<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 27, 1999
-------------------------------------------------
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 27, 1999, the Registrant had 903,480,492 outstanding shares of
common stock $.01 par value, which is the Registrant's only class of common
stock.
The document contains 27 pages.
Page 1
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I -
FINANCIAL STATEMENTS -
Preface 3
Condensed Consolidated Balance Sheets -
At March 27, 1999 and June 27, 1998 4
Consolidated Statements of Income -
For the thirteen and thirty-nine weeks ended
March 27, 1999 and March 28, 1998 5
Consolidated Statements of Common Stockholders' Equity -
For the period June 28, 1997 to March 27,1999 6
Consolidated Statements of Cash Flows -
For the thirty-nine weeks ended March 27, 1999
and March 28, 1998 7
Notes to Consolidated Financial Statements 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 9
PART II -
ITEM 1. - LEGAL PROCEEDINGS 20
ITEM 2. - CHANGES IN SECURITIES 20
ITEM 5. - OTHER INFORMATION 20
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURE 22
EXHIBIT 11 - Computation of Net Income Per Common Share 23
EXHIBIT 12.1 - Computation of Ratio of Earnings to Fixed Charges 25
EXHIBIT 12.2 - Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividend Requirements 26
EXHIBIT 27 - Financial Data Schedule 27
</TABLE>
Page 2
<PAGE>
PART I
SARA LEE CORPORATION AND SUBSIDIARIES
PREFACE
The consolidated financial statements for the thirteen and thirty-nine weeks
ended March 27, 1999 and March 28, 1998 and the balance sheet as of March 27,
1999 included herein have not been audited 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 27, 1999 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 27, 1999 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 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 consolidated financial statements and notes thereto
included in the Corporation's Form 10-K for the year ended June 27, 1998.
Page 3
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 27, 1999 AND JUNE 27, 1998
(in millions)
<TABLE>
<CAPTION>
March 27, June 27,
1999 1998
------------------- --------------------
ASSETS
<S> <C> <C>
Cash and equivalents $ 232 $ 273
Trade accounts receivable, less allowances 1,850 1,800
Inventories:
Finished goods 1,711 1,809
Work in process 428 443
Materials and supplies 485 630
------------------- --------------------
2,624 2,882
Other current assets 353 265
------------------- --------------------
Total current assets 5,059 5,220
Trademarks and other assets 504 501
Property, net 1,996 2,090
Intangible assets, net 3,021 3,178
------------------- --------------------
$ 10,580 $ 10,989
------------------- --------------------
------------------- --------------------
LIABILITIES AND EQUITY
Notes payable $ 967 $ 586
Accounts payable 1,624 2,003
Accrued liabilities 2,822 2,923
Current maturities of long-term debt 283 221
------------------- --------------------
Total current liabilities 5,696 5,733
Long-term debt 1,998 2,270
Deferred income taxes 39 22
Other liabilities 542 538
Minority interests in subsidiaries 562 560
ESOP convertible preferred stock 270 305
Unearned deferred compensation (214) (255)
Common stockholders' equity 1,687 1,816
------------------- --------------------
$ 10,580 $ 10,989
------------------- --------------------
------------------- --------------------
</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 27, 1999 AND MARCH 28, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------- ---------------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 4,664 $ 4,736 $ 14,810 $ 14,908
------------- ------------- ------------- ------------
Cost of sales 2,818 2,904 9,013 9,237
Selling, general and administrative expenses 1,466 1,459 4,488 4,387
Interest expense 59 55 173 164
Interest income (24) (11) (71) (37)
Product recall charge -- -- 76 --
Gain on sale of business -- -- (137) --
Restructuring charge -- -- -- 2,040
------------- ------------- ------------- ------------
4,319 4,407 13,542 15,791
------------- ------------- ------------- ------------
Income (loss) before income taxes 345 329 1,268 (883)
Income tax (expense) benefit (100) (102) (363) 57
------------- ------------- ------------- ------------
Net income (loss) 245 227 905 (826)
Preferred dividends, net of tax 3 4 9 12
------------- ------------- ------------- ------------
Net income (loss) applicable to common stockholders $ 242 $ 223 $ 896 $ (838)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Net income (loss) per common share - basic $ 0.27 $ 0.24 $ 0.99 $ (0.89)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Average shares outstanding 903 934 908 944
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Net income (loss) per common share - diluted $ 0.26 $ 0.23 $ 0.95 $ (0.89)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Average shares outstanding 947 988 953 944
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Cash dividends per common share $ 0.125 $ 0.115 $ 0.365 $ 0.335
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 28, 1997 TO MARCH 27, 1999
(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 28, 1997 $ 4,280 $ 640 $ -- $ 4,274 $ (618) $ (16)
Net loss (826) -- -- (826) -- --
Cash dividends -
Common ($.335 per share) (317) -- -- (317) -- --
Auction preferred ($458.00 per share) (1) -- -- (1) -- --
ESOP convertible preferred
($4.08 per share) (18) -- -- (18) -- --
Stock issuances -
Business acquisitions 9 -- 9 -- -- --
Stock option and benefit plans 69 6 63 -- -- --
Restricted stock, less
amortization of $30 32 2 94 -- -- (64)
Reacquired shares (1,028) (26) (161) (841) -- --
Translation adjustments (198) -- -- -- (198) --
ESOP tax benefit 7 -- -- 7 -- --
ESOP share redemption 5 -- 5 -- -- --
Other (6) -- (10) -- -- 4
--------- ------------ ----------- ----------- ------------- ---------
Balances at March 28, 1998 2,008 622 -- 2,278 (816) (76)
Net income 303 -- -- 303 -- --
Cash dividends -
Common ($.115 per share) (106) -- -- (106) -- --
ESOP convertible preferred
($1.36 per share) (5) -- -- (5) -- --
Stock issuances -
Stock option and benefit plans 17 2 15 -- -- --
Restricted stock, less
amortization of $12 2 (1) (27) -- -- 30
Reacquired shares (472) (10) (25) (437) -- --
Translation adjustments 32 -- -- -- 32 --
ESOP tax benefit 3 -- -- 3 -- --
ESOP share redemption 4 1 3 -- -- --
Other 30 -- 34 -- -- (4)
--------- ------------ ----------- ----------- ------------- ---------
Balances at June 27, 1998 1,816 614 -- 2,036 (784) (50)
Net income 905 -- -- 905 -- --
Cash dividends -
Common ($.365 per share) (332) -- -- (332) -- --
ESOP convertible preferred
($4.08 per share) (15) -- -- (15) -- --
Stock issuances -
Business acquisitions 9 -- 9 -- -- --
Stock option and benefit plans 88 4 84 -- -- --
Restricted stock, less
amortization of $24 24 -- (8) -- -- 32
Reacquired shares (810) (12) (396) (402) -- --
Translation adjustments (28) -- -- -- (28) --
ESOP tax benefit 6 -- -- 6 -- --
ESOP share redemption 35 2 33 -- -- --
Two-for-one stock split -- 609 -- (609) -- --
Change in common stock par value
($1.33 1/3 per share to $.01 per share) -- (1,208) 1,208 -- -- --
Other (11) -- (11) -- -- --
--------- ------------ ----------- ----------- ------------- ---------
Balances at March 27, 1999 $ 1,687 $ 9 $ 919 $ 1,589 $ (812) $ (18)
--------- ------------ ----------- ----------- ------------- ---------
--------- ------------ ----------- ----------- ------------- ---------
</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 27, 1999 AND MARCH 28, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------------
March 27, March 28,
1999 1998
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES -
Net income (loss) $ 905 $ (826)
Adjustments for non-cash charges included in net income (loss):
Depreciation 280 309
Amortization of intangibles 139 139
Increase (decrease) in deferred income taxes 18 (377)
Product recall charge 76 -
Gain on sale of business (137) -
Restructuring charge - 2,040
Other (2) (43)
Changes in current assets and liabilities, excluding
businesses acquired and sold (435) (514)
---------------- ----------------
Net cash from operating activities 844 728
---------------- ----------------
INVESTMENT ACTIVITIES -
Purchases of property and equipment (330) (302)
Acquisitions of businesses and investments (203) (375)
Disposition of businesses and investments 412 451
Sales of assets 157 48
Other 3 -
---------------- ----------------
Net cash from (used in) investment activities 39 (178)
---------------- ----------------
FINANCING ACTIVITIES -
Issuances of common stock 88 69
Purchases of common stock (810) (1,028)
Redemption of preferred stock - (200)
Borrowings of long-term debt 20 406
Repayments of long-term debt (241) (155)
Short-term borrowings, net 378 603
Payments of dividends (347) (336)
---------------- ----------------
Net cash used in financing activities (912) (641)
---------------- ----------------
Effect of changes in foreign exchange rates on cash (12) (8)
---------------- ----------------
Decrease in cash and equivalents (41) (99)
Cash and equivalents at beginning of year 273 272
---------------- ----------------
Cash and equivalents at end of quarter $ 232 $ 173
---------------- ----------------
---------------- ----------------
COMPONENTS OF CHANGES IN CURRENT ASSETS
AND LIABILITIES:
(Increase) in trade accounts receivable $ (105) $ (38)
Decrease (increase) in inventories 149 (115)
(Increase) in other current assets (90) (3)
(Decrease) in accounts payable (381) (384)
(Decrease) increase in accrued liabilities (8) 26
---------------- ----------------
Changes in current assets and liabilities $ (435) $ (514)
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 7
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. On December 22,1998, the Corporation announced that it was recalling
specific production lots of hot dogs and other packaged meat products
that could contain listeria bacteria. The estimated cost of this action
was recognized in the second quarter of fiscal 1999 and reduced income
before income taxes, net income and diluted earnings per share by $76
million, $50 million and $.05 per share, respectively in the nine months
ended March 27, 1999. The recall charge recognized the estimated costs
associated with the return and destruction of affected products sold
through retail grocery stores and selected foodservice channels in the
United States, the destruction of affected inventory in the Corporation's
Zeeland, Michigan facility, and liabilities incurred as a result of these
actions. During the third quarter of fiscal 1999, substantially all of
the product and inventory subject to the recall was destroyed. The
actual costs of the inventory destroyed and related disposition costs
were consistent with prior estimates.
2. In the first quarter of fiscal 1999, as part of its ongoing restructuring
program, the Corporation disposed of certain assets of the Coffee and Tea
segment related primarily to its international tobacco operations. The
Corporation received cash proceeds of $386 million in connection with the
sale and recognized a pretax gain of $137 million which increased net
income by $97 million or $.10 per share on a diluted basis in the nine
months ended March 27, 1999. Additional cash payments may be received
beginning in fiscal 2004; however, these payments are dependent upon the
outcome of significant contingencies related to the ongoing operation of
the sold business. Receipt of these contingent payments is not assured.
3. On October 29, 1998, the Corporation declared a two-for-one stock split
in the form of a 100% stock dividend effective as of December 1, 1998.
Common share data in the accompanying consolidated financial statements
gives effect to the stock split for all periods presented.
4. The components of comprehensive income, net of related tax effects, for
the thirteen and thirty-nine weeks ended March 27, 1999 and March 28,
1998 are as follows (in millions):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ ------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 245 $ 227 $ 905 $ (826)
Foreign currency translation
adjustment (201) (65) (28) (198)
--------- --------- --------- ---------
Comprehensive income (loss) $ 44 $ 162 $ 877 $ (1,024)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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 1999 compared to the third quarter and first
nine months of fiscal 1998, and a discussion of the changes in financial
condition during the first nine months of fiscal 1999.
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER FISCAL 1999 TO THIRD QUARTER FISCAL 1998
Operating results by business segment in the third quarter of fiscal 1999
compared to the third quarter of fiscal 1998 are as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------------------------
(in millions)
Sales Operating Income (1)
------------------------- -------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 1,134 $ 1,245 $ 102 $ 94
Coffee & Tea 627 683 95 102
Household and Body Care 509 492 68 59
Foodservice 654 648 20 18
Branded Apparel 1,770 1,699 159 158
---------- ---------- ---------- ----------
Total business segments 4,694 4,767 444 431
Intersegment sales (30) (31) -- --
---------- ---------- ---------- ----------
Net sales and operating income $ 4,664 $ 4,736 $ 444 $ 431
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pretax Income (1) Net Income
------------------------- -------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 96 $ 86 $ 60 $ 53
Coffee & Tea 93 98 66 68
Household and Body Care 61 51 41 33
Foodservice 18 16 12 10
Branded Apparel 141 136 111 102
---------- ---------- ---------- ----------
Total business segments 409 387 290 266
Unallocated corporate expense (64) (58) (45) (39)
---------- ---------- ---------- ----------
Pretax income and net income $ 345 $ 329 $ 245 $ 227
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) The difference between operating and pretax income for each business
segment is net interest expense. The Corporation's net interest expense is
allocated to each segment based on the average invested capital of each
business.
Page 9
<PAGE>
CONSOLIDATED RESULTS - THIRD QUARTER FISCAL 1999 COMPARED WITH THIRD QUARTER
FISCAL 1998
Consolidated net sales in the third quarter decreased 1.5% over the year ago
period. The effect on reported sales of businesses acquired net of businesses
sold subsequent to the start of the third quarter of last fiscal year was less
than 0.1%. Changes in foreign currencies had the effect of improving reported
sales by approximately 0.5 percentage points. The strengthening in the quarter
of many European currencies versus the U.S. dollar more than offset declines in
the currencies of Mexico, South Africa, Canada and certain Pacific Rim and Asian
countries. Excluding the impact of acquisitions, dispositions and foreign
currency changes, sales decreased 2.0% over the same quarter in the prior year.
The gross profit margin was 39.6% in the third quarter of fiscal 1999 compared
with 38.7% in the third quarter of fiscal 1998. Higher gross profit margins in
the Sara Lee Foods, Coffee and Tea, Household and Body Care and Foodservice
segments were responsible for the increase. Branded Apparel gross profit margins
declined from the prior year quarter. Selling, general and administrative
expenses increased 0.5% over the same quarter last year due to the impact of
inflation on salaries and other personnel costs offset in part by lower media,
advertising and promotion costs and efficiencies associated with corporate-wide
programs to reduce general and administrative expenses.
Operating income, increased 3.1% in the quarter, reflecting the gross profit
margin improvement noted above. Excluding the impact of divestitures, net of
new acquisitions completed subsequent to the start of the third quarter of last
fiscal year, operating income increased 5.9%. Changes in foreign currency
exchange rates had the effect of improving operating income by approximately 1.1
percentage points. Excluding the impact of business acquisitions, dispositions
and changes in foreign currency exchange rates, operating income increased 4.8%.
Net interest expense decreased $9 million to $35 million in the quarter. The
lower level of net interest expense was due to strong operating cash flows in
the fourth quarter of fiscal 1998 and the first nine months of fiscal 1999,
along with the sale of the Corporation's international tobacco operations in the
first quarter of fiscal 1999. Unallocated corporate expenses increased $6
million to $64 million from the year ago quarter.
Income before income taxes increased 4.9%. The effective tax rate decreased
from 31% to 29% of pretax income in the quarter, primarily as a result of
increased earnings in certain foreign jurisdictions that had lower tax rates.
Net income increased 7.9%, while diluted earnings per share increased 13%.
Earnings per share increased at a rate in excess of net income because of fewer
average shares outstanding during the period.
OPERATING RESULTS BY BUSINESS SEGMENT - THIRD QUARTER FISCAL 1999 COMPARED WITH
THIRD QUARTER FISCAL 1998
Net sales in the Sara Lee Foods segment declined in the quarter by 8.9%,
partially reflecting the impact of lower processed meat commodity costs, which
resulted in lower prices to customers. Sales were also affected by the recall of
packaged meat products produced at the Corporation's Bil Mar Foods plant in
Zeeland, Michigan and the temporary closure of that plant. Excluding the impact
of acquisitions, dispositions and changes in foreign currencies, sales in this
segment declined 9.8%. Excluding acquisitions, Packaged Meats unit volumes were
down 7%, as increases at many U.S. meat divisions were offset by volume declines
at Bil Mar. Excluding Bil Mar, meat unit volumes increased 5% in the U.S. and
3% worldwide. Worldwide unit sales for Sara Lee Bakery, excluding acquisitions,
were down 1%, as gains in the growing U.S. bakery-deli and fresh baked segments
were offset by declines in Europe. Including acquisitions, Packaged Meats unit
sales declined 6% and Bakery volumes increased 4%.
Page 10
<PAGE>
Operating income in the Sara Lee Foods segment increased 7.9% despite the
decline in sales. Substantially lower media, advertising and promotion
expenditures in the processed meats business, continued low commodity costs for
processed meats, increased efficiencies resulting from the fiscal 1998
restructuring program, and improved product mix more than offset lower profits
resulting from the decline in segment sales. Excluding the impact of
acquisitions, dispositions and changes in foreign currencies, operating income
increased 6.8%. Pretax income increased 11%, or $10 million, resulting from the
operating income improvement noted above and a $2 million reduction in the
segment's net interest expense allocation. The effective tax rate of the
segment declined to 37% and net income grew 13.1% to $60 million.
Net sales in the Coffee and Tea segment declined 8.2%. Excluding the results of
the tobacco operations disposed of earlier this fiscal year and acquisitions
made subsequent to the start of the third quarter of last fiscal year, sales
declined 5.1%. The strengthening of many European currencies versus the U.S.
dollar subsequent to the start of the third quarter of last fiscal year
increased reported sales by 2.3%. Thus, on a comparable basis, sales declined
7.4%, reflecting lower prices to customers as a result of declines in commodity
coffee costs. Excluding acquisitions, unit volumes for roasted coffee and
coffee concentrates, the segment's primary business, were flat. Unit volumes
grew 19% including sales contributed from recently acquired businesses in Brazil
and the United States.
Operating income for the Coffee and Tea segment declined 7.1% reflecting the
impact of the divestment of the international tobacco operations in the first
quarter of fiscal 1999. Excluding the impact of divestitures, net of new
acquisitions completed subsequent to the start of the third quarter of last
fiscal year, operating income increased 3.3%. Changes in foreign currency
exchange rates had the effect of improving operating income of this segment by
3.6 percentage points, as many European currencies strengthened in relation to
the U.S. dollar. Segment net income declined 2.6% to $66 million, reflecting
the operating income decline noted above, offset in part by reductions in the
net interest expense allocation and the effective tax rate of the segment to
28.5% from 31.1% in the year ago quarter.
Net sales in the Household and Body Care segment increased 3.3% and operating
income increased 14.0%. The weakening of certain foreign currencies relative to
the U.S. dollar, primarily in Mexico and South Africa, reduced reported sales
and operating income by 0.4% and 1.6%, respectively. Excluding the impact of
acquisitions, dispositions and changes in foreign currencies, Household and Body
Care sales and operating income increased 3.2% and 13.6%, respectively. Unit
volumes for this segment's four core categories - shoe care, body care,
insecticides and air fresheners - grew 6% in the quarter including acquisitions,
and 3% excluding acquisitions. Operating income was favorably impacted by lower
overhead costs resulting from the ongoing restructuring program. Pretax income
of the segment increased 18.3% and net income increased 20.4% to $41 million.
Net sales in the Foodservice segment increased 0.9% including the impact of
acquisitions and were flat excluding acquisitions. Excluding acquisitions, unit
volumes were flat, reflecting gains from continuing operations offset by the
loss of a large, lower-margin chain customer. Including acquisitions, unit
volumes grew 2%. Operating income grew 17.7% to $20 million. These results
benefited from an improved customer mix and continued focus on cost containment.
Pretax income grew 18.6% and net income grew 20.2% to $12 million, as the
effective tax rate of this segment declined approximately 0.9 percentage points
to 36.5%.
Page 11
<PAGE>
Branded Apparel sales and operating income grew 4.2% and 1.2 %, respectively.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, sales increased 3.3% and operating income increased 1.3%. Unit
volumes for Worldwide Legwear increased 3%, combining a 16% increase in sock
unit sales with a 1% decline in sheer hosiery volumes. Worldwide Knit Products
unit sales increased 14% over the year ago quarter, including 14% and 13% gains
in the underwear and activewear categories, respectively. Intimate Apparel unit
sales increased 6%, with strength in both the United States and Europe.
Pretax income in the Branded Apparel segment improved 4.5% in the quarter. This
increase was the result of the operating income improvement noted above and the
reduction of the net interest expense allocated to this business segment
resulting from a lower level of invested capital due to ongoing restructuring
efforts. The effective tax rate of the Branded Apparel segment declined from
24.6% to 21.4%, resulting primarily from increased earnings in certain foreign
jurisdictions that had lower tax rates. Segment net income increased 8.9% as a
result of improved operating income, the reduced net interest expense
allocation, and the lower effective tax rate.
COMPARISON OF FIRST NINE MONTHS OF FISCAL 1999 TO FIRST NINE MONTHS OF FISCAL
1998
Operating results by business segment in the first nine months of fiscal 1999
compared to the first nine months of fiscal 1998 are as follows:
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------------------------------------
(in millions)
SALES OPERATING INCOME (1)(2)
------------------------- -------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 3,917 $ 4,075 $ 281 $ 106
Coffee & Tea 1,966 2,080 447 252
Household and Body Care 1,479 1,454 178 (21)
Foodservice 1,982 1,903 66 58
Branded Apparel 5,568 5,502 532 (1,037)
---------- ---------- ---------- -----------
Total business segments 14,912 15,014 1,504 (642)
Intersegment sales (102) (106) -- --
---------- ---------- ---------- -----------
Net sales and operating income $ 14,810 $ 14,908 $ 1,504 $ (642)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
<CAPTION>
PRETAX INCOME (1)(2) NET INCOME (2)
------------------------- -------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 264 $ 84 $ 164 $ 47
Coffee & Tea 438 241 312 169
Household and Body Care 158 (42) 104 (72)
Foodservice 61 54 39 34
Branded Apparel 481 (1,106) 378 (928)
---------- ---------- ---------- -----------
Total business segments 1,402 (769) 997 (750)
Unallocated corporate expense (134) (114) (92) (76)
---------- ---------- ---------- -----------
Pretax income (loss)
and net income (loss) $ 1,268 $ (883) $ 905 $ (826)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
(1) The difference between operating and pretax income for each business
segment is net interest expense. The Corporation's net interest expense is
allocated to each segment based on the average invested capital of each
business.
(2) Reported results include the fiscal 1999 product recall charge and gain on
sale of the Corporation's tobacco operations and the fiscal 1998
restructuring charge. These items are discussed elsewhere in Management's
Discussion and Analysis of Results of Operations.
Page 12
<PAGE>
CONSOLIDATED RESULTS - FIRST NINE MONTHS OF FISCAL 1999 COMPARED WITH FIRST NINE
MONTHS OF FISCAL 1998
Consolidated net sales decreased 0.7% in the first nine months of fiscal 1999.
Businesses acquired net of businesses sold subsequent to the start of fiscal
1998 increased sales by approximately 0.2 percentage points. The overall
strengthening of the U.S. dollar relative to foreign currencies during the first
nine months of the fiscal year had the effect of reducing reported sales by
approximately 0.2 percentage points. While many European currencies have
strengthened versus the U.S. dollar in the period, declines in the currencies of
Mexico, Australia, South Africa and Canada, as well as certain Asian currencies
offset the overall strength of currencies in Europe. Excluding the impact of
acquisitions, dispositions and foreign currency changes, sales decreased
approximately 0.7% over the same period in the prior year.
The gross profit margin was 39.1% in fiscal 1999 compared with 38.0% in fiscal
1998, reflecting improved gross margins in the Sara Lee Foods, Coffee and Tea,
Household and Body Care and Foodservice segments. Branded Apparel gross profit
margins were down slightly from the prior year. Selling, general and
administrative expenses increased 2.3% over the same period last year. This
increase was due to higher media, advertising and promotion expenses in the
first nine months of fiscal 1999 as well as the impact of inflation on salaries
and other personnel costs partially offset by efficiencies associated with
corporate-wide programs to reduce general and administrative costs.
On December 22,1998, the Corporation announced that it was recalling specific
production lots of hot dogs and other packaged meat products that could contain
listeria bacteria. The estimated cost of this action was recognized in the
second quarter of fiscal 1999 and reduced income before income taxes, net income
and diluted earnings per share by $76 million, $50 million and $.05 per share,
respectively in the nine-month period ended March 27, 1999. The recall charge
recognized the estimated costs associated with the return and destruction of
affected products sold through retail grocery stores and selected foodservice
channels in the United States, the destruction of affected inventory in the
Corporation's Zeeland, Michigan facility and liabilities incurred as a result of
these actions.
In the first quarter of fiscal 1999, as part of its ongoing restructuring
program, the Corporation disposed of certain assets of the Coffee and Tea
segment related primarily to its international tobacco operations. The
Corporation received cash proceeds of $386 million in connection with the sale
and recognized a pretax gain of $137 million which increased net income by $97
million or $.10 per common share on a diluted basis in the nine-month period
ended March 27, 1999.
In the second quarter of fiscal 1998, the Corporation provided for the cost of
restructuring its worldwide operations. The restructuring provision reduced
income before income taxes by $2,040 million and net income by $1,625 million,
or $1.69 per common share on a diluted basis, in the nine-month period ended
March 28, 1998.
Operating income, excluding the fiscal 1999 product recall charge and gain on
sale of the Corporation's tobacco operations and the fiscal 1998 restructuring
charge, increased 3.2% in the first nine months of fiscal 1999. Businesses sold
net of businesses acquired subsequent to the start of fiscal 1998 decreased
operating income by approximately 1.0 percentage point. The overall
strengthening of the U.S. dollar relative to foreign currencies had the effect
of reducing operating income by 0.2 percentage points. Excluding the impact of
business acquisitions, dispositions and changes in foreign currency exchange
rates, operating income increased 4.4%.
Page 13
<PAGE>
Net interest expense decreased to $102 million in the period. The lower level
of net interest expense was due to strong operating cash flows in the fourth
quarter of fiscal 1998 and the first nine months of fiscal 1999, along with the
sale of the Corporation's international tobacco operations in the first quarter
of fiscal 1999. Unallocated corporate expenses increased by $20 million to $134
million as a result of higher administrative costs and changes in foreign
currency movements.
The following comparisons exclude the fiscal 1999 product recall charge and
tobacco sale gain, and the fiscal 1998 restructuring charge. Income before
income taxes increased 4.3% during the first nine months of fiscal 1999. The
effective tax rate decreased from 31% to 29% of pretax income
resulting primarily from increased earnings in certain foreign jurisdictions
that had lower tax rates. Net income increased 7.3%, while diluted earnings per
share increased 12.5%.
Earnings per share increased at a rate in excess of net income because of fewer
average shares outstanding during the period. Preferred dividends also declined
during the period 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 for the cost of
restructuring its worldwide operations. The planned restructuring activities
include the disposition of 116 manufacturing and distribution facilities - 86 of
which are owned and 30 of which are leased. The restructuring provision reduced
income before income taxes, net income and net income per common share on a
diluted basis by $2,040 million, $1,625 million and $1.69 per share,
respectively in the nine-month period ended March 28, 1998. 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 remaining assets from
various business combinations. The remainder of the charge consists of $219
million for pension and social costs associated with employees impacted by
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. Fiscal 1998 business segment
operating results include charges for restructuring on a pretax and after-tax
basis as follows (in millions): Sara Lee Foods - $208 and $133; Coffee and Tea -
$71 and $46; Household and Body Care - $185 and $164; Foodservice - $2 and $1;
and Branded Apparel - $1,574 and $1,281. Of the total after-tax provision, 89%
is non-cash and 11% requires cash outflows.
Through March 27, 1999, 36 manufacturing and distribution facilities have
been sold and 51 additional facilities have been closed. These actions
comprise approximately 61% 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 anticipates that
the remaining costs of the plan will be funded from internal sources and
available borrowings. Operating costs were lowered in the first nine months
of fiscal 1999 and fiscal 1998 by approximately $108 million and $54 million,
respectively, primarily as a result of lower plant overhead and long-lived
asset 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 are expected to be used for both business-building initiatives and
profit improvement. A reconciliation of the restructuring reserves through
March 27, 1999 is presented on page 19 of this document.
Page 14
<PAGE>
OPERATING RESULTS BY BUSINESS SEGMENT - FIRST NINE MONTHS OF FISCAL 1999
COMPARED WITH FIRST NINE MONTHS OF FISCAL 1998
The following discussion comparing business segment performance for the first
nine months of fiscal 1999 with the first nine months of fiscal 1998 excludes
the fiscal 1999 product recall charge and gain on sale of the international
tobacco operations, and the fiscal 1998 restructuring charge noted previously.
Net sales in the Sara Lee Foods segment declined in fiscal 1999 by 3.9% as lower
processed meat commodity costs resulted in lower prices to customers. Sales
were also negatively affected by the recall of packaged meat products produced
at the Bil Mar Foods plant in Zeeland, Michigan, which resulted in the temporary
closure of that plant. Excluding the impact of acquisitions, dispositions and
changes in foreign currencies, sales in this segment declined 5.0%. Excluding
acquisitions, Packaged Meats unit volumes were flat, but gained 4% excluding Bil
Mar. Worldwide unit sales for Sara Lee Bakery, excluding acquisitions, fell 1%
as gains in the growing bakery-deli and fresh baked segments were offset by
declines at retail. Including acquisitions, Packaged Meats unit sales grew 1%
and Bakery volumes increased 2%.
Operating income increased 13.7% resulting primarily from improved gross profit
margins, which benefited from lower commodity costs and improved sales mix,
favorable impacts from the restructuring program initiated in fiscal 1998, and
lower levels of selling, general and administrative spending in the Packaged
Meats business. Excluding the impact of acquisitions, dispositions and changes
in foreign currencies, operating income increased 12.2%. Net interest expense
allocated to the segment declined $5 million and pretax income increased 16.3%.
The effective tax rate of the segment declined to 37% and net income grew 18.6%,
to $214 million.
Net sales in the Coffee and Tea segment declined 5.5%. Excluding the results
of the international tobacco operations disposed of earlier this fiscal year and
acquisitions made subsequent to the start of last fiscal year, sales decreased
1.6%. The strengthening of most European currencies versus the U.S. dollar
increased reported sales by 1.7%. Thus, on a comparable basis, sales decreased
3.3%. Excluding acquisitions, unit volumes for roasted coffee and coffee
concentrates, the segment's primary business, increased 4% as consumers reacted
favorably to lower coffee prices and product introductions. Unit volumes grew
20% including sales contributed from recently acquired businesses.
Operating income for the Coffee and Tea segment declined 4% reflecting the
impact of the divestment of the international tobacco operations in the first
quarter of fiscal 1999. Changes in foreign currency exchange rates had the
effect of improving operating income of the segment by 2.6 percentage points.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, operating income declined 3.3%. Segment net income was flat as a
reduction in the net interest expense allocation and improvements in the
effective tax rate from 31.1% in fiscal 1998 to 28.5% in fiscal 1999 offset
the decline in operating income.
Net sales and operating income in the Household and Body Care segment increased
1.7% and 8.0%, respectively. The weakening of foreign currencies relative to
the U.S. dollar, primarily in Mexico, Australia, South Africa and certain Asian
countries, reduced reported sales and operating income by 3.7% and 6.1%,
respectively. Excluding the impact of acquisitions, dispositions and changes in
foreign currencies, Household and Body Care sales and operating income increased
5.1% and 13.7%, respectively. Excluding acquisitions, unit volumes for this
segment's four core categories - shoe care, body care, insecticides and air
fresheners - grew 9%. Unit volumes for these four categories grew 11% including
acquisitions.
Page 15
<PAGE>
Pretax income of the segment increased 10.0% primarily as a result of the
operating income improvements noted above. Net income increased 11.9%, to $104
million, as the effective tax rate of the segment declined approximately 1.1
percentage points.
Net sales in the Foodservice segment increased 4.1% including the impact of
acquisitions and 1.8% excluding acquisitions. Excluding acquisitions, unit
volumes grew 1%, but including recently completed acquisitions, unit volumes
grew 4% during the period. Operating income grew 10.4%, to $66 million. These
results benefited from improved customer mix and continued focus on cost
containment. Pretax income grew 10.2% and net income grew 11.7%, as the
effective tax rate of the segment declined to 36.5% from 37.4%.
Branded Apparel sales improved 1.2%, while operating income declined 0.9%.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, sales increased 0.8% while operating income was flat. Unit volumes
for Worldwide Legwear fell 2%, combining an 8% increase in sock unit sales with
a 6% decline in sheer hosiery volumes. Worldwide Knit Products unit sales
improved 6%, including gains in both the underwear and activewear categories.
Unit volume declines at the Corporation's Champion division, due primarily to
difficult market conditions, reduced the overall unit sales gain in the
activewear category and contributed to the segment's operating income decline.
Intimate Apparel unit sales increased 11%, with strength in both the United
States and Europe.
Pretax income in the Branded Apparel segment increased 2.8% as the Corporation's
ongoing restructuring efforts resulted in a reduction of the total invested
capital and the net interest expense allocated to this business segment. The
effective tax rate of the Branded Apparel segment declined from 24.6% to 21.4%
in the period. The lower tax rate is primarily the result of increased earnings
in certain foreign jurisdictions that had lower tax rates. Segment net income
increased 7.2% as a result of the lower effective tax rate and net interest
expense allocation.
FINANCIAL CONDITION
During the first nine months of fiscal 1999, net cash provided from operating
activities was $844 million as compared to $728 million in the comparable period
of fiscal 1998. The $116 million improvement is primarily due to improved
earnings and better inventory management.
Net cash generated from investment activities was $39 million in the first nine
months of fiscal 1999 as compared to a net use of cash of $178 million in the
comparable period of fiscal 1998. The Corporation received $569 million of cash
from the sale of assets and businesses during the first nine months of the
current year, primarily relating to the sale of the international tobacco
business during the first quarter and sales of assets as part of the on-going
program to reduce the level of assets deployed in the business. Cash
expenditures for purchases of businesses declined $172 million from the
comparable period in the prior year.
In fiscal 1998, the Corporation announced 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 fiscal 1998 and $810 million was
repurchased during the first nine months of fiscal 1999. During the first nine
months of fiscal 1999, $157 million of net cash was received from long and
short-term borrowings, while in the comparable period of fiscal 1998, cash of
$854 million was received from long and short-term borrowings and $200 million
was used to redeem the remaining auction preferred shares.
Page 16
<PAGE>
YEAR 2000 COMPLIANCE
In January 1996, the Corporation initiated a program to address the Year 2000
information technology issues that potentially could affect its operations.
Essentially, the Year 2000 issue 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 to the extent that "00" is not recognized as 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 systems and
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. The Corporation
has completed its inventory of IT and non-IT systems and has identified systems
with Year 2000 exposures. The Corporation has also conducted systems reviews to
determine the need for remediation efforts and is currently involved in testing
and verifying compliance. In addition, third parties with whom there are
systems interactions, including outsourced services, are being surveyed to
determine Year 2000 compliance or the need for remediation efforts.
Similarly, the Corporation has contacted 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
or are expected to be affected by Year 2000 issues. The Corporation has also
begun to assess systemic Year 2000 risks 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 third quarter of fiscal 1999, the Corporation had verified
that approximately 85% of its worldwide systems were Year 2000 compliant. The
Corporation anticipates that its remaining systems will be Year 2000 complaint
by the end of fiscal 1999. The total cost of this project is estimated to be
approximately $50 million. These costs have not had and are not 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 occurred or
is expected to 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.
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 its 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 or its
results of operations. Due to the general uncertainty inherent in the Year 2000
issue, including uncertainty regarding the Year 2000 readiness of customers,
suppliers, governmental agencies, and others, the Corporation has not developed
a comprehensive analysis of the most likely adverse Year 2000 scenario.
However, the Corporation is currently developing contingency plans to ensure
that Year 2000 issues will not create significant operational problems for the
Corporation. This process includes, among others, developing emergency backup
procedures in case of systems failures, identifying alternative suppliers, and
developing alternative plans to engage in business activities with customers and
suppliers that are not experiencing Year 2000 issues. These plans will continue
to be monitored as the year 2000 approaches.
Page 17
<PAGE>
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
established fixed conversion rates between their existing currencies (legacy
currencies) and one new common currency - the euro. The euro then began trading
on currency exchanges and began to be used in certain business transactions.
The transition period for the introduction of the euro occurs through June 2002.
Beginning 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.
Because of the significant concentration of sales and operating profits
generated in the European Union, the Corporation has established plans to
identify and address risks arising from 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 cross-border price
transparency, evaluating the Corporation's exposure to currency exchange risks
during and following the transition period to the euro and determining the
impact on the Corporation's processes for preparing and maintaining 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
appropriate steps to mitigate risks associated with the euro conversion,
uncertainties exist concerning the effects the euro currency may have on the
Corporation's customers, suppliers and 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 the member states of
the European Union. Accordingly, there can be no assurance that the conversion
and transition to the euro will not materially adversely impact the
Corporation's results of operations or its relationships with customers,
suppliers or others. Additionally, there can be no assurance that the euro
conversion issues of other entities will not have a material adverse impact on
the Corporation's results of operations.
OTHER FINANCIAL INFORMATION
In an April 22, 1999 press release communicating third quarter results, the
Corporation also announced that fiscal 1999 earnings per share will likely be
$.03 to $.05 below analysts' current estimates. This shortfall primarily
reflects anticipated increases in costs associated with new food safety
measures, expenses related to increased brand support, and lower sales resulting
from the temporary closure of the Corporation's Bil Mar Foods plant in Zeeland,
Michigan. These costs are expected to be partially offset by continued low
processed meat commodity costs and strong operating performance in the
Corporation's other U.S. Packaged Meats operations.
Page 18
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
Reconciliation Of Restructuring Reserves
As of March 27, 1999
(in millions)
<TABLE>
<CAPTION>
WRITEDOWN OF RECOGNITION OF
LONG-LIVED CURTAILMENT RESTRUCTURING
ORIGINAL ASSETS TO NET LOSS AND SPECIAL FOREIGN RESERVES
RESTRUCTURING REALIZABLE TERMINATION CASH EXCHANGE AS OF
RESERVES VALUE BENEFITS PAYMENTS IMPACTS MARCH 27, 1999
--------------- --------------- ------------------ ---------- ---------- -----------------
<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) (72) - 108
Anticipated expenditures to
close and dispose of idled
facilities - includes
non-cancelable lease
obligations 47 - - (20) - 27
Anticipated losses associated
with disposal of equity and
cost method investments 45 (45) - - - -
--------------- --------------- ------------------ ---------- ---------- -----------------
2,040 (1,774) (39) (92) - 135
Foreign exchange impacts - - - - (4) (4)
--------------- --------------- ------------------ ---------- ---------- -----------------
Total restructuring reserves $ 2,040 $ (1,774) $ (39) $ (92) $ (4) $ 131
--------------- --------------- ------------------ ---------- ---------- -----------------
--------------- --------------- ------------------ ---------- ---------- -----------------
</TABLE>
Page 19
<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
--------------------------
On December 22, 1998, the Corporation announced the recall of specific
production lots of packaged meat products produced at the Corporation's
Zeeland, Michigan facility between July 1, 1998 and the date of the recall.
This action was taken as a result of concerns that the specified products may
contain listeria bacteria that can pose a health hazard. The Centers for
Disease Control and Prevention ("CDC") has conducted an investigation into
these concerns. Although the CDC report has not been issued as of May 7,
1999, the CDC has publicly linked the consumption of packaged meat products
from the Zeeland, Michigan facility, which allegedly contained listeria, to
21 fatalities (15 adult deaths and 6 miscarriages) and approximately 100
illnesses. The Corporation is cooperating with pending government
investigations into the matters alleged by the CDC. Seven lawsuits, including
individual and class actions, have been filed against the Corporation
involving eight deaths, and additional claims are expected. Although the
outcome of the pending litigation cannot be determined with certainty, the
Corporation believes that the pending litigation and expected claims should
not have a material adverse effect on the Corporation's consolidated results
of operations, financial position or cash flows.
ITEM 2 - CHANGES IN SECURITIES
(c) As of February 1, 1999, the Corporation issued 127,629 shares of its common
stock in connection with a business acquisition in reliance on Section 4 (2)
of the Securities Act of 1933.
ITEM 5 - OTHER 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) the effect on future revenues and expenses of the
Corporation's December 1998 voluntary recall of certain packaged meat
products and the governmental investigations and litigation arising
therefrom; (ii) the Corporation's ability to realize forecasted savings, as
well as improvements in productivity and efficiency, from its restructuring
and other programs; (iii) significant competitive activity, including
advertising, promotional and price competition, and changes in consumer
demand for the Corporation's products; (iv) fluctuations in the cost and
availability of various raw materials; (v) inherent risks in the marketplace
associated with new product introductions, including uncertainties about
trade and consumer acceptance; (vi) the Corporation's ability to successfully
integrate acquisitions into its existing operations and the availability of
new acquisitions, joint ventures and alliance opportunities that build
stockholder value; and (vii) the Corporation's ability, and its suppliers'
and customers' ability, to adequately address the "Year 2000" computer issue.
In addition, the Corporation's results may be affected by general factors,
such as economic conditions, political developments, currency exchange rates
including the impact of the conversion to the euro currency,
interest and inflation rates, accounting standards, taxes, and laws and
regulations affecting the Corporation in markets where it competes.
Page 20
<PAGE>
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 23
12.1 Computation of Ratio of
Earnings to Fixed Charges 25
12.2 Computation of Ratio of
Earnings to Fixed Charges
and Preferred Stock Dividend
Requirements 26
27 Financial Data Schedule 27
</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 21
<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 10, 1999
Page 22
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(in millions, except per share data) EXHIBIT 11
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED MARCH 27, 1999
-----------------------------------------------------------------------
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------------- ---------------------------------
Basic Diluted Basic Diluted
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
EARNINGS:
Net income $ 245 $ 245 $ 905 $ 905
Less: Dividends on Preferred Stock,
net of tax benefits (3) - (9) -
Adjustment attributable to conversion of
ESOP Convertible Preferred Stock - (1) - (3)
------------- -------------- -------------- --------------
Net Income Available for Common Stockholders $ 242 $ 244 $ 896 $ 902
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
SHARES:
Weighted Average Shares Outstanding 903 903 908 908
Common Stock Equivalents :
Stock Options - 9 - 11
ESOP Convertible Preferred Stock - 30 - 30
Restricted Stock and Other - 5 - 4
------------- -------------- -------------- --------------
Adjusted Weighted Average Shares Outstanding 903 947 908 953
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
NET INCOME PER COMMON SHARE $ 0.27 $ 0.26 $ 0.99 $ 0.95
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
</TABLE>
Page 23
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11
(in millions, except per share data) (continued)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED MARCH 28, 1998
----------------------------------------------------------------------
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------- --------------------------------
Basic Diluted Basic Diluted
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
EARNINGS:
Net Income (Loss) $ 227 $ 227 $ (826) $ (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 $ 226 $ (838) $ (838)
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
SHARES:
Weighted Average Shares Outstanding 934 934 944 944
Common Stock Equivalents:
Stock Options - 16 - -
ESOP Convertible Preferred Stock - 34 - -
Restricted Stock and Other - 4 - -
-------------- --------------- --------------- --------------
Adjusted Weighted Average Shares Outstanding 934 988 944 944
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.24 $ 0.23 $ (0.89) $ (0.89)
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
</TABLE>
Page 24
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(in millions, except ratios) EXHIBIT 12.1
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
--------------------------------------
March 27, March 28,
1999 (1) 1998 (2)
------------- ---------------
<S> <C> <C>
Fixed charges:
Interest expense $ 173 $ 164
Interest portion of rental expense 50 47
------------- ---------------
Total fixed charges before capitalized interest 223 211
Capitalized interest 5 10
------------- ---------------
Total fixed charges $ 228 $ 221
------------- ---------------
------------- ---------------
Earnings available for fixed charges:
Income (loss) before income taxes $ 1,268 $ (883)
Less undistributed income in minority-owned companies (4) (5)
Add minority interest in majority-owned subsidiaries 23 20
Add amortization of capitalized interest 17 16
Add fixed charges before capitalized interest 223 211
------------- ---------------
Total earnings (losses) available for fixed charges $ 1,527 $ (641)
------------- ---------------
------------- ---------------
Ratio of earnings (losses) to fixed charges 6.7 (2.9)
------------- ---------------
------------- ---------------
</TABLE>
(1) In the second quarter of fiscal 1999, the Corporation recorded a pretax
charge of $76 million in connection with a voluntary recall of certain of
its packaged meat products.
In the first quarter of fiscal 1999, the Corporation recorded a pretax gain
of $137 million in connection with the sale of its international tobacco
operations.
(2) In the second quarter of fiscal 1998, the Corporation recorded a pretax
charge of $2.0 billion in connection with various restructuring actions.
Page 25
<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
---------------------------------------
March 27, March 28,
1999 (1) 1998 (2)
---------------- ----------------
<S> <C> <C>
Fixed charges and preferred stock dividend requirements:
Interest expense $ 173 $ 164
Interest portion of rental expense 50 47
---------------- ----------------
Total fixed charges before capitalized interest
and preferred stock dividend requirements 223 211
Capitalized interest 5 10
Preferred stock dividend requirements (3) 15 19
---------------- ----------------
Total fixed charges and preferred stock
dividend requirements $ 243 $ 240
---------------- ----------------
---------------- ----------------
Earnings available for fixed charges and preferred
stock dividend requirements:
Income (loss) before income taxes $ 1,268 $ (883)
Less undistributed income in minority-owned companies (4) (5)
Add minority interest in majority-owned subsidiaries 23 20
Add amortization of capitalized interest 17 16
Add fixed charges before capitalized interest and
preferred stock dividend requirements 223 211
---------------- ----------------
Total earnings (losses) available for fixed charges and
preferred stock dividend requirements $ 1,527 $ (641)
---------------- ----------------
---------------- ----------------
Ratio of earnings (losses) to fixed charges and
preferred stock dividend requirements 6.3 (2.7)
---------------- ----------------
---------------- ----------------
</TABLE>
(1) In the second quarter of fiscal 1999, the Corporation recorded a pretax
charge of $76 million in connection with a voluntary recall of certain of
its packaged meat products.
In the first quarter of fiscal 1999, the Corporation recorded a pretax gain
of $137 million in connection with the sale of its international tobacco
operations.
(2) In the second quarter of fiscal 1998, the Corporation recorded a pretax
charge of $2.0 billion in connection with various restructuring activities.
(3) 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 26
<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> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> MAR-27-1999
<CASH> 212
<SECURITIES> 20
<RECEIVABLES> 2,084
<ALLOWANCES> 234
<INVENTORY> 2,624
<CURRENT-ASSETS> 5,059
<PP&E> 5,018
<DEPRECIATION> 3,022
<TOTAL-ASSETS> 10,580
<CURRENT-LIABILITIES> 5,696
<BONDS> 1,998
0
56
<COMMON> 9
<OTHER-SE> 1,678
<TOTAL-LIABILITY-AND-EQUITY> 10,580
<SALES> 14,810
<TOTAL-REVENUES> 14,810
<CGS> 9,013
<TOTAL-COSTS> 9,013
<OTHER-EXPENSES> 76
<LOSS-PROVISION> 143
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> 1,268
<INCOME-TAX> 363
<INCOME-CONTINUING> 905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 905
<EPS-PRIMARY> .99
<EPS-DILUTED> .95
</TABLE>
