SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 4, 2001
SARA LEE CORPORATION
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(Exact name of Registrant as Specified in Its Charter)
Maryland 1-3344 36-2089049
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
Suite 4600, Three First National Plaza, Chicago, Illinois 60602-4260
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 312/726-2600
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Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Item 5. Other Events.
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Set forth is the registrant's audited consolidated financial statements as
of June 30, 2001 and for the fiscal year then ended, Management's Discussion and
Analysis of Financial Condition and Results of Operations related thereto and
the report of its independent accountants, Arthur Andersen LLP, dated August
July 27, 2001.
Financial Summary
Years ended
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June 30, July 1, July 3, June 27, June 28,
Dollars in millions except per share data 2001(1) 2000 1999(2,4) 1998(3) 1997
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Results of Operations
Continuing Operations
Net sales $ 17,747 $ 17,511 $ 17,270 $ 17,426 $ 17,361
Operating income (loss)(5) 2,453 2,041 2,071 (28) 1,990
Income (loss) before income taxes 1,851 1,567 1,570 (531) 1,401
Income (loss) 1,603 1,158 1,131 (575) 960
Effective tax rate 13.4% 26.1% 28.0% 8.2% 31.5%
Income (loss) per common share
Basic 1.94 1.31 1.24 (.63) .97
Diluted 1.87 1.27 1.19 (.63) .94
Net income (loss) 2,266 1,222 1,191 (523) 1,009
Net income (loss) per common share
Basic 2.75 1.38 1.31 (.57) 1.02
Diluted 2.65 1.34 1.26 (.57) .99
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Financial Position
Total assets $ 10,167 $ 11,611 $ 10,292 $ 10,784 $ 12,775
Total debt 3,221 4,683 3,344 3,061 2,663
Operating cash flow to total debt(6) 42.0% 29.8% 41.4% 55.0% 47.0%
Return on invested capital(7) 23.9% 24.2% 21.3% 17.5% 16.0%
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Per Common Share(8)
Dividends $ .57 $ .53 $ .49 $ .45 $ .41
Book value at year-end 1.43 1.46 1.43 1.97 4.46
Market value at year-end 18.94 19.31 22.50 28.31 21.03
Shares Used in the Determination
of Net Income per Share
Basic (in millions) 819 875 903 939 959
Diluted (in millions) 854 912 944 939 1,004
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Other Information
Cash flow - Net cash from operating activities $ 1,496 $ 1,540 $ 1,603 $ 1,935 $ 1,552
Depreciation 392 402 352 409 470
Amortization of intangibles 207 200 181 186 193
Capital expenditures 532 647 535 474 547
Media advertising expense 347 391 414 401 414
Total advertising and promotion expense 2,069 1,997 2,010 1,970 1,936
Common stockholders of record 78,400 82,600 83,300 85,100 88,800
Number of employees 141,500 154,200 133,900 134,800 137,100
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(1) In 2001, the gain on the disposal of Coach of $967, net of the business
dispositions and other charges of $554, had the following impacts on
continuing operations - income before income taxes and income increased
$413 and $467, respectively. Including the after-tax gain on the sale of
PYA/Monarch of $638, recorded as discontinued operations, and the previous
items, net income increased $1,105.
(2) In 1999, the gain on the sale of the tobacco business of $137, net of the
product recall charge of $76, had the following impacts on continuing
operations - income before income taxes and income increased $61 and $47,
respectively. Net income increased $47 as a result of these items.
(3) In 1998, a restructuring provision had the following impacts on continuing
operations - income before income taxes and income were reduced by $2,038
and $1,624, respectively. Net income was reduced by $1,625 as a result of
the restructuring.
(4) 53-week year.
(5) Operating income (loss) is reconciled to income from continuing operations
in the business segment information note to the consolidated financial
statements.
(6) Net cash flow from operating activities as a percentage of total balance
sheet debt, imputed lease liabilities and auction preferred stock.
(7) The numerator in the Return on Invested Capital (ROIC) computation consists
of net income, plus after tax interest, amortization and the cash generated
or used from the change in deferred taxes. The denominator in the ROIC
computation consists of the average of total assets less payables, accruals
and investments in associated companies for the year.
(8) Restated for the 2-for-1 stock split in 1999.
The Notes to Financial Statements should be read in conjunction with the
Financial Summary.
Management's Discussion and Analysis of Financial Condition and Results of
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Operations
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The following discusses Sara Lee Corporation's (corporation) results of
operations, financial position and risk management activities. This discussion
should be read in conjunction with the consolidated financial statements and
related notes thereto contained elsewhere in this Report. The corporation's
fiscal year ends on the Saturday closest to June 30. Fiscal years 2001 and 2000
were 52-week years, and fiscal 1999 was a 53-week year. Unless otherwise stated,
references to years relate to fiscal years.
CONSOLIDATED RESULTS OF OPERATIONS - 2001 COMPARED WITH 2000
Unusual Items Affecting Comparability - In May 2000, a program to reshape the
business activities of the corporation was announced. The primary objectives of
this program were to: 1) divest PYA/Monarch, a domestic foodservice business,
and focus on the global operations in the Sara Lee Foods, Beverage, Intimates
and Underwear and Household Products segments; 2) divest the Coach accessories
business and focus the Intimates and Underwear segment around operations that
market basic, non-fashion, repeat purchase branded items; 3) divest certain
other businesses that have limited growth opportunities and low returns; and 4)
improve the competitive structure of the corporation by exiting certain high-
cost manufacturing, distribution and administrative activities. During 2001, a
substantial number of these actions were completed. The recognition of these
events in the consolidated financial statements increased income from continuing
operations in 2001 by $467 million and net income by $1.1 billion. Diluted
earnings per share in 2001 excluding these items is $1.36 and including these
items is $2.65. For purposes of discussing the consolidated results of
operations and segment performance in 2001 as compared with 2000, these items
are defined as unusual items. A discussion of each item follows:
PYA/Monarch Divestiture - In December 2000, the corporation sold its PYA/Monarch
foodservice distribution business and received cash proceeds of $1,559 million.
The disposition resulted in a gain before income taxes of $1,126 million and an
after-tax gain of $638 million, or $.75 of diluted earnings per share. The
PYA/Monarch foodservice operation constituted a reportable segment of the
corporation, and as a result, this gain has been recognized in the discontinued
operations section of the accompanying consolidated financial statements.
Divestiture of Coach Business - A tax-free gain of $967 million, or $1.13 of
diluted earnings per share, was recognized on the disposition of the Coach
business in 2001. This disposition took place in two steps. In October 2000, the
corporation's Coach subsidiary completed an initial public offering of 19.5% of
its common stock. Cash proceeds of $122 million were received and a tax-free
gain of $105 million was recognized upon completion of the offering. In April
2001, the second step of the disposition was completed when the corporation's
remaining 80.5% ownership interest in Coach was exchanged with third parties for
41.4 million shares of Sara Lee common stock. The market value of the Coach
shares disposed of was $998 million, and an $862 million gain was recognized on
this tax-free transaction.
Other Business Dispositions - During 2001, the corporation's management approved
plans to dispose of 17 businesses with limited growth opportunities and low
returns. At the end of 2001, the disposition of 10 of these businesses had been
completed, and the disposition of the remaining businesses is expected to be
completed by December 2001. These actions resulted in a pretax charge of $341
million and a reduction in net income of $352 million, or $.41 of diluted
earnings per share. Of the total pretax charge, $236 million relates to the 10
transactions that were closed in 2001 and $105 million is the estimated loss on
transactions that are anticipated to close in 2002. The $341 million charge is
included in the "business dispositions and other charges" line of the
consolidated statement of income and reduced operating income in the
corporation's business segments as follows: Intimates and Underwear - $246
million; Sara Lee Foods - $93 million; and Beverage - $2 million. These 17
businesses had an operating loss of $7 million in 2001 and an operating profit
of $2 million in 2000. Sales recognized by these operations were $670 million in
2001 and $925 million in 2000. The net assets of businesses awaiting sale are
displayed on the "net assets of businesses held for sale" line of the
consolidated balance sheets. See the unusual items note to the consolidated
financial statements for a more complete description of these business
dispositions.
Other Charges - During 2001, the corporation's management approved plans to
terminate a number of employees and exit certain manufacturing, distribution and
administrative activities within a twelve-month period. These actions resulted
in a pretax charge of $213 million and a reduction in net income of $148
million, or $.17 of diluted earnings per share. Of the $213 million charge, $187
million is included in the "business dispositions and other charges" line of the
consolidated statement of income.
The remaining $26 million relates to anticipated losses on the exit of certain
licensed apparel products and is displayed in the "cost of sales - product line
exit costs" line of the consolidated statement of income. $210 million of the
charge is directly attributable to the corporation's business segments, and $3
million is related to the corporate headquarters. Business segment operating
income was reduced as follows: Intimates and Underwear - $165 million; Sara Lee
Foods - $36 million; Beverage - $6 million; and Household Products - $3 million.
The $213 million charge consists of the following:
. $124 million of the charge is for the cost of severance and other employee
benefits associated with the termination of 13,200 specifically identified
employees. Of this total, 12,301 individuals are employed in the Intimates and
Underwear operations.
. $38 million of the charge is for anticipated losses on the disposal of real
estate and equipment at nine owned facilities and the disposal of equipment at a
number of leased facilities. The charge primarily relates to the planned exit of
Intimates and Underwear manufacturing facilities in the United States, Mexico
and Europe; two domestic meat processing plants; and a Beverage facility in
Europe. As of June 30, 2001, four of the nine owned facilities had been closed,
and all actions contemplated by the exit plan are expected to be completed
within twelve months of the related charge. The carrying value of the property
and equipment awaiting sale at June 30, 2001 is $26 million.
. $23 million of the charge is related to non-cancelable lease payments on 26
leased facilities that are being exited. As of June 30, 2001, nine of the leased
facilities had been exited.
. $28 million of the charge resulted from the decision to terminate product
licensing agreements and exit related manufacturing operations. Of the $28
million charge, $26 million is for anticipated losses on the disposition of
inventory related to manufacturing operations exited and $2 million is for
payments to cancel third-party licensing arrangements.
Of the $213 million charge, $150 million will require the use of cash and $63
million is a non-cash component. The corporation expects to fund the cash costs
of this charge from internal sources and proceeds generated from the sale of
non-core businesses. These actions are expected to generate savings of $141
million in 2003. A more complete description of the 2001 exit activities is
contained in the unusual items note to the consolidated financial statements.
Additional exit activities, which have not been finalized or approved by
management at this time, are expected to be recognized in the first half of
2002.
Continuing Operations - Consolidated net sales increased 1.3% to $17.7 billion
from $17.5 billion in 2000. Businesses acquired net of businesses sold
subsequent to the start of 2000 increased reported sales by 4.8%. The
strengthening of the U.S. dollar in relation to key foreign currencies,
including the euro, had the effect of reducing reported sales by 4.1%. Thus, on
a comparable basis, excluding the impact of acquisitions, dispositions and
changes in foreign currency exchange rates, sales increased 0.6%. Comparable
sales growth in Sara Lee Foods and Household Products contributed to this
increase; the Beverage and Intimates and Underwear segments reported net sales
declines for the year.
The gross profit margin, excluding unusual items, was 42.2% in 2001, compared
to 42.3% with 2000. Lower gross profit margins in the Intimates and Underwear
business offset improved gross profit margins in the corporation's other
business segments.
Selling, general and administrative (SG&A) expenses increased 3.5% from the
prior year due principally to a 3.7% increase in media, advertising and
promotion spending. When measured as a percentage of sales, SG&A expenses were
33.0% in 2001, compared with 32.4% in 2000.
Operating income is defined as income from continuing operations before income
taxes, interest, corporate unallocated expenses, and amortization of goodwill
and trademarks. Operating income, excluding the unusual items, decreased $4
million, or 0.2%, in 2001 from 2000. Businesses acquired net of businesses sold
subsequent to the start of 2000 increased operating income by 4.2%. Changes in
foreign currency exchange rates had the effect of reducing operating income by
4.6%. As a result, on a comparable basis, excluding the impact of business
acquisitions, dispositions, changes in foreign currency exchange rates and
unusual items, operating income increased 0.2% in the year. Lower gross profit
margins and increased SG&A spending offset sales increases and resulted in the
decline in reported operating income. Operating income including unusual items
increased 20.1% versus the comparable period of the prior year.
Net interest expense increased $4 million to $180 million during 2001, due to
higher average interest rates compared with the prior year. Unallocated
corporate expenses, which are costs not directly attributable to specific
business segment operations, increased to $231 million in 2001. Higher corporate
office and
minority interest expense in the current year along with favorable currency
movements in the prior year were responsible for the increase in the unallocated
corporate expenses. Goodwill and trademark amortization increased $20 million to
$191 million as a result of business acquisitions completed over the past year.
Income from continuing operations before income taxes, excluding unusual
items, decreased 8.2% in 2001. The effective tax rate decreased from 26.1% to
21.0% of pretax income from continuing operations during the year, as a result
of increased earnings in certain foreign jurisdictions that had lower tax rates.
Income from continuing operations, excluding unusual items, decreased 1.9%,
while income from continuing operations per diluted share increased to $1.33, or
4.7%, in 2001, due to fewer average shares outstanding during the period.
Including the unusual items, income from continuing operations increased 38.4%
and diluted earnings per share increased 47.2% to $1.87 in 2001.
Discontinued Operations - On December 4, 2000, the corporation completed the
sale of the PYA/Monarch foodservice operation. The operating results of this
business are included in discontinued operations until the date of disposition.
These results contributed pretax income of $42 million and after-tax income of
$25 million, or $.03 per diluted share, during 2001.
Consolidated Net Income - Excluding the unusual items, net income declined 4.9%,
from $1,222 million in 2000 to $1,161 million in 2001. Diluted earnings per
share increased 1.5% to $1.36 in 2001 due to fewer average shares outstanding
during the period. Including the unusual items, net income was $2,266 million,
an increase of 85.5%, and diluted earnings per share increased 97.8% to $2.65.
OPERATING RESULTS BY CONTINUING BUSINESS SEGMENT - 2001 COMPARED WITH 2000
The following discussion comparing 2001 business segment performance with 2000
excludes the unusual items as defined above.
Net sales in the Sara Lee Foods segment declined 0.1% in 2001. The
strengthening of the U.S. dollar in relation to foreign currencies decreased
reported sales by 2.6%, and business dispositions, net of acquisitions completed
subsequent to the start of 2000, also decreased sales by 0.4%. Excluding the
impact of changes in foreign currency, acquisitions and dispositions, comparable
sales in the Sara Lee Foods segment increased 2.9%. During 2001, the corporation
completed the disposition of its Bakery operations in Europe and India; Argal, a
Spanish meat business; and Ozark Salad, a domestic prepared salad business.
Excluding acquisitions and divested businesses, Packaged Meats unit volumes
decreased 1%. Increased sales of branded meat products in the United States were
offset by weak unit volumes in Europe resulting from higher commodity costs and
animal safety concerns. Excluding divested businesses, unit sales for Bakery
operations declined 2%.
Operating income in Sara Lee Foods decreased 2.0% in 2001. The strengthening
of the U.S. dollar in relation to foreign currencies decreased reported
operating income by 2.0%, and business dispositions net of acquisitions
completed subsequent to the start of 2000 increased operating income by 4.4%.
Excluding the impact of changes in foreign currency, acquisitions and
dispositions, comparable operating income in this segment declined 4.4%.
Increased media, advertising and promotion spending offset improved gross
margins in the meats and bakery operations.
Net sales in the Beverage segment increased 2.2% in 2001. Businesses acquired
subsequent to the start of 2000 increased reported sales by 11.4%. The
strengthening of the U.S. dollar in relation to foreign currencies decreased
reported sales by 6.6%. Thus, excluding acquisitions and changes in foreign
currency, sales decreased 2.6%, reflecting base business unit sales declines and
the negative impact of lower commodity coffee costs during the year, which
resulted in lower prices to customers. Excluding acquisitions, unit volumes for
roasted coffee and coffee concentrates, the segment's primary business,
decreased 2%. Unit volumes grew 30% including sales contributed from recently
acquired coffee businesses.
Operating income for the Beverage segment increased 2.8% in 2001. Businesses
acquired subsequent to the start of 2000 increased operating income by 6.9%. The
strengthening of the U.S. dollar in 2001 decreased reported operating income by
8.6%. Thus, on a comparable basis, operating income increased 4.5% from 2000.
The increase reflects an improved gross profit margin offset in part by higher
media, advertising and promotion spending in relation to 2000.
Net sales in the Household Products segment declined 3.1% and operating income
decreased 2.9%, reflecting the impact of foreign currencies on this segment in
2001. The strengthening of the U.S. dollar relative to foreign currencies,
particularly in Europe, reduced both reported sales and operating income by
9.3%. Excluding the impact of acquisitions and changes in foreign currencies,
sales and operating income in Household Products increased 6.1% and 6.3%,
respectively. Total unit volumes for this segment's four core categories - shoe
care, body care, insecticides and air fresheners - increased 4% in 2001.
Intimates and Underwear net sales of $7.8 billion increased 2.2% over the
prior year. Businesses acquired net of businesses sold subsequent to the start
of 2000 increased reported sales by 7.3%, while the impact of exchange rate
changes resulting from the strengthening of the U.S. dollar in 2001 reduced
reported sales by 2.6%. As a result, on a comparable basis, sales decreased
2.5%. Operating income was unchanged in 2001, reflecting a decline in the
segment's gross profit margin, due largely to significant competitive pressures
in several basic apparel retail sectors and an increase in media, advertising
and promotion spending. Businesses acquired net of businesses sold subsequent to
the start of 2000 increased operating income by 4.2%, and the impact of exchange
rate changes resulting from the strengthening of the U.S. dollar reduced
operating income by 1.6%. Thus, on a comparable basis, excluding the impacts of
acquisitions, dispositions and changes in foreign currencies, operating income
decreased 2.6%. The sales and operating income performance of this segment
include the results of the disposed businesses (Coach, Champion Europe and the
Australasian Intimates and Underwear business) until the date of disposition.
Had these disposed businesses been excluded from both 2001 and 2000 results,
reported net sales would have risen 5.3% and reported operating income would
have fallen 4.1%. Intimate apparel unit sales increased 14% in 2001 including
acquisitions, and increased 2% excluding unit sales volumes contributed from
recent acquisitions. Worldwide Knit Products unit sales, including acquisitions,
increased 1% in relation to 2000, combining a 7% increase in activewear volumes
and a 2% decline in the underwear category. Excluding the impact of recent
acquisitions, Knit Products volumes declined 2%. Unit volumes for Worldwide
Legwear were unchanged including acquisitions, reflecting a 9% increase in sock
unit sales and a 9% decline in sheer hosiery volumes. Legwear volumes declined
4% excluding acquisitions.
CONSOLIDATED RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999
Unusual Items Affecting Comparability - In 1999, the corporation recognized a
gain on the disposition of its international tobacco operations and a charge
related to the recall of certain meat products. The net impact of these two
events increased 1999 income from continuing operations and net income by $47
million. Diluted earnings per share in 1999 excluding these two items was $1.21
and including these two items was $1.26. For purposes of discussing the
consolidated results of operations and segment performance in 2000 as compared
to 1999, these items are defined as unusual items. A summary of each item
follows:
Divestiture of Tobacco Business - In the first week of 1999, the corporation
disposed of certain assets related to its international tobacco operation. The
corporation received cash proceeds of $386 million upon closing the transaction,
had an investment in the net assets of the business of $249 million and
recognized a pretax gain of $137 million in 1999. The gain on this sale
increased 1999 income by $97 million, or $.10 of diluted earnings per share.
Product Recall - In December 1998, the corporation announced that it was
recalling specific production lots of hot dogs and other packaged meat products
that could contain Listeria bacteria. The estimated cost of this action was
recognized in the second quarter of 1999 and reduced 1999 income from continuing
operations before income taxes, income from continuing operations and income
from continuing operations per common share - diluted by $76 million, $50
million and $.05 per share, respectively. The recall charge recognized the
estimated costs associated with the return and destruction of affected products
sold through retail grocery stores and selected foodservice channels in the
United States, the destruction of affected inventory in the corporation's
Zeeland, Michigan facility, and liabilities incurred as a result of these
actions. Substantially all of the product and inventory subject to recall was
subsequently destroyed. The actual cost of the inventory destroyed and related
disposition costs were consistent with prior estimates.
Continuing Operations - Net sales increased 1.4% to $17.5 billion in 2000 from
$17.3 billion in 1999. Businesses acquired net of businesses sold subsequent to
the start of 1999 increased net sales by 4.7%. The strengthening of the U.S.
dollar in relation to foreign currencies during the year had the effect of
reducing reported sales by 3.4%. The strength of the U.S. dollar in relation to
most European currencies, including those of several European Union member
countries whose currency exchange rates were previously fixed with the euro, was
offset in part by the strength of the currencies in Japan, Mexico, Canada and
Indonesia. Since 1999 was a 53-week year, prior-year results reflect the impact
of an additional week of reported sales. On a comparable basis, excluding the
impact of acquisitions, dispositions, foreign currency exchange rate changes and
the additional week included in the fourth quarter of 1999, sales increased 1.9%
over the prior year. Comparable sales growth in Household Products and Intimates
and Underwear contributed to this increase; Sara Lee Foods and Beverage reported
sales declines of 0.5% and 0.4%, respectively, on a comparable basis.
The gross profit margin was 42.3% in 2000, compared with 42.8% in 1999. Higher
gross profit margins in Sara Lee's Beverage and Household Products segments,
which were favorably impacted by improved sales volumes during the year, were
offset by lower gross profit margins in Sara Lee Foods. Intimates and Underwear
segment gross profit margins were down slightly from the prior year as well. The
gross profit margin decline in Sara Lee Foods resulted from lower unit volumes
in both the Packaged Meats and Bakery operations, and increased costs in the
Packaged Meats business caused by significantly higher commodity costs, and the
continuing effects during much of the year from the December 1998 product
recall.
SG&A expenses decreased 1.3% from the prior year, or 0.8% when measured on a
percentage of sales basis. The lower level of SG&A expenses in 2000 was
attributable to continuing benefits from completed restructuring actions, lower
corporate and administrative overhead, and reduced levels of advertising and
promotion spending.
Excluding the unusual items, operating income increased $31 million, or 1.5%,
in 2000. Businesses acquired net of businesses sold subsequent to the start of
1999 increased operating income by 2.2%. The strengthening of the U.S. dollar
relative to foreign currencies had the effect of reducing operating income by
3.2%. Prior-year results reflect the impact of an additional week in the fourth
quarter of 1999. Thus, on a comparable basis, excluding the impact of business
acquisitions, dispositions, changes in foreign currency exchange rates and
1999's 53rd week, operating income increased 4.4%, reflecting improvements on a
comparable basis in all business segments except Sara Lee Foods, which declined
significantly in relation to the prior year.
Net interest expense increased to $176 million in 2000, compared with $141
million in 1999. This increase was the result of higher average outstanding debt
levels required to support acquisitions and the corporation's share repurchase
activities during the year. Unallocated corporate expenses, which are costs not
directly attributable to specific business segment operations, decreased to $127
million, principally as a result of decreased corporate office administration
costs and lower expenses associated with incentive compensation and benefit
plans.
The following comparisons exclude the impact of the unusual items recognized
in 1999. Income from continuing operations before income taxes of $1.6 billion
increased 3.8% during 2000. The effective tax rate decreased from 28.2% to 26.1%
of pretax income from continuing operations, resulting primarily from increased
earnings in certain foreign jurisdictions with lower tax rates. Income from
continuing operations increased 6.9% to $1.2 billion, while income from
continuing operations per diluted share increased 11.4% to $1.27 per share.
Diluted earnings per share increased at a rate in excess of income from
continuing operations because of fewer average shares and exercisable stock
options outstanding during the year. Including the unusual items, income from
continuing operations and related diluted earnings per share increased 2.4% and
6.7%, respectively.
Discontinued Operations - Net sales of the PYA/Monarch foodservice segment were
$2,903 million in 2000 and $2,742 million in 1999, an increase of 5.9%. Pretax
income of this segment increased 5.7% from $101 million in 1999 to $107 million
in 2000. Income from the discontinued PYA/Monarch operation increased 5.5%, from
$60 million in 1999 to $64 million in 2000.
Consolidated Net Income - Excluding the impact of unusual items, net income
increased 6.9%, from $1,144 million in 1999 to $1,222 million in 2000, while
diluted earnings per share increased 10.7% to $1.34. Diluted earnings per share
increased at a rate in excess of net income because of fewer average shares and
exercisable stock options outstanding during the year. Including the impact of
unusual items, net income increased 2.6% in 2000 while diluted earnings per
share increased 6.3%.
OPERATING RESULTS BY CONTINUING BUSINESS SEGMENT - 2000 COMPARED WITH 1999
The following discussion comparing 2000 business segment performance with 1999
excludes the unusual items noted above.
Net sales in the Sara Lee Foods segment declined 3.1% in 2000, largely due to
unit volume declines in both the Packaged Meats and Bakery operations. Sales
were negatively affected during much of the year by the impact of the business
disruption caused by the December 1998 recall of certain packaged meat products
produced at the corporation's plant in Zeeland, Michigan. Excluding the impact
of acquisitions, dispositions, changes in foreign currencies and the 53rd week
in 1999, segment sales decreased 0.5%. Packaged Meats unit volumes were down 5%
excluding acquisitions and the impact of the 53rd week in 1999, reflecting
declines in both the U.S. and European markets. Worldwide unit sales for Sara
Lee Bakery declined 9%, as the impact of the 53rd week in 1999 was offset by
acquisitions completed during the year. Volume declines in the U.S. bakery-deli
category coupled with declines in Europe contributed to the unit sales decrease
during the year. Including acquisitions, Packaged Meats unit volumes declined
5%.
Operating income in the Sara Lee Foods segment declined 21.7% in 2000. This
decline reflects higher costs in the packaged meats businesses caused by
significantly higher commodity costs, the continuing effects during much of the
year from the December 1998 product recall and the profit impacts of lower sales
volumes in both the Packaged Meats and Bakery operations. On a comparable basis,
excluding the impact of acquisitions, dispositions, changes in foreign
currencies and 1999's 53rd week, segment operating income declined 19.6%.
Net sales in Sara Lee's Beverage segment increased 7.6%. Businesses acquired
subsequent to the start of the prior fiscal year contributed significantly to
segment results, increasing reported sales in 2000 by 17.1%. The strengthening
of the U.S. dollar in relation to key European currencies decreased reported
sales by 7.3%. On a comparable basis, excluding the impact of acquisitions,
currency exchange rate changes and the 53rd week in 1999, sales decreased 0.4%.
Net sales were negatively impacted by significantly lower commodity coffee costs
in 2000, which resulted in lower prices to customers during much of the year.
Excluding acquisitions and the 1999 53rd week impact, unit volumes for roasted
coffee and coffee concentrates, the segment's primary business, increased 1%, as
consumers reacted favorably to product offerings and lower coffee prices. Unit
volumes grew 26% including sales contributed from recently acquired businesses.
Operating income for the Beverage segment increased 9.0%, reflecting the
profit impact of higher segment sales volumes and the benefits from lower
commodity costs during the year. Changes in foreign currency exchange rates had
the effect of reducing operating income in the Beverage segment by 7.8%.
Excluding the impact of acquisitions, changes in foreign currencies and the 53rd
week in 1999, operating income increased 11.0%.
Net sales and operating income in the Household Products segment increased
2.8% and 8.3%, respectively. The strengthening of the U.S. dollar in relation to
foreign currencies, particularly in Europe, reduced reported sales and operating
income by 5.8% and 5.4%, respectively. Sales and operating income contributed
from recently completed acquisitions largely offset the impact of 1999's 53rd
week. As a result, excluding the impact of acquisitions, dispositions, changes
in foreign currencies and the 53rd week in 1999, Household Products segment
sales and operating income increased 8.9% and 14.3%, respectively. Excluding
acquisitions and the 53rd week impact, unit volumes for this segment's four core
categories - shoe care, body care, insecticides and air fresheners - increased
10%. Unit volumes contributed from acquisitions made during the year offset the
impact of 1999's 53rd week.
Intimates and Underwear net sales improved 2.1%, while operating income
increased 8.7% to $844 million. Excluding the impact of acquisitions,
dispositions, changes in foreign currencies and 1999's 53rd week, sales
increased 2.7% and operating income increased 11.2%. Unit volumes for Worldwide
Legwear declined 4%, combining a 6% increase in sock unit sales with an 8%
decline in sheer hosiery volumes, reflecting the continuing decline in the
global sheer hosiery market. Unaffected by acquisitions during the year, sock
unit volumes increased 8% and sheer hosiery unit sales declined 6%, excluding
the impact of 1999's 53rd week. Worldwide Knit Products unit sales improved 6%,
including unit gains of 9% in the underwear and 6% in the activewear categories.
On a comparable basis, excluding acquisitions and the 1999 53rd week impact,
Knit Products unit volumes increased 8%. Intimate Apparel unit sales increased
6%, with strength in both the United States and Europe. Excluding the impact of
acquisitions and 1999's 53rd week, unit sales improved 8%. The Coach accessories
business reported improved unit volumes, sales and operating income during the
year, reflecting growth in both the direct-to-consumer and wholesale channels.
Intimates and Underwear segment operating income was favorably impacted during
the year by the restructuring program initiated in 1998.
Financial Position
Net cash provided by operating activities was $1,496 million in 2001, $1,540
million in 2000 and $1,603 million in 1999. Net cash from operations in 2001 was
negatively impacted by a number of factors. First, the PYA/Monarch foodservice
business, which generated $84 million of cash from operations in 2000, used $24
million of cash in the period prior to its disposition. Second, a number of the
other operating units disposed of in 2001 generated lower levels of operating
cash flow than in 2000. Finally, the reshaping activities taking place in 2001
required the use of cash. The net reduction in operating cash flows in 2000 was
primarily the result of increased receivable and inventory levels in comparison
with the prior year, which offset cash generated by improved earnings during the
year.
Net cash generated from investing activities during 2001 was $1,065 million,
while net cash used in investing activities was $1,296 million in 2000 and $192
million in 1999. This increase in cash in 2001 resulted from management's focus
on disposing of certain non-core businesses, generating proceeds of $1,819
million. These proceeds, in conjunction with management's
decision to finance a larger portion of the capital needs of the corporation
with long-term debt, resulted in the repayment of virtually all of the short-
term debt at the end of 2001. The repayment of the short-term debt in
conjunction with the business dispositions reduced the corporation's current
liabilities to $5.0 billion at the end of 2001, as compared with $6.8 billion in
the prior year.
As of July 1, 2000, the corporation's current liabilities exceeded current
assets by $785 million. This working capital deficit resulted from the
corporation's 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 increase in cash used for investment activities in 2000 as compared to
1999 is the result of a $621 million increase in cash expenditures for purchases
of businesses and property and equipment, and lower proceeds from the
disposition of businesses and assets versus the prior year. The corporation
received $570 million of cash from the disposition of businesses and
investments, and the sale of assets in 1999. These proceeds relate primarily to
the sale during the first quarter of the international tobacco business, which
resulted in the receipt of $386 million of cash proceeds, and sales of assets as
part of the ongoing program to reduce the level of assets deployed in the
business.
During 2001, the corporation acquired several companies for an aggregate
purchase price of $300 million. The principal acquisitions were Cafe Pilao
Caboclo Ltda., a Brazilian manufacturer and marketer of roasted coffee; Amando,
a European processed meat manufacturer; and Zorba, a Brazilian apparel
manufacturer.
During 2000, the corporation acquired several companies and made certain
equity method investments for an aggregate purchase price of $1 billion, which
consisted of $743 million in cash and $257 million in stock. The principal
acquisitions were Chock full o'Nuts Corporation, a roaster, packer and marketer
of coffee in the United States; the North American coffee business of Nestle
S.A., which includes the roasted and ground coffee products sold under the Hills
Bros, MJB and Chase & Sanborn brands; Outer Banks Inc., a manufacturer, marketer
and distributor of knitted sport shirts; and Courtaulds Textiles plc, a European
producer, marketer and distributor of private-label and branded apparel and
fabrics based in the United Kingdom. The corporation also acquired a minority
interest in Johnsonville Sausage, a domestic manufacturer and marketer of fresh
meat products.
During 1999, the corporation acquired several companies for an aggregate
purchase price of $234 million in cash and $9 million in common stock. The
principal acquisitions were Continental Coffee, a domestic manufacturer,
marketer and distributor of roasted and ground coffee, and Monsavon, a European
marketer and distributor of personal body care products.
Under the corporation's ongoing stock repurchase plan, the corporation
repurchased common stock with a value of $643 million in 2001, $1.0 billion in
2000 and $1.3 billion in 1999. Since 1998, the corporation has repurchased
common stock with a total value of approximately $4.5 billion. On June 27, 2001,
the corporation's board of directors voted to increase the number of shares of
common stock authorized for repurchase, resulting in a total remaining purchase
authorization at the end of 2001 of 25 million shares. Using cash proceeds from
business dispositions and issuances of long-term debt during 2001, the
corporation repaid a net $1.9 billion of short-term debt. During 2000, $1,245
million of net cash was received from long- and short-term borrowing, while in
1999, net cash of $187 million was received. Cash dividends increased to $486
million in 2001, compared with $485 million in 2000 and $464 million in 1999.
As described in the subsequent event discussion below and in the notes to the
consolidated financial statements, the corporation has acquired The Earthgrains
Company (Earthgrains) for a cash purchase price of approximately $1.9 billion
plus the assumption of approximately $957 million of Earthgrains' outstanding
debt. Subsequent to year-end, in connection with completing this acquisition,
the corporation increased the size of its short-term credit facilities to
provide funding for both acquisitions and operations. The corporation has
numerous credit facilities available, including ongoing revolving credit
agreements totaling $3.82 billion, after the subsequent year-end increase.
Management considers these facilities sufficient to satisfy its operating
requirements. The initial funding of the Earthgrains acquisition was completed
with cash on hand and short-term debt, a portion of which management intends to
refinance on a long-term basis.
SUBSEQUENT EVENT
In July 2001, the corporation announced that it had entered into an agreement to
acquire Earthgrains, a fresh packaged bread and refrigerated dough business in
the United States and Europe. Under the terms of the agreement, the corporation
made a cash tender offer for all of Earthgrains' common stock at $40.25 per
share, or approximately $1.9 billion, plus the assumption of Earthgrains'
outstanding long-term debt of approximately $957 million. On August 7, 2001,
upon the completion of the initial tender offer period, the corporation acquired
Earthgrains when approximately 93% of the outstanding Earthgrains' shares were
tendered and accepted by the corporation. Following the completion of the tender
offer period, Earthgrains was merged into a subsidiary of Sara Lee.
RISK MANAGEMENT
The corporation is exposed to market risk from changes in interest rates,
foreign exchange rates and commodity prices. To modify the risk from these
interest rate, foreign currency exchange rate and commodity price fluctuations,
the corporation enters into various hedging transactions that have been
authorized pursuant to the corporation's policies and procedures. The
corporation does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.
Foreign Exchange - The corporation uses primarily foreign currency forward and
option contracts to hedge its exposure from adverse changes in foreign exchange
rates. The corporation's exposure to foreign exchange rates exists primarily
with the European euro, Mexican peso, Canadian dollar and British pound against
the U.S. dollar. Hedging is accomplished through the use of financial
instruments as the gain or loss on the hedging instrument offsets the gain or
loss on an asset, a liability or a basis adjustment to a firm commitment.
Hedging of anticipated transactions is accomplished with financial instruments
as the gain or loss on the hedge occurs on or near the maturity date of the
anticipated transactions.
Interest Rates - The corporation uses interest rate swaps to modify its exposure
to interest rate movements and to reduce borrowing costs. The corporation's net
exposure to interest rate risk consists of floating-rate instruments that are
benchmarked to U.S. and European short-term money market interest rates.
Interest rate risk management is accomplished through the use of swaps to modify
interest payments under these instruments.
Commodities - The corporation is a purchaser of certain commodities such as
beef, pork, coffee, wheat, corn, butter, soybean and corn oils, and sugar. The
corporation generally buys these commodities based upon market prices that are
established with the vendor as part of the purchase process. The corporation
does not use significant levels of commodity financial instruments to hedge
commodity prices, due to a high correlation between the commodity cost and the
ultimate selling price of the corporation's products.
Risk Management Activities - The corporation maintains risk management control
systems to monitor the foreign exchange, interest rate and commodity risks, and
the corporation's offsetting hedge positions. The risk management control system
uses analytical techniques including market value, sensitivity analysis and
value at risk estimations.
Value at Risk - The value at risk estimations are intended to measure the
maximum amount the corporation could lose from adverse market movements in
interest rates and foreign exchange rates, given a specified confidence level,
over a given period of time. Loss is defined in the value at risk estimation as
fair market value loss. As a result, foreign exchange gains or losses that are
charged directly to translation adjustments in common stockholders' equity are
included in this estimate. The value at risk estimation utilizes historical
interest rates and foreign exchange rates from the past year to estimate the
volatility and correlation of these rates in the future. The model uses the
variance-covariance statistical modeling technique and includes all interest
rate sensitive debt and swaps, foreign exchange hedges and their corresponding
underlying exposures. The estimated value at risk amounts shown below represent
the potential loss the corporation could incur from adverse changes in either
interest rates or foreign exchange rates for a one-day period. The average value
at risk amount represents the simple average of the quarterly amounts for the
past year. These amounts are not significant compared with the equity,
historical earnings trend or daily change in market capitalization of the
corporation.
Time Confidence
Dollars in millions Amounts Average Interval Level
------------------- ------- ------- -------- ----------
Value at Risk Amounts
Interest rates $6.3 $5.8 1 day 95%
Foreign exchange 9.9 6.0 1 day 95
------------------- ---- ---- ----- --
Sensitivity Analysis - For commodity derivative instruments held, the
corporation utilizes a sensitivity analysis technique to evaluate the effect
that changes in the market value of commodities will have on the corporation's
commodity derivative instruments. This analysis includes the commodity
derivative instruments and, thereby, does not consider the underlying exposure.
At year-end, the potential change in fair value of commodity derivative
instruments, assuming a 10% change in the underlying commodity price, was $4.5
million. This amount is not significant compared with the earnings and equity of
the corporation.
EURO
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies (legacy
currencies) and one new common currency - the euro. The transition period for
the introduction of the euro extends through June 2002. Beginning January 2002,
new euro-denominated bills and coins will be issued. In conjunction with the
conversion process to the euro, the corporation has taken steps to convert its
information technology systems to handle the new currency, prepared for
maintaining accounting, tax and other business records in the new currency and
is continuing to evaluate the ability of all significant vendors and customers
to accurately convert to the euro. Currently, the introduction and use of the
euro has not had a material effect on the corporation's foreign operations,
foreign exchange practices, or hedging and cash management activities. While the
corporation will continue to evaluate the impact of the euro over time, based on
currently available information, the corporation does not believe that the
introduction of the euro currency will have a material adverse impact on its
consolidated financial condition, cash flows or results of operations.
ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS
Following is a discussion of recently issued accounting standards that the
corporation will be required to adopt in a future period.
Business Combinations Accounting Standards - In June 2001, the Financial
Accounting Standards Board (FASB) issued Statements of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." The provisions of SFAS 141 apply to all business
acquisitions initiated after June 30, 2001, and the corporation will adopt the
provisions of SFAS 142 as of July 1, 2001. These pronouncements reflect a
fundamentally different approach to accounting for business combinations,
goodwill and other intangible assets than is currently required. Upon adoption,
the subsequent accounting for these items will change in the following
significant respects:
. All business combinations will be accounted for by the purchase method.
. Intangibles acquired in a business combination are to be recognized apart from
goodwill if they either arise from contractual or other legal rights or if the
intangible is capable of being separated from the acquired business and sold,
licensed or transferred. Intangibles such as trademarks, customer lists,
customer contracts and relationships, employment contracts, and licensing and
royalty agreements meet these recognition criteria and will need to be measured,
and separately classified apart from goodwill on the balance sheet for
acquisitions initiated after June 30, 2001. Previously recognized intangibles
that do not meet the criteria will need to be reclassified as goodwill.
. Accounting standards in place through June 30, 2001 concluded that goodwill
and all other intangible assets were wasting assets (that is, finite lived) and
thus the amounts assigned to them should be amortized in determining net income.
SFAS 142 does not presume that those assets are wasting assets. Instead,
goodwill and intangible assets that have indefinite useful lives will not be
amortized. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives.
. SFAS 142 sets forth a number of pertinent factors to be considered in
establishing a useful life of intangibles that differs from prior guidelines.
These factors include product life cycles, market competitive and other economic
trends, as well as the level of maintenance required to obtain future cash
flows. The useful lives of all intangible assets as of July 1, 2001 will need to
be reassessed using these criteria, and future amortization will be based on
these lives.
. Both goodwill and intangibles will need to be tested for impairment at least
annually using the specific guidance and criteria set out in SFAS 142. In the
first interim period after adoption, an impairment test will need to be
performed using the guidance provided by this Statement.
All business combinations recognized in the attached consolidated financial
statements have been accounted for using the purchase method. The primary
intangible assets recognized by the corporation in connection with prior
business combinations have been trademarks associated with acquired brands. Of
the $207 million of amortization recognized in 2001, $97 million relates to
goodwill associated with business combinations and equity method investments;
$95 million relates to trademarks purchased or acquired in connection with
business combinations; and $15 million relates to purchased intangibles
unrelated to business combinations. No further amortization of goodwill will be
recognized in 2002 under the provisions of SFAS 142. The corporation is
currently evaluating the useful lives of its individual trademarks in accordance
with the provisions of SFAS 142. Under the provisions of these new accounting
requirements, certain trademarks will be classified as having an infinite life
and will not be amortized and the useful lives of other trademarks will be
adjusted to comply with the requirements of this new standard.
Accounting for Sales Incentives - Over the past year, the Emerging Issues Task
Force (EITF) of the FASB has reached conclusions on a number of issues relating
to the measurement, recognition and income statement classification of a number
of items that can be broadly characterized as sales incentives or promotions.
Set out below is a summary of each of those pronouncements which the corporation
must adopt in 2002.
. EITF Issue 00-14, "Accounting for Certain Sales Incentives" - This Issue
addresses the recognition, measurement and income statement classification of
sales incentives voluntarily offered by a vendor without charge to customers
such as discounts, coupons, rebates and free products or services. The
corporation's current procedures regarding the recognition and measurement of
these types of sales incentives are in substantial compliance with this
statement. The consensus reached by the EITF does however require that any cash
sales incentives be recognized as a reduction to revenue and any incentives
involving free products must be classified as cost of sales on the consolidated
statement of income. The corporation's current policy is to classify many of the
sales incentives in the selling, general and administrative expenses caption of
the consolidated statement of income. This statement will be adopted by the
corporation in the third quarter of 2002 and will likely result in the
reclassification of certain amounts within the consolidated statement of income.
The amount of this reclassification is currently being measured.
. EITF Issue 00-25, "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor Products" - This Issue addresses the income
statement classification of a number of common incentives offered to businesses
that purchase products from the corporation and then sell those products to
third parties. The incentives include payments made to retailers to obtain space
on store shelves; agreements to reimburse a retailer for a portion of the cost
of product advertising; and agreements to reimburse retailers for shortfalls in
the selling price of the corporation's products. The consensus does not modify
the policies followed by the corporation in the recognition or measurement of
these incentives, but it does require that these incentives be presented in the
income statement as a reduction of revenue. The corporation's current policy is
to classify certain of these incentives in the selling, general and
administrative expenses caption of the consolidated statement of income. This
statement will be adopted by the corporation in the third quarter of 2002 and
will likely result in the reclassification of certain amounts within the
consolidated statement of income. The amount of this reclassification is
currently being measured.
FORWARD-LOOKING INFORMATION
From time to time, in oral statements and written reports, 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 affect the corporation's ability to achieve its stated goals
are the following: (i) impacts on reported earnings from fluctuations in foreign
currency exchange rates - particularly the euro - given the corporation's
significant concentration of business in Western Europe; (ii) significant
competitive activity, including advertising, promotional and price competition,
and changes in consumer demand for the corporation's products; (iii) inherent
risks in the marketplace associated with new product introductions, including
uncertainties about trade and consumer acceptance; (iv) the corporation's
ability to successfully integrate acquisitions, particularly Earthgrains, into
its existing operations and the availability of new acquisitions, joint ventures
and alliance opportunities that build stockholder value; (v) the financial
impact of the corporation's decision to dispose of certain non-core business
units; (vi) fluctuations in the cost and availability of various raw materials;
(vii) the effect on future revenues and expenses in the corporation's Packaged
Meats business resulting from the foot-and-mouth viral disease in parts of
Europe; (viii) the corporation's ability to complete transactions anticipated in
its business reshaping programs; and (ix) the corporation's ability to realize
forecasted savings, as well as improvements in productivity and efficiency from
its business reshaping programs. In addition, the corporation's results may also
be affected by general factors, such as economic conditions, political
developments, interest and inflation rates, accounting standards, taxes, and
laws and regulations in markets where the corporation competes.
Consolidated Statements of Income
Dollars in millions except per share data Years ended June 30, 2001 July 1, 2000 July 3, 1999
----------------------------------------------------------------------------------- ------------- ------------ ------------
Continuing Operations
Net sales $17,747 $17,511 $17,270
----------------------------------------------------------------------------------- ------------- ------------ ------------
Cost of sales 10,264 10,100 9,879
Cost of sales - product line exit costs 26 - -
Selling, general and administrative expenses 5,865 5,668 5,741
Interest expense 270 252 237
Interest income (90) (76) (96)
Unusual items
Gain on disposal of Coach business (967) - -
Business dispositions and other charges 528 - (137)
Product recall charge - - 76
----------------------------------------------------------------------------------- ------------- ------------ ------------
15,896 15,944 15,700
----------------------------------------------------------------------------------- ------------- ------------ ------------
Income from continuing operations before income taxes 1,851 1,567 1,570
Income taxes 248 409 439
----------------------------------------------------------------------------------- ------------- ------------ ------------
Income from Continuing Operations 1,603 1,158 1,131
Discontinued Operations
Income from discontinued operations, net of income taxes 25 64 60
Gain on disposal of discontinued operations, net of income taxes 638 - -
----------------------------------------------------------------------------------- ------------- ------------ ------------
Net Income $ 2,266 $ 1,222 $ 1,191
=================================================================================== ============= ============ ============
Income from Continuing Operations per Share of Common Stock
----------------------------------------------------------------------------------- ------------- ------------ ------------
Basic $ 1.94 $ 1.31 $ 1.24
=================================================================================== ============= ============ ============
Diluted $ 1.87 $ 1.27 $ 1.19
=================================================================================== ============= ============ ============
Net Income per Share of Common Stock
----------------------------------------------------------------------------------- ------------- ------------ ------------
Basic $ 2.75 $ 1.38 $ 1.31
=================================================================================== ============= ============ ============
Diluted $ 2.65 $ 1.34 $ 1.26
=================================================================================== ============= ============ ============
The accompanying Notes to Financial Statements are an integral part of these
statements.
Consolidated Balance Sheets
Dollars in millions except share data June 30, 2001 July 1, 2000 July 3, 1999
-------------------------------------------------------------------------------------- ------------- ------------ ------------
Assets
Cash and equivalents $ 548 $ 314 $ 279
Trade accounts receivable, less allowances of $157 in 2001, $195 in 2000
and $193 in 1999 1,538 1,764 1,611
Inventories
Finished goods 1,715 1,941 1,602
Work in process 454 529 470
Materials and supplies 413 481 463
-------------------------------------------------------------------------------------- ------------- ------------ ------------
2,582 2,951 2,535
Other current assets 321 382 294
Net assets of businesses held for sale 94 563 315
-------------------------------------------------------------------------------------- ------------- ------------ ------------
Total current assets 5,083 5,974 5,034
-------------------------------------------------------------------------------------- ------------- ------------ ------------
Other non-current assets 304 470 326
Property
Land 98 99 94
Buildings and improvements 1,646 1,745 1,613
Machinery and equipment 2,891 3,188 2,756
Construction in progress 266 330 260
-------------------------------------------------------------------------------------- ------------- ------------ ------------
4,901 5,362 4,723
Accumulated depreciation 2,755 3,043 2,699
-------------------------------------------------------------------------------------- ------------- ------------ ------------
Property, net 2,146 2,319 2,024
Trademarks and other identifiable intangibles, net 1,097 1,090 1,022
Goodwill, net 1,537 1,758 1,886
-------------------------------------------------------------------------------------- ------------- ------------ ------------
$10,167 $11,611 $10,292
====================================================================================== ============= ============ ============
The accompanying Notes to Financial Statements are an integral part of these
Balance Sheets.
June 30, 2001 July 1, 2000 July 3, 1999
------------------------------------------------------------------------ ------------- ------------ ------------
Liabilities and Stockholders' Equity
Notes payable $ 101 $ 2,054 $ 1,116
Accounts payable 1,505 1,762 1,645
Accrued liabilities
Payroll and employee benefits 812 928 779
Advertising and promotion 343 421 386
Taxes other than payroll and income 84 104 89
Income taxes 423 55 45
Other 1,210 1,054 1,320
Current maturities of long-term debt 480 381 336
------------------------------------------------------------------------ ------------- ------------ ------------
Total current liabilities 4,958 6,759 5,716
------------------------------------------------------------------------ ------------- ------------ ------------
Long-term debt 2,640 2,248 1,892
Deferred income taxes 244 148 71
Other liabilities 563 581 701
Minority interest in subsidiaries 625 616 613
Preferred stock (authorized 13,500,000 shares; no par value)
ESOP convertible: Issued and outstanding - 3,289,979 shares in 2001,
3,481,017 shares in 2000 and 3,654,073 shares in 1999 238 252 265
Unearned deferred compensation (223) (227) (232)
Common stockholders' equity
Common stock: (authorized 1,200,000,000 shares; $.01 par value)
Issued and outstanding - 781,964,060 shares in 2001,
846,330,749 shares in 2000 and 883,782,525 shares in 1999 8 8 9
Capital surplus - - 508
Retained earnings 2,635 2,393 1,760
Accumulated other comprehensive loss (1,521) (1,146) (1,006)
Unearned restricted stock issued for future services - (21) (5)
------------------------------------------------------------------------ ------------- ------------ ------------
Total common stockholders' equity 1,122 1,234 1,266
------------------------------------------------------------------------ ------------- ------------ ------------
$10,167 $11,611 $10,292
========================================================================= ============= ============ ============
The accompanying Notes to Fianancial Statements are an integral part of these
Balance Sheets.
Consolidated Statements of Common Stockholders' Equity
Accumulated
Other Com-
Unearned prehensive Comprehen-
Common Capital Retained Restricted Income sive Income
Dollars in millions Total Stock Surplus Earnings Stock (Loss) (Loss)
---------------------------------------------- ------- ---------------------------------------------------------------------
Balances at June 27, 1998 $ 1,816 $ 614 $ - $2,036 $ (50) $ (784)
Net income 1,191 - - 1,191 - - $1,191
Translation adjustments, net of tax of $(51) (161) - - - - (161) (161)
Unrealized gains on securities, net of tax 1 - - - - 1 1
Minimum pension liability, net of tax of $32 (62) - - - - (62) (62)
---------------------------------------------- ------- ---------------------------------------------------------------------
Comprehensive income $ 969
---------------------------------------------- ------- ---------------------------------------------------------------------
Cash dividends (464) - - (464) - -
Stock issuances (cancelations)
Business acquisitions 9 - 9 - - -
Stock option and benefit plans 111 4 107 - - -
Restricted stock, less amortization of $28 (15) - (60) - 45 -
Tax benefit related to incentive stock options 66 - 66 - - -
Reacquired shares (1,279) (13) (864) (402) - -
Two-for-one stock split - 609 - (609) - -
Par value change - (1,208) 1,208 - - -
ESOP tax benefit, redemptions and other 53 3 42 8 - -
---------------------------------------------- ------- ---------------------------------------------------------------------
Balances at July 3, 1999 1,266 9 508 1,760 (5) (1,006)
Net income 1,222 - - 1,222 - - $1,222
Translation adjustments, net of tax of $(75) (181) - - - - (181) (181)
Unrealized losses on securities, net of tax (1) - - - - (1) (1)
Minimum pension liability, net of tax of $(22) 42 - - - - 42 42
---------------------------------------------- ------- ---------------------------------------------------------------------
Comprehensive income $1,082
---------------------------------------------- ------- ---------------------------------------------------------------------
Cash dividends (485) - - (485) - -
Stock issuances (cancelations)
Business acquisitions 257 - 257 - - -
Stock option and benefit plans 84 - 84 - - -
Restricted stock, less amortization of $26 (28) - (12) - (16) -
Tax benefit related to incentive stock options 65 - 65 - - -
Reacquired shares (1,032) (1) (919) (112) - -
ESOP tax benefit, redemptions and other 25 - 17 8 - -
---------------------------------------------- ------- ---------------------------------------------------------------------
Balances at July 1, 2000 1,234 8 - 2,393 (21) (1,146)
Net income 2,266 - - 2,266 - - $2,266
Translation adjustments, net of tax of $98 (263) - - - - (263) (263)
Minimum pension liability, net of tax of $58 (107) - - - - (107) (107)
Transition adjustment related to change in
accounting for derivative instruments
and hedging activities, net of tax of $3 6 - - - - 6 6
Net unrealized loss on qualifying
cash flow hedges (11) - - - - (11) (11)
---------------------------------------------- ------- ---------------------------------------------------------------------
Comprehensive income $1,891
---------------------------------------------- ------- ---------------------------------------------------------------------
Cash dividends (486) - - (486) - -
Stock issuances (cancelations)
Stock option and benefit plans 104 - 104 - - -
Restricted stock (13) - - (34) 21 -
Tax benefit related to incentive stock options 10 - 10 - - -
Reacquired shares - repurchases (643) - (129) (514) - -
Exchange offer for Coach common stock (998) - - (998) - -
ESOP tax benefit, redemptions and other 23 - 15 8 - -
---------------------------------------------- ------- ---------------------------------------------------------------------
Balances at June 30, 2001 $ 1,122 $ 8 $ - $2,635 $ - $(1,521)
============================================== ======= =====================================================================
The accompanying Notes to Financial Statements are an integral part of these
statements.
Consolidated Statements of Cash Flows
Dollars in millions Years ended June 30, 2001 July 1, 2000 July 3, 1999
-------------------------------------------------------------- ------------- ------------ ------------
Operating Activities
Income from continuing operations $ 1,603 $ 1,158 $ 1,131
Adjustments for non-cash charges included in income
from continuing operations
Depreciation 392 402 352
Amortization of intangibles 207 200 181
Unusual items
Gain on disposal of Coach business (967) - -
Business dispositions and other charges 554 - (137)
Product recall charge - - 76
Increase in deferred taxes 88 48 29
Other non-cash credits, net (62) (38) (35)
Changes in current assets and liabilities, net of businesses
acquired and sold
Decrease (increase) in trade accounts receivable 42 (116) (21)
Decrease (increase) in inventories 25 (152) 112
(Increase) in other current assets (11) (47) (60)
(Decrease) in accounts payable (133) (56) (50)
(Decrease) increase in accrued liabilities (218) 57 (29)
-------------------------------------------------------------- ------------- ------------ ------------
Net cash from operating activities - continuing operations 1,520 1,456 1,549
Operating cash flows (used by) from discontinued operations (24) 84 54
-------------------------------------------------------------- ------------- ------------ ------------
Net cash from operating activities 1,496 1,540 1,603
-------------------------------------------------------------- ------------- ------------ ------------
Investment Activities
Purchases of property and equipment (532) (647) (535)
Acquisitions of businesses and investments (300) (743) (234)
Dispositions of businesses and investments 1,819 21 412
Sales of assets 65 64 158
Other 13 9 7
-------------------------------------------------------------- ------------- ------------ ------------
Net cash from (used in) investment activities 1,065 (1,296) (192)
-------------------------------------------------------------- ------------- ------------ ------------
Financing Activities
Issuances of common stock 104 84 111
Purchases of common stock (643) (1,032) (1,279)
Issuance of equity securities by subsidiary - - 50
Borrowings of long-term debt 1,023 725 20
Repayments of long-term debt (390) (502) (284)
Short-term (repayments) borrowings, net (1,914) 1,022 451
Payments of dividends (486) (485) (464)
-------------------------------------------------------------- ------------- ------------ ------------
Net cash used in financing activities (2,306) (188) (1,395)
-------------------------------------------------------------- ------------- ------------ ------------
Effect of changes in foreign exchange rates on cash (21) (21) (10)
-------------------------------------------------------------- ------------- ------------ ------------
Increase in cash and equivalents 234 35 6
Cash and equivalents at beginning of year 314 279 273
-------------------------------------------------------------- ------------- ------------ ------------
Cash and equivalents at end of year $ 548 $ 314 $ 279
============================================================== ============= ============ ============
The accompanying Notes to Financial Statements are an integral part of these
statements.
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(dollars in millions, except per share data)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain prior-year amounts
have been reclassified to conform with the current-year presentation. These
reclassifications had no impact on previously reported results of operations or
total stockholders' equity.
Consolidation
The consolidated financial statements include all majority-owned subsidiaries.
All significant intercompany transactions of consolidated subsidiaries are
eliminated. Acquisitions recorded as purchases are included in the consolidated
statements of income from the date of acquisition. Gains and losses resulting
from the issuance of common stock by a subsidiary of the corporation are
recognized in earnings in the period realized.
Fiscal Year
The corporation's fiscal year ends on the Saturday closest to June 30. Fiscal
years 2001 and 2000 were 52-week years, and fiscal year 1999 was a 53-week year.
Unless otherwise stated, references to years relate to fiscal years.
Foreign Operations
Foreign-currency-denominated assets and liabilities are translated into U.S.
dollars at the exchange rates existing at the respective balance sheet dates.
Translation adjustments resulting from fluctuations in exchange rates are
recorded as a separate component of other comprehensive income within common
stockholders' equity. Income and expense items are translated at the average
exchange rates during the respective periods.
Business Acquisitions and Dispositions
All business acquisitions in 2001, 2000 and 1999 have been accounted for using
the purchase method. Cash and the fair value of other assets distributed and
securities issued unconditionally and amounts of contingent consideration that
are determinable at the date of acquisition are included in determining the cost
of an acquired business and recorded at that date. Consideration that is issued
or is issuable at the expiration of a contingency period or that is held in
escrow pending the outcome of a contingency is not recorded as a liability or
shown as an outstanding security unless the outcome of the contingency is
determinable beyond a reasonable doubt.
Gains on business dispositions are recognized when the transactions close
and the amounts are realized. Losses on business dispositions are realized when
the losses are probable and measurable. In measuring gains or losses on the
disposition of a business, the consideration received is measured as the amount
of cash and the fair value of other assets received and securities transferred
unconditionally and amounts of contingent consideration that are determinable at
the date of disposition.
Substantially all consideration associated with business acquisitions and
dispositions recognized in 2001, 2000 and 1999 involved the receipt or payment
of cash or shares of the corporation's common stock. These amounts are disclosed
in the consolidated statements of stockholders' equity and the consolidated
statements of cash flows.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method for 94% of the corporation's inventories at
June 30, 2001 and by the last-in, first-out (LIFO) method for the remainder. Had
the FIFO method been used for the valuation of all inventories, the book value
of this asset would have been higher by $7 at June 30, 2001, $12 at July 1, 2000
and $1 at July 3, 1999.
Property
Property is stated at cost, and depreciation is computed principally using the
straight-line method at annual rates of 2% to 20% for buildings and
improvements, and 4% to 33% for machinery and equipment. Additions and
improvements that substantially extend the useful life of a particular asset and
interest costs incurred during the construction period of major properties are
capitalized. Repairs and maintenance costs are charged to expense. Upon sale or
disposition of the asset, the cost and related accumulated depreciation are
removed from the accounts.
Trademarks and Other Identified Intangibles
Trademarks arising from acquired businesses are amortized on a straight-line
basis over the periods of expected benefit, which range from 5 years to 40
years. Accumulated amortization of intangible assets amounted to $555 at June
30, 2001, $508 at July 1, 2000 and $402 at July 3, 1999.
Goodwill
The excess of the cost of purchased companies over the fair value of the
companies' assets and liabilities at the date of acquisition is amortized on a
straight-line basis over the periods of expected benefit, which range from 5
years to 40 years. Accumulated amortization of goodwill amounted to $609 at June
30, 2001, $611 at July 1, 2000 and $645 at July 3, 1999.
Long-lived Assets
Long-lived assets include primarily property, identifiable intangible assets and
goodwill. Long-lived assets being retained for use are periodically reviewed for
impairment by comparing the carrying value of the assets with their estimated
future undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during the period in which the loss was
incurred. An impairment loss is calculated as the difference between the
carrying value of the assets and the present value of estimated future net cash
flows or comparable market values, giving consideration to recent operating
performance.
Long-lived assets that are to be disposed of are reported at the lower of
carrying value or fair value less costs to sell. Reductions in carrying value
are recognized in the period in which management commits to a plan to dispose of
the assets.
Financial Instruments
The corporation uses financial instruments, including forward exchange, option,
futures and swap contracts, to manage its exposures to movements in interest
rates, foreign exchange rates and commodity prices. The use of these financial
instruments modifies the exposure of these risks with the intent to reduce the
risk or cost to the corporation. The corporation does not use derivatives for
trading purposes and is not a party to leveraged derivatives.
On the date a derivative contract is entered into, the corporation
designates the derivative as one of the following types of hedging instruments
and accounts for the derivative as follows:
Fair Value Hedge
A hedge of a recognized asset or liability or an unrecognized firm commitment is
declared as a fair value hedge. For fair value hedges, both the effective and
ineffective portions of the changes in the fair value of the derivative, along
with the gain or loss on the hedged item that is attributable to the hedged
risk, are recorded in earnings and reported in the consolidated statements of
income on the same line as the hedged item.
Cash Flow Hedge
A hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability is declared as a
cash flow hedge. The effective portion of the change in the fair value of a
derivative that is declared as a cash flow hedge is recorded in accumulated
other comprehensive income. When the hedged item impacts the income statement,
the gain or loss included in accumulated other comprehensive income is reported
on the same line in the consolidated statements of income as the hedged item. In
addition, both the fair value of changes excluded from the corporation's
effectiveness assessments and the ineffective portion of the changes in the fair
value of derivatives used as cash flow hedges are reported in selling, general
and administrative expenses in the consolidated statements of income.
Net Investment Hedge
A hedge of a net investment in a foreign operation is declared as a net
investment hedge. The effective portion of the change in the fair value of
derivatives, based upon spot rates, used as a net investment hedge of a foreign
operation is recorded in the cumulative translation adjustment account within
stockholders' equity. The ineffective portion of the change in the fair value of
a derivative or non-derivative instrument designated as a net investment hedge
is recorded in either selling, general and administrative expenses, or interest
expense if the hedging instrument is a swap, in the consolidated statements of
income.
Natural Hedge
A derivative used as a natural hedging instrument whose change in fair value is
recognized to act as an economic hedge against changes in the values of the
hedged item is declared as a natural hedge. For derivatives designated as
natural hedges, changes in fair value are reported in earnings in the selling,
general and administrative expenses line of the consolidated statements of
income.
The corporation formally documents its hedge relationships, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge transaction.
Derivatives are recorded in the consolidated balance sheets at fair value in
other assets and other liabilities. This process includes linking derivatives
that are designated as hedges of specific assets, liabilities, firm commitments
or forecasted transactions. The corporation also formally assesses, both at
inception and at least quarterly thereafter, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in
either the fair value or cash flows of the hedged item. If it is determined that
a derivative ceases to be a highly effective hedge, or if the anticipated
transaction is no longer likely to occur, the corporation discontinues hedge
accounting, and any deferred gains or losses are recorded in selling, general
and administrative expenses.
Non-U.S.-dollar financing transactions are accounted for as net investment
hedges when the hedged item is a long-term investment in the corresponding
foreign currency. Forward exchange contracts are recorded as natural hedges when
the hedged item is a recorded asset or liability that is revalued in each
accounting period, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52.
Revenue Recognition
The corporation recognizes revenue when title and risk of loss pass to the
customer. Appropriate provisions are made at the time of sale for uncollectible
accounts.
Advertising
Advertising costs, which include media advertising and production costs, are
expensed in the period in which the advertising first takes place. Advertising
costs were $347 in 2001, $391 in 2000 and $414 in 1999.
Stock-based Compensation
Employee stock options are accounted for under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25). APB No. 25 requires the use of the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price of
the stock at grant over the amount an employee must pay to acquire the stock.
The corporation makes pro forma disclosures of net earnings and earnings per
share as if the fair-value-based method of accounting had been applied as
required by SFAS No. 123, "Accounting for Stock-Based Compensation."
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based upon enacted tax
laws and rates. Federal income taxes are provided on that portion of the income
of foreign subsidiaries that is expected to be remitted to the United States and
be taxable.
COMMON STOCK
Changes in outstanding common shares for the past three years were:
Shares in thousands 2001 2000 1999
------------------------------ ------- ------- -------
Beginning balances 846,331 883,783 460,665
Stock issuances (cancelations):
Stock option and
benefit plans 7,248 5,467 6,431
Business acquisitions 25 10,209 257
Restricted stock plans (1,279) (152) (2,431)
Two-for-one stock split - - 456,628
Reacquired shares:
Stock purchased (30,692) (54,714) (40,582)
Exchange offer for Coach
common stock (41,402) - -
ESOP share redemption 1,684 1,615 2,694
Other 49 123 121
------------------------------ ------- ------- -------
Ending balances 781,964 846,331 883,783
============================== ======= ======= =======
Effective December 1, 1998, the corporation declared a two-for-one stock
split in the form of a 100% stock dividend. Common stock dividends and dividend
per share amounts declared were $468 and $.57 in 2001, $465 and $.53 in 2000,
and $444 and $.49 in 1999, respectively.
In October 1998, the stockholders of the corporation approved an amendment
to the corporation's charter to reduce the par value of each share of common
stock from $1.33 to $.01.
STOCK-BASED COMPENSATION
The corporation has various stock option, employee stock purchase and stock
award plans.
Stock Options
The exercise price of each stock option equals 100% of the market price of the
corporation's stock on the date of grant. Options can generally be exercised
over a maximum term of 10 years. Options generally vest ratably over three
years.
Under certain stock option plans, an active employee may receive a
replacement stock option equal to the number of shares surrendered upon a stock-
for-stock exercise. The exercise price of the replacement option is 100% of the
market value at the date of exercise of the original option, and the replacement
option will remain exercisable for the remaining term of the original option.
Replacement stock options generally vest six months from the grant date.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model and the following weighted average
assumptions:
2001 2000 1999
----------------------- --------- --------- ---------
Expected lives 3.0 years 4.3 years 3.2 years
Risk-free interest rate 5.4% 6.2% 5.1%
Expected volatility 33.6% 28.6% 25.0%
Dividend yield 2.8% 2.6% 1.9%
======================= ========= ========= =========
A summary of the changes in stock options outstanding under the
corporation's option plans during the years ended June 30, 2001, July 1, 2000
and July 3, 1999 is presented below:
Weighted
Average
Exercise
Shares in thousands Shares Price
----------------------------- ------- --------
Outstanding at June 27, 1998 61,098 $19.64
Granted 17,172 25.56
Exercised (13,085) 17.63
Canceled / Expired (2,982) 21.71
----------------------------- ------- --------
Outstanding at July 3, 1999 62,203 21.52
Granted 37,780 18.24
Exercised (4,639) 16.76
Canceled / Expired (5,739) 22.82
----------------------------- ------- --------
Outstanding at July 1, 2000 89,605 20.32
Granted 5,411 21.68
Exercised (8,532) 17.71
Canceled / Expired (8,496) 21.04
----------------------------- ------- --------
Outstanding at June 30, 2001 77,988 $20.62
============================= ======= ========
The following table summarizes information about stock options outstanding
at June 30, 2001:
Shares in thousands Options Outstanding Options Exercisable
------------------- -------------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at June 30, Contractual Exercise at June 30, Exercise
Prices 2001 Life (Yrs.) Price 2001 Price
------------------- -------------------------------------- -----------------------
$11.41-$18.71 26,866 7.6 $15.61 11,919 $15.38
18.72- 22.65 19,844 5.3 20.47 17,462 20.55
22.66- 31.60 31,278 5.5 25.01 22,976 25.71
------------------- -------------------------------------- -----------------------
$11.41-$31.60 77,988 6.2 $20.62 52,357 $21.64
=================== ====================================== =======================
At July 1, 2000 and July 3, 1999, the number of options exercisable was
40,932 and 31,283, respectively, with weighted average exercise prices of $21.73
and $21.50, respectively. Options available for future grant at the end of 2001,
2000 and 1999 were 52,736, 46,945 and 49,937, respectively. The weighted average
fair value of individual options granted during 2001, 2000 and 1999 was $4.65,
$3.95 and $4.68, respectively.
Employee Stock Purchase Plan (ESPP)
The ESPP permits full-time employees to purchase a limited number of shares of
the corporation's common stock at 85% of market value. Under the plan, the
corporation sold 2,155,261, 2,711,644 and 2,275,606 shares to employees in 2001,
2000 and 1999, respectively. Pro forma compensation expense is calculated for
the fair value of the employees' purchase rights using the Black-Scholes model.
Assumptions include an expected life of 1/4 of a year and weighted average risk-
free interest rates of 5.4% in both 2001 and 2000 and 4.6% in 1999. Other
underlying assumptions are consistent with those used for the corporation's
stock option plans described above.
Under APB No. 25, no compensation cost is recognized for stock options and
replacement stock options under the various stock-based compensation plans and
shares purchased under the ESPP. Had compensation cost for the corporation's
grants for stock-based compensation been determined consistent with SFAS No.
123, the pro forma net income and per share net income for 2001, 2000 and 1999
would have been as follows:
2001 2000 1999
------------------------------ ------ ------ ------
Net income $2,205 $1,139 $1,118
Net income per share - basic 2.68 1.29 1.23
Net income per share - diluted 2.59 1.25 1.19
============================== ====== ====== ======
Stock Unit Awards
Beginning in 1999, restricted stock units (RSUs) were granted to certain
employees to incent performance and retention over periods ranging from two to
three years. Upon the achievement of defined goals, the RSUs are converted into
shares of the corporation's common stock on a one-for-one basis and issued to
the employees. Awards granted in 2001, 2000 and 1999 were 184,888 units,
3,502,220 units and 655,000 units, respectively. The fair value of the stock
unit awards on the date of grant in 2001, 2000 and 1999 was $4, $62 and $16,
respectively. As a result of a change in the corporation's compensation system,
no further awards are anticipated in future years. Compensation expense for
these plans in 2001, 2000 and 1999 was $34, $20 and $8, respectively.
PREFERRED STOCK
The convertible preferred stock sold to the corporation's Employee Stock
Ownership Plan (ESOP) is redeemable at the option of the corporation at any time
after December 15, 2001. Each share is currently convertible into eight shares
of the corporation's common stock and is entitled to 10.264 votes. This stock
has a 7.5% annual dividend rate, payable semiannually, and has a liquidation
value of $72.50 plus accrued but unpaid dividends. ESOP dividends and dividend
per share amounts declared were $18 and $5.4375 per share in 2001 and $20 and
$5.4375 per share in both 2000 and 1999. The purchase of the preferred stock by
the ESOP was funded with notes guaranteed by the corporation. The loan is
included in long-term debt and is offset in the corporation's consolidated
balance sheets under the caption unearned deferred compensation. Each year, the
corporation makes contributions that, with the dividends on the preferred stock
held by the ESOP, are used to pay loan interest and principal. Shares are
allocated to participants based upon the ratio of the current year's debt
service to the sum of the total principal and interest payments over the life of
the loan. Plan expense is recognized in accordance with Emerging Issues Task
Force (EITF) Opinion 89-8.
During 1999, the ESOP extended its debt service through a loan program from
the corporation. As a result of this program, the allocation of preferred shares
and the related recognition of compensation expense has been extended up to
2030. The ESOP loan reflected in long-term debt was not affected by this action.
ESOP-related expenses amounted to $6 in 2001, $17 in 2000 and less than $1
in 1999. Payments to the ESOP were $51 in 2001, $48 in 2000 and $45 in 1999.
Principal and interest payments by the ESOP totaled $39 and $12 in 2001, $33 and
$15 in 2000, and $27 and $18 in 1999, respectively.
The corporation has a Preferred Stock Purchase Rights Plan. The Rights are
exercisable 10 days after certain events involving the acquisition of 15% or
more of the corporation's outstanding common stock or the commencement of a
tender or exchange offer for at least 15% of the common stock. Upon the
occurrence of such an event, each Right, unless redeemed by the board of
directors, entitles the holder to receive, upon exercise and payment of the
exercise price, common stock with a value equal to twice the exercise price of
the Right. The initial exercise price of a Right is $215, subject to adjustment.
There are 6,000,000 shares of preferred stock reserved for issuance upon
exercise of the Rights.
MINORITY INTEREST IN SUBSIDIARIES
Minority interest in subsidiaries consists primarily of preferred equity
securities issued by subsidiaries of the corporation. No gain or loss was
recognized as a result of the issuance of these securities, and the corporation
owned substantially all of the voting equity of the subsidiaries both before and
after the transactions.
Minority interest in subsidiaries includes $295 of preferred equity
securities issued by a wholly owned foreign subsidiary of the corporation. The
securities provide a rate of return based upon the Euribor inter-bank borrowing
rate, which averaged 5.2%, 3.6% and 3.9% for 2001, 2000 and 1999, respectively.
The securities are redeemable in 2004 in exchange for common shares of the
issuer, which may then be put to the corporation for preferred stock. In the
event of this put, the corporation's preferred stock would have a nominal value
of $295 with a dividend rate to be set based upon market factors at the time of
issuance. The subsidiary may call the securities at any time.
Minority interest in subsidiaries also includes preferred equity securities
issued by a domestic subsidiary of the corporation. The amount of these
securities was $250 for 2001, 2000 and 1999. The securities provide the holder a
rate of return based upon the LIBOR interest rate plus 0.425%, are redeemable in
2005 and may be called at any time by the subsidiary. The weighted average
inter-bank borrowing rate was 6.3%, 6.2% and 5.7% for 2001, 2000 and 1999,
respectively. The subsidiary has the option of redeeming the securities with
either cash, debt or shares of common stock of the corporation with a value of
$250.
EARNINGS PER SHARE
Net income per share - basic is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Net income per share - diluted reflects the dilution that could occur if
options or other contracts to issue common stock were exercised or converted
into common stock. Effective December 1, 1998, the corporation declared a two-
for-one stock split in the form of a 100% stock dividend. Prior periods have
been restated to reflect this split.
Options to purchase 33.1 million shares at June 30, 2001, 34.1 million
shares at July 1, 2000 and 9.0 million shares at July 3, 1999 were not included
in the computation of diluted earnings per share because the exercise price of
these options was greater than the average market price of the corporation's
outstanding common stock.
The following is a reconciliation of net income to net income per
share - basic and diluted for the years ended June 30, 2001, July 1, 2000 and
July 3, 1999:
Shares in millions 2001 2000 1999
-------------------------------------------------------------- ------ ------ ------
Income from continuing operations $1,603 $1,158 $1,131
Income from discontinued operations and gain on disposal of
discontinued operations, net of income taxes 663 64 60
-------------------------------------------------------------- ------ ------ ------
Net income 2,266 1,222 1,191
Less dividends on preferred stocks, net of tax benefits (11) (12) (12)
-------------------------------------------------------------- ------ ------ ------
Income applicable to common stockholders - basic 2,255 1,210 1,179
Adjustment for assumed conversion of ESOP shares 9 9 8
-------------------------------------------------------------- ------ ------ ------
Income applicable to common stockholders - diluted $2,264 $1,219 $1,187
============================================================== ====== ====== ======
Average shares outstanding - basic 819 875 903
Dilutive effect of stock option and stock award plans 9 9 12
Dilutive effect of ESOP plan 26 28 29
-------------------------------------------------------------- ------ ------ ------
Diluted shares outstanding 854 912 944
============================================================== ====== ====== ======
Income from continuing operations per share - basic $ 1.94 $ 1.31 $ 1.24
============================================================== ====== ====== ======
Income from discontinued operations per share - basic $ .81 $ .07 $ .07
============================================================== ====== ====== ======
Net income per share - basic $ 2.75 $ 1.38 $ 1.31
============================================================== ====== ====== ======
Income from continuing operations per share - diluted $ 1.87 $ 1.27 $ 1.19
============================================================== ====== ====== ======
Income from discontinued operations per share - diluted $ .78 $ .07 $ .06
============================================================== ====== ====== ======
Net income per share - diluted $ 2.65 $ 1.34 $ 1.26
============================================================== ====== ====== ======
LONG-TERM DEBT
The composition of the corporation's long-term debt is summarized in the
following tables:
Interest Rate Range Maturity 2001 2000 1999
----------------------------- ------------------------------- ------ ------ ------
U.S. dollar obligations:
ESOP debt 5.73-8.18% 2002-2004 $ 126 $ 165 $ 197
Notes and debentures 4.35-8.36 2002-2010 1,064 1,179 1,206
Revenue bonds 2.80-3.90 2002-2024 50 50 60
Zero coupon notes 10.00-14.25 2014-2015 27 24 22
Various other obligations - 10 13
----------------------------- ------------------------------- ------ ------ ------
1,267 1,428 1,498
----------------------------- ------------------------------- ------ ------ ------
Foreign currency obligations:
European euro 4.63-6.13 2002-2008 1,759 991 574
British pound - - - 100 -
Swiss franc - - - - 81
Various other obligations 94 110 75
----------------------------- ------------------------------- ------ ------ ------
1,853 1,201 730
----------------------------- ------------------------------- ------ ------ ------
Total long-term debt 3,120 2,629 2,228
Less current maturities 480 381 336
----------------------------- ------------------------------- ------ ------ ------
$2,640 $2,248 $1,892
============================= =============================== ====== ====== ======
The ESOP debt is guaranteed by the corporation.
The zero coupon notes are net of unamortized discounts of $97 in 2001, $100
in 2000 and $102 in 1999. Principal payments of $19 and $105 are due in 2014 and
2015, respectively.
Payments required on long-term debt during the years ending in 2002 through
2006 are $480, $637, $360, $543 and $148, respectively.
The corporation made cash interest payments of $251, $249 and $242 in 2001,
2000 and 1999, respectively.
Rental expense under operating leases was $201 in 2001, $204 in 2000 and
$201 in 1999. Future minimum annual fixed rentals required during the years
ending in 2002 through 2006 under non-cancelable operating leases having an
original term of more than one year are $99, $83, $64, $53 and $46,
respectively. The aggregate obligation subsequent to 2006 is $104.
The corporation is contingently liable for long-term leases on properties
operated by others. The minimum annual rentals under these leases average
approximately $25 for the years ending in 2002 through 2006. The aggregate
obligation subsequent to 2006 is $75.
CREDIT FACILITIES
The corporation has numerous credit facilities available, including ongoing
revolving credit agreements totaling $1.82 billion that had a weighted average
annual fee of 0.06% as of June 30, 2001. Subsequent to 2001, the corporation
increased the size of its credit facilities to $3.82 billion in anticipation of
completing the acquisition of The Earthgrains Company that is described in the
subsequent event note to the consolidated financial statements. These agreements
support commercial paper borrowings and other financial instruments. Selected
data on the corporation's short-term obligations follow:
2001 2000 1999
------------------------------ ------ ------ ------
Maximum period-end
borrowings $2,577 $2,726 $1,844
Average borrowings during
the year 1,573 2,102 1,473
Weighted average interest rate
during the year 6.0% 4.9% 4.3%
Weighted average interest rate
at year-end 5.6 6.1 4.8
============================== ====== ====== ======
CONTINGENCIES
The corporation is a party to several pending legal proceedings and claims, and
environmental actions by governmental agencies. Although the outcome of such
items cannot be determined with certainty, the corporation's general counsel and
management are of the opinion that the final outcome of these matters should not
have a material effect on the corporation's results of operations or financial
position.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
On July 2, 2000, the corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. In accordance with the
provisions of SFAS No. 133, the corporation recorded a transition adjustment
upon adoption of the standard to recognize its derivative instruments at fair
value, to recognize the ineffective portion of cash flow hedges and to recognize
the difference (attributable to the hedged risks) between the carrying values
and fair values of related hedged assets and liabilities. The effect of this
transition adjustment was to increase reported income in the year by
approximately $1. The corporation also recorded a transition adjustment of
approximately $6 in accumulated other comprehensive income to recognize
previously deferred net gains on derivatives designated as cash flow hedges and
a net increase in net assets of approximately $7.
Interest Rate and Currency Swaps
To manage interest rate risk, the corporation has entered into interest rate
swaps that effectively fix the interest payments of certain floating-rate debt
instruments. Interest rate swap agreements are accounted for as cash flow
hedges. The fair value of interest rate and currency swaps is based on quotes
from swap dealers.
Weighted Average
Interest Rates(2)
-------------------------------
Notional
Principal(1) Receive Pay
---------------------------------- --------- -------------------------------
Interest Rate Swaps
2000 Receive variable-pay fixed $385 5.9% 5.4%
Receive fixed-pay variable 100 7.1 6.6
1999 Receive variable-pay fixed 516 4.0 4.5
Currency Swaps
2001 Receive fixed-pay fixed $ 8 13.6% 4.0%
2000 Receive variable-pay variable 9 6.6 4.1
1999 Receive fixed-pay fixed 360 6.1 3.4
================================== ========= ===============================
(1) The notional principal is the amount used for the calculation of interest
payments that are exchanged over the life of the swap transaction and is
equal to the amount of foreign currency or dollar principal exchanged at
maturity.
(2) The weighted average interest rates are as of the respective balance sheet
dates.
Forward Exchange, Futures and Option Contracts
The corporation uses forward exchange and option contracts to reduce the effect
of fluctuating foreign currencies on short-term foreign-currency-denominated
intercompany transactions, third-party product sourcing transactions, foreign-
denominated investments and other known foreign currency exposures. Gains and
losses on the derivative are intended to offset losses and gains on the hedged
transaction in an effort to reduce the earnings volatility resulting from
fluctuating foreign currency exchange rates. The principal currencies hedged by
the corporation include the European euro, Mexican peso, Canadian dollar and
British pound.
The corporation uses futures contracts to hedge commodity price risk. The
principal commodities hedged by the corporation include hogs, beef, wheat,
butter and corn.
The following table summarizes by major currency the contractual amounts of
the corporation's forward exchange contracts in U.S. dollars. The bought amounts
represent the net U.S.-dollar-equivalent of commitments to purchase foreign
currencies, and the sold amounts represent the net U.S.-dollar-equivalent of
commitments to sell foreign currencies. The foreign currency amounts have been
translated into a U.S.-dollar-equivalent value using the exchange rate at the
reporting date. Forward exchange contracts mature at the anticipated cash
requirement date of the hedged transaction, generally within one year.
Foreign Currency - Bought (Sold) 2001(1) 2000(1) 1999(1)
-------------------------------- ------- ------- --------
European euro $ 412 $ 297 $(665)
British pound (101) (115) (123)
Canadian dollar (92) (71) (84)
Other (134) (51) (244)
================================ ======= ======= ========
(1) Forward contracts denominated in European legacy currencies have been
translated into European euros.
The corporation held foreign exchange option contracts to reduce the foreign
exchange fluctuations on anticipated purchase transactions. The following table
summarizes the notional amount of option contracts to buy foreign currency, in
U.S. dollars:
Foreign Currency - Bought 2001 2000
------------------------- ---- ----
European euro $12 $260
Mexican pesos 33 -
========================= ==== ====
As of July 2, 2000 and June 30, 2001, the net accumulated derivative gain
in accumulated other comprehensive income was $6 and the net derivative loss was
$5, respectively. During the year ended June 30, 2001, $18 of accumulated net
derivative gains was deferred in accumulated other comprehensive income related
to cash flow hedges and $29 of accumulated net derivative gains was reclassified
out of accumulated other comprehensive income into earnings. At June 30, 2001,
the maximum maturity date of any cash flow hedge was two years, excluding any
forward exchange, option or swap contracts related to the payment of variable
interest on existing financial instruments. The corporation expects to
reclassify into earnings during the next 12 months net losses from accumulated
other comprehensive income of approximately $12, at the time the underlying
hedged transactions are realized.
During the year ended June 30, 2001, $2 of net losses related to cash flow
hedge ineffectiveness and $2 related to derivative losses excluded from the
assessment of effectiveness was recorded in the consolidated statements of
income. Other disclosures related to fair value hedge ineffectiveness, fair
value gains and losses excluded from the assessment of hedge ineffectiveness,
and gains or losses resulting from the disqualification of hedge accounting have
been omitted due to the insignificance of these amounts.
Non-U.S.-Dollar Financing Transactions
The corporation uses non-U.S.-dollar financing transactions as net investment
hedges of long-term investments in the corresponding foreign currency. Hedges
that meet the effectiveness requirements are accounted for under net investment
hedging rules. For the year ended June 30, 2001, net gains of $186 arising from
effective hedges of net investments have been reflected in the cumulative
translation adjustment account within stockholders' equity.
Concentrations of Credit Risk
A large number of major international financial institutions are counterparties
to the corporation's financial instruments. The corporation enters into
financial instrument agreements only with counterparties meeting very stringent
credit standards, limiting the amount of agreements or contracts it enters into
with any one party and, where legally available, executing master netting
agreements. These positions are continuously monitored. While the corporation
may be exposed to credit losses in the event of nonperformance by these
counterparties, it does not anticipate material losses, because of these control
procedures.
Trade accounts receivable due from highly leveraged customers were $69 at
June 30, 2001, $62 at July 1, 2000 and $58 at July 3, 1999. The financial
position of these businesses has been considered in determining allowances for
doubtful accounts.
Guarantees
The corporation had third-party guarantees outstanding, aggregating
approximately $14 at June 30, 2001, $14 at July 1, 2000 and $17 at July 3, 1999.
These guarantees relate primarily to financial arrangements to support various
suppliers of the corporation and are secured by the inventory and fixed assets
of the suppliers.
Fair Values
The carrying amounts of cash and equivalents, trade receivables, notes payable
and accounts payable approximated fair value as of June 30, 2001, July 1, 2000
and July 3, 1999. The fair values of the remaining financial instruments
recognized on the consolidated balance sheets of the corporation at the
respective year-ends were:
2001 2000 1999
-------------------------- ------ ------ ------
Long-term debt, including
current portion $3,098 $2,654 $2,315
ESOP convertible
preferred stock 508 514 694
Interest rate swaps - 6 3
Currency swaps - 1 12
Foreign currency forwards (20) 13 60
Foreign currency options (1) 8 -
========================= ====== ====== ======
The fair value of the corporation's long-term debt, including the current
portion, is estimated using discounted cash flows based on the corporation's
current incremental borrowing rates for similar types of borrowing arrangements.
The fair value of the ESOP preferred stock is based on the contracted conversion
into the corporation's common stock. The fair value of interest rate and
currency swaps is based on quotes from swap dealers. The fair value of foreign
currency forwards and options is based upon currency forward rates obtained from
third-party institutions.
UNUSUAL ITEMS
PYA/Monarch Disposition
In December 2000, the corporation sold its PYA/Monarch foodservice distribution
business and received cash proceeds of $1,559. The disposition resulted in a
gain before income taxes of $1,126 and an after-tax gain of $638, or $.75 of
diluted earnings per share. The PYA/Monarch foodservice operation constituted a
reportable segment of the corporation, and as a result, this gain has been
recognized in the discontinued operations section of the accompanying
consolidated financial statements.
Gain on Disposal of Coach Business
A tax-free gain of $967, or $1.13 of diluted earnings per share, was recognized
on the disposition of the Coach business in 2001. This disposition took place in
two steps. In October 2000, the corporation's Coach subsidiary completed an
initial public offering of 19.5% (8,487,000 shares) of its common stock. Cash
proceeds of $122 were received and a tax-free gain of $105 was recognized upon
completion of the offering. In April 2001, the second step of the disposition
was completed when the corporation's remaining 80.5% (35,026,333 shares)
ownership interest in Coach was exchanged with third parties for 41,402,285
shares of Sara Lee common stock. The market value of the Coach shares disposed
of was $998, and an $862 gain was recognized on this tax-free transaction.
Other Business Dispositions
During 2001, the corporation's management approved plans to dispose of 17 non-
core businesses. At the end of 2001, the disposition of 10 of these businesses
had been completed, and the corporation expects to complete the disposition of
the remaining businesses by December 2001. These actions resulted in a pretax
charge of $341 and a reduction in net income of $352, or $.41 of diluted
earnings per share. Of the total pretax charge, $236 relates to the 10
transactions that were closed in 2001 and $105 is the estimated loss on
transactions that are anticipated to close in 2002. The $341 charge is included
in the "business dispositions and other charges" line of the consolidated
statement of income and reduced operating income in the corporation's business
segments as follows: Intimates and Underwear - $246; Sara Lee Foods - $93; and
Beverage - $2. These 17 businesses had an operating loss of $7 in 2001 and an
operating profit of $2 in 2000. Sales recognized by these operations were $670
in 2001 and $925 in 2000.
Cash proceeds of $120 were received for the 10 business dispositions
completed in 2001. Businesses disposed in 2001 included Argal, a Spanish meat
business; Ozark Salad, a domestic prepared salad business; the Champion apparel
business in Europe and a portion of the domestic Champion business; Bakery
operations in Europe and India; and certain intimate apparel businesses in
Australasia and Europe.
Business dispositions expected to close in 2002 include the Liabel intimate
apparel business in Europe; Bakery and textile manufacturing operations in
China; and a number of businesses that supply textile products to the domestic
and European intimate apparel industry. The $105 estimated loss on the
disposition of these businesses is the difference between the estimated selling
price and the corporation's investment in these operations as of June 30, 2001.
The estimated selling prices were based upon submitted bids and discussions with
prospective buyers, as well as input from investment bankers retained by the
corporation. The net assets of businesses awaiting sale are displayed on the
"net assets of businesses held for sale" line of the consolidated balance
sheets.
In the first week of 1999, the corporation disposed of certain assets
related to its international tobacco operations. The corporation received cash
proceeds of $386 upon closing the transaction, had an investment in the net
assets of the business of $249 and recognized a pretax gain of $137 in 1999. The
gain on this sale increased 1999 income from continuing operations by $97, or
$.10 of diluted earnings per share.
Other Charges
During 2001, the corporation's management approved plans to terminate a number
of employees and exit certain manufacturing, distribution and administrative
activities within a 12-month period. These actions resulted in a pretax charge
of $213 and a reduction in net income of $148, or $.17 of diluted earnings per
share. Of the $213 charge, $187 is included in the "business dispositions and
other charges" line of the consolidated statement of income. The remaining $26
relates to anticipated losses on the exit of certain licensed products and is
displayed in the "cost of sales - product line exit costs" line of the
consolidated statement of income. $210 of the charge is directly attributable to
the corporation's business segments, and $3 is related to the corporate
headquarters. Business segment operating income was reduced as follows:
Intimates and Underwear - $165; Sara Lee Foods - $36; Beverage - $6; and
Household Products - $3. The $213 charge consists of the following:
. $124 of the charge is for the cost of severance and other employee benefits
associated with termination of 13,200 employees. The specific location of these
employees and the status of the planned actions as of June 30, 2001 are
summarized in a the table contained in this note.
. $38 of the charge is for anticipated losses on the disposal of real estate
and equipment at nine owned facilities and the disposal of equipment at a number
of leased facilities. The loss recognized is the difference between the
estimated selling price and the carrying value of the assets held for sale.
Selling prices were estimated based upon third-party appraisals of real
estate held for sale and the corporation's prior experience with comparable
equipment disposals. The charge primarily relates to the planned exit of
Intimates and Underwear manufacturing facilities in the United States, Mexico
and Europe; two domestic meat processing plants; and a Beverage facility in
Europe. As of June 30, 2001, four of the nine owned facilities had been closed,
and all actions contemplated by the exit plan are expected to be completed
within 12 months of the related charge. The carrying value of the property and
equipment awaiting sale at June 30, 2001 is $26.
. $23 of the charge is related to non-cancelable lease payments on 26 leased
facilities that are being exited. The charge is the difference between the non-
cancelable lease obligation after the facility is exited and the estimated
sublease income that will be received. As of June 30, 2001, nine of the leased
facilities had been exited.
. $28 of the charge resulted from the decision to terminate product licensing
agreements and exit related manufacturing operations. Of the $28 charge, $26 is
for anticipated losses on the disposition of inventory related to manufacturing
operations exited and $2 is for payments to cancel third-party licensing
arrangements. The loss recognized on the disposition of inventory is the
difference between the estimated net realizable value of the inventory and the
related carrying value. Net realizable values were based upon the corporation's
prior experience with the disposition of similar types of product.
The following table summarizes the charges taken for the approved exit plans
and the related activity through June 30, 2001:
Write-down
of Assets to Accrued Exit
Exit Costs Net Realizable Cash Costs as of
Recognized Value Payments June 30, 2001
------------------------------------------- -----------------------------------------------------------
Employee termination and other benefits $124 $ - $(29) $ 95
Expected losses on disposal of inventories 26 (26) - -
Expected losses on disposal of property and
equipment and other related costs 38 (37) (1) -
Other exit costs - includes non-cancelable
lease and other contractual obligations 25 - (3) 22
------------------------------------------- -----------------------------------------------------------
Total exit costs $213 $(63) $(33) $117
=========================================== ===========================================================
Of the $213 charge, $150 will require the use of cash and $63 is a non-cash
component. The corporation expects to fund the cash costs of this charge from
internal sources and proceeds generated from the sale of non-core businesses.
The following table summarizes the planned employee terminations by location
and business segment, and the status of those actions as of the end of 2001:
Household Intimates and As of
Sara Lee Foods Beverage Products Underwear Corporate June 30, 2001
------------------------------------- --------------------------------------------------------------------------------
United States 504 - - 1,445 21 1,970
Canada - - - 101 - 101
Puerto Rico, Mexico and Latin America 17 - - 8,633 - 8,650
Europe 237 72 - 1,627 - 1,936
Asia and Africa - - 48 495 - 543
------------------------------------- --------------------------------------------------------------------------------
758 72 48 12,301 21 13,200
===================================== ================================================================================
As of June 30, 2001:
Actions completed 328 - 48 4,074 8 4,458
Actions remaining 430 72 - 8,227 13 8,742
------------------------------------- --------------------------------------------------------------------------------
758 72 48 12,301 21 13,200
===================================== ================================================================================
Product Recall
On December 22, 1998, the corporation announced that it was recalling specific
production lots of hot dogs and other packaged meat products that could contain
Listeria bacteria. The estimated cost of this action was recognized in the
second quarter of 1999 and reduced 1999 income from continuing operations before
income taxes, income from continuing operations and income from continuing
operations per common share - diluted by $76, $50 and $.05 per share,
respectively. The recall charge recognized the estimated costs associated with
the return and destruction of affected products sold through retail grocery
stores and selected foodservice channels in the United States, the destruction
of affected inventory in the corporation's Zeeland, Michigan facility, and
liabilities incurred as a result of these actions. Substantially all of the
product and inventory subject to the recall was subsequently destroyed. The
actual costs of the inventory destroyed and related disposition costs were
consistent with prior estimates.
ACQUISITIONS
During 2001, the corporation acquired several businesses for an aggregate
purchase price of $300. The principal acquisitions were Cafe Pilao Caboclo
Ltda., a Brazilian manufacturer and marketer of roasted coffee; Amando, a
European processed meat manufacturer; and Zorba, a Brazilian apparel
manufacturer. The businesses acquired in 2001 generated sales of $247 and
contributions to pretax income were not significant.
During 2000, the corporation acquired several businesses and certain equity
method investments for an aggregate purchase price of $1 billion, consisting of
$743 of cash and $257 of common stock. The principal acquisitions were Chock
full o'Nuts Corporation, a domestic roaster, packer and marketer of coffee; the
North American coffee business of Nestle S.A., which includes the Hills Bros,
MJB and Chase & Sanborn brands; Outer Banks Inc., a manufacturer, marketer and
distributor of knitted sport shirts; and Courtaulds Textiles plc, a European
producer, marketer and distributor of private-label and branded apparel
products. The corporation also acquired a minority interest in Johnsonville
Sausage, a domestic manufacturer and marketer of fresh meat products.
During 1999, the corporation acquired several companies for an aggregate
purchase price of $234 in cash and $9 of common stock. The principal
acquisitions were Continental Coffee, a domestic manufacturer, marketer and
distributor of roasted and ground coffee; and Monsavon, a European marketer and
distributor of personal body care products.
SUBSEQUENT EVENT
In July 2001, the corporation announced that it had entered into an agreement to
acquire The Earthgrains Company (Earthgrains), a fresh packaged bread and
refrigerated dough business in the United States and Europe. Under the terms of
the agreement, the corporation made a cash tender offer for all of Earthgrains'
common stock at $40.25 per share, or approximately $1.9 billion, plus the
assumption of Earthgrains' outstanding long-term debt of approximately $957.
On August 7, 2001, upon the completion of the initial tender offer
period, the corporation acquired Earthgrains when approximately 93% of the
outstanding Earthgrains shares were tendered and accepted by the corporation.
Following the completion of the tender offer period, Earthgrains was merged into
a subsidiary of Sara Lee.
RETIREMENT PLANS
The corporation has noncontributory defined benefit plans covering certain of
its domestic employees. The benefits under these plans are based primarily on
years of service and compensation levels. The plans are funded in conformity
with the requirements of applicable government regulations. The plans' assets
consist principally of marketable equity securities, and corporate and
government debt securities.
The employee benefit plans of the corporation's foreign subsidiaries have
provisions consistent with local practices.
The components of the defined benefit plan expenses were:
2001 2000 1999
--------------------------------- ------- ------ ------
Components of defined benefit net
periodic benefit cost:
Service cost $ 92 $ 85 $ 87
Interest cost 179 134 139
Expected return on assets (235) (183) (193)
Amortization of:
Net initial asset (3) (3) (4)
Prior service cost 9 9 7
Net actuarial loss 2 6 8
--------------------------------- ------- ------ ------
Net periodic benefit cost $ 44 $ 48 $ 44
================================= ======= ====== ======
The funded status of defined benefit plans at the respective year-ends was:
2001 2000 1999
--------------------------------- ------ ------ ------
Projected benefit obligation
Beginning of year $2,928 $2,326 $2,297
Service cost 92 85 87
Interest cost 179 134 139
Plan amendments 2 6 15
Acquisitions/dispositions 10 619 (43)
Benefits paid (141) (104) (99)
Participant contributions 1 2 1
Actuarial loss (gain) 37 (45) (17)
Foreign exchange (151) (95) (54)
--------------------------------- ------ ------ ------
End of year $2,957 $2,928 $2,326
--------------------------------- ------ ------ ------
Fair value of plan assets
Beginning of year $3,007 $2,238 $2,306
Actual return on plan assets (55) 248 96
Employer contributions 56 24 22
Participant contributions 1 2 1
Benefits paid (141) (104) (99)
Acquisitions/dispositions (1) 708 (31)
Foreign exchange (166) (109) (57)
--------------------------------- ------ ------ ------
End of year $2,701 $3,007 $2,238
--------------------------------- ------ ------ ------
Funded status $ (256) $ 79 $ (88)
Unrecognized
Prior service cost 59 70 77
Net actuarial loss 350 50 173
Net initial liability (asset) 4 2 (1)
--------------------------------- ------ ------ ------
Prepaid benefit cost recognized $ 157 $ 201 $ 161
================================= ====== ====== ======
Amounts recognized on the
consolidated balance sheets
Noncurrent benefit liability $ (38) $ - $ (132)
Other noncurrent assets - 171 199
Accumulated other
comprehensive income 195 30 94
--------------------------------- ------ ------ ------
Prepaid benefit cost recognized $ 157 $ 201 $ 161
================================= ====== ====== ======
Net pension expense is determined using assumptions as of the beginning of
each year. Funded status is determined using assumptions as of the end of each
year. The weighted average assumptions at the respective year-ends were:
2001 2000 1999
--------------------------------- ------ ----- ----
Discount rate 6.1% 6.2% 5.9%
Rate of compensation increase 4.9 4.9 4.7
Long-term rate of return on
plan assets 8.0 8.2 8.4
================================= ====== ===== ====
The corporation provides health care and life insurance benefits to certain
retired employees and their covered dependents and beneficiaries. Generally,
employees who have attained age 55 and who have rendered 10 years of service are
eligible for these postretirement benefits. Certain retirees are required to
contribute to plans in order to maintain coverage. The components of the expense
for these plans were:
2001 2000 1999
--------------------------------- ------ ----- -----
Components of defined benefit net
periodic benefit cost
Service cost $ 4 $ 6 $ 6
Interest cost 11 12 13
Net amortization and deferral 1 1 2
--------------------------------- ------ ----- -----
Net periodic benefit cost $ 16 $ 19 $ 21
================================= ====== ===== =====
The funded status of postretirement benefit plans at the respective
year-ends was:
2001 2000 1999
--------------------------------- ------ ----- -----
Accumulated postretirement
benefit obligation
Beginning of year $ 181 $ 196 $ 204
Service cost 4 6 6
Interest cost 11 12 13
Net benefit paid (14) (14) (12)
Actuarial loss (gain) 2 (17) (13)
Foreign exchange (4) (2) (2)
--------------------------------- ------ ----- -----
End of year $ 180 $ 181 $ 196
--------------------------------- ------ ----- -----
Fair value of plan assets $ 2 $ 2 $ 2
--------------------------------- ------ ----- -----
Funded status $(178) $(179) $(194)
Unrecognized
Prior service cost (2) (2) (2)
Net actuarial (gain) (28) (26) (7)
Net initial asset (6) (5) (4)
--------------------------------- ------ ----- -----
Net accrued benefit liability
recognized on the
consolidated balance sheets $(214) $(212) $(207)
================================= ====== ===== =====
Weighted average discount rate 6.5% 6.5% 6.3%
================================= ====== ===== =====
The assumed health care cost trend rate is 8% for 2001, decreasing to 7% in
fiscal 2002 and remaining at that level thereafter. These trend rates reflect
the corporation's prior experience and management's expectation that future
rates will decline. Assumed health care cost trend rates impact the amounts
reported for health care plans. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
One One
Percentage Percentage
Point Point
Increase Decrease
--------------------------------------- ---------- ----------
Effect on total service and
interest components $ 2 $ (1)
Effect on postretirement
benefit obligation 15 (11)
======================================= ========== ==========
INCOME TAXES
The provisions for income taxes computed by applying the U.S. statutory rate to
income before taxes as reconciled to the actual provisions were:
2001 2000 1999
----------------------------------------- --------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
----------------------------------------- --------------------- ------------------ ------------------
Income from continuing operations before
provision for income taxes
United States $1,079 58.3% $ 975 62.2% $ 679 43.3%
Foreign 772 41.7 592 37.8 891 56.7
----------------------------------------- --------------------- ------------------ ------------------
$1,851 100.0% $1,567 100.0% $1,570 100.0%
----------------------------------------- --------------------- ------------------ ------------------
Tax expense at U.S. statutory rate $ 648 35.0% $ 548 35.0% $ 550 35.0%
State taxes, net of federal benefit 9 0.5 16 1.0 12 0.8
Difference between U.S. and foreign rates (169) (9.2) (77) (4.9) (106) (6.7)
Gain on disposal of Coach business (338) (18.3) - - - -
Business dispositions and other charges 140 7.6 - - - -
Nondeductible amortization 50 2.7 50 3.2 48 3.0
Other, net (92) (4.9) (128) (8.2) (65) (4.1)
----------------------------------------- --------------------- ------------------ ------------------
Taxes at effective worldwide tax rates $ 248 13.4% $ 409 26.1% $ 439 28.0%
========================================= ===================== ================== ==================
Current and deferred tax provisions (benefits) were:
2001 2000 1999
---------------------------- --------------------- ------------------ ------------------
Current Deferred Current Deferred Current Deferred
---------------------------- --------------------- ------------------ ------------------
United States $ (12) $29 $ 99 $ 36 $ 117 $ 46
Foreign 169 48 241 8 237 20
State 3 11 21 4 56 (37)
---------------------------- --------------------- ------------------ ------------------
$ 160 $88 $ 361 $ 48 $ 410 $ 29
============================ ===================== ================== ==================
Following are the components of the deferred tax provisions (benefits)
occurring as a result of transactions being reported in different years for
financial and tax reporting:
2001 2000 1999
------------------------------ ----- ----- -----
Depreciation $ 11 $ (39) $ (73)
Inventory valuation methods 22 (23) (27)
Nondeductible reserves 31 17 101
Other, net 24 93 28
------------------------------ ----- ----- -----
$ 88 $ 48 $ 29
============================== ===== ===== =====
Cash payments for income taxes $ 259 $ 245 $ 321
============================== ===== ===== =====
The deferred tax (assets) liabilities at the respective year-ends were as
follows:
2001 2000 1999
------------------------------------ ------- ------ ------
Deferred tax (assets) liabilities
Reserves not deductible until paid $ (325) $ (435) $ (470)
Intangibles 232 186 200
Restructuring reserves (52) (11) (22)
Net operating loss and
other tax carryforwards (86) (37) (15)
Property, plant and equipment (60) (55) 4
Other (8) 23 (96)
------------------------------------ ------- ------ ------
Net deferred tax (assets) $ (299) $ (329) $ (399)
==================================== ======= ====== ======
At June 30, 2001, applicable U.S. federal income taxes and foreign withholding
taxes have not been provided on the accumulated earnings of foreign subsidiaries
that are expected to be permanently reinvested. If these earnings had not been
permanently reinvested, deferred taxes of between $425 and $475 would have been
recognized in the consolidated financial statements.
BUSINESS SEGMENT INFORMATION
The corporation's business segments are described in the Operations Review on
pages 17 through 29.
2001 2000 1999(2)
---------------------------------------- ------- ------- -------
Sales(1)
Sara Lee Foods $ 5,081 $ 5,088 $ 5,249
Beverage 2,889 2,827 2,627
Household Products 2,088 2,154 2,095
Intimates and Underwear 7,767 7,598 7,440
---------------------------------------- ------- ------- -------
17,825 17,667 17,411
Intersegment (78) (156) (141)
---------------------------------------- ------- ------- -------
Total $17,747 $17,511 $17,270
======================================== ======= ======= =======
Operating Income
Sara Lee Foods $ 234(3) $ 370 $ 397(5)
Beverage 477(3) 472 570(6)
Household Products 342(3) 355 328
Intimates and Underwear 1,400(3,4) 844 776
---------------------------------------- ------- ------- -------
Total operating companies income 2,453 2,041 2,071
---------------------------------------- ------- ------- -------
Amortization of goodwill
and trademarks (191) (171) (163)
General corporate expenses (231)(3) (127) (197)
---------------------------------------- ------- ------- -------
Total operating income 2,031 1,743 1,711
Net interest expense (180) (176) (141)
---------------------------------------- ------- ------- -------
Income from continuing
operations before
income taxes $ 1,851 $ 1,567 $ 1,570
======================================== ======= ======= =======
2001 2000 1999(2)
---------------------------------------- ------- ------- -------
Assets
Sara Lee Foods $ 2,037 $ 2,310 $ 2,173
Beverage 1,669 1,967 1,187
Household Products 1,750 1,464 1,839
Intimates and Underwear 4,372 4,902 4,642
---------------------------------------- ------- ------- -------
9,828 10,643 9,841
Other(7,8) 339 968 451
---------------------------------------- ------- ------- -------
Total assets $10,167 $11,611 $10,292
======================================== ======= ======= =======
Depreciation
Sara Lee Foods $ 129 $ 119 $ 98
Beverage 77 81 69
Household Products 30 31 31
Intimates and Underwear 149 154 141
---------------------------------------- ------- ------- -------
385 385 339
Other 7 17 13
---------------------------------------- ------- ------- -------
Total depreciation $ 392 $ 402 $ 352
======================================== ======= ======= =======
Additions to Long-lived Assets
Sara Lee Foods $ 185 $ 316 $ 193
Beverage 331 399 171
Household Products 51 76 129
Intimates and Underwear 234 386 231
---------------------------------------- ------- ------- -------
801 1,177 724
Other 24 18 2
---------------------------------------- ------- ------- -------
Total additions to
long-lived assets $ 825 $ 1,195 $ 726
======================================== ======= ======= =======
(1) Includes sales between segments. Such sales are at transfer prices that are
equivalent to market value.
(2) 53-week year.
(3) Includes provisions for business dispositions and other charges reported in
the 2001 consolidated statement of income which reduced operating income
by: Sara Lee Foods $129; Beverage $8; Household Products $3; Intimates and
Underwear $411; and Corporate Office $3.
(4) Includes the gain on the disposal of the Coach business of $967.
(5) Includes the product recall charge which reduced operating income by $76.
(6) Includes the gain on sale of the tobacco operations which increased
operating income by $137.
(7) Principally cash and equivalents, certain fixed assets and certain other
noncurrent assets.
(8) Includes net assets of businesses held for sale of $94 in 2001, $563 in
2000 and $315 in 1999.
Geographic Area Information
United States France Netherlands Other Total
------------------------- -------------------------------------------------------- -------
2001 Sales $10,131 $1,351 $ 969 $5,296 $17,747
Long-lived assets 2,631 375 740 1,091 4,837
------------------------- -------------------------------------------------------- -------
2000 Sales $ 9,979 $1,534 $1,021 $4,977 $17,511
Long-lived assets 2,796 472 876 1,076 5,220
------------------------- -------------------------------------------------------- -------
1999 Sales $ 9,413 $1,681 $1,069 $5,107 $17,270
Long-lived assets 2,230 515 1,043 1,215 5,003
========================= ======================================================== =======
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter First Second Third Fourth
----------------------------------- ----------------------------------------------------
2001
Continuing operations
Net sales $4,455 $4,757 $4,308 $4,227
Gross profit 1,855 2,015(2) 1,797 1,790(6)
Income 238 151(3) 241(5) 973(7)
Income per common share - basic .28 .18(3) .29(5) 1.24(7)
Income per common share - diluted .27 .17(3) .28(5) 1.19(7)
Net income 254 798(4) 241(5) 973(7)
Per common share
Net income - basic .30 .96(4) .29(5) 1.24(7)
Net income - diluted .29 .92(4) .28(5) 1.19(7)
Cash dividends declared .135 .145 .145 .145
Market price - high 20.81 25.31 24.75 23.25
- low 17.44 19.00 20.20 18.26
- close 20.31 24.56 21.58 18.94
----------------------------------- ----------------------------------------------------
2000
Continuing operations
Net sales $4,239 $4,634 $4,175 $4,463
Gross profit 1,784 2,018 1,768 1,841
Income 241 375 249 293
Income per common share - basic .27 .42 .28 .33
Income per common share - diluted .26 .40 .27 .33
Net income 258 389 262 313
Per common share
Net income - basic .29 .44 .30 .36
Net income - diluted .28 .42 .29 .35
Cash dividends declared .125 .135 .135 .135
Market price - high 24.44 27.50 22.00 19.44
- low 21.19 21.06 13.38 14.56
- close 22.94 22.06 18.00 19.31
----------------------------------- ----------------------------------------------------
1999
Continuing operations
Net sales $4,192 $4,626 $4,011 $4,441
Gross profit 1,742 2,011 1,746 1,892
Income 324(8) 308(9) 233 266
Income per common share - basic .35(8) .34(9) .25 .30
Income per common share - diluted .34(8) .32(9) .24 .29
Net income 338(8) 322(9) 245 286
Per common share(1)
Net income - basic .37(8) .35(9) .27 .32
Net income - diluted .35(8) .34(9) .26 .31
Cash dividends declared .115 .125 .125 .125
Market price - high 29.59 30.81 29.88 26.31
- low 22.16 26.13 23.50 21.50
- close 27.25 29.50 26.13 22.50
=================================== ====================================================
(1) Restated for the 2-for-1 stock split in 1999.
(2) Includes cost of sales - product line exit costs of $24.
(3) Includes gain from the initial public offering of Coach of $105 and
business dispositions and other charges of $317, or a reduction of $.25 per
share basic and diluted.
(4) Includes gain from the initial public offering of Coach of $105, gain on
the sale of PYA/Monarch of $638 and business dispositions and other charges
of $317, or an increase of $.52 per share - basic, $.48 per share -
diluted.
(5) Includes income from business dispositions and other charges of $5, or an
increase of $.01 per share basic and diluted.
(6) Includes cost of sales - product line exit costs of $2.
(7) Includes gain on the disposal of the Coach business of $862 and business
dispositions and other charges of $188, or an increase of $.86 per share -
basic, $.82 per share - diluted.
(8) Includes gain on sale of business of $97, or $.11 per share - basic, $.10
per share - diluted.
(9) Includes product recall charge of $50, or $.06 per share - basic, $.05 per
share - diluted.
Management's Report on Financial Information
Management of Sara Lee Corporation is responsible for the preparation and
integrity of the financial information included in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, where required, reflect our best estimates and
judgments.
It is the corporation's policy to maintain a control-conscious environment
through an effective system of internal accounting controls supported by formal
policies and procedures communicated throughout the corporation. These controls
are adequate to provide reasonable assurance that assets are safeguarded against
loss or unauthorized use and to produce the records necessary for the
preparation of financial information. There are limits inherent in all systems
of internal control based on the recognition that the costs of such systems
should be related to the benefits to be derived. We believe the corporation's
systems provide this appropriate balance.
The control environment is complemented by the corporation's internal
auditors, who perform extensive audits and evaluate the adequacy of and the
adherence to these controls, policies and procedures. In addition, the
corporation's independent public accountants have developed an understanding of
our accounting and financial controls, and have conducted such tests as they
consider necessary to support their report below.
The Board of Directors pursues its oversight role for the financial
statements through the Audit Committee, which is composed solely of outside
directors. The Audit Committee meets regularly with management, the corporate
internal auditors and Arthur Andersen LLP, jointly and separately, to receive
reports on management's process of implementation and administration of internal
accounting controls, as well as auditing and financial reporting matters. Both
Arthur Andersen LLP and the internal auditors have unrestricted access to the
Audit Committee.
The corporation maintains high standards in selecting, training and
developing personnel to help ensure that management's objectives of maintaining
strong, effective internal controls and unbiased, uniform reporting standards
are attained. We believe it is essential for the corporation to conduct its
business affairs in accordance with the highest ethical practices as expressed
in Sara Lee Corporation's Global Business Standards.
/s/ C. Steven McMillan /s/ Cary D. McMillan
--------------------------------- ------------------------------------------
C. Steven McMillan Cary D. McMillan
President and Executive vice president,
chief executive officer chief financial and administrative officer
Report of Independent Public Accountants
To the Board of Directors and Stockholders,
Sara Lee Corporation:
We have audited the accompanying consolidated balance sheets of SARA LEE
CORPORATION (a Maryland corporation) AND SUBSIDIARIES as of June 30, 2001,
July 1, 2000, and July 3, 1999, and the related consolidated statements of
income, common stockholders' equity, and cash flows for each of the three years
in the period ended June 30, 2001. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sara Lee
Corporation and Subsidiaries as of June 30, 2001, July 1, 2000, and July 3,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
July 27, 2001
Item 7. Financial Statements and Exhibits.
---------------------------------
(c) Exhibits:
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23.1 Consent of Arthur Andersen LLP
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SIGNATURES
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 hereunto duly authorized.
SARA LEE CORPORATION
By:/s/ Wayne R. Szypulski
-------------------------------------
Wayne R. Szypulski
Senior Vice President and Controller
Date: September 4, 2001
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EXHIBIT INDEX
The following exhibits are filed herewith as noted below.
Exhibit
No. Description
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23.1 Consent of Arthur Andersen LLP
5