<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 December 26, 1998
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-3344
-------------------------------------------------
Sara Lee Corporation
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 36-2089049
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three First National Plaza, Suite 4600, Chicago, Illinois 60602-4260
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(312) 726-2600
---------------------------------------------------------
(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 December 26, 1998, the Registrant had 912,030,559 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>
<TABLE>
<CAPTION>
SARA LEE CORPORATION AND SUBSIDIARIES
INDEX
<S> <C> <C>
PART I -
FINANCIAL STATEMENTS -
Preface 3
Condensed Consolidated Balance Sheets -
At December 26, 1998 and June 27, 1998 4
Consolidated Statements of Income -
For the thirteen and twenty-six weeks ended
December 26, 1998 and December 27, 1997 5
Consolidated Statements of Common Stockholders' Equity -
For the period June 28, 1997 to December 26, 1998 6
Consolidated Statements of Cash Flows -
For the twenty-six weeks ended December 26, 1998
and December 27, 1997 7
Notes to Consolidated Financial Statements 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 9
PART II -
ITEM 2. - 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 twenty-six weeks
ended December 26, 1998 and December 27, 1997 and the balance sheet as of
December 26, 1998 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 December 26, 1998 and the results of
operations and the cash flows for the periods presented herein have been made.
The results of operations for the thirteen and twenty-six weeks ended
December 26, 1998 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 December 26, 1998 and June 27, 1998
(in millions)
<TABLE>
<CAPTION>
Dec. 26, June 27,
1998 1998
--------- --------
<S> <C> <C>
ASSETS
Cash and equivalents $ 310 $ 273
Trade accounts receivable, less allowances 1,938 1,800
Inventories:
Finished goods 1,692 1,809
Work in process 427 443
Materials and supplies 525 630
--------- ---------
2,644 2,882
Other current assets 384 265
--------- ---------
Total current assets 5,276 5,220
Trademarks and other assets 524 501
Property, net 2,022 2,090
Intangible assets, net 3,229 3,178
--------- ---------
$ 11,051 $ 10,989
========= =========
LIABILITIES AND EQUITY
Notes payable $ 843 $ 586
Accounts payable 1,672 2,003
Accrued liabilities 2,980 2,923
Current maturities of long-term debt 258 221
--------- ---------
Total current liabilities 5,753 5,733
Long-term debt 2,096 2,270
Deferred income taxes 36 22
Other liabilities 557 538
Minority interests in subsidiaries 557 560
ESOP convertible preferred stock 270 305
Unearned deferred compensation (214) (255)
Common stockholders' equity 1,996 1,816
--------- ---------
$ 11,051 $ 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 Twenty-Six Weeks
Ended December 26, 1998 and December 27, 1997
(in millions, except per share data)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------- -------------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 5,286 $ 5,279 $ 10,146 $ 10,172
-------- -------- --------- ---------
Cost of sales 3,175 3,259 6,195 6,333
Selling, general and administrative expenses 1,549 1,474 3,022 2,928
Interest expense 62 61 114 109
Interest income (23) (17) (47) (26)
Product recall charge 76 - 76 -
Gain on sale of business - - (137) -
Restructuring charge - 2,040 - 2,040
-------- -------- --------- ---------
4,839 6,817 9,223 11,384
-------- -------- --------- ---------
Income (loss) before income taxes 447 (1,538) 923 (1,212)
Income tax (expense) benefit (125) 260 (263) 159
-------- -------- --------- ---------
Net income (loss) 322 (1,278) 660 (1,053)
Preferred dividends, net of tax 3 4 6 8
-------- -------- --------- ---------
Net income (loss) applicable to common stockholders $ 319 $(1,282) $ 654 $ (1,061)
======== ======== ========= =========
Net income (loss) per common share - basic $ 0.35 $ (1.36) $ 0.72 $ (1.12)
======== ======== ========= =========
Average shares outstanding 908 945 910 949
======== ======== ========= =========
Net income (loss) per common share - diluted $ 0.34 $ (1.36) $ 0.69 $ (1.12)
======== ======== ========= =========
Average shares outstanding 955 945 956 949
======== ======== ========= =========
Cash dividends per common share $ 0.125 $ 0.115 $ 0.24 $ 0.22
======== ======== ========= =========
</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 December 26, 1998
(in millions, except per share data)
<TABLE>
<CAPTION>
UNEARNED
COMMON CAPITAL RETAINED TRANSLATION RESTRICTED
TOTAL STOCK SURPLUS EARNINGS ADJUSTMENTS STOCK
------- ------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 28, 1997 $ 4,280 $ 640 $ -- $ 4,274 $ (618) $ (16)
Net loss (1,053) -- -- (1,053) -- --
Cash dividends -
Common ($.22 per share) (209) -- -- (209) -- --
Auction preferred ($458.00 per share) (1) -- -- (1) -- --
ESOP convertible preferred
($2.72 per share) (12) -- -- (12) -- --
Stock issuances -
Stock option and benefit plans 40 4 36 -- -- --
Restricted stock, less
amortization of $22 23 1 81 -- -- (59)
Reacquired shares (567) (15) (116) (436) -- --
Translation adjustments (133) -- -- -- (133) --
ESOP tax benefit 5 -- -- 5 -- --
ESOP share redemption 5 -- 5 -- -- --
Other (5) 1 (6) -- -- --
------- ------- ------- ------- ------- -------
Balances at December 27, 1997 2,373 631 -- 2,568 (751) (75)
Net income 530 -- -- 530 -- --
Cash dividends -
Common ($.23 per share) (214) -- -- (214) -- --
ESOP convertible preferred
($2.72 per share) (11) -- -- (11) -- --
Stock issuances -
Business acquisitions 10 -- 10 -- -- --
Stock option and benefit plans 46 4 42 -- -- --
Restricted stock, less
amortization of $20 11 -- (14) -- -- 25
Reacquired shares (933) (21) (70) (842) -- --
Translation adjustments (33) -- -- -- (33) --
ESOP tax benefit 5 -- -- 5 -- --
ESOP share redemption 4 1 3 -- -- --
Other 28 (1) 29 -- -- --
------- ------- ------- ------- ------- -------
Balances at June 27, 1998 1,816 614 -- 2,036 (784) (50)
Net income 660 -- -- 660 -- --
Cash dividends -
Common ($.24 per share) (219) -- -- (219) -- --
ESOP convertible preferred
($2.72 per share) (10) -- -- (10) -- --
Stock issuances -
Stock option and benefit plans 70 4 66 -- -- --
Business acquisitions 6 -- 6 -- -- --
Restricted stock, less
amortization of $17 17 -- 1 -- -- 16
Reacquired shares (543) (12) (129) (402) -- --
Translation adjustments 173 -- -- -- 173 --
ESOP tax benefit 4 -- -- 4 -- --
ESOP share redemption 35 2 33 -- -- --
Two-for-one stock split -- 609 -- (609) -- --
Change in common stock par value -- (1,208) 1,208 -- -- --
Other (13) -- (13) -- -- --
------- ------- ------- ------- ------- -------
Balances at December 26, 1998 $ 1,996 $ 9 $ 1,172 $ 1,460 $ (611) $ (34)
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 6
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Twenty-Six Weeks Ended December 26, 1998 and December 27, 1997
(in millions)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-------------------------
Dec. 26, Dec. 27,
1998 1997
------- ---------
<S> <C> <C>
OPERATING ACTIVITIES -
Net income (loss) $ 660 $ (1,053)
Adjustments for non-cash charges included in net income (loss):
Depreciation 189 214
Amortization of intangibles 91 95
Change in deferred income taxes 15 (375)
Product recall charge 76 -
Gain on sale of business (137) -
Restructuring charge - 2,040
Other 36 (11)
Changes in current assets and liabilities, excluding
businesses acquired and sold (382) (468)
-------- ----------
Net cash from operating activities 548 442
-------- ----------
INVESTMENT ACTIVITIES -
Purchases of property and equipment (206) (204)
Acquisitions of businesses and investments (201) (285)
Disposition of businesses 407 439
Sales of assets 142 26
Other 2 1
-------- ----------
Net cash from (used in) investment activities 144 (23)
-------- ----------
FINANCING ACTIVITIES -
Issuances of common stock 70 40
Purchases of common stock (543) (567)
Redemption of preferred stock - (200)
Borrowings of long-term debt 17 294
Repayments of long-term debt (220) (123)
Short-term borrowings, net 236 330
Payments of dividends (229) (222)
-------- ----------
Net cash used in financing activities (669) (448)
-------- ----------
Effect of changes in foreign exchange rates on cash 14 (6)
-------- ----------
Increase (decrease) in cash and equivalents 37 (35)
Cash and equivalents at beginning of year 273 272
-------- ----------
Cash and equivalents at end of quarter $ 310 $ 237
======== ==========
COMPONENTS OF CHANGES IN CURRENT ASSETS
AND LIABILITIES:
Increase in trade accounts receivable $ (111) $ (106)
Decrease in inventories 208 21
(Increase) decrease in other current assets (99) 2
Decrease in accounts payable (388) (376)
Increase (decrease) in accrued liabilities 8 (9)
-------- ----------
Changes in current assets and liabilities $ (382) $ (468)
======== ==========
</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 thirteen week period ended December 26, 1998 and
reduced income before income taxes, net income and diluted earnings per
share by $76 million, $50 million and $.05 per share, respectively. The
recall charge recognizes 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.
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 primarily related 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 or $.10 per share on a diluted basis. 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
has been adjusted to give effect to the stock split for all periods
presented.
On November 28,1998, the per share par value of the Corporation's
authorized common stock was changed from $1.33 1/3 per share to $.01
per share.
4. The components of comprehensive income, net of related tax effects, for
the thirteen and twenty-six weeks ended December 26, 1998 and
December 27, 1997 are as follows (in millions):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------------ -----------------------------
Dec. 26, 1998 Dec. 27, 1997 Dec. 26, 1998 Dec. 27, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 322 $ (1,278) $ 660 $ (1,053)
Foreign currency translation
adjustment 21 (75) 173 (133)
----- --------- ------ ---------
Comprehensive income (loss) $ 343 $ (1,353) $ 833 $ (1,186)
===== ========= ====== =========
</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 second
quarter and first six months of fiscal 1999 compared to the second quarter and
first six months of fiscal 1998, and a discussion of the changes in financial
condition during the first six months of fiscal 1999.
RESULTS OF OPERATIONS
Comparison of Second Quarter Fiscal 1999 to Second Quarter Fiscal 1998
- ----------------------------------------------------------------------
Operating results by business segment in the second quarter of fiscal 1999
compared to the second quarter of fiscal 1998 were as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
(in millions)
----------------------------------------------------
Sales Operating Income (1)(2)
----------------------- -----------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 1,452 $ 1,470 $ 89 $ (64)
Coffee & Tea 731 764 111 44
Household and Body Care 519 509 66 (120)
Foodservice 660 624 22 18
Branded Apparel 1,961 1,952 224 (1,344)
------- -------- ------- ---------
Total business segments 5,323 5,319 512 (1,466)
Intersegment sales (37) (40) -- --
------- -------- ------- ---------
Net sales and operating income $ 5,286 $ 5,279 $ 512 $ (1,466)
======= ======== ======= =========
</TABLE>
<TABLE>
<CAPTION>
Pretax Income (1)(2) Net Income (2)
----------------------- ----------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 82 $ (71) $ 50 $ (49)
Coffee & Tea 107 40 76 31
Household and Body Care 59 (127) 38 (127)
Foodservice 20 17 13 11
Branded Apparel 205 (1,369) 161 (1,126)
------- -------- ------- ---------
Total business segments 473 (1,510) 338 (1,260)
Unallocated corporate expense (26) (28) (16) (18)
------- -------- -------- ---------
Pretax income (loss) and
net income (loss) $ 447 $(1,538) $ 322 $ (1,278)
======= ======== ======== =========
</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 the
fiscal 1998 restructuring charge. These items are discussed elsewhere in
Management's Discussion and Analysis of Results of Operations.
Page 9
<PAGE>
CONSOLIDATED RESULTS - SECOND QUARTER FISCAL 1999 COMPARED WITH SECOND QUARTER
FISCAL 1998
Consolidated net sales increased 0.1% in the second quarter over the year ago
period. Businesses acquired net of businesses sold subsequent to the start of
the second quarter of last fiscal year increased sales by approximately 0.5
percentage points. Changes in foreign currencies had the effect of improving
reported sales by approximately 0.3 percentage points. The strengthening of most
European currencies relative to the U.S. dollar in the quarter more than offset
declines in the currencies of Mexico, South Africa and certain Asian countries.
Excluding the impact of acquisitions, dispositions and foreign currency changes,
sales decreased approximately 0.7% over the same quarter in the prior year.
The gross profit margin was 39.9% in the second quarter of fiscal 1999 compared
with 38.3% in the second quarter of fiscal 1998, reflecting improved gross
margins in each business segment. Higher gross margins in the Sara Lee Foods,
Coffee and Tea, and Household and Body Care segments were primarily responsible
for the increase. Foodservice and Branded Apparel gross profit margins were each
up slightly from the prior year quarter. Selling, general and administrative
expenses increased 5.1% over the same quarter last year. This increase was
primarily due to higher marketing, advertising and promotion expense as well as
changes in foreign currency movements.
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
thirteen week period ended December 26, 1998 and reduced income before income
taxes, net income and diluted earnings per share by $76 million, $50 million and
$.05 per share, respectively. The recall charge recognizes 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.
Operating income, excluding the product recall charge noted above and the fiscal
1998 restructuring charge described below, increased 2.2% in the quarter.
Businesses acquired net of businesses sold subsequent to the start of the second
quarter of last fiscal year decreased operating income by approximately 2.1
percentage points. Changes in foreign currency exchange rates had the effect of
reducing operating income by approximately 0.4 percentage points. Excluding the
impact of business acquisitions, dispositions and changes in foreign currency
exchange rates, operating income increased 4.7%.
Net interest expense decreased to $39 million in the quarter. Strong operating
cash flows in the first half of fiscal 1999 and the last half of fiscal 1998,
along with the recently completed sale of the Corporation's international
tobacco operations, were primarily responsible for the lower level of net
interest expense. Unallocated corporate expenses decreased $2 million from the
year ago quarter.
The following comparisons exclude the fiscal 1999 product recall charge and the
fiscal 1998 restructuring charge. Income before income taxes increased 4.1%. 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 7.1%, while diluted earnings per
share increased 14.7%. Earnings per share increased at a rate in excess of net
income primarily because of fewer average shares outstanding during the period.
Page 10
<PAGE>
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 in the second quarter of fiscal 1998 by $2,040 million, $1,625
million and $1.70 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
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 December 26, 1998, 25 manufacturing and distribution facilities have
been sold and 51 additional facilities have been closed. These actions comprise
approximately 60% 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 six months of fiscal 1999 and fiscal
1998 by approximately $65 million and $27 million, respectively, primarily as a
result of lower plant overhead and amortization expense. The Corporation expects
the restructuring plan to generate increased savings in subsequent periods,
growing to an annual savings of approximately $200 million in 2001. Savings from
the planned actions are expected to be used for both business-building
initiatives and profit improvement. A reconciliation of the restructuring
reserves through December 26, 1998 is presented on page 19 of this document.
OPERATING RESULTS BY BUSINESS SEGMENT - SECOND QUARTER FISCAL 1999 COMPARED WITH
SECOND QUARTER FISCAL 1998
The following discussion comparing business segment performance for the second
quarter of fiscal 1999 with the second quarter of fiscal 1998 excludes the
fiscal 1999 product recall charge and the fiscal 1998 restructuring charge noted
previously.
Net sales in the Sara Lee Foods segment declined in fiscal 1999 by 1.3%,
primarily reflecting the impact of lower commodity costs for processed meats
passed on to customers in the form of lower prices. Excluding the impact of
acquisitions, dispositions and changes in foreign currencies, sales in this
segment declined 2.7%. Excluding acquisitions, Packaged Meats posted a unit
volume gain of 2%, led by a 3% increase in branded product sales in the United
States. Worldwide unit sales for Sara Lee Bakery, excluding acquisitions, were
flat, as gains in the growing bakery-deli and fresh baked segments were offset
by declines at retail. Including acquisitions, Packaged Meats unit sales grew 4%
and Bakery volumes increased 3%.
Operating income in the Sara Lee Foods segment increased 13.8% as margins
benefited from increased unit sales, improved product mix in both Packaged Meats
and Bakery, lower commodity costs and favorable impacts from the restructuring
program initiated in fiscal 1998. Excluding the impact of acquisitions,
dispositions and changes in foreign currencies, operating income increased
13.5%. Pretax income of the segment increased 15.4%, or $21 million, resulting
principally from the operating income improvements noted above. The effective
tax rate of the segment declined to 37% and net income grew 17.7% to $100
million.
Page 11
<PAGE>
Net sales in the Coffee and Tea segment declined 4.4%. Excluding the results
of the tobacco operations disposed of earlier this fiscal year and
acquisitions made subsequent to the start of the second quarter of last
fiscal year, sales declined 2.1%. The strengthening of most European
currencies versus the U.S. dollar subsequent to the start of the second
quarter of last fiscal year increased reported sales by 2.5%. Thus, on a
comparable basis, sales declined 4.6% reflecting lower consumer prices, as a
result of declines in coffee costs. Excluding acquisitions, unit volumes for
roasted coffee and coffee concentrates, the segment's primary business,
increased 2% as consumers reacted favorably to lower coffee prices and
product introductions. Unit volumes grew 21% including sales contributed from
recently acquired businesses in Brazil and the United States.
Operating income for the Coffee and Tea segment declined 3.5% reflecting the
impact of the divestment of the international tobacco operations in the first
quarter. Excluding the impact of divestitures, net of new acquisitions,
operating income increased 7.2%. Changes in foreign currency exchange rates had
the effect of improving operating income of this segment by 3.4 percentage
points. Segment net income was flat reflecting a reduction in 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 2.2% and operating
income increased 1.6%. The weakening of foreign currencies relative to the U.S.
dollar, primarily in Mexico, South Africa and certain Asian countries, reduced
reported sales and operating income by 2.3% and 5.1%, respectively. Excluding
the impact of acquisitions, dispositions and changes in foreign currencies,
Household and Body Care sales and operating income increased 4.5% and 6.8%,
respectively. Unit volumes for this segment's four core categories - shoe care,
body care, insecticides and air fresheners - grew 15% in the quarter. Operating
income was favorably impacted by the ongoing restructuring program. Pretax
income of the segment increased 0.7% and net income increased 2.5% to $38
million.
Net sales in the Foodservice segment increased 5.8% including the impact of
acquisitions and 2.7% excluding the impact of acquisitions. Excluding
acquisitions, unit volumes grew 1%, reflecting gains from continuing operations
offset by the loss of a large, lower-margin chain customer during the quarter.
Including acquisitions, unit volumes grew 5%. Operating income grew 8.5% to $22
million. Results benefited from an improved customer mix and continued focus on
cost containment. Pretax income grew 6.8% and net income grew 8.3%, as the
effective tax rate of this segment declined approximately 1 percentage point.
Branded Apparel sales grew 0.5%, while operating income declined 2.6%.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, sales declined 0.2% and operating income decreased 1.4%. Unit
volumes for Worldwide Legwear fell 7%, combining a 1% increase in sock unit
sales with a 9% decline in sheer hosiery volumes. Worldwide Knit Products
unit sales increased 4% over the year ago second quarter, including 5% and 4%
gains in the underwear and activewear categories, respectively. 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 decline in operating income. Intimate Apparel
unit sales increased 16%, with strength in both the United States and Europe.
Pretax income in the Branded Apparel segment was flat in the quarter, as the
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%,
resulting primarily from increased earnings in certain foreign jurisdictions
that had lower tax rates. Segment net income increased 4.2% as a result of the
lower effective tax rate and net interest expense allocation.
Page 12
<PAGE>
Comparison of First Six Months of Fiscal 1999 to First Six Months of Fiscal 1998
- --------------------------------------------------------------------------------
Operating results by business segment in the first six months of fiscal 1999
compared to the first six months of fiscal 1998 were as follows:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
------------------------------------------------------
(in millions)
Sales Operating Income (1)(2)
------------------------- ------------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1998 1997 1998 1997
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 2,783 $ 2,829 $ 179 $ 12
Coffee & Tea 1,339 1,398 352 150
Household and Body Care 970 962 110 (80)
Foodservice 1,328 1,256 46 40
Branded Apparel 3,798 3,802 373 (1,195)
---------- -------- -------- ---------
Total business segments 10,218 10,247 1,060 (1,073)
Intersegment sales (72) (75) -- --
---------- -------- -------- ---------
Net sales and operating income $ 10,146 $ 10,172 $ 1,060 $ (1,073)
========== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Pretax Income (1)(2) Net Income (2)
------------------------- ------------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1998 1997 1998 1997
----------- --------- --------- --------
<S> <C> <C> <C> <C>
Sara Lee Foods $ 168 $ (2) $ 104 $ (6)
Coffee & Tea 345 143 247 102
Household and Body Care 97 (93) 63 (105)
Foodservice 43 38 27 24
Branded Apparel 340 (1,242) 267 (1,030)
---------- --------- -------- ---------
Total business segments 993 (1,156) 708 (1,015)
Unallocated corporate expense (70) (56) (48) (38)
---------- --------- -------- ---------
Pretax income (loss) and
net income (loss) $ 923 $ (1,212) $ 660 $ (1,053)
========== ========= ======== =========
</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 13
<PAGE>
CONSOLIDATED RESULTS - FIRST SIX MONTHS OF FISCAL 1999 COMPARED WITH FIRST SIX
MONTHS OF FISCAL 1998
Consolidated net sales decreased 0.3% in the first six months of fiscal 1999.
Businesses acquired net of businesses sold subsequent to the start of fiscal
1998 increased sales by approximately 0.3 percentage points. The overall
strengthening of the U.S. dollar relative to foreign currencies during the first
six months of the fiscal year had the effect of reducing reported sales by
approximately 0.5 percentage points. While most European currencies have
strengthened versus the U.S. dollar in the period, declines in Asian currencies
as well as those of Mexico, Australia, and South Africa offset the strength of
currencies in Europe. Excluding the impact of acquisitions, dispositions and
foreign currency changes, sales decreased approximately 0.1% over the same
period in the prior year.
The gross profit margin was 38.9% in fiscal 1999 compared with 37.7% in fiscal
1998, reflecting improved gross margins in each business segment. Higher gross
margins in the Sara Lee Foods, Coffee and Tea, and Household and Body Care
segments were largely responsible for the increase. Foodservice and Branded
Apparel gross profit margins were each up slightly from the prior year. Selling,
general and administrative expenses increased 3.2% over the same period last
year. This increase was primarily due to higher marketing, advertising and
promotion expense as well as changes in foreign currency movements.
As noted previously, in December 1998, the Corporation recorded a pretax charge
to provide for the estimated costs of a voluntary product recall relating to
selected packaged meat products. The charge reduced pretax income for the six
months ended December 26, 1998 by $76 million and net income by $50 million or
$.05 per share on a diluted basis.
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 for the six months ended December 26, 1998.
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 for the six months ended December 27, 1997
by $2,040 million, and net income by $1,625 million, or $1.69 per common
share on a diluted basis.
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 six months of fiscal 1999. Businesses
acquired net of businesses sold subsequent to the start of fiscal 1998 decreased
operating income by approximately 0.2 percentage points. The overall
strengthening of the U.S. dollar relative to foreign currencies had the effect
of reducing operating income by 0.9 percentage points. Excluding the impact of
business acquisitions, dispositions and changes in foreign currency exchange
rates, operating income increased 4.3%.
Net interest expense decreased to $67 million in the period. Strong operating
cash flows in the first half of fiscal 1999 and the last half of fiscal 1998,
along with the recently completed sale of the Corporation's international
tobacco operations, were primarily responsible for the lower level of net
interest expense. Unallocated corporate expenses increased by $14 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 4.1% during the first six 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 7.1%, while diluted earnings per share
increased 12.3%.
Page 14
<PAGE>
Earnings per share increased at a rate in excess of net income primarily because
of fewer average shares outstanding during the period. Preferred dividends also
declined during the period as a result of the redemption of the remaining
auction preferred shares during the first quarter of fiscal 1998.
OPERATING RESULTS BY BUSINESS SEGMENT - FIRST SIX MONTHS OF FISCAL 1999 COMPARED
WITH FIRST SIX MONTHS OF FISCAL 1998
The following discussion comparing business segment performance for the first
six months of fiscal 1999 with the first six 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 1.6% as lower
commodity costs were passed on to customers in the form of lower prices.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, sales in this segment declined 2.9%. Excluding acquisitions,
Packaged Meats posted a unit volume gain of 3%, led by a 5% increase in branded
product sales in the United States. 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 5% and Bakery volumes increased 2%.
Operating income increased by 16.1% resulting primarily from increased unit
sales, lower commodity costs and favorable impacts from the restructuring
program initiated in fiscal 1998. Excluding the impact of acquisitions,
dispositions and changes in foreign currencies, operating income increased
14.5%. Net interest expense allocated to the segment declined $3 million and
pretax income of the segment increased by 18.5%. The effective tax rate of the
segment declined to 37% and net income grew 20.8%, to $154 million.
Net sales in the Coffee and Tea segment declined 4.2%. Excluding the results
of the tobacco operations disposed of earlier this fiscal year and
acquisitions made subsequent to the start of last fiscal year, sales
increased 0.2%. The strengthening of most European currencies versus the U.S.
dollar increased reported sales by 1.5%. Thus, on a comparable basis, sales
decreased 1.3%. Excluding acquisitions, unit volumes for roasted coffee and
coffee concentrates, the segment's primary business, increased 6% as
consumers reacted favorably to lower coffee prices and product introductions.
Unit volumes grew 21% including sales contributed from recently acquired
businesses.
Operating income for the Coffee and Tea segment declined 2.6% 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 this segment by 2.1 percentage points.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, operating income in the segment declined 4.6%. Segment net income
increased 1.2% as a result of a reduction in the effective tax rate of the
segment from 31.1% to 28.5% for the six month period.
Net sales and operating income in the Household and Body Care segment increased
0.9% and 4.5%, 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 5.4% and 8.7%,
respectively. Excluding the impact of acquisitions, dispositions and changes in
foreign currencies, Household and Body Care sales and operating income increased
6.1% and 13.8%, respectively. Excluding acquisitions, unit volumes for this
segment's four core categories - shoe care, body care, insecticides and air
fresheners - grew 11%; unit volumes for these four categories grew 13% including
acquisitions.
Page 15
<PAGE>
Pretax income of the segment increased 5.4% primarily as a result of the
operating income improvements noted above. Net income increased 7.2%, to $63
million, as the effective tax rate related to this segment declined
approximately 1 percentage point.
Net sales in the Foodservice segment increased 5.8% including the impact of
acquisitions and 2.8% excluding the impact of acquisitions. Excluding
acquisitions, unit volumes grew 1%, but including recently completed
acquisitions, unit volumes grew 4% during the period. Operating income grew
7.4%, to $46 million. Results benefited from improved customer mix and continued
focus on cost containment. Pretax income grew 6.9% and net income grew 8.4%, as
the effective tax rate of this segment declined to 36.5% from 37.4%.
Branded Apparel sales and operating income declined 0.1% and 1.8%, respectively.
Excluding the impact of acquisitions, dispositions and changes in foreign
currencies, sales declined 0.3% while operating income declined 0.6%. Unit
volumes for Worldwide Legwear fell 4%, combining a 5% increase in sock unit
sales with an 8% decline in sheer hosiery volumes. Worldwide Knit Products unit
sales improved 2%, 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
gains in the activewear category and contributed to the decline in operating
income. Intimate Apparel unit sales increased 13%, with strength in both the
United States and Europe.
Pretax income in the Branded Apparel segment increased 2.1% 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 6.5% as a result of the lower effective tax rate and net interest
expense allocation.
FINANCIAL CONDITION
During the first six months of fiscal 1999, net cash provided from operating
activities was $548 million as compared to $442 million in the comparable period
of fiscal 1998. The $106 million improvement is primarily due to improved
earnings and better inventory management.
Net cash generated from investment activities was $144 million in the first six
months of fiscal 1999 as compared to a net use of cash of $23 million in the
comparable period of fiscal 1998. The Corporation received $549 million of cash
from the sale of assets and businesses during the first six 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 $84 million from the
comparable period in the prior year.
In fiscal 1998, the Corporation announced its plans to repurchase $3 billion of
its common stock over a three year period. A total of $1.5 billion of Sara Lee
Corporation common stock was repurchased in fiscal 1998 and $543 million was
repurchased during the first six months of fiscal 1999. During the first six
months of fiscal 1999, $33 million of net cash was received from long and
short-term borrowings, while in the comparable period of fiscal 1998, cash of
$501 million was received from long and short-term borrowings.
Page 16
<PAGE>
YEAR 2000 COMPLIANCE
In January 1996, the Corporation initiated a program to address the Year 2000
information technology issues that affect its operations. Essentially, the Year
2000 problem consists of computer applications, including devices with imbedded
technology, using only the last two digits to refer to a year rather than all
four digits. As a result, these applications could fail or create erroneous
results to the extent that "00" is recognized as the year 1900 rather than the
year 2000. The Corporation's Year 2000 program is designed to identify and
correct these problems.
The program has been developed with the help of independent consultants and
consists of various steps to identify and evaluate Year 2000 issues and
remediate systems that are not Year 2000 compliant. The Corporation's program to
identify and evaluate Year 2000 readiness includes inventorying and testing
systems that are commonly thought of as IT systems, such as computer networks,
as well as systems that are not commonly thought of as IT systems, such as
automated production systems. Both IT and non-IT systems may contain imbedded
technology or "chips" which complicates the Corporation's Year 2000
identification, evaluation, remediation and testing efforts. Among the
functional areas the Corporation has evaluated are its order, production,
distribution and financial systems. The Corporation has completed its inventory
of all IT and non-IT systems and has identified systems with Year 2000
exposures. The Corporation has also conducted 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
and will continue to contact its significant suppliers, customers and service
providers to determine the extent to which such entities are vulnerable to Year
2000 issues and whether the products and services purchased by or from such
entities are Year 2000 compliant. The Corporation has also begun to assess
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 second quarter of fiscal 1999, the Corporation had verified
that approximately 65% 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 $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 or will occur. This expectation assumes
that the Corporation will not be obligated to incur significant Year 2000
related costs on behalf of its customers or suppliers.
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
problem, including uncertainty regarding the Year 2000 readiness of customers,
suppliers and governmental agencies, the Corporation has not developed a
comprehensive analysis of the most likely adverse Year 2000 scenario. However,
the Corporation is currently developing contingency
Page 17
<PAGE>
plans to ensure that the Year 2000 issue will not pose significant operational
problems for the Corporation. This process includes, among others, developing
emergency backup procedures in case of systems failures, identifying alternative
suppliers, and developing alternative plans to engage in business activities
with customers and suppliers that are not experiencing Year 2000 problems. These
plans will continue to be monitored as the year 2000 approaches.
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 some 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. 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 price transparency, evaluating the Corporation's exposure to currency
exchange risk during and following the transition period to the euro and
determining the impact on the Corporation's processes for preparing accounting
and taxation records. The cost of the Corporation's program to address the euro
conversion is not expected to be material. However, while the Corporation
believes it is taking the appropriate steps to mitigate risks associated with
the euro conversion, uncertainties 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 all
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.
Page 18
<PAGE>
SARA LEE CORPORATION AND SUBSIDIARIES
RECONCILIATION OF RESTRUCTURING RESERVES
AS OF DECEMBER 26, 1998
(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 DEC. 26, 1998
------------- ------------- ---------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anticipated losses associated with disposal
of long-lived assets $ 1,729 $(1,729) $ -- $ -- $ -- $ --
Pension and social costs 219 -- (39) (53) -- 127
Anticipated expenditures to close and
dispose of idled facilities - includes
non-cancelable lease obligations 47 -- -- (14) -- 33
Anticipated losses associated with disposal
of equity and cost method investments 45 (45) -- -- -- --
------- ------- ------- ------- ------- -------
2,040 (1,774) (39) (67) -- 160
Foreign exchange impacts -- -- -- 4 4
------- ------- ------- ------- ------- -------
Total restructuring reserves $ 2,040 $(1,774) $ (39) $ (67) $ 4 $ 164
======= ======= ======= ======= ======= =======
</TABLE>
Page 19
<PAGE>
PART II
ITEM 2 - CHANGES IN SECURITIES
On October 29, 1998, the Corporation declared a two-for-one stock split in the
form of a 100% stock dividend effective December 1, 1998. Also, on November 28,
1998, the Corporation changed the per share par value of its authorized common
stock from $1.33 1/3 per share to $.01 per share.
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 voluntary recall of certain packaged meats products; (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, 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
On December 23, 1998, the Corporation filed a current report on Form 8-K
with respect to its press release on December 22, 1998 relating to a
voluntary recall of certain packaged meat products. A copy of the
Corporation's press release is attached as an exhibit to Form 8-K.
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: February 8, 1999
Page 22
<PAGE>
EXHIBIT 11
SARA LEE CORPORATION AND SUBSIDIARIES
Computation of Net Income per Common Share
(in millions except per share data)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 26, 1998
-----------------------------------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------- --------------------------------
Basic Diluted Basic Diluted
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
EARNINGS:
Net income $ 322 $ 322 $ 660 $ 660
Less: Dividends on Preferred Stock,
net of tax benefits (3) - (6) -
Adjustment attributable to conversion of
ESOP Convertible Preferred Stock - (1) - (2)
-------------- ------------- -------------- -------------
Net Income Available for Common Stockholders $ 319 $ 321 $ 654 $ 658
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
SHARES:
Weighted Average Shares Outstanding 908 908 910 910
Add: Common Stock Equivalents -
Stock options - 13 - 12
ESOP Convertible Preferred Stock - 30 - 30
Restricted stock and other - 4 - 4
-------------- ------------- -------------- -------------
Adjusted Weighted Average Shares Outstanding 908 955 910 956
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
NET INCOME PER COMMON SHARE $ 0.35 $ 0.34 $ 0.72 $ 0.69
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
</TABLE>
Page 23
<PAGE>
EXHIBIT 11
(continued)
SARA LEE CORPORATION AND SUBSIDIARIES
Computation of Net Income per Common Share
(in millions except per share data)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 27, 1997
-----------------------------------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------- --------------------------------
Basic Diluted Basic Diluted
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
EARNINGS:
Net Loss $ (1,278) $ (1,278) $ (1,053) $ (1,053)
Less: Dividends on Preferred Stocks,
net of tax benefits (4) (4) (8) (8)
-------------- ------------- -------------- -------------
Net Loss Applicable to Common Stockholders $ (1,282) $ (1,282) $ (1,061) $ (1,061)
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
SHARES:
Weighted Average Shares Outstanding 945 945 949 949
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
NET LOSS PER COMMON SHARE $ (1.36) $ (1.36) $ (1.12) $ (1.12)
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
</TABLE>
Page 24
<PAGE>
EXHIBIT 12.1
SARA LEE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions except ratios)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
--------------------------------------
Dec. 26, Dec. 27,
1998 (1) 1997 (2)
-------------- --------------
<S> <C> <C>
Fixed charges:
Interest expense $ 114 $ 109
Interest portion of rental expense 30 33
-------------- --------------
Total fixed charges before capitalized interest 144 142
Capitalized interest 5 9
-------------- --------------
Total fixed charges $ 149 $ 151
-------------- --------------
-------------- --------------
Earnings available for fixed charges:
Income (loss) before income taxes $ 923 $ (1,212)
Less undistributed income in minority-owned companies (2) (2)
Add minority interest in majority-owned subsidiaries 16 15
Add amortization of capitalized interest 11 10
Add fixed charges before capitalized interest 144 142
-------------- --------------
Total earnings (losses) available for fixed charges $ 1,092 $ (1,047)
-------------- --------------
-------------- --------------
Ratio of earnings (losses) to fixed charges 7.3 (6.9)
-------------- --------------
-------------- --------------
</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>
Twenty-Six Weeks Ended
----------------------------------------
Dec. 26, Dec. 27,
1998 (1) 1997 (2)
----------------- --------------
<S> <C> <C>
Fixed charges and preferred stock dividend requirements:
Interest expense $ 114 $ 109
Interest portion of rental expense 30 33
----------------- ----------------
Total fixed charges before capitalized interest
and preferred stock dividend requirements 144 142
Capitalized interest 5 9
Preferred stock dividend requirements (3) 10 13
----------------- ----------------
Total fixed charges and preferred stock
dividend requirements $ 159 $ 164
----------------- ----------------
----------------- ----------------
Earnings available for fixed charges and preferred
stock dividend requirements:
Income (loss) before income taxes $ 923 $ (1,212)
Less undistributed income in minority-owned companies (2) (2)
Add minority interest in majority-owned subsidiaries 16 15
Add amortization of capitalized interest 11 10
Add fixed charges before capitalized interest and
preferred stock dividend requirements 144 142
----------------- ----------------
Total earnings (losses) available for fixed charges and
preferred stock dividend requirements $ 1,092 $ (1,047)
----------------- ----------------
----------------- ----------------
Ratio of earnings (losses) to fixed charges and
preferred stock dividend requirements 6.9 (6.4)
----------------- ----------------
----------------- ----------------
</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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> DEC-26-1998
<CASH> 289
<SECURITIES> 21
<RECEIVABLES> 2,198
<ALLOWANCES> 260
<INVENTORY> 2,644
<CURRENT-ASSETS> 5,276
<PP&E> 5,111
<DEPRECIATION> 3,089
<TOTAL-ASSETS> 11,051
<CURRENT-LIABILITIES> 5,753
<BONDS> 2,096
0
56
<COMMON> 9
<OTHER-SE> 1,987
<TOTAL-LIABILITY-AND-EQUITY> 11,051
<SALES> 10,146
<TOTAL-REVENUES> 10,146
<CGS> 6,195
<TOTAL-COSTS> 6,195
<OTHER-EXPENSES> 76
<LOSS-PROVISION> 105
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 923
<INCOME-TAX> 263
<INCOME-CONTINUING> 660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 660
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.69
</TABLE>
