year period. The strength of the U.S.
dollar in the first nine months of 2002 decreased reported operating income by
1.5%. Thus, excluding the impact of foreign currencies, operating income
declined 11.2%.
Net sales in the Household Products segment increased 2.8% and operating income
increased 0.5%. The impact of changes in foreign currency during the quarter
reduced sales by 3.5% and operating income by 1.3%. Excluding the impact of
changes in foreign currencies, sales and operating income in Household Products
increased 6.3% and 1.8%, respectively. Sales increased at a rate in excess of
operating income because of increased spending on media advertising and
promotion for new product launches and continued brand building. Unit volumes
for this segment's four core categories - shoe care, body care, insecticides and
air fresheners - increased 5% for the first nine months of fiscal 2002, with
strength in the air freshener, body care and insecticide categories and declines
in shoe care.
Intimates and Underwear net sales in the first nine months of 2002 declined
16.8% over the year ago comparable period. The prior year comparable nine-month
period includes sales from certain non-core businesses that were sold. Excluding
the impact of acquisitions and dispositions, sales declined 6.1%. The strength
of the U.S. dollar in the first nine months of 2002 decreased net sales by 0.7%.
As a result, on a comparable basis, sales decreased 5.4%. Unit volumes in this
segment, excluding acquisitions and dispositions, increased 2% from the
comparable prior year nine-month period. This net increase consisted of a 2%
unit volume increase at both Knit Products and Intimates and a 1% increase in
Worldwide Legwear. The impact of recent acquisitions on unit volume changes was
not significant during the nine-month period.
Intimates and Underwear operating income decreased 31.5% for the first nine
months of 2002. Excluding the impact of acquisitions and dispositions since the
start of the prior year, operating income declined 18.0%. This decrease reflects
the profit impact of reduced operating margins in a competitive Knit Products
marketplace. The strengthening of the U.S. dollar in the first nine months of
2002 decreased operating income by 0.1%. As a result, excluding the impact of
acquisitions, dispositions and changes in foreign currency, operating income
declined 17.9%. Media advertising and promotion expenses decreased 17% in the
first nine months of 2002. However, media advertising and promotion spending was
concentrated on the largest knit product brands including Hanes and Hanes Her
Way, resulting in a 70% increase in media advertising expense for these brands
as compared to the prior year period.
Financial Condition
Net cash provided from operating activities from continuing operations was $930
million in the first nine months of fiscal 2002 as compared to $758 million in
the comparable period of the prior year. The increase in operating cash flow in
fiscal 2002 was primarily due to improved inventory management.
32
As of March 30, 2002, the Corporation's current liabilities exceeded current
assets by $655 million. This working capital deficit results from the
Corporation's emphasis on the management of trade receivables, payables and
inventories, as well as the decision to finance a portion of its capital needs
with short-term debt.
Net cash used in investment activities was $2,234 million in the first nine
months of 2002 compared with net cash generated from investment activities of
$1,072 million in the comparable period of fiscal 2001. The Corporation expended
$1,823 million to fund the Earthgrains acquisition in the first quarter of
fiscal 2002 and received $1,651 million from the sales of businesses in the
first nine months of fiscal 2001.
Net cash from financing activities was $1,415 million during the nine months
ended March 2002 as the Corporation borrowed to fund the Earthgrains
acquisition. This compares to net cash of $1,499 million used in financing
activities in the prior year as the Corporation used the proceeds from the Coach
and PYA/Monarch business dispositions to repay debt. The Corporation has an
ongoing share repurchase program in place that allows the Corporation to
repurchase the Corporation's common shares at times management deems appropriate
given current market valuations. The Corporation has approximately 21 million
shares remaining on its current repurchase authorization.
Liquidity
Notes Payable - Notes payable increased from $101 million at June 30, 2001 to
$1,250 million at March 30, 2002 to fund a portion of the Earthgrains
acquisition price and for general working capital needs. The Corporation's
issuance of short-term commercial paper is recorded in notes payable as the
Corporation funds a large portion of its working capital commercial paper
denominated in either U.S. dollars or euros.
Debt - The Corporation's total long-term debt increased $1,679 million from
$3,120 million at June 30, 2001 to $4,799 million at the end of the third
quarter of fiscal 2002. During the first nine months of fiscal 2002, the
Corporation issued $1,355 million of floating rate and fixed rate notes that
were used primarily to fund the Earthgrains acquisition and assumed $755 million
of Earthgrains' previous long-term debt. During the first nine months of fiscal
2002, the Corporation repaid $476 million of previous issued long-term debt.
The $1,355 million of term debt issued during the nine month period primarily
consists of $1,101 million of 6.25% fixed rate debt due in 2011 and $250 million
of floating rate debt due in 2003. The Corporation's total long-term debt of
$4,799 million is due to be repaid as follows: $26 million in the fourth quarter
of fiscal 2002; $655 million in fiscal 2003; $1,477 million in fiscal 2004 and
2005; $439 million in fiscal 2006 and 2007 and $2,202 million thereafter. Debt
obligations due to mature in the next year are expected to be satisfied with a
combination of short-term borrowings, new long-term debt issuances and operating
cash flows.
The Corporation's debt consists of 47% fixed rate debt as of March 30, 2002, as
compared to 79% as of June 30, 2001. The increase in floating rate debt at March
30, 2002 versus June 30, 2001 is due to repayments of commercial paper at June
2001 with the proceeds from the Coach and PYA/Monarch business dispositions that
occurred in fiscal 2001. The Corporation monitors the interest rate environments
in the geographic regions it operates and modifies the components of the debt
portfolio as necessary to manage interest rate and foreign currency risks.
Credit Facilities and Ratings - The Corporation has numerous credit facilities
available which management considers sufficient to satisfy its operating
requirements. These credit facilities include $2.3 billion of available credit
from a group of 29 banks and lending institutions. These facilities consist of a
$1.5 billion 364-day credit facility and an $800 million 5-year facility. The
364-day $1.5 billion facility expires in fiscal 2003 and allows the Corporation,
at its option, to extend any borrowings under this facility for an additional
year. The Corporation expects to renew this facility under similar terms and
33
conditions. The 5-year $800 million facility expires in fiscal 2006 and based on
the Corporation's credit rating, allows for an increase in the size of this
facility up to $1.5 billion. At March 30, 2002, the Corporation had not borrowed
under either of these facilities. Neither of these facilities mature nor
terminate upon a credit rating downgrade. These facilities contain a number of
covenants, including a requirement to maintain a certain interest coverage
ratio.
The Corporation's credit ratings by Moody's as of March 30, 2002 were A3 for
long-term debt obligations and P-2 for commercial paper. The Corporation's
credit ratings by Standard & Poor's ("S&P") at March 30, 2002 were A+ for
long-term debt obligations and A-1 for commercial paper. The Company's credit
ratings by Fitch Rating Services were A for long-term debt obligations and F-1
for commercial paper. Changes in the Corporation's credit ratings would result
in changes in the Corporation's borrowing costs. A downgrade of the
Corporation's commercial paper credit rating would restrict our ability to sell
commercial paper.
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: $105 million in
fiscal 2003, $82 million in fiscal 2004, $67 million in 2005, $58 million in
fiscal 2006 and $152 million thereafter. The Corporation is 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 term of the lease on these properties
in the event that the owner of the business in unable to satisfy the lease
liability. The minimum annual rentals under these leases are as follows: $22
million in fiscal 2003, $21 million in fiscal 2004, $20 million is fiscal 2005,
$19 million in fiscal 2006 and $69 million thereafter.
Minority Interest - Certain subsidiaries of the Corporation have issued
preferred stock that is recorded in minority interest on the Consolidated
Balance Sheet. No gain or loss was recognized upon the issuance of these
securities. A foreign subsidiary has issued $295 million of preferred equity
securities. These securities provide a rate of return based upon the Euribor
inter-bank borrowing rate. These securities are redeemable by the Corporation in
2004 in exchange for common shares of the issuer, which may then be put to the
Corporation for preferred stock. In the event of this put, the Corporation's
preferred stock would have a nominal value of $295 million with a dividend rate
to be set based upon market factors at the time.
A domestic subsidiary has issued preferred equity securities in the amount of
$250 million. These securities provide the holder with a rate of return based
upon the LIBOR interest rate plus 0.425%, are redeemable in 2005, and may be
called at any time by the subsidiary. The subsidiary has the option of redeeming
the securities with either cash, debt or shares of common stock of the
Corporation with a value of $250 million.
Kmart Bankruptcy
On January 22, 2002, Kmart Corporation ("Kmart") filed a voluntary petition for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. At the date
of the bankruptcy filing, the carrying value of the Kmart receivable on the
Corporation's balance sheet was $36.6 million. Prior to the Kmart bankruptcy
filing, Sara Lee entered into agreements that allowed the Corporation to put
these receivables to a third party. During the third quarter of fiscal 2002, the
Corporation exercised the right to put its pre-bankruptcy petition Kmart
receivables to the counter parties in the transaction and received cash equal to
the carrying value of the receivable on the bankruptcy date. In fiscal 2001, the
Corporation had sales to Kmart of $394 million making it the Corporation's fifth
largest customer. In the first nine months of fiscal 2002, the Corporation had
sales to Kmart of $277 million. The Corporation's Intimates and Underwear
segment generates substantially all of these sales. The Corporation's Meats,
Bakery, Beverage and Household Products segments sell products to a third party
distributor (Fleming Corporation) which in turn resells product to Kmart. The
Corporation has continued to sell product to
34
Kmart in the period after the bankruptcy filing. At this time, the Corporation
cannot estimate the impact that the Kmart bankruptcy and reorganization plan
will have on future revenues or profitability.
EURO
In January 2002, new Euro denominated bills and coins were issued as 11 of the
15 member countries of the European Union established one new common currency.
The transition period for the euro continues through June 2002. In conjunction
with the conversion process to the euro, the Corporation has taken steps to
convert its information technology systems to handle the new currency, prepared
for maintaining accounting, tax and other business records in the new currency
and is continuing to evaluate the ability of all significant vendors and
customers to accurately convert to the euro. The introduction and use of the
euro has not had a material effect on the Corporation's foreign operations,
foreign exchange practices or hedging and cash management activities. Based on
currently available information, the Corporation does not believe that the
introduction of the euro currency will have a material adverse impact on its
consolidated financial condition, cash flows or results of operations.
35
PART II
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ITEM 1 - LEGAL PROCEEDINGS
--------------------------
In June 2000, The Earthgrains Company ("Earthgrains") received an information
request from the United States Environmental Protection Agency ("EPA") relating
to Earthgrains' refrigerant handling practices and, specifically, its
consistency with the requirements of 40 C.F.R. Part 82 governing ozone depleting
substances. Earthgrains was acquired by the Corporation in August 2001 and now
constitutes part of the Sara Lee Bakery Group. The Corporation has cooperated
with the EPA with respect to the information request and is engaged in
settlement discussions relating to this matter. The EPA has not made a penalty
demand; however, the Corporation believes that it may be required to pay a
penalty once the settlement discussions have been concluded. Although the amount
of any such penalty cannot be reasonably estimated at this time, the
Corporation's management believes that the ultimate amount of liability arising
from this matter will not have a material adverse effect on the Corporation's
consolidated results of operations, financial position or cash flows.
Item 5 - OTHER INFORMATION
--------------------------
Forward-Looking Information
From time to time, in oral statements and written reports, including this
report, the Corporation discusses its expectations regarding future performance
by making certain "forward-looking statements." These forward-looking statements
are based on currently available competitive, financial and economic data and
management's views and assumptions regarding future events. Such forward-looking
statements are inherently uncertain, and actual results may differ materially
from those expressed or implied herein. Consequently, the Corporation wishes to
caution readers not to place undue reliance on any forward-looking statements.
Among the factors that could impact the Corporation's ability to achieve its
stated goals are the following: (i) impacts on reported earnings from
fluctuations in foreign currency exchange rates - particularly the euro - given
Sara Lee's significant concentration of business in Western Europe; (ii)
significant competitive activity, including advertising, promotional and price
competition, and changes in consumer demand for Sara Lee's products; (iii)
adverse economic trends, including reduced consumer spending, relating in part
to incidents of terrorism and the global repercussions from such incidents; (iv)
Sara Lee's ability to continue to source production and conduct manufacturing
and selling operations in various countries in the world due to changing
political environments and the impacts on the related business environment; (v)
Sara Lee's ability to successfully integrate acquisitions, particularly
Earthgrains, into its existing operations and the availability of new
acquisitions, joint ventures and alliance opportunities that build stockholder
value; (vi) Sara Lee's ability to complete transactions anticipated in its
business Reshaping initiative, and the ability to realize the estimated savings
and productivity improvements associated with these programs; (vii) fluctuations
in the cost and availability of various raw materials; (viii) the impact of
foot-and-mouth viral disease in parts of Europe on the consumption of meat
products in general and the cost of raw materials not affected by the disease
but used in the production of food products; (ix) credit and
other business risks associated with customers operating in a highly competitive
retail environment; and (x) inherent risks in the marketplace associated with
new product introductions, including uncertainties about trade and consumer
acceptance. 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.
36
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Page Number or
Exhibit Incorporated herein
Number Description by Reference to
------- ------------------------- -------------------
10.1 Consulting and Retirement
Agreement Between Sara
Lee Corporation and Paul
J. Lustig 39
12.1 Computation of Ratio of
Earnings to Fixed Charges 49
12.2 Computation of Ratio of
Earnings to Fixed Charges
and Preferred Stock Dividend
Requirements 50
(b) Reports on Form 8-K
On March 20, 2002, the Corporation filed a Current Report on Form 8-K with the
Securities and Exchange Commission to report that on March 14, 2002 the
Corporation had dismissed its independent public accountants, Arthur Andersen
LLP and that, on March 18, 2002, the Corporation had retained
PricewaterhouseCoopers LLP as its new independent public accountants. No other
reports on Form 8-K were filed during the quarter.
37
S I G N A T U R E
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SARA LEE CORPORATION
--------------------
(Registrant)
By: /s/ Wayne R. Szypulski
--------------------------------------
Wayne R. Szypulski
Senior Vice President and Controller
DATE: May 10, 2002
38