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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 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 (State or other jurisdiction of incorporation or organization) |
36-2089049 (I.R.S. Employer 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 October 2, 1999, the Registrant had 883,037,705 outstanding shares of common stock $.01 par value, which is the Registrant's only class of common stock.
The document contains 24 pages.
SARA LEE CORPORATION AND SUBSIDIARIES
INDEX
PART I | ||
FINANCIAL STATEMENTS |
|
|
Preface |
|
3 |
Condensed Consolidated Balance Sheets At October 2, 1999 and July 3, 1999 |
|
4 |
Consolidated Statements of Income For the thirteen weeks ended October 2, 1999 and September 26, 1998 |
|
5 |
Consolidated Statements of Common Stockholders' Equity For the period June 27, 1998 to October 2, 1999 |
|
6 |
Consolidated Statements of Cash Flows For the thirteen weeks ended October 2, 1999 and September 26, 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 |
|
17 |
ITEM 2. CHANGES IN SECURITIES |
|
17 |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|
17 |
ITEM 5. OTHER INFORMATION |
|
18 |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K |
|
19 |
SIGNATURE |
|
20 |
EXHIBIT 11 Computation of Net Income Per Common Share |
|
21 |
EXHIBIT 12.1 Computation of Ratio of Earnings to Fixed Charges |
|
22 |
EXHIBIT 12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements |
|
23 |
EXHIBIT 27 Financial Data Schedule |
|
24 |
2
SARA LEE CORPORATION AND SUBSIDIARIES
Preface
The consolidated financial statements for the thirteen weeks ended October 2, 1999 and September 26, 1998 and the balance sheet as of October 2, 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 October 2, 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 weeks ended October 2, 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 July 3, 1999.
3
SARA LEE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets at October 2, 1999 and July 3, 1999
(in millions)
|
October 2, 1999 |
July 3, 1999 |
|||||
---|---|---|---|---|---|---|---|
ASSETS | |||||||
Cash and equivalents |
|
$ |
169 |
|
$ |
279 |
|
Trade accounts receivable, less allowances | 1,998 | 1,744 | |||||
Inventories: | |||||||
Finished goods | 1,747 | 1,710 | |||||
Work in process | 472 | 470 | |||||
Materials and supplies | 532 | 463 | |||||
2,751 | 2,643 | ||||||
Other current assets | 332 | 321 | |||||
Total current assets | 5,250 | 4,987 | |||||
Trademarks and other assets | 540 | 533 | |||||
Property, net | 2,241 | 2,169 | |||||
Intangible assets, net | 2,886 | 2,832 | |||||
$ | 10,917 | $ | 10,521 | ||||
LIABILITIES AND EQUITY | |||||||
Notes payable |
|
$ |
1,311 |
|
$ |
1,167 |
|
Accounts payable | 1,482 | 1,782 | |||||
Accrued liabilities | 2,692 | 2,668 | |||||
Current maturities of long-term debt | 419 | 336 | |||||
Total current liabilities | 5,904 | 5,953 | |||||
Long-term debt | 2,140 | 1,892 | |||||
Deferred income taxes | 68 | 62 | |||||
Other liabilities | 717 | 702 | |||||
Minority interests in subsidiaries | 615 | 613 | |||||
ESOP convertible preferred stock | 258 | 265 | |||||
Unearned deferred compensation | (232 | ) | (232 | ) | |||
Common stockholders' equity | 1,447 | 1,266 | |||||
$ | 10,917 | $ | 10,521 | ||||
See accompanying Notes to Consolidated Financial Statements.
4
SARA LEE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Thirteen Weeks Ended October 2, 1999 and September 26, 1998
(in millions, except per share data)
|
THIRTEEN WEEKS ENDED |
||||||
---|---|---|---|---|---|---|---|
|
October 2, 1999 |
September 26, 1998 |
|||||
Net sales | $ | 4,950 | $ | 4,860 | |||
Cost of sales | 3,055 | 3,020 | |||||
Selling, general and administrative expenses | 1,506 | 1,473 | |||||
Interest expense | 54 | 52 | |||||
Interest income | (19 | ) | (24 | ) | |||
Gain on sale of business | | (137 | ) | ||||
4,596 | 4,384 | ||||||
Income before income taxes | 354 | 476 | |||||
Income taxes | 96 | 138 | |||||
Net income | 258 | 338 | |||||
Preferred dividends, net of tax | 3 | 3 | |||||
Net income available for common stockholders | $ | 255 | $ | 335 | |||
Net income per common sharebasic | $ | 0.29 | $ | 0.37 | |||
Average shares outstanding | 881 | 912 | |||||
Net income per common sharediluted | $ | 0.28 | $ | 0.35 | |||
Average shares outstanding | 919 | 959 | |||||
Cash dividends per common share | $ | 0.125 | $ | 0.115 | |||
See accompanying Notes to Consolidated Financial Statements.
5
SARA LEE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Common Stockholders' Equity
For the Period June 27, 1998 to October 2, 1999
(in millions, except per share data)
|
TOTAL |
COMMON STOCK |
CAPITAL SURPLUS |
RETAINED EARNINGS |
UNEARNED RESTRICTED STOCK |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
COMPREHENSIVE INCOME (LOSS) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balances at June 27, 1998 | $ | 1,816 | $ | 614 | $ | | $ | 2,036 | $ | (50 | ) | $ | (784 | ) | ||||||||
Net income | 338 | | | 338 | | | $ | 338 | ||||||||||||||
Translation adjustments, net of tax | 152 | | | | | 152 | 152 | |||||||||||||||
Comprehensive income | $ | 490 | ||||||||||||||||||||
Cash dividends | ||||||||||||||||||||||
Common ($0.115 per share) | (105 | ) | | | (105 | ) | | | ||||||||||||||
ESOP convertible preferred ($1.36 per share) | (5 | ) | | | (5 | ) | | | ||||||||||||||
Stock issuances | ||||||||||||||||||||||
Business acquisitions | 4 | | 4 | | | | ||||||||||||||||
Stock option and benefit plans | 17 | 1 | 16 | | | | ||||||||||||||||
Restricted stock, less amortization of $10 | (6 | ) | | (20 | ) | | 14 | | ||||||||||||||
Reacquired shares | (293 | ) | (8 | ) | (16 | ) | (269 | ) | | | ||||||||||||
ESOP tax benefit | 2 | | | 2 | | | ||||||||||||||||
ESOP share redemption | 17 | 2 | 15 | | | | ||||||||||||||||
Other | 1 | | 1 | | | | ||||||||||||||||
Balances at September 26, 1998 | 1,938 | 609 | | 1,997 | (36 | ) | (632 | ) | ||||||||||||||
Net income | 853 | | | 853 | | | $ | 853 | ||||||||||||||
Translation adjustments, net of tax | (313 | ) | | | | | (313 | ) | (313 | ) | ||||||||||||
Unrealized gains on securities, net of tax | 1 | | | | | 1 | 1 | |||||||||||||||
Minimum pension liability, net of tax | (62 | ) | | | | | (62 | ) | (62 | ) | ||||||||||||
Comprehensive income | $ | 479 | ||||||||||||||||||||
Cash dividends | ||||||||||||||||||||||
Common ($0.375 per share) | (339 | ) | | | (339 | ) | | | ||||||||||||||
ESOP convertible preferred ($4.08 per share) | (15 | ) | | | (15 | ) | | | ||||||||||||||
Stock issuances | ||||||||||||||||||||||
Business acquisitions | 5 | | 5 | | | | ||||||||||||||||
Stock option and benefit plans | 94 | 3 | 91 | | | | ||||||||||||||||
Restricted stock, less amortization of $18 | (25 | ) | | (56 | ) | | 31 | | ||||||||||||||
Tax benefit related to incentive stock options | 66 | | 66 | | | | ||||||||||||||||
Reacquired shares | (986 | ) | (5 | ) | (848 | ) | (133 | ) | | | ||||||||||||
Two-for-one stock split | | 609 | | (609 | ) | | | |||||||||||||||
Common stock par value change ($1.331/3 per share to $.01 per share) | | (1,208 | ) | 1,208 | | | | |||||||||||||||
ESOP tax benefit | 6 | | | 6 | | | ||||||||||||||||
ESOP share redemption | 23 | 1 | 22 | | | | ||||||||||||||||
Other | 20 | | 20 | | | | ||||||||||||||||
|
TOTAL |
COMMON STOCK |
CAPITAL SURPLUS |
RETAINED EARNINGS |
UNEARNED RESTRICTED STOCK |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
COMPREHENSIVE INCOME (LOSS) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balances at July 3, 1999 | 1,266 | 9 | 508 | 1,760 | (5 | ) | (1,006 | ) | ||||||||||||||
Net income | 258 | | | 258 | | | $ | 258 | ||||||||||||||
Translation adjustments, net of tax | 65 | | | | | 65 | 65 | |||||||||||||||
Unrealized losses on securities, net of tax | (1 | ) | | | | | (1 | ) | (1 | ) | ||||||||||||
Comprehensive income | $ | 322 | ||||||||||||||||||||
Cash dividends | ||||||||||||||||||||||
Common ($0.125 per share) | (114 | ) | | | (114 | ) | | | ||||||||||||||
ESOP convertible preferred ($1.36 per share) | (5 | ) | | | (5 | ) | | | ||||||||||||||
Stock issuances | ||||||||||||||||||||||
Business acquisitions | 12 | | 12 | | | | ||||||||||||||||
Stock option and benefit plans | 15 | | 15 | | | | ||||||||||||||||
Restricted stock, less amortization of $1 | (2 | ) | | (1 | ) | | (1 | ) | | |||||||||||||
Tax benefit related to incentive stock options | 13 | | 13 | | | | ||||||||||||||||
Reacquired shares | (71 | ) | | (71 | ) | | | | ||||||||||||||
ESOP tax benefit | 2 | | | 2 | | | ||||||||||||||||
ESOP share redemption | 7 | | 7 | | | | ||||||||||||||||
Other | 2 | | 2 | | | | ||||||||||||||||
Balances at October 2, 1999 | $ | 1,447 | $ | 9 | $ | 485 | $ | 1,901 | $ | (6 | ) | $ | (942 | ) | ||||||||
See accompanying Notes to Consolidated Financial Statements
6
SARA LEE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Thirteen Weeks Ended October 2, 1999 and September 26, 1998
(in millions)
|
THIRTEEN WEEKS ENDED |
||||||
---|---|---|---|---|---|---|---|
|
October 2, 1999 |
September 26, 1998 |
|||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 258 | $ | 338 | |||
Adjustments for non-cash charges included in net income: | |||||||
Depreciation | 104 | 95 | |||||
Amortization of intangibles | 48 | 46 | |||||
Increase in deferred income taxes | 20 | 12 | |||||
Gain on sale of business | | (137 | ) | ||||
Other | (16 | ) | 3 | ||||
Changes in current assets and liabilities, excluding businesses acquired and sold | (519 | ) | (313 | ) | |||
Net cash (used in) from operating activities | (105 | ) | 44 | ||||
INVESTMENT ACTIVITIES | |||||||
Purchases of property and equipment | (113 | ) | (84 | ) | |||
Acquisitions of businesses and investments | (121 | ) | (102 | ) | |||
Dispositions of businesses and investments | | 407 | |||||
Sales of assets | 8 | 94 | |||||
Other | 1 | 2 | |||||
Net cash (used in) from investment activities | (225 | ) | 317 | ||||
FINANCING ACTIVITIES | |||||||
Issuances of common stock | 15 | 17 | |||||
Purchases of common stock | (71 | ) | (293 | ) | |||
Borrowings of long-term debt | 373 | 1 | |||||
Repayments of long-term debt | (81 | ) | (5 | ) | |||
Short-term borrowings (repayments), net | 90 | (31 | ) | ||||
Payments of dividends | (119 | ) | (110 | ) | |||
Net cash from (used in) financing activities | 207 | (421 | ) | ||||
Effect of changes in foreign exchange rates on cash | 13 | 9 | |||||
Decrease in cash and equivalents | (110 | ) | (51 | ) | |||
Cash and equivalents at beginning of year | 279 | 273 | |||||
Cash and equivalents at end of quarter | $ | 169 | $ | 222 | |||
COMPONENTS OF CHANGES IN CURRENT ASSETS AND LIABILITIES: | |||||||
(Increase) in trade accounts receivable | $ | (179 | ) | $ | (109 | ) | |
Decrease in inventories | 8 | 8 | |||||
Decrease (increase) in other current assets | 5 | (36 | ) | ||||
(Decrease) in accounts payable | (341 | ) | (188 | ) | |||
(Decrease) increase in accrued liabilities | (12 | ) | 12 | ||||
Changes in current assets and liabilities | $ | (519 | ) | $ | (313 | ) | |
See accompanying Notes to Consolidated Financial Statements
7
SARA LEE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8
SARA LEE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Results of Operations and Financial Condition
The following is a discussion of the results of operations for the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999, and a discussion of the changes in financial condition during the first quarter of fiscal 2000.
Results of Operations
Comparison of First Quarter Fiscal 2000 to First Quarter Fiscal 1999
Operating results by business segment in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999 are as follows:
|
THIRTEEN WEEKS ENDED |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Sales |
Operating Income(1) |
||||||||||
|
Oct. 2, 1999 |
Sept. 26, 1998 |
Oct. 2, 1999 |
Sept. 26, 1998 |
||||||||
|
(in millions) |
|||||||||||
Sara Lee Foods | $ | 1,220 | $ | 1,331 | $ | 85 | $ | 90 | ||||
Coffee & Tea | 599 | 608 | 100 | 241 | ||||||||
Household and Body Care | 506 | 451 | 51 | 44 | ||||||||
Foodservice | 711 | 668 | 27 | 24 | ||||||||
Branded Apparel | 1,949 | 1,837 | 160 | 149 | ||||||||
Total business segments | 4,985 | 4,895 | 423 | 548 | ||||||||
Intersegment sales | (35 | ) | (35 | ) | | | ||||||
Net sales and operating income | $ | 4,950 | $ | 4,860 | $ | 423 | $ | 548 | ||||
|
Pretax Income(1) |
Net Income |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Oct. 2, 1999 |
Sept. 26, 1998 |
Oct. 2, 1999 |
Sept. 26, 1998 |
|||||||||
Sara Lee Foods | $ | 79 | $ | 86 | $ | 50 | $ | 54 | |||||
Coffee & Tea | 97 | 238 | 70 | 170 | |||||||||
Household and Body Care | 45 | 39 | 30 | 26 | |||||||||
Foodservice | 25 | 23 | 16 | 15 | |||||||||
Branded Apparel | 142 | 134 | 116 | 105 | |||||||||
Total business segments | 388 | 520 | 282 | 370 | |||||||||
Unallocated corporate expense | (34 | ) | (44 | ) | (24 | ) | (32 | ) | |||||
Pretax income and net income | $ | 354 | $ | 476 | $ | 258 | $ | 338 | |||||
9
Consolidated ResultsFirst Quarter Fiscal 2000 Compared with First Quarter Fiscal 1999
Consolidated net sales increased 1.8% over the year ago quarter. Sales were essentially unchanged excluding the effect of businesses acquired net of businesses sold subsequent to the start of the prior fiscal year. The strengthening of the U.S. dollar relative to key foreign currencies had the effect of reducing reported sales by 1.3%. As a result, on a comparable basis, excluding the impact of acquisitions, dispositions and foreign currency changes, sales increased 1.3% over the same quarter in the prior year. Comparable sales growth in Household and Body Care, Foodservice, and Branded Apparel contributed to this increase; Sara Lee Foods and Coffee and Tea reported sales declines on a comparable basis.
The gross profit margin was 38.3% in the first quarter of fiscal 2000 compared with 37.9% in the first quarter of fiscal 1999. Higher gross profit margins in the Coffee and Tea, Household and Body Care and Foodservice segments were responsible for the increase. Sara Lee Foods and Branded Apparel gross profit margins each declined slightly from the prior year quarter. Selling, general and administrative expenses increased 2.2% over the same quarter last year primarily as a result of higher media, advertising and promotion spending.
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 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 thirteen weeks ended September 26, 1998.
Excluding the tobacco sale gain, operating income increased 2.9% in the quarter, reflecting the sales and gross profit margin improvements noted above, offset by higher levels of media, advertising and promotion spending. Excluding the impact of acquisitions and divestitures completed subsequent to the start of the previous fiscal year, operating income increased 1.9%. Changes in foreign currency exchange rates had the effect of reducing operating income by approximately 1.1%. As a result, on a comparable basis, excluding the impact of business acquisitions, dispositions and changes in foreign currency exchange rates, operating income increased 3.0%.
Net interest expense increased $7 million to $35 million due to higher borrowing levels in the quarter from the year ago period. Unallocated corporate expenses, which are costs not directly attributable to specific business segment operations, declined $10 million to $34 million from the year ago quarter. Lower corporate office administrative costs and favorable currency movements contributed to the reduction.
Income before income taxes increased 4.2%, excluding the impact of the $137 million gain noted above. The effective tax rate decreased from 29% to 27% 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 7.1% to $258 million and diluted earnings per share increased 12%. Earnings per share increased at a rate in excess of net income because of fewer average shares outstanding during the period. Including the fiscal 1999 tobacco sale gain, income before income taxes, net income, and diluted earnings per share declined 25.8%, 23.7% and 20.0%, respectively.
10
Operating Results by Business SegmentFirst Quarter Fiscal 2000 Compared with First Quarter Fiscal 1999
Net sales in the Sara Lee Foods segment declined in the quarter by 8.4%, due largely to the business disruption resulting from the December 1998 recall of packaged meat products produced at the Corporation's Bil Mar Foods plant in Zeeland, Michigan, and the resulting temporary closure of that plant. Packaged meats unit volumes were down 11% from the year ago period. This sales volume decline largely reflects the impact of the recall, which has resulted in various plant reconfigurations and additional processing procedures aimed at enhancing food safety that have temporarily constrained capacity. Worldwide unit sales for Sara Lee Bakery, excluding acquisitions, were down 8%, as gains in the retail and fresh-baked categories were offset by declines in the bakery-deli channel in the U.S. and by declines in Europe. Including acquisitions, Bakery volumes declined 7% in the quarter. Excluding the impact of acquisitions, dispositions, and changes in foreign currencies, sales in the Sara Lee Foods segment declined 7.6%.
Operating income in the Sara Lee Foods segment declined 6.2% in the quarter. Lower media, advertising and promotion expenditures in the packaged meats businesses and continued low commodity costs for processed meats partially offset the lower profits resulting from the decline in segment sales. Excluding the impact of acquisitions, dispositions and changes in foreign currencies, operating income declined 5.5%. Pretax income decreased 7.9%, or $7 million resulting from the operating income decline and a $2 million increase in the segment's net interest expense allocation. The effective tax rate in the Sara Lee Foods segment declined to 36% and net income declined 6.4% to $50 million.
Net sales in the Coffee and Tea segment declined 1.4%. Excluding the impact of businesses acquired net of businesses sold subsequent to the start of the previous fiscal year, sales declined 8.1%. The strengthening of the U.S. dollar in relation to foreign currencies decreased reported sales by 4.4%. Thus, on a comparable basis, sales declined 3.7%, largely 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, increased 1%. Unit volumes grew 14% including sales contributed from recently acquired coffee businesses in Brazil and the United States.
Operating income for the Coffee and Tea segment declined 3.5% excluding the tobacco sale gain. Excluding the negative impact of currency, resulting from the overall strengthening of the U.S. dollar in the quarter, operating income was essentially unchanged from the year ago period. Segment net income declined 2.6% to $70 million, reflecting the operating income decline noted above, offset in part by reductions in the effective tax rate of the segment to 27.4% of pretax income from 28.5% in the year ago quarter.
Net sales in the Household and Body Care segment increased 12.2% and operating income increased 15.8%. The overall strengthening of the U.S. dollar relative to foreign currencies, particularly in Europe, reduced reported sales and operating income by 1.8% and 1.5%, respectively. Excluding the impact of acquisitions, dispositions and changes in foreign currencies, Household and Body Care sales and operating income increased 10.8% and 15.3%, respectively. Unit volumes for this segment's four core categoriesshoe care, body care, insecticides and air freshenersincreased 19% in the quarter including acquisitions, with each category reporting double digit growth. Excluding acquisitions, unit volumes increased 15%. Operating income was favorably impacted by improved sales volumes and by lower overhead costs resulting from the ongoing restructuring program. Pretax income increased 14.5% and net income increased 15.8% to $30 million, as the effective tax rate of the segment was reduced to 33.8%.
11
Net sales in the Foodservice segment increased 6.4% including the impact of acquisitions and 5.7% excluding acquisitions. Excluding acquisitions, unit volumes increased 5%, reflecting gains from continuing operations. Including acquisitions, unit volumes grew 6%. Operating income increased 11.7% to $27 million. These results benefited from an improved customer mix and continued focus on cost containment. Pretax income improved 9.3% over the year ago period, and net income increased 10.6% to $16 million, as the effective tax rate of this segment declined to 35.8%.
Branded Apparel sales and operating income increased 6.1% and 7.5%, respectively in the quarter. Excluding the impact of acquisitions, dispositions and changes in foreign currencies, sales increased 5.6% and operating income increased 5.4%. Worldwide Knit Products unit sales increased 14% over the year ago quarter excluding acquisitions. These unit volume results include 16% and 11% gains in the underwear and activewear categories, respectively. Including acquisitions, Knit Products unit sales increased 16%. Intimate Apparel unit sales increased 12%, with particular strength in the U.S. market. Unit volumes for Worldwide Legwear decreased 4%, combining a 1% decline in sock unit sales with a 6% decline in sheer hosiery volumes.
Pretax income in the Branded Apparel segment improved 5.6% in the quarter. This increase was the result of the operating income improvement noted above offset by an increase in the net interest expense allocated to this business segment resulting from an increase in consolidated net interest from the year ago quarter. The effective tax rate of the Branded Apparel segment declined from 21.4% to 18.5%, resulting primarily from increased earnings in certain foreign jurisdictions that had lower tax rates. Segment net income increased 9.5% to $116 million as a result of improved operating and pretax income, and the segments lower effective tax rate.
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 facilities86 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 in fiscal 1998 by $2,040 million, $1,625 million and $1.68 per share, respectively. 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 prior 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 charge of $1,625 million, 89% is non-cash and 11% requires cash outflows.
Through October 2, 1999, 44 manufacturing and distribution facilities have been sold and 63 additional facilities have been closed. The Corporation expects to complete the restructuring by the year 2000, and it is anticipated that the remaining costs of the plan will be funded from internal sources and available borrowings. Operating costs were lowered in the first quarter of fiscal 2000 and fiscal 1999 by approximately $52 million and $32 million, respectively, primarily as a result of lower plant overhead, long-lived asset amortization expense and manufacturing efficiencies resulting from the restructuring actions. 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 October 2, 1999 is presented on page 16 of this document.
12
Financial Condition
Net cash used in operating activities was $105 million in the quarter, compared to $44 million of cash generated from operations in the first quarter of fiscal 1999. The decline in operating cash flow was primarily due to the timing of payments to various trade creditors and increased receivable levels resulting from sales growth in the quarter.
As of October 2, 1999 and July 3, 1999, the Corporation's current liabilities exceeded current assets by $654 million and $966 million, respectively. These working capital deficits result from the Corporation's continued emphasis on the management of trade receivables, payables and inventories, as well as the decision to finance a portion of its capital needs with short-term debt. The Corporation has numerous credit facilities available which management considers sufficient to satisfy its operating requirements. Unutilized revolving credit facilities were $1.6 billion as of October 2, 1999.
Net cash used in investment activities was $225 million in the first quarter of fiscal 2000 compared to net cash generated from investment activities of $317 million in the comparable quarter of fiscal 1999. The Corporation received $501 million of cash from the sale of businesses and assets during the first quarter of fiscal 1999, primarily relating to the sale of the international tobacco business during the prior year 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 and property and equipment increased $48 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 $1.3 billion in fiscal 1999. During the first quarter of fiscal 2000, $71 million of common stock was reacquired. In addition, net cash of $382 million was received from long and short-term borrowing in the quarter, while in the comparable period of fiscal 1999, $35 million was used to reduce outstanding debt.
13
Year 2000 Readiness Disclosure
In January 1996, the Corporation initiated a program to address the Year 2000 information technology issues that could potentially affect its operations. Essentially, the Year 2000 issue consists of programmed code within computer applications, including devices with imbedded technology, using only the last two digits to refer to a year rather than all four of the year's 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 conducting 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 is also assessing 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 first quarter of fiscal 2000, the Corporation had verified that substantially all of its worldwide systems were Year 2000 compliant, including mission critical systems that affect core business operations. The Corporation anticipates that remaining systems not tested or verified as of October 2, 1999, will be Year 2000 compliant prior to the end of the calendar year. In addition, the Corporation has developed or is developing specific contingency plans to address unexpected issues or circumstances beyond its control related to these remaining systems. The estimated cost of the Corporation's Year 2000 program is expected to be approximately $50 million in total, a substantial portion of which has been incurred to date. 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.
14
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 currencythe 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 and labor cost 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. The Corporation believes it is taking appropriate steps to mitigate risks associated with the euro conversion. However, due to numerous uncertainties concerning the effects the euro currency may have on the Corporation's customers, suppliers and marketplaces in which the Corporation operates, the Corporation cannot reasonably estimate the effects one common European currency will have, if any, on the Corporation's financial condition or results of operations.
15
SARA LEE CORPORATION AND SUBSIDIARIES
Reconciliation Of Restructuring Reserves
As of October 2, 1999
(in millions)
|
ORIGINAL RESTRUCTURING RESERVES |
WRITEDOWN OF LONG-LIVED ASSETS TO NET REALIZABLE VALUE |
RECOGNITION OF CURTAILMENT LOSS AND SPECIAL TERMINATION BENEFITS |
CASH PAYMENTS |
FOREIGN EXCHANGE IMPACTS |
RESTRUCTURING RESERVES AS OF OCTOBER 2, 1999 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Anticipated losses associated with disposal of long-lived assets | $ | 1,729 | $ | (1,729 | ) | $ | | $ | | $ | | $ | | ||||||
Pension and social costs(1) | 219 | | (39 | ) | (116 | ) | | 64 | |||||||||||
Anticipated expenditures to close and dispose of idled facilitiesincludes non-cancelable lease obligations(2) | 47 | | | (36 | ) | | 11 | ||||||||||||
Anticipated losses associated with disposal of equity and cost method investments | 45 | (45 | ) | | | | | ||||||||||||
2,040 | (1,774 | ) | (39 | ) | (152 | ) | | 75 | |||||||||||
Foreign exchange impacts | | | | | (5 | ) | (5 | ) | |||||||||||
Total restructuring reserves | $ | 2,040 | $ | (1,774 | ) | $ | (39 | ) | $ | (152 | ) | $ | (5 | ) | $ | 70 | |||
16
On December 22, 1998, the Corporation announced the recall of specific production lots of packaged meat products produced at its 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. On May 27, 1999, the CDC issued a public report linking 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 in total. The Corporation is cooperating with pending government investigations into the matters alleged by the CDC. Thirteen lawsuits, including individual and class actions, have been filed against the Corporation involving thirteen 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 its consolidated results of operations, financial position or cash flows.
On August 27, 1999, the Corporation issued 549,602 shares of its common stock in connection with a business acquisition in reliance on Section 4 (2) of the Securities Act of 1933.
ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Name |
For |
Withheld |
||
---|---|---|---|---|
Paul A. Allaire | 779,567,539 | 11,669,548 | ||
Frans H.J.J. Andriessen | 779,324,785 | 11,912,302 | ||
John H. Bryan | 779,419,657 | 11,817,430 | ||
Duane L. Burnham | 779,729,506 | 11,507,581 | ||
Charles W. Coker | 779,706,098 | 11,530,989 | ||
James S. Crown | 779,865,723 | 11,371,364 | ||
Willie D. Davis | 778,858,202 | 12,378,885 | ||
Vernon E. Jordan, Jr. | 761,977,968 | 29,259,119 | ||
James L. Ketelsen | 778,965,152 | 12,271,935 | ||
Hans B. van Liemt | 779,689,655 | 11,547,432 | ||
Joan D. Manley | 779,351,307 | 11,885,780 | ||
C. Steven McMillan | 779,138,585 | 12,098,502 | ||
Frank L. Meysman | 779,855,217 | 11,381,870 | ||
Rozanne L. Ridgway | 778,875,639 | 12,361,448 | ||
Judith A. Sprieser | 779,676,294 | 11,560,793 | ||
Richard L. Thomas | 779,430,369 | 11,806,718 | ||
John D. Zeglis | 779,694,043 | 11,543,044 |
17
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.
18
ITEM 6EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number |
Description |
Page Number or Incorporated herein by Reference to |
||
---|---|---|---|---|
11 | Computation of Net Income Per Common Share | 21 | ||
12.1 | Computation of Ratio of Earnings to Fixed Charges | 22 | ||
12.2 | Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements | 23 | ||
27 | Financial Data Schedule | 24 |
On September 29, 1999, the Corporation filed a Current Report on Form 8-K with respect to its press release on that date relating to the Corporation's expectations of its first quarter fiscal 2000 results of operations. A copy of the Corporation's press release is attached as an exhibit to Form 8-K.
19
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SARA LEE CORPORATION | |||
(Registrant) | |||
|
|
By: |
/s/ WAYNE R. SZYPULSKI Wayne R. Szypulski Vice President and Controller |
DATE: November 11, 1999 |
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20
PART II
ITEM 1LEGAL PROCEEDINGS
ITEM 2CHANGES IN SECURITIES
ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5OTHER INFORMATION
ITEM 6EXHIBITS AND REPORTS ON FORM 8-K
|