<PAGE>
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 September 26, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-3344
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Sara Lee Corporation
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(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
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(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
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On September 26, 1998, the Registrant had 456,716,756 outstanding shares of
common stock $1.33 1/3 par value, which is the Registrant's only class of common
stock.
The document contains 22 pages.
Page 1
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SARA LEE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I -
FINANCIAL STATEMENTS -
Preface 3
Condensed Consolidated Balance Sheets -
At September 26, 1998 and June 27, 1998 4
Consolidated Statements of Income -
For the thirteen weeks ended September 26, 1998
and September 27, 1997 5
Consolidated Statements of Common Stockholders' Equity -
For the period June 28, 1997 to September 26, 1998 6
Consolidated Statements of Cash Flows -
For the thirteen weeks ended September 26, 1998
and September 27, 1997 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 9
PART II -
ITEM 2. - CHANGE IN SECURITIES 16
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 16
ITEM 5. - OTHER INFORMATION 17
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
EXHIBIT 11 - Computation of Net Income Per Common Share 19
EXHIBIT 12.1 - Computation of Ratio of Earnings to Fixed Charges 20
EXHIBIT 12.2 - Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividend Requirements 21
EXHIBIT 27 - Financial Data Schedule 22
</TABLE>
Page 2
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PART I
SARA LEE CORPORATION AND SUBSIDIARIES
PREFACE
The consolidated financial statements for the thirteen weeks ended September 26,
1998 and September 27, 1997 and the balance sheet as of September 26, 1998
included herein have not been examined by independent public accountants, but,
in the opinion of Sara Lee Corporation ("Corporation"), all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position at September 26, 1998 and the results of operations and the
cash flows for the periods presented herein have been made. The results of
operations for the thirteen weeks ended September 26, 1998 are not necessarily
indicative of the operating results 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 that 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 financial statements and the notes thereto included
in the Corporation's Form 10-K for the year ended June 27, 1998.
Page 3
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SARA LEE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 26, 1998 AND JUNE 27, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Sept. 26, June 27,
1998 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 222 $ 273
Trade accounts receivable, less allowances 1,953 1,800
Inventories:
Finished goods 1,846 1,809
Work in process 421 443
Materials and supplies 573 630
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2,840 2,882
Other current assets 321 265
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Total current assets 5,336 5,220
Trademarks and other assets 538 501
Property, net 2,024 2,090
Intangible assets 3,172 3,178
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$ 11,070 $ 10,989
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LIABILITIES AND EQUITY
Notes payable $ 572 $ 586
Accounts payable 1,851 2,003
Accrued liabilities 2,976 2,923
Current maturities of long-term debt 292 221
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Total current liabilities 5,691 5,733
Long-term debt 2,263 2,270
Deferred income taxes 33 22
Other liabilities 556 538
Minority interest in subsidiaries 556 560
ESOP convertible preferred stock 288 305
Unearned deferred compensation (255) (255)
Common stockholders' equity 1,938 1,816
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$ 11,070 $ 10,989
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</TABLE>
Page 4
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SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------
Sept. 26, Sept. 27,
1998 1997
----------- ----------
<S> <C> <C>
Net sales $ 4,860 $ 4,893
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Cost of sales 3,020 3,074
Selling, general and administrative expenses 1,473 1,454
Interest expense 52 48
Interest income (24) (9)
Gain on sale of business (137) -
----------- ----------
4,384 4,567
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Income before income taxes 476 326
Income taxes 138 101
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Net income 338 225
Preferred dividend requirements, net of tax 3 4
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Net income available for common stockholders $ 335 $ 221
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----------- ----------
Net income per common share - basic $ 0.73 $ 0.46
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Average shares outstanding 456 478
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Net income per common share - diluted $ 0.70 $ 0.44
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Average shares outstanding 479 501
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Cash dividends per common share $ 0.23 $ 0.21
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</TABLE>
Page 5
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SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 28, 1997 TO SEPTEMBER 26, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
TOTAL STOCK SURPLUS EARNINGS
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balances at June 28, 1997 $ 4,280 $ 640 $ -- $ 4,274
Net income 225 -- -- 225
Cash dividends -
Common ($.21 per share) (101) -- -- (101)
Auction preferred ($458.00 per share) (1) -- -- (1)
ESOP convertible preferred
($1.36 per share) (5) -- -- (5)
Stock issuances -
Stock option and benefit plans 21 2 19 --
Restricted stock, less
amortization of $8 9 -- 41 --
Reacquired shares (104) (3) (57) (44)
Translation adjustments (58) -- -- --
ESOP tax benefit 2 -- -- 2
ESOP share redemption 5 -- 5 --
Other (8) -- (8) --
-------- -------- --------- ---------
Balances at September 27, 1997 4,265 639 -- 4,350
Net loss (748) -- -- (748)
Cash dividends -
Common ($.69 per share) (322) -- -- (322)
ESOP convertible preferred
($4.08 per share) (18) -- -- (18)
Stock issuances -
Business acquisitions 10 -- 10 --
Stock option and benefit plans 65 6 59 --
Restricted stock, less
amortization of $34 25 1 26 --
Reacquired shares (1,396) (33) (129) (1,234)
Translation adjustments (108) -- -- --
ESOP tax benefit 8 -- -- 8
ESOP share redemption 4 1 3 --
Other 31 -- 31 --
-------- -------- --------- ---------
Balances at June 27, 1998 1,816 614 -- 2,036
Net income 338 -- -- 338
Cash dividends -
Common ($.23 per share) (105) -- -- (105)
ESOP convertible preferred
($1.36 per share) (5) -- -- (5)
Stock issuances -
Stock option and benefit plans 17 1 16 --
Business acquisitions 4 -- 4 --
Restricted stock, less
amortization of $10 10 -- (4) --
Reacquired shares (293) (8) (16) (269)
Translation adjustments 152 -- -- --
ESOP tax benefit 2 -- -- 2
ESOP share redemption 17 2 15 --
Other (15) -- (15) --
-------- -------- --------- ---------
Balances at September 26, 1998 $ 1,938 $ 609 $ -- $ 1,997
-------- -------- --------- ---------
-------- -------- --------- ---------
<CAPTION>
UNEARNED
TRANSLATION RESTRICTED
ADJUSTMENTS STOCK
----------------- -------------------
<S> <C> <C>
Balances at June 28, 1997 $(618) $ (16)
Net income -- --
Cash dividends -
Common ($.21 per share) -- --
Auction preferred ($458.00 per share) -- --
ESOP convertible preferred
($1.36 per share) -- --
Stock issuances -
Stock option and benefit plans -- --
Restricted stock, less
amortization of $8 -- (32)
Reacquired shares -- --
Translation adjustments (58) --
ESOP tax benefit -- --
ESOP share redemption -- --
Other -- --
------- --------
Balances at September 27, 1997 (676) (48)
Net loss -- --
Cash dividends -
Common ($.69 per share) -- --
ESOP convertible preferred
($4.08 per share) -- --
Stock issuances -
Business acquisitions -- --
Stock option and benefit plans -- --
Restricted stock, less
amortization of $34 -- (2)
Reacquired shares -- --
Translation adjustments (108) --
ESOP tax benefit -- --
ESOP share redemption -- --
Other -- --
------- --------
Balances at June 27, 1998 (784) (50)
Net income -- --
Cash dividends -
Common ($.23 per share) -- --
ESOP convertible preferred
($1.36 per share) -- --
Stock issuances -
Stock option and benefit plans -- --
Business acquisitions -- --
Restricted stock, less
amortization of $10 -- 14
Reacquired shares -- --
Translation adjustments 152 --
ESOP tax benefit -- --
ESOP share redemption -- --
Other -- --
------- --------
Balances at September 26, 1998 $(632) $ (36)
------- --------
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</TABLE>
Page 6
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SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------------------
Sept. 26, Sept. 27,
1998 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES -
Net income $ 338 $ 225
Adjustments for non-cash charges included in net income:
Depreciation 95 119
Amortization of intangibles 46 52
Gain on sale of business (97) -
Increase in deferred income taxes 12 27
Other 3 (21)
Changes in current assets and liabilities, excluding
businesses acquired and sold (353) (563)
---------------- ----------------
Net cash from (used in) operating activities 44 (161)
---------------- ----------------
INVESTING ACTIVITIES -
Purchases of property and equipment (84) (91)
Acquisitions of businesses (102) (207)
Sales of businesses 407 -
Sales of assets 94 9
Other 2 (5)
---------------- ----------------
Net cash from (used in) investing activities 317 (294)
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FINANCING ACTIVITIES -
Issuances of common stock 17 21
Purchases of common stock (293) (104)
Redemption of preferred stock - (200)
Borrowings of long-term debt 1 277
Repayments of long-term debt (5) (99)
Short-term (repayments) borrowings, net (31) 571
Payments of dividends (110) (107)
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Net cash (used in) from financing activities (421) 359
---------------- ----------------
Effect of changes in foreign exchange rates on cash 9 (3)
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Decrease in cash and equivalents (51) (99)
Cash and equivalents at beginning of year 273 272
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Cash and equivalents at end of quarter $ 222 $ 173
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---------------- ----------------
COMPONENTS OF THE CHANGES IN CURRENT ASSETS
AND LIABILITIES:
(Increase) in trade accounts receivable $ (109) $ (209)
Decrease (increase) in inventories 8 (90)
(Increase) in other current assets (36) (27)
(Decrease) in accounts payable (188) (218)
(Decrease) in accrued liabilities (28) (19)
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Changes in current assets and liabilities $ (353) $ (563)
---------------- ----------------
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</TABLE>
Page 7
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SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. As part of its ongoing restructuring program, the Corporation disposed
of certain assets of the Coffee and Tea segment primarily related to
its international tobacco operations. In the first quarter of fiscal
1999, the Corporation received cash proceeds of $386 million and
recognized a pretax gain of $137 million or $.20 per share on a diluted
basis.
Additional cash proceeds of between zero and $700 million in total may
be received between fiscal 2004 and 2010. The realization of these
amounts is dependent upon significant contingencies related to the
ongoing operation of the sold business between fiscal 2004 and 2010.
The receipt of these payments is not assured, and the Corporation will
periodically assess the realization of these amounts. No portion of
these contingent payments has been realized in the $137 million gain.
2. On October 29, 1998, the Corporation declared a two-for-one stock
split in the form of a 100% stock dividend effective December 1, 1998.
After giving effect to the stock split, common share data for the first
quarter of fiscal 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Net Income Per Common Share - Basic $ .37 $ .23
-------- -------
-------- -------
Average Shares Outstanding (millions) 912 955
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Net Income Per Common Share - Diluted $ .35 $ .22
-------- -------
-------- -------
Average Shares Outstanding (millions) 959 1,001
-------- -------
-------- -------
Cash Dividends Per Common Share $ .115 $ .105
-------- -------
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</TABLE>
3. As of June 28, 1998, the Corporation adopted Statements of Financial
Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income" issued in June 1997. SFAS 130 requires the reporting and
display of comprehensive income, which is composed of net income
and other comprehensive income items, in a full set of general
purpose financial statements. Other comprehensive income items are
revenues, expenses, gains and losses that under generally accepted
accounting principles are excluded from net income and reflected as
a component of equity; such as currency translation adjustments.
The components of comprehensive income, net of related tax, for the
first quarter of fiscal 1999 and 1998 are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net income $ 338 $ 225
Foreign currency translation adjustment 152 (58)
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Comprehensive income $ 490 $ 167
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</TABLE>
Page 8
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SARA LEE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following is a discussion of the results of operations for the first quarter
of fiscal 1999 compared to the first quarter of fiscal 1998 and a discussion of
the changes in financial condition during the first three months of fiscal 1999.
RESULTS OF OPERATIONS
COMPARISON OF FIRST QUARTER FISCAL 1999 TO FIRST QUARTER FISCAL 1998
Operating results by business segment in the first quarter of fiscal 1999 as
compared to the first quarter of fiscal 1998 were as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------------------------
(IN MILLIONS)
SALES OPERATING INCOME (1)
--------------------------- ------------------------
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1998 1997 1998 1997
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Sara Lee Foods $1,331 $1,359 $ 90 $ 75
Coffee & Tea 608 633 104 106
Household and Body Care 451 453 44 40
Foodservice 668 632 24 22
Branded Apparel 1,837 1,851 149 150
------- ------- ----- ---
Total business segments 4,895 4,928 411 393
Intersegment sales (35) (35) -- --
-------- ------- ----- ------
Net sales and operating income $4,860 $4,893 $ 411 $ 393
------- ------- ----- ------
------- ------- ----- ------
<CAPTION>
PRETAX INCOME (1) NET INCOME
--------------------------- ------------------------
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1998 1997 1998 1997
----------- ----------- ----------- --------
Sara Lee Foods $ 86 $ 69 $ 54 $ 43
Coffee & Tea 238 103 170 71
Household and Body Care 39 34 26 22
Foodservice 23 21 15 13
Branded Apparel 134 127 105 96
------- -------- ------- -------
Total business segments 520 354 370 245
Unallocated corporate expense (44) (28) (32) (20)
------- ------- --------- --------
Pretax income and net income $ 476 $ 326 $ 338 $ 225
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
(1) Except for the Coffee and Tea segment, the difference between the operating
and pretax income of each segment is interest expense. The Corporation's
net interest expense is allocated to each segment based upon the average
invested capital of each business. The pretax income of the Coffee and Tea
segment in fiscal 1999 includes a $137 million gain from the disposal of
certain assets offset by $3 million of net interest expense.
Page 9
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CONSOLIDATED RESULTS - FIRST QUARTER FISCAL 1999 COMPARED WITH FIRST QUARTER
FISCAL 1998
Consolidated net sales decreased .7% in the first quarter. Businesses acquired
net of businesses sold subsequent to the start of the first quarter of last
fiscal year increased sales by approximately .2 percentage points. The
strengthening of the U.S. dollar relative to foreign currencies had the effect
of reducing sales by approximately 1.3 percentage points. While the U.S. dollar
has weakened slightly versus most European currencies, the declines in the Asian
currencies as well as those of Australia, Mexico and South Africa offset the
strength in Europe. Excluding the impact of acquisitions, dispositions and
foreign currency changes, sales increased .4% over the same quarter in the prior
year.
The gross profit margin was 37.9% in fiscal 1999 compared with 37.2% in fiscal
1998. Higher gross margins in the Sara Lee Foods and Household and Body Care
segments were largely responsible for the increase. Branded Apparel gross profit
margins were unchanged from the prior year while the Coffee and Tea and
Foodservice segments had slight margin declines. Selling, general and
administrative expenses increased by 1.3% over the same quarter last year. This
increase was primarily due to higher marketing, advertising and promotion
expense.
Operating income increased 4.7% in the quarter. Businesses acquired net of
businesses sold subsequent to the start of the first quarter of last fiscal year
increased operating income by approximately 2.6 percentage points. The
strengthening of the U.S. dollar relative to foreign currencies had the effect
of reducing operating income by 1.6 percentage points. Excluding the impact of
business acquisitions, dispositions and changes in foreign currency exchange
rates, operating income increased 3.7%.
As part of its ongoing restructuring program, the Corporation disposed of
certain assets of the Coffee and Tea segment primarily related to its
international tobacco operation, Douwe Egberts Van Nelle Tobacco. The
Corporation acquired this business through the purchase of Douwe Egberts B.V. in
1978 and Van Nelle Holding N.V. in 1989 for a total price of approximately $300
million. In the first quarter of fiscal 1999, the Corporation received cash
proceeds of $386 million and recognized a pretax gain of $137 million or $.20
per share on a diluted basis. See notes to the financial statements on page 8 of
this document for additional information on this transaction.
Net interest expense decreased primarily as a result of the sale of assets,
lower cash disbursements for business acquisitions and capital expenditures and
improved operating cash flows. Unallocated corporate expenses increased by $16
million as a result of higher administrative costs and costs associated with
hedging foreign currency movements.
Income before income taxes, excluding the impact of the $137 million gain noted
above, increased 4.1%. The effective tax rate decreased from 31% to 29% of
pretax income. The reduction in the tax rate was attributable primarily to
increased earnings in certain foreign jurisdictions that had lower tax rates
than the United States. Excluding the impact of the gain, net income increased
7.1%, while diluted earnings per share increased 13.6%. Earnings per share
increased at a rate in excess of net income primarily because of fewer average
shares outstanding during the period. Preferred dividends also declined as a
result of the redemption of the remaining auction preferred shares during the
first quarter of fiscal 1998.
FISCAL 1998 RESTRUCTURING
In the second quarter of fiscal 1998, the Corporation provided a pretax charge
of $2,040 million for the cost of restructuring its worldwide operations. The
planned restructuring
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activities include the disposition of 116 manufacturing and distribution
facilities - 86 facilities are owned and 30 are leased. Of the total pretax
charge for restructuring, $899 million relates to anticipated losses associated
with the disposal of manufacturing and distribution facilities and $830 million
relates to goodwill associated with the disposition of the remaining assets from
various business combinations. The remainder of the charge consists of $219
million for pension and social costs associated with facility disposals; $47
million for anticipated costs to close and dispose of idled facilities and $45
million for anticipated losses on the disposal of certain equity and cost method
investments. Of the total after-tax provision, 89% is non-cash and 11% will
require cash outflows.
Through September 26, 1998, 19 manufacturing and distribution facilities have
been sold and 36 additional facilities have been closed. These actions comprise
58% of the total anticipated losses associated with long-lived assets included
in the restructuring charge. The Corporation expects to complete the
restructuring by the year 2000, and it is anticipated that the remaining costs
of the plan will be funded from internal sources and available borrowings.
Operating costs in fiscal 1999 were lowered by $17 million, primarily as a
result of lower plant overhead and amortization expense. The Corporation expects
the restructuring plan to generate increased savings in subsequent periods,
growing to an annual savings of approximately $200 million in 2001. Savings from
the planned actions will be used for both business-building initiatives and
profit improvement. A reconciliation of the restructuring reserves through
September 26, 1998 is presented on page 15 of this document.
OPERATING RESULTS BY BUSINESS SEGMENT - FIRST QUARTER FISCAL 1999 COMPARED WITH
FIRST QUARTER FISCAL 1998
Net sales in the Sara Lee Foods segment declined in fiscal 1999 by 2.0% as lower
commodity costs were passed on to customers in the form of lower prices.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, sales in this segment declined 3.1%. Excluding acquisitions,
Packaged Meats posted a unit volume gain of 3%, led by a 6% increase in branded
product sales in the United States. Worldwide unit sales for Sara Lee Bakery,
excluding acquisitions, fell 2% as gains in the growing bakery-deli, foodservice
and fresh baked segments were offset by declines at retail. Including
acquisitions, Packaged Meats unit sales grew 6% and Bakery volumes increased
2%.
Operating income increased by 20.6% as margins benefited from increased meat
unit sales, an improved product mix both in Bakery and worldwide Packaged Meats,
lower commodity costs and the restructuring program initiated in fiscal 1998.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, operating income increased 16.6%. The net interest expenses
allocated to the segment declined by $2 million and the pretax income of the
segment increased by 24.7%. The effective tax rate of the segment declined to
37.0% and net income grew 27.2% to $54 million.
Net sales in the Coffee and Tea segment declined 4% reflecting lower consumer
prices, as a result of a substantial decline in green coffee costs, and the
divestment of tobacco operations in July 1998. Excluding the impact of
acquisitions, dispositions and changes in foreign currencies, sales in this
segment increased 2.7%. Excluding acquisitions, unit volumes for roasted coffee,
the segment's primary business, increased 13% as consumers reacted favorably to
lower coffee prices and product introductions. Unit volumes grew 22% including
the sales from recently acquired businesses.
Operating income for the Coffee and Tea segment declined 1.5% reflecting the
divestment of tobacco operations and ongoing restructuring activities. The
strengthening of foreign currencies versus the U.S. dollar improved operating
income of this segment by .8%. As previously noted, the pretax earnings of
this segment include a gain of $137 million associated with the disposition of
the Corporation's international tobacco operations. Segment net income,
excluding
Page 11
<PAGE>
the gain, increased 2.5% as a result of lower interest expense and a
reduction in the effective tax rate of this segment.
Net sales in the Household and Body Care segment declined .5% while operating
income increased 9.2%. These results were significantly affected by declines in
the Asian currencies as well as those in Mexico, Australia and South Africa.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, Household and Body Care sales and operating income increased 7.9%
and 25.0%, respectively. Excluding acquisitions, unit volumes for this segment's
four core categories - shoe care, body care, insecticides and air fresheners -
grew 8%; unit volumes for these four categories grew 11% including acquisitions.
The operating income of this segment in the first quarter of fiscal 1999 was
also favorably impacted by the Corporation's ongoing restructuring program. The
net interest allocated to the Household and Body Care segment declined by
$1 million and pretax income of the segment increased 13%. Net income increased
15% to $26 million as the effective tax rate related to this segment declined
approximately 1 percentage point.
Net sales in the Foodservice segment increased 5.7% including the impact of
acquisitions and 2.9% excluding the impact of acquisitions. Excluding
acquisitions, unit volumes grew 1%, reflecting the loss of a large,
lower-margin chain customer during the quarter. Including acquisitions, unit
volumes grew 4%. Operating income grew 6.4% to $24 million. Results benefited
from an improved customer mix and a continued focus on cost containment.
Pretax income grew 6.9% and net income grew 8.4% as the effective tax rate of
this segment declined approximately 1 percentage point.
Branded Apparel sales and operating income declined .7% and .5%,
respectively. Excluding the impact of acquisitions, dispositions and changes
in foreign currencies, sales declined .3% while operating income increased
.7%. These results reflect a difficult competitive environment for knit
activewear products, and a decline in unit sales for lower-margin legwear
products. Unit volumes for Worldwide Legwear fell 2%, combining a 10%
increase in sock unit sales with a 7% decline in sheer hosiery volumes.
Worldwide Knit Products unit sales were flat compared against a strong 9%
increase in the first quarter one year ago. Intimate Apparel units increased
10%, with strength in both the United States and Europe.
Pretax income in the Branded Apparel segment increased 5.7% as the Corporation's
ongoing restructuring efforts reduced the invested capital of this business and
the allocated net interest expense. The effective tax rate of the Branded
Apparel segment declined from 24.6% to 21.4%. The lower tax rate is primarily
attributable to an increased level of pretax profits being attributable to
certain foreign jurisdictions that had lower tax rates than the United States.
Segment net income increased 10.2% as a result of the lower effective tax rate
and interest expense.
FINANCIAL CONDITION
During the first three months of fiscal 1999, net cash provided from operating
activities was $44 million as compared to a net use of cash of $161 million in
the comparable period in fiscal 1998. The $205 million improvement is primarily
due to better management of inventories and trade receivables.
Net cash generated from investment activities was $317 million in the first
three months of fiscal 1999 as compared to a net use of cash of $294 million in
fiscal 1998. The Corporation received $501 million of cash from the sale of
assets and businesses during the first quarter of the current year. $386 million
was received from the sale of the international tobacco business
Page 12
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and $94 million was received from the sale of assets as part of the ongoing
program to reduce the level of assets employed in the business. Cash
expenditures for the purchase of businesses declined by $105 million and
capital expenditures for the quarter declined $7 million from the comparable
period in the prior year.
In fiscal 1998, the Corporation announced its plans to repurchase $3 billion
of its common stock over a three year period. A total of $1.5 billion of Sara
Lee Corporation common stock was repurchased in 1998 and $293 million was
repurchased in the first quarter of fiscal 1999. During the first quarter of
fiscal 1999, $35 million of cash was used to reduce long and short term debt,
while in the comparable period of fiscal 1998, cash of $749 million was
received from long and short term borrowings.
YEAR 2000 COMPLIANCE
In January 1996, the Corporation initiated a program to address the Year 2000
information technology issues that affect its operations. Essentially, the
Year 2000 problem consists of computer applications, including devices with
imbedded technology, using only the last two digits to refer to a year rather
than all four digits. As a result, these applications could fail or create
erroneous results if they recognize "00" as the year 1900 rather than the
year 2000. The Corporation's Year 2000 program is designed to identify and
correct these problems.
The program has been developed with the help of independent consultants and
consists of various steps to identify and evaluate Year 2000 issues and
remediate systems that are not Year 2000 compliant. The Corporation's program
to identify and evaluate Year 2000 readiness includes inventorying and
testing systems that are commonly thought of as IT systems, such as computer
networks, as well as systems that are not commonly thought of as IT systems,
such as automated production systems. Both IT and non-IT systems may contain
imbedded technology or "chips" which complicates the Corporation's Year 2000
identification, evaluation, remediation and testing efforts. Among the
functional areas the Corporation has evaluated are its order, production,
distribution and financial systems. The Corporation has completed its
inventory of all IT and non-IT systems and has identified systems with
Year 2000 exposure. The Corporation has also conducted reviews to determine
the need for remediation efforts and is currently involved in testing and
verifying compliance. In addition, all third parties with whom there is
systems interaction, including outsourced services are being surveyed to
determine Year 2000 compliance or the need for remediation efforts.
Similarly, the Corporation has and will continue to contact its significant
suppliers, customers and service providers to determine the extent to which
such entities are vulnerable to Year 2000 issues and whether the products and
services purchased by or from such entities are Year 2000 compliant. The
Corporation has also begun to assess the systemic Year 2000 risk in the
various countries in which it operates. Progress against these plans is
monitored and reported to management on a regular basis.
As of the end of the first quarter of fiscal 1999, the Corporation had
verified that approximately 52% of its worldwide systems were Year 2000
compliant. The Corporation anticipates that its remaining systems will be
Year 2000 compliant by the end of fiscal 1999. The total cost of this project
is estimated to be $50 million, of which approximately half has been
expensed. These costs have not had nor are expected to have a material effect
on the Corporation's financial position, results of operations or cash flows
in any of the years in which spending has or will occur. This expectation
assumes that the Corporation will not be obligated to incur significant
Year 2000 related costs on behalf of its customers or suppliers.
Page 13
<PAGE>
In the event that the Corporation's Year 2000 program does not properly
identify, assess or remediate Year 2000 problems, there can be no assurance
that the Year 2000 issue will not materially adversely impact the
Corporation's results of operations or adversely affect the Corporation's
relationships with customers, suppliers or others. Additionally, there can be
no assurance that the Year 2000 issues of other entities will not have a
material adverse impact on the Corporation's systems or results of
operations. Due to the general uncertainty inherent in the Year 2000 problem,
including uncertainty regarding the Year 2000 readiness of customers,
suppliers and governmental agencies, the Corporation has not yet developed a
comprehensive analysis of the most likely worst case Year 2000 scenario.
However, the Corporation is currently developing contingency plans to ensure
that the Year 2000 issue will not pose significant operational problems for
the Corporation. This process includes, among others, developing emergency
backup procedures in case of system failure, identifying alternative
suppliers, and developing alternative plans to engage in business activities
with customers and suppliers should they not be Year 2000 compliant. These
plans will continue to be monitored for completion as the Corporation
approaches the year 2000.
The costs of the Corporation's Year 2000 Program and the dates on which the
Corporation believes it will complete various stages of the program are based
upon management's best estimates, which are derived using numerous
assumptions regarding future events, including the continued availability of
certain resources, third-party remediation plans and other factors. There can
be no assurance that these estimates will prove to be accurate and actual
results could differ materially from those currently anticipated. Specific
factors that could cause such material differences include, but are not
limited to: the availability and cost of personnel trained in Year 2000
issues; the ability to identify, assess, remediate and test all relevant
systems, including those using imbedded technology; the variability of
definitions of "Year 2000 compliant;" and similar uncertainties.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their
existing currencies (legacy currencies) and one common currency - the euro.
The euro will then trade on currency exchanges and may be used in business
transactions. The transition period for the introduction of the euro will
occur through June 2002. Beginning in January 2002, new euro-denominated
bills and coins will be issued. Simultaneously, legacy currencies will begin
to be withdrawn from circulation with the completion of the withdrawal
scheduled no later than June 30, 2002. The Corporation has established plans
to identify and address risks arising out of the conversion to the new
currency. These risks include, but are not limited to, converting information
technology systems to handle the new currency, evaluating the competitive
impact of one common currency due to, among other things, increased price
transparency, evaluating the Corporation's exposure to currency exchange risk
during and following the transition period to the euro and determining the
impact on the Corporation's processes for preparing accounting and taxation
records. The cost of the Corporation's program to address the euro conversion
is not expected to be material. However, while the Corporation believes it is
taking the appropriate steps to mitigate risks associated with the euro
conversion, uncertainties do exist as to the effects the euro currency will
have on the Corporation's customers, suppliers and in the marketplaces in
which the Corporation operates. In addition, substantial uncertainty exists
with respect to the impact of the conversion to the euro on the economies of
all member states of the European Union. Accordingly, there can be no
assurance that the conversion to the euro will not materially adversely
impact the Corporation's results of operations or adversely affect the
Corporation's relationships with customers, suppliers or others.
Additionally, there can be no assurances that the euro conversion issues of
other entities will not have a materially adverse impact on the Corporation's
results of operations.
Page 14
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
RECONCILIATION OF RESTRUCTURING RESERVES
AS OF SEPTEMBER 26, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
WRITEDOWN OF RECOGNITION OF
LONG-LIVED CURTAILMENT
ORIGINAL ASSETS TO NET LOSS AND SPECIAL
RESTRUCTURING REALIZABLE TERMINATION
RESERVES VALUE BENEFITS
-------------- ------------ --------------
<S> <C> <C> <C>
Anticipated losses associated with disposal
of long-lived assets $ 1,729 $ (1,729) $ -
Pension and social costs 219 - (39)
Anticipated expenditures to close and
dispose of idled facilities - includes
non-cancelable lease obligations 47 - -
Anticipated loss associated with the disposal
of equity and cost method investments 45 (45) -
---------- ----------- ----------
2,040 (1,774) (39)
Foreign exchange impacts - - -
---------- ----------- ----------
Total restructuring reserves $ 2,040 $ (1,774) $ (39)
---------- ----------- ----------
---------- ----------- ----------
<CAPTION>
RESTRUCTURING
FOREIGN RESERVES
CASH EXCHANGE AS OF
PAYMENTS IMPACTS SEPT. 26, 1998
---------- ---------- ---------------
<S> <C> <C> <C>
Anticipated losses associated with disposal
of long-lived assets $ - $ - $ -
Pension and social costs (33) - 147
Anticipated expenditures to close and
dispose of idled facilities - includes
non-cancelable lease obligations (13) - 34
Anticipated loss associated with the disposal
of equity and cost method investments - - -
------ ------- --------
(46) - 181
Foreign exchange impacts - 4 4
------ ------- --------
Total restructuring reserves $ (46) $ 4 $ 185
------ ------- --------
------ ------- --------
</TABLE>
Page 15
<PAGE>
PART II
ITEM 2 - CHANGES IN SECURITIES
(c) On July 31, 1998, the Corporation issued 94,423 shares of its common
stock in connection with a business acquisition in reliance on
Section 4(2) of the Securities Act of of 1933.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's 1998 Annual Meeting of Stockholders was held on
October 29,1998, in Chicago, Illinois ("Annual Meeting").
(b) Not applicable.
(c)(i) A total of 400,619,983 votes (83.5% of all votes entitled to vote
at the Annual Meeting) were represented by proxy or ballot at the
Annual Meeting. The stockholders of the Registrant were requested to
elect 17 directors as nominated by management. All nominees were
elected as indicated by the following voting tabulation:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
------------------------ ----------- -----------
<S> <C> <C>
Paul A. Allaire 392,708,418 7,911,565
Frans H.J.J. Andriessen 398,096,410 2,523,573
John H. Bryan 398,037,439 2,582,544
Duane L. Burnham 398,354,671 2,265,312
Charles W. Coker 398,196,284 2,423,699
James S. Crown 398,241,352 2,378,631
Willie D. Davis 397,790,150 2,829,833
Vernon E. Jordan, Jr. 387,342,071 13,277,912
James L. Ketelsen 397,627,712 2,992,271
Hans B. van Liemt 397,769,079 2,850,904
Joan D. Manley 397,787,169 2,832,814
C. Steven McMillan 397,773,657 2,846,326
Frank L. Meysman 398,314,679 2,305,304
Rozanne L. Ridgway 397,699,964 2,920,019
Judith A. Sprieser 398,237,086 2,382,897
Richard L. Thomas 397,482,744 3,137,239
John D. Zeglis 398,199,007 2,420,976
</TABLE>
(ii) The stockholders were requested to vote on a resolution to amend the
Corporation's Charter to increase the total number of authorized shares
of stock to 1,213,500,000 and the number of authorized shares of
common stock to 1,200,000,000. The resolution also proposed to reduce
the par value of each share of common stock to $.01. The resolution
was adopted by the stockholders, as 368,387,389 votes were cast for
the proposal, 29,872,679 votes were cast against the proposal, and
2,357,406 votes abstained. There were 2,509 broker non-votes.
(iii) The stockholders were requested to vote on a resolution to approve the
Sara Lee Corporation 1998 Long-Term Incentive Stock Plan. The
resolution was adopted by the stockholders, as 304,358,738 votes were
cast for the proposal, 39,714,407 votes were cast against the proposal,
and 4,031,600 votes abstained. There were 52,515,238 broker non-votes.
(iv) The stockholders were requested to ratify the appointment of Arthur
Andersen LLP as the independent public accountants of the Corporation
for its fiscal year 1999. The appointment of Arthur Andersen LLP was
ratified by the stockholders, as 398,163,324 votes were cast for the
proposal, 1,282,914 votes were cast against the proposal, and
1,173,745 votes abstained.
(d) Not applicable.
Page 16
<PAGE>
ITEM 5. - OTHER INFORMATION
This report contains certain forward-looking statements which are based on
management's current view and assumptions regarding future events and
financial performance. Reference should be made to the section "Forward
Looking Information" in item 7 of the registrant's Annual Report on Form 10-K
for the fiscal year ended June 27, 1998, for a description of the important
factors that could cause actual results to differ materially from those
discussed herein.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
PAGE NUMBER OR
EXHIBIT INCORPORATED HEREIN
NUMBER DESCRIPTION BY REFERENCE TO
--------- ------------------------- -------------------
<S> <C> <C>
11 Computation of Net Income
Per Common Share 19
12.1 Computation of Ratio of
Earnings to Fixed Charges 20
12.2 Computation of Ratio of
Earnings to Fixed Charges
and Preferred Stock Dividend
Requirements 21
27 Financial Data Schedule 22
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the quarter
for which this report is filed.
Page 17
<PAGE>
SIGNATURE
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
Vice President and Controller
DATE: November 9, 1998
Page 18
<PAGE>
<TABLE>
<CAPTION>
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11
(in millions except per share data)
Thirteen Weeks Ended Thirteen Weeks Ended
September 26, 1998 September 27, 1997
------------------ ------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
EARNINGS:
Net income $ 338 $ 338 $ 225 $ 225
Less: Dividends on preferred stocks,
net of tax benefits (3) - (4) (1)
Adjustment attributable to
ESOP Convertible Preferred Stock - (1) - (1)
------- ------- ------- -------
Net Income Available for Common
Stockholders $ 335 $ 337 $ 221 $ 223
------- ------- ------- -------
------- ------- ------- -------
SHARES:
Weighted Average Shares Outstanding 456 456 478 478
Add: Common Stock Equivalents -
Stock options - 5 - 4
ESOP Convertible Preferred Stock - 16 - 17
Restricted stock and other - 2 - 2
------- ------- ------- -------
Adjusted Weighted Average Shares
Outstanding 456 479 478 501
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER COMMON SHARE $ 0.73 $ 0.70 $ 0.46 $ 0.44
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Page 19
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1
(in millions except ratios)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------
Sept. 26, Sept. 27,
1998 (1) 1997
-------- --------
<S> <C> <C>
Fixed charges:
Interest expense $ 52 $ 48
Interest portion of rental expense 15 16
-------- --------
Total fixed charges before capitalized interest 67 64
Capitalized interest 2 4
-------- --------
Total fixed charges $ 69 $ 68
-------- --------
-------- --------
Earnings available for fixed charges:
Income before income taxes $ 476 $ 326
Less undistributed income in minority-owned companies (1) (1)
Add minority interest in majority-owned subsidiaries 8 7
Add amortization of capitalized interest 6 6
Add fixed charges before capitalized interest 67 64
-------- --------
Total earnings available for fixed charges $ 556 $ 402
-------- --------
-------- --------
Ratio of earnings to fixed charges 8.1 5.9
-------- --------
-------- --------
</TABLE>
(1) In the first quarter of fiscal 1999, the Corporation sold its international
tobacco operations. The 1999 pretax income of the Corporation includes a
$137 million pretax gain realized upon the sale of the tobacco operations.
Page 20
<PAGE>
EXHIBIT 12.2
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(in millions except ratios)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
Sept. 26, Sept. 27,
1998 (1) 1997
-------- --------
<S> <C> <C>
Fixed charges and preferred stock dividend requirements:
Interest expense $ 52 $ 48
Interest portion of rental expense 15 16
-------- --------
Total fixed charges before capitalized interest
and preferred stock dividend requirements 67 64
Capitalized interest 2 4
Preferred stock dividend requirements (2) 6 7
-------- --------
Total fixed charges and preferred stock
dividend requirements $ 75 $ 75
-------- --------
-------- --------
Earnings available for fixed charges and preferred
stock dividend requirements:
Income before income taxes $ 476 $ 326
Less undistributed income in minority-owned companies (1) (1)
Add minority interest in majority-owned subsidiaries 8 7
Add amortization of capitalized interest 6 6
Add fixed charges before capitalized interest and
preferred stock dividend requirements 67 64
-------- --------
Total earnings available for fixed charges and
preferred stock dividend requirements $ 556 $ 402
-------- --------
-------- --------
Ratio of earnings to fixed charges and preferred stock
dividend requirements 7.4 5.4
-------- --------
-------- --------
</TABLE>
(1) In the first quarter of fiscal 1999, the Corporation sold its international
tobacco operations. The 1999 pretax income of the Corporation includes a
$137 million pretax gain realized upon the sale of the tobacco operations.
(2) Preferred stock dividends in the computation have been increased to an
amount representing the pretax earnings that would have been required to
cover such dividends.
Page 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 204
<SECURITIES> 18
<RECEIVABLES> 2,172
<ALLOWANCES> 219
<INVENTORY> 2,840
<CURRENT-ASSETS> 5,336
<PP&E> 5,046
<DEPRECIATION> 3,022
<TOTAL-ASSETS> 11,070
<CURRENT-LIABILITIES> 5,691
<BONDS> 2,263
0
33
<COMMON> 609
<OTHER-SE> 1,329
<TOTAL-LIABILITY-AND-EQUITY> 11,070
<SALES> 4,860
<TOTAL-REVENUES> 4,860
<CGS> 3,020
<TOTAL-COSTS> 3,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 38
<INTEREST-EXPENSE> 28
<INCOME-PRETAX> 476
<INCOME-TAX> 138
<INCOME-CONTINUING> 338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 338
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.70
</TABLE>
