<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 March 28, 1998
-----------------------------------------------
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
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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
----- -----
On March 28, 1998, the Registrant had 467,083,691 outstanding shares of
common stock $1.33 1/3 par value, which is the Registrant's only class of
common stock.
The document contains 21 pages.
Page 1
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
INDEX
PART I -
FINANCIAL STATEMENTS -
Preface 3
Condensed Consolidated Balance Sheets -
At March 28, 1998 and June 28, 1997 4
Consolidated Statements of Income -
For the thirteen and thirty-nine weeks ended
March 28, 1998 and March 29, 1997 5
Consolidated Statements of Common Stockholders' Equity -
For the period June 29, 1996 to March 28, 1998 6
Consolidated Statements of Cash Flows -
For the thirty-nine weeks ended March 28, 1998
and March 29, 1997 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 9
PART II -
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE 16
EXHIBIT 11 - Computation of Net Income Per Common Share 17
EXHIBIT 12.1 - Computation of Ratio of Earnings to Fixed Charges 19
EXHIBIT 12.2 - Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements 20
EXHIBIT 27 - Financial Data Schedule 21
Page 2
<PAGE>
PART I
SARA LEE CORPORATION AND SUBSIDIARIES
PREFACE
The consolidated financial statements for the thirteen and thirty-nine weeks
ended March 28, 1998 and March 29, 1997 and the balance sheet as of March 28,
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 March 28, 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 and thirty-nine weeks ended
March 28, 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 28, 1997.
Page 3
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 28, 1998 AND JUNE 28, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
MAR. 28, JUNE 28,
1998 1997
------- -------
<S> <C> <C>
ASSETS
Cash and equivalents $ 173 $ 272
Trade accounts receivable, less allowances 1,843 1,841
Inventories:
Finished goods 1,915 1,803
Work in process 446 497
Materials and supplies 602 673
------- -------
2,963 2,973
Other current assets 306 305
------- -------
Total current assets 5,285 5,391
Trademarks and other assets 537 536
Property, net 2,137 3,079
Intangible assets 3,208 3,947
------- -------
$11,167 $12,953
------- -------
------- -------
LIABILITIES AND EQUITY
Notes payable $ 1,075 $ 476
Accounts payable 1,595 1,703
Accrued liabilities 2,893 2,582
Current maturities of long-term debt 345 255
------- -------
Total current liabilities 5,908 5,016
Long-term debt 2,080 1,933
Deferred income taxes 40 416
Other liabilities 519 543
Minority interest in subsidiaries 568 523
Auction preferred stock -- 200
ESOP convertible preferred stock 309 314
Unearned deferred compensation (265) (272)
Common stockholders' equity 2,008 4,280
------- -------
$11,167 $12,953
------- -------
------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 28, 1998 AND MARCH 29, 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------- ------------------------
MAR. 28, MAR. 29, MAR. 28, MAR. 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 4,736 $ 4,649 $ 14,908 $ 14,804
-------- -------- --------- ---------
Cost of sales 2,904 2,892 9,237 9,218
Selling, general and administrative expenses 1,459 1,416 4,387 4,388
Interest expense 55 48 164 156
Interest income (11) (9) (37) (30)
Restructuring charge -- -- 2,040 --
-------- -------- --------- ---------
4,407 4,347 15,791 13,732
-------- -------- --------- ---------
Income (loss) before income taxes 329 302 (883) 1,072
Income tax (expense) benefit (102) (96) 57 (343)
-------- -------- --------- ---------
Net income (loss) 227 206 (826) 729
Preferred dividend requirements - net of tax 4 7 12 20
-------- -------- --------- ---------
Net income (loss) applicable to common stockholders $ 223 $ 199 $ (838) $ 709
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income (loss) per common share - basic $ 0.48 $ 0.42 $ (1.77) $ 1.48
-------- -------- --------- ---------
-------- -------- --------- ---------
Average shares outstanding 467 478 472 480
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income (loss) per common share - diluted $ 0.46 $ 0.40 $ (1.77) $ 1.42
-------- -------- --------- ---------
-------- -------- --------- ---------'
Average shares outstanding 494 501 472 503
-------- -------- --------- ---------
-------- -------- --------- ---------
Cash dividends per common share $ 0.23 $ 0.21 $ 0.67 $ 0.61
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
For the Period June 29, 1996 to March 28, 1998
(in millions, except per share data)
<TABLE>
<CAPTION>
UNEARNED
COMMON CAPITAL RETAINED TRANSLATION RESTRICTED
TOTAL STOCK SURPLUS EARNINGS ADJUSTMENTS STOCK
----- ------ ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 29, 1996 $ 4,320 $ 646 $ 141 $ 3,783 $ (227) $ (23)
Net income 729 -- -- 729 -- --
Cash dividends -
Common ($.61 per share) (294) -- -- (294) -- --
Auction preferred
($2,981.00 per share) (9) -- -- (9) -- --
ESOP convertible preferred
($4.08 per share) (18) -- -- (18) -- --
Stock issuances -
Business acquisition 18 1 17 -- -- --
Stock option and benefit plans 71 5 66 -- -- --
Restricted stock, less
amortization of $18 18 -- 13 -- -- 5
Reacquired shares (338) (12) (245) (81) -- --
Translation adjustments (274) -- -- -- (274) --
ESOP tax benefit 7 -- -- 7 -- --
ESOP share redemption 6 -- 6 -- -- --
Other 3 -- 2 -- -- 1
-------- ------ ------ -------- ------- -------
Balances at March 29, 1997 4,239 640 -- 4,117 (501) (17)
Net income 280 -- -- 280 -- --
Cash dividends -
Common ($.21 per share) (100) -- -- (100) -- --
Auction preferred
($1,019.93 per share) (3) -- -- (3) -- --
ESOP convertible preferred
($1.36 per share) (6) -- -- (6) -- --
Stock issuances -
Stock option and benefit plans 22 1 21 -- -- --
Restricted stock, less
amortization of $1 1 -- -- -- -- 1
Reacquired shares (55) (2) (36) (17) -- --
Translation adjustments (117) -- -- -- (117) --
ESOP tax benefit 3 -- -- 3 -- --
ESOP share redemption 4 1 3 -- -- --
Other 12 -- 12 -- -- --
-------- ------ ------ -------- ------- -------
Balances at June 28, 1997 4,280 640 -- 4,274 (618) (16)
Net loss (826) -- -- (826) -- --
Cash dividends -
Common ($.67 per share) (317) -- -- (317) -- --
Auction preferred ($458.00 per share) (1) -- -- (1) -- --
ESOP convertible preferred
($4.08 per share) (18) -- -- (18) -- --
Stock issuances -
Business acquisition 9 -- 9 -- -- --
Stock option and benefit plans 69 6 63 -- -- --
Restricted stock, less
amortization of $30 32 2 94 -- -- (64)
Reacquired shares (1,028) (26) (161) (841) -- --
Translation adjustments (198) -- -- -- (198) --
ESOP tax benefit 7 -- -- 7 -- --
ESOP share redemption 5 -- 5 -- -- --
Other (6) -- (10) -- -- 4
-------- ------ ------ -------- ------- -------
Balances at March 28, 1998 $ 2,008 $ 622 $ -- $ 2,278 $ (816) $ (76)
-------- ------ ------ -------- ------- -------
-------- ------ ------ -------- ------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 6
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED MARCH 28, 1998 AND MARCH 29, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------
Mar. 28, Mar. 29,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES -
Net income (loss) $ (826) $ 729
Adjustments for non-cash charges included in net income(loss):
Depreciation 309 367
Amortization of intangibles 139 143
(Decrease) increase in deferred income taxes (377) 13
Restructuring charge 2,040 --
Other (43) (30)
Changes in current assets and liabilities, excluding
businesses acquired and sold (514) (477)
-------- -------
Net cash from operating activities 728 745
-------- -------
INVESTING ACTIVITIES -
Purchases of property and equipment (302) (350)
Acquisitions of businesses and investments (375) (594)
Dispositions of businesses and investments 451 114
Sales of assets 48 40
Other - 11
-------- -------
Net cash used in investing activities (178) (779)
-------- -------
FINANCING ACTIVITIES -
Issuances of common stock 69 71
Purchases of common stock (1,028) (338)
Redemption of preferred stock (200) --
Borrowings of long-term debt 406 353
Repayments of long-term debt (155) (224)
Short-term borrowings, net 603 492
Payments of dividends (336) (321)
-------- -------
Net cash (used in) from financing activities (641) 33
-------- -------
Effect of changes in foreign exchange rates on cash (8) (12)
-------- -------
Decrease in cash and equivalents (99) (13)
Cash and equivalents at beginning of year 272 243
-------- -------
Cash and equivalents at end of quarter $ 173 $ 230
-------- -------
-------- -------
COMPONENTS OF THE CHANGES IN CURRENT ASSETS
AND LIABILITIES:
(Increase) in trade accounts receivable $ (38) $ (175)
(Increase) decrease in inventories (115) 42
(Increase) decrease in other current assets (3) 26
(Decrease) in accounts payable (384) (362)
Increase (decrease) in accrued liabilities 26 (8)
-------- -------
Changes in current assets and liabilities $ (514) $ (477)
-------- -------
-------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 7
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128) became effective for the Corporation in the quarter ended
December 27, 1997. The adoption of SFAS 128 has resulted in the
replacement of the presentation of primary Earnings Per Share (EPS) with
a presentation of basic EPS. The presentation of fully diluted EPS has
been replaced with the presentation of diluted EPS.
Basic EPS excludes dilution and is computed by dividing income applicable
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Corporation.
Diluted EPS is computed similarly to the fully diluted EPS measurement
previously disclosed by the Corporation. A reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation is presented in Exhibit 11
of this document.
All prior period EPS presentations have been restated to comply with SFAS
128.
2. In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) was issued. This statement
establishes standards for the reporting and display of comprehensive income
and its components in a full set of financial statements. SFAS 130 divides
comprehensive income into net income and other comprehensive income. The
measurement and presentation of net income will not change. Other
comprehensive income will present certain changes in the equity of the
Corporation which are currently recognized and separately presented in the
Consolidated Statements of Common Stockholders' Equity. The most
significant of these items is the change in the Translation Adjustments
account.
The Corporation will be required to adopt SFAS 130 beginning in fiscal
1999.
3. In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131) was issued. This statement establishes new standards for the way
companies report information about operating segments and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 is effective
for the Corporation beginning in fiscal 1999; however, early adoption is
permitted. The Corporation currently discloses segment information in
interim financial reports and is currently evaluating the other reporting
requirements of the statement.
Page 8
<PAGE>
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 third
quarter and first nine months of fiscal 1998 compared to comparable periods of
fiscal 1997 and a discussion of the changes in financial condition during the
first nine months of fiscal 1998.
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER FISCAL 1998 TO THIRD QUARTER FISCAL 1997
Operating results by business segment in the third quarter of fiscal 1998 as
compared to the third quarter of fiscal 1997 were as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------------------
(in millions)
Sales Operating Income
--------- ------------------
Mar. 28, Mar. 29, Mar. 28, Mar.29,
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Packaged Meats and Bakery $ 1,865 $ 1,788 $ 112 $ 99
Coffee and Grocery 683 684 102 99
Household and Body Care 492 448 59 49
Personal Products 1,699 1,732 158 158
-------- -------- ------- -------
Total sales and operating income 4,739 4,652 431 405
Intersegment sales (3) (3) ---- ----
Interest, net ---- ---- (44) (39)
Unallocated corporate expense ---- ---- (58) (64)
-------- -------- ------- -------
Net sales and income
before income taxes $ 4,736 $ 4,649 $ 329 $ 302
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
Consolidated net sales increased 1.9% in the third quarter of fiscal 1998.
Businesses acquired net of businesses sold subsequent to the start of the
third quarter of last fiscal year increased net sales by approximately 3.4
percentage points. The strengthening of the U.S. dollar relative to foreign
currencies had the effect of reducing sales by approximately 3.9 percentage
points. Thus, on a comparable basis, sales increased 2.4%.
Operating income increased $26 million or 6.4% in the quarter. The
strengthening of the U.S. dollar relative to other currencies reduced
operating income by approximately 4.7 percentage points. Excluding the
impact of business acquisitions, dispositions and changes in foreign currency
exchange rates, operating income increased 6.1%. As a result of the
restructuring announced in the second quarter of fiscal 1998, operating costs
for the third quarter of fiscal 1998 were reduced by $27 million. See pages
11, 12 and 14 of this document for a more complete discussion of the
restructuring charge.
Net interest expense of $44 million was $5 million higher than that
recognized in the same quarter last year due to higher borrowing levels
offset in part by the impact of the strengthening of the U.S. dollar relative
to foreign currency denominated interest expense.
Page 9
<PAGE>
The decrease in unallocated corporate expense was primarily due to the impact
of the strengthening of the U.S. dollar relative to foreign currency
denominated minority interest expense and improved results from hedging
foreign currency movements.
The income before income taxes recognized in the third quarter of fiscal 1998
was $329 million. The effective tax rate decreased from 32.0% to 31.0% of
pretax income. This decrease is largely due to lower taxes on income earned
outside the United States. Net income increased 10.4% while basic earnings
per share increased 14.3%. Earnings per share increased at a rate in excess
of net income because of lower preferred dividends and fewer shares
outstanding during the period.
Net sales and operating income in the Packaged Meats and Bakery segment
increased 4.3% and 13.0%, respectively. Excluding the impact of acquisitions
and changes in foreign currency exchange rates, sales and operating income
for this segment increased approximately 1% and 10%, respectively.
Improvements in profitability were due to lower raw material costs in U.S.
Meat operations, as well as base business growth and improved gross margins
in North American Bakery operations. Acquisitions of bakery businesses in
Europe and a processed meats business in Mexico also contributed to the
growth in sales and operating income. Excluding acquisitions, unit volumes
for worldwide Packaged Meats rose 1%. Bakery volumes fell 6% as strength in
the U.S. bakery/deli channel was offset by continued weakness in the frozen
retail market. Foodservice units rose 9% during the quarter, lead by
double-digit unit gains in the specialty division, which serves chain
restaurants.
Coffee and Grocery sales decreased 0.2% in the quarter while operating income
increased 2.2%. A stronger U.S. dollar relative to other currencies
negatively impacted the translated results for sales and operating income by
approximately 8 percentage points. Excluding the impact of acquisitions and
changes in foreign currency exchange rates, Coffee and Grocery sales and
operating income increased 8% and 11%, respectively, reflecting an improved
product mix and production efficiencies. Unit volumes for roasted coffee were
down 11% for the quarter due to lower consumption caused by higher coffee
prices.
Net sales and operating income in the Household and Body Care segment
increased 9.9% and 22.1%, respectively. Results benefited from acquisitions
and base business gains in several Household and Body Care product
categories, with particular strength in key European markets. The Direct
Selling division of this segment was also favorably affected by the recent
acquisitions of Nutri-Metics and HomCare Japan. Excluding the effects of
acquisitions and the impact of changes in foreign currency exchange rates,
sales and operating income increased 5% and 26%, respectively. Unit volumes
increased 8% in the quarter, excluding acquisitions.
Personal Products sales declined 1.9% while operating income was flat with
last year's results. The stronger U.S. dollar negatively impacted sales and
operating income of this segment by approximately 2 percentage points.
Excluding acquisitions, dispositions and the impact of changes in foreign
currency exchange rates, sales increased 1% and operating income declined 5%.
Strength in worldwide Intimate Apparel operations and improved margins in
U.S. Legwear were offset by significant price competition in the U.S. screen
print category and reduced demand for Champion's fleece and activewear
products. Worldwide Knit Products unit volume increased 1% and worldwide
Intimate Apparel unit volume increased 13%. These unit volume increases
contributed to domestic market share gains in Knit Products and Intimate
Apparel. Worldwide Legwear unit volumes declined 6%, reflecting continued
market weakness and the company's strategy to exit low-margin product lines.
Page 10
<PAGE>
COMPARISON OF FIRST NINE MONTHS OF FISCAL 1998 TO FIRST NINE MONTHS OF
FISCAL 1997
Operating results by business segment for the first nine months of fiscal
1998 as compared to the first nine months of fiscal 1997 were as follows:
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
---------------------------------------------
(in millions)
Sales Operating Income/(Loss)
------------------- -----------------------
Mar. 28, Mar. 29, Mar. 28, Mar.29,
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Packaged Meats and Bakery $ 5,888 $ 5,712 $ 163 $ 342
Coffee and Grocery 2,080 2,089 251 339
Household and Body Care 1,454 1,319 (20) 143
Personal Products 5,502 5,697 (1,036) 546
-------- -------- -------- -------
Total sales and operating income (loss) 14,924 14,817 (642) 1,370
Intersegment sales (16) (13) --- ---
Interest, net --- --- (127) (126)
Unallocated corporate expense --- --- (114) (172)
-------- -------- -------- -------
Net sales and income (loss)
before income taxes $14,908 $14,804 $ (883) $1,072
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
Consolidated net sales increased 0.7% for the first nine months of fiscal
1998. Businesses acquired net of businesses sold subsequent to the start of
fiscal 1997 increased net sales by approximately 2.0 percentage points. The
strengthening of the U.S. dollar relative to foreign currencies had the
effect of reducing sales by approximately 5.0 percentage points. Thus, on a
comparable basis, sales increased 3.7%.
In the second quarter of fiscal 1998, the Corporation provided for the cost
of restructuring its worldwide operations. The planned restructuring
activities include the disposition of 116 manufacturing and distribution
facilities - 86 facilities are owned and 30 are leased. This restructuring
provision reduced income before income taxes, net income and basic earnings
per share in fiscal 1998 by $2,040 million, $1,625 million and $3.44 per
share, respectively. The fiscal 1998 operating income includes charges for
restructuring as follows: Personal Products - $1,574 million; Packaged Meats
and Bakery - $210 million; Household and Body Care - $185 million; and Coffee
and Grocery - $71 million.
Of the total pretax charge for restructuring, $1,729 million relates to
anticipated losses associated with the disposal of manufacturing and
distribution facilities and related long lived assets; $219 million relates
to recognition of pension and social costs associated with the facility
disposals; $47 million relates to anticipated expenditures to close and
dispose of idled facilities; and $45 million relates to anticipated losses on
the disposal of certain equity and cost method investments. Through March
28, 1998, 12 manufacturing and distribution facilities have been sold and 9
have been closed. The realized loss relating to the disposition of
manufacturing facilities and related long lived assets was $618 million.
Substantially all of the 5,955 individuals impacted by these actions have
become employees of the companies purchasing the facilities. A reconciliation
of the restructuring reserves through March 28, 1998 is presented on page 14
of this document.
Page 11
<PAGE>
Quarterly operating costs in fiscal 1998 are being reduced by $27 million
primarily as a result of lower plant overhead related to the restructuring
charge. The Corporation expects the restructuring to generate increasing
savings in subsequent periods, growing to an annual savings of approximately
$200 million in the year 2001. Savings from the planned actions will be used
both for business building and profit improvement initiatives.
Restructuring actions are expected to be completed by 2000, and the
Corporation expects to fund the costs of the plan from internal sources and
available borrowing capacity. Of the $1,625 million after-tax charge, 11% is
cash related and 89% is non-cash.
Operating income, excluding the restructuring charge, increased $28 million
or 2.1% for the first nine months of fiscal 1998. The strengthening of the
U.S. dollar relative to other currencies reduced operating income by
approximately 6.3 percentage points. Excluding the restructuring charge, the
impact of business acquisitions, dispositions and changes in foreign currency
exchange rates, operating income increased 5%. Net interest expense was
virtually flat with last year as higher borrowing levels were offset by the
strengthening of the U.S. dollar relative to foreign currencies. The decrease
in unallocated corporate expense was primarily due to the impact of the
strengthening of the U.S. dollar relative to foreign currency denominated
minority interest expense and improved results from hedging foreign currency
movements. Excluding the restructuring charge, income before income taxes
increased 7.9%.
The loss before income taxes recognized in the first nine months of fiscal
1998 was $883 million. The effective tax rate on this loss was 6.4% largely
as a result of the write-off of non-deductible intangible assets. Excluding
the restructuring charge, the effective tax rate decreased from 32.0% to
31.0% of pretax income. This decrease is largely due to lower taxes on
income earned outside the United States. Excluding the restructuring charge,
net income increased 9.5% while basic earnings per share increased 12.8%.
Earnings per share, excluding the restructuring charge, increased at a rate
in excess of net income because of lower preferred dividends and fewer shares
outstanding during the period. Including the restructuring charge, the
Corporation recognized a net loss of $826 million or $1.77 per share.
The following comments regarding business segment performance exclude the
impact of the restructuring charge noted above.
Net sales and operating income in the Packaged Meats and Bakery segment
increased 3.1% and 9.1%, respectively. Excluding the impact of acquisitions
and changes in foreign currency exchange rates, sales and operating income
for this segment increased approximately 2% and 10%, respectively.
Improvements in profitability were due to lower raw material costs in U.S.
Meat operations, as well as base business growth. Acquisitions of bakery
businesses in Europe and a processed meats business in Mexico also
contributed to the growth in sales and operating income. Excluding
acquisitions, unit volumes for worldwide Packaged Meats rose 1%, Bakery
volumes fell 3% and Foodservice units increased 7%.
Coffee and Grocery sales and operating income declined 0.4% and 4.9%,
respectively. A stronger U.S. dollar relative to other currencies negatively
impacted the translated results for sales and operating income by
approximately 12 percentage points. Excluding the impact of acquisitions and
changes in foreign currency exchange rates, Coffee and Grocery sales and
operating income increased 11% and 8%, respectively. Unit volumes for roasted
coffee were down 8% for the first nine months of fiscal 1998 due to lower
consumption caused by higher coffee prices.
Page 12
<PAGE>
Net sales and operating income in the Household and Body Care segment
increased 10.3% and 15.4%, respectively. Results benefited from acquisitions
and base business gains in several Household and Body Care product
categories, with particular strength in key European markets. The Direct
Selling division of this segment was also favorably affected by the recent
acquisitions of Nutri-Metics and HomCare Japan. Excluding the effects of
acquisitions and the impact of changes in foreign currency exchange rates,
sales and operating income increased 8% and 18%, respectively. Unit volumes
increased 11%, excluding acquisitions.
Personal Products sales and operating income declined 3.4% and 1.5%,
respectively. The stronger U.S. dollar negatively impacted sales and
operating income of this segment by approximately 3 percentage points.
Excluding acquisitions, dispositions and the impact of changes in foreign
currency exchange rates, sales increased 2% while operating income declined
4%. Profit improvements in Intimate Apparel and socks were offset by weakness
in sheer hosiery, accessories and Champion's fleece and activewear products.
Unit volumes for worldwide Knit Products and Intimate Apparel increased 7%
and 8%, respectively, while worldwide Legwear unit volumes declined 3%.
For the nine months ended March 28, 1998, approximately 2% of the
Corporation's sales and pretax profits, excluding the restructuring charge,
were derived from Asia. The recent financial problems in the area have not
had a material impact on the consolidated results of the Corporation.
FINANCIAL CONDITION
During the first nine months of fiscal 1998, net cash from operating
activities was $728 million as compared to $745 million in the comparable
period of fiscal 1997. Higher working capital requirements were largely
responsible for the decline in operating cash flow.
Net cash expended for investing activities was $178 million in the first nine
months of fiscal 1998 as compared to $779 million in the previous year. The
decrease in net expenditures is primarily due to the cash received upon the
disposition of businesses and lower expenditures for acquisitions of
businesses and investments in fiscal 1998.
During the first nine months of fiscal 1998, cash and equivalents decreased
by $99 million to $173 million while borrowings produced a cash inflow of
$854 million. During fiscal 1998, the Corporation redeemed $200 million of
auction preferred stock at book value. In addition, 19.2 million shares of
the Corporation's outstanding common stock were repurchased for $1,028
million.
SUBSEQUENT EVENT
On April 7, 1998, the Corporation announced plans to sell its international
cut tobacco business, Douwe Egberts Van Nelle Tobacco, to Imperial Tobacco
Group PLC, a major tobacco company based in the United Kingdom. Cash
proceeds of approximately $370 million are expected to be received at the
anticipated closing in the first quarter of fiscal 1999. In addition, the
Corporation has agreed not to compete with the purchaser in the tobacco
business for a period of 5 years. Additional cash payments may be received
beginning in fiscal 2004; however, these payments are dependent upon
significant contingencies related to the ongoing operation of the sold
business. Receipt of these contingent payments is not assured.
The tobacco business is not a significant subsidiary of the Corporation.
Page 13
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
RECONCILIATION OF RESTRUCTURING RESERVES
AS OF MARCH 28, 1998
(in millions)
<TABLE>
<CAPTION>
WRITEDOWN
OF PROPERTY RECOGNITION OF
AND INVESTMENTS CURTAILMENT RESTRUCTURING
ORIGINAL TO NET LOSS AND SPECIAL FOREIGN RESERVES
RESTRUCTURING REALIZABLE TERMINATION CASH EXCHANGE AS OF
RESERVES VALUE BENEFITS PAYMENTS IMPACTS MARCH 28, 1998
------------- --------------- ---------------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Anticipated losses associated
with disposal of long-lived
assets $ 1,729 $ (1,729) $ -- $ -- $ -- $ --
Pension and social costs 219 -- (39) (5) -- 175
Anticipated expenditures to
close and dispose of idled
facilities - includes
non-cancelable lease obligations 47 -- -- (5) -- 42
Anticipated loss associated with
the disposal of equity and cost
method investments 45 (45) -- -- -- --
------------- --------------- ---------------- -------- -------- --------------
2,040 (1,774) (39) (10) -- 217
Foreign exchange impacts -- -- -- -- (6) (6)
------------- --------------- ---------------- -------- -------- --------------
Total restructuring reserves $ 2,040 $ (1,774) $ (39) $ (10) $ (6) $ 211
------------- --------------- ---------------- -------- -------- --------------
------------- --------------- ---------------- -------- -------- --------------
</TABLE>
Page 14
<PAGE>
PART II
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 17
12.1 Computation of Ratio of Earnings to
Fixed Charges 19
12.2 Computation of Ratio of Earnings to
Fixed Charges and Preferred Stock
Dividend Requirements 20
27 Financial Data Schedule 21
</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 15
<PAGE>
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
Vice President and
Controller
DATE: May 11, 1998
Page 16
<PAGE>
EXHIBIT 11
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED MARCH 28, 1998
_______________________________________________________________
BASIC DILUTED
_____________________________ ___________________________
Thirteen Thirty-Nine Thirteen Thirty-Nine
Weeks Weeks Weeks Weeks
_________ ___________ __________ _____________
<S> <C> <C> <C> <C>
EARNINGS:
Net Income (Loss) $ 227 $ (826) $ 227 $ (826)
Less: Dividends on Preferred Stocks,
net of tax benefits (4) (12) --- (12)
Adjustment attributable to conversion of ESOP
Convertible Preferred Stock --- --- (1) ---
________ ___________ ________ _________
Net Income (Loss) Applicable to Common Stockholders $ 223 $ (838) $ 226 $ (838)
________ ___________ ________ _________
________ ___________ ________ _________
SHARES:
Weighted Average Shares Outstanding 467 472 467 472
Add: Common Stock Equivalents -
Stock Options --- --- 8 ---
ESOP Convertible Preferred Stock --- --- 17 ---
Restricted stock and other --- --- 2 ---
________ ___________ ________ _________
Adjusted Weighted Average Shares Outstanding 467 472 494 472
________ ___________ ________ _________
________ ___________ ________ _________
NET INCOME (LOSS) PER COMMON SHARE $ 0.48 $ (1.77) $ 0.46 $ (1.77)
________ ___________ ________ _________
________ ___________ ________ _________
</TABLE>
Page 17
<PAGE>
EXHIBIT 11
(Continued)
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED MARCH 29, 1997
_______________________________________________________________
BASIC DILUTED
_____________________________ ___________________________
Thirteen Thirty-Nine Thirteen Thirty-Nine
Weeks Weeks Weeks Weeks
_________ ___________ __________ _____________
<S> <C> <C> <C> <C>
EARNINGS:
Net income $ 206 $ 729 $ 206 $ 729
Less: Dividends on Preferred Stocks,
net of tax benefits (7) (20) (3) (9)
Adjustment attributable to conversion of
ESOP Convertible Preferred Stock -- -- (1) (4)
___________ _________ _________ _________
Net Income Available for Common Stockholders $ 199 $ 709 $ 202 $ 716
___________ _________ _________ _________
___________ _________ _________ _________
SHARES:
Weighted Average Shares Outstanding 478 480 478 480
Add: Common Stock Equivalents -
Stock options -- -- 3 3
ESOP Convertible Preferred Stock -- -- 18 18
Restricted stock and other -- -- 2 2
___________ _________ _________ _________
Adjusted Weighted Average Shares Outstanding 478 480 501 503
___________ _________ _________ _________
___________ _________ _________ _________
NET INCOME PER COMMON SHARE $ 0.42 $ 1.48 $ 0.40 $ 1.42
___________ _________ _________ _________
___________ _________ _________ _________
</TABLE>
Page 18
<PAGE>
EXHIBIT 12.1
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS EXCEPT RATIOS)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
_______________________________
Mar. 28, Mar. 29,
1998 (1) 1997
____________ ______________
<S> <C> <C>
Fixed charges:
Interest expense $ 164 $ 156
Interest portion of rental expense 47 49
_______ _________
Total fixed charges before capitalized interest 211 205
Capitalized interest 10 9
_______ _________
Total fixed charges $ 221 $ 214
_______ _________
_______ _________
Earnings available for fixed charges:
Income(loss) before income taxes $ (883) $ 1,072
Less undistributed income in minority-owned companies (5) (5)
Add minority interest in majority-owned subsidiaries 20 23
Add amortization of capitalized interest 16 17
Add fixed charges before capitalized interest 211 205
_______ _________
Total earnings(losses) available for fixed charges $ (641) $ 1,312
_______ _________
_______ _________
Ratio of earnings(losses) to fixed charges (2.9) 6.1
_______ _________
_______ _________
</TABLE>
(1) During the second quarter of fiscal 1998, the Corporation recorded a pretax
charge of $2.0 billion in connection with various restructuring actions.
Page 19
<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>
Thirty-Nine Weeks Ended
____________________________
Mar. 28, Mar. 29,
1998 (1) 1997
____________ ___________
<S> <C> <C>
Fixed charges and preferred stock dividend requirements:
Interest expense $ 164 $ 156
Interest portion of rental expense 47 49
________ _________
Total fixed charges before capitalized interest
and preferred stock dividend requirements 211 205
Capitalized interest 10 9
Preferred stock dividend requirements (2) 19 31
________ _________
Total fixed charges and preferred stock
dividend requirements $ 240 $ 245
________ _________
________ _________
Earnings available for fixed charges and preferred
stock dividend requirements:
Income(loss) before income taxes $ (883) $ 1,072
Less undistributed income in minority-owned companies (5) (5)
Add minority interest in majority-owned subsidiaries 20 23
Add amortization of capitalized interest 16 17
Add fixed charges before capitalized interest and
preferred stock dividend requirements 211 205
________ _________
Total earnings(losses) available for fixed charges and
preferred stock dividend requirements $ (641) $ 1,312
________ _________
________ _________
Ratio of earnings(losses) to fixed charges and preferred stock
dividend requirements (2.7) 5.4
________ _________
________ _________
</TABLE>
(1) During the second quarter of fiscal 1998, the Corporation recorded a pretax
charge of $2.0 billion in connection with various restructuring actions.
(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 20
<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> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 154
<SECURITIES> 19
<RECEIVABLES> 2,047
<ALLOWANCES> 204
<INVENTORY> 2,963
<CURRENT-ASSETS> 5,285
<PP&E> 5,304
<DEPRECIATION> 3,167
<TOTAL-ASSETS> 11,167
<CURRENT-LIABILITIES> 5,908
<BONDS> 2,080
0
44
<COMMON> 622
<OTHER-SE> 1,386
<TOTAL-LIABILITY-AND-EQUITY> 11,167
<SALES> 14,908
<TOTAL-REVENUES> 14,908
<CGS> 9,237
<TOTAL-COSTS> 9,237
<OTHER-EXPENSES> 2,040
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 127
<INCOME-PRETAX> (883)
<INCOME-TAX> 57
<INCOME-CONTINUING> (826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (826)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)
</TABLE>
