Edgar Filing: LEE SARA CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-3344

Sara Lee Corporation

(Exact name of registrant as specified in its charter)

Maryland

36-2089049

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Three First National Plaza, Suite 4600, Chicago, Illinois 60602-4260

(Address of principal executive offices)

(Zip Code)

(312) 726-2600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

On December 31, 2005, the Registrant had 760,144,149 outstanding shares of common stock $.01 par value, which is the Registrant’s only class of common stock.

SARA LEE CORPORATION AND SUBSIDIARIES

INDEX


PART I –

ITEM 1 – FINANCIAL STATEMENTS

Preface		3

Condensed Consolidated Balance Sheets - At December 31, 2005 and July 2, 2005		4

Consolidated Statements of Income - For the thirteen and twenty-six weeks ended December 31, 2005 and January 1, 2005		5

Consolidated Statements of Common Stockholders’ Equity - For the period July 3, 2004 to December 31, 2005		6

Consolidated Statements of Cash Flows - For the twenty-six weeks ended December 31, 2005 and January 1, 2005		7

Notes to Consolidated Financial Statements		8

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION		24

ITEM 4 – CONTROLS AND PROCEDURES		74

PART II –

ITEM 2(c) - REPURCHASES OF EQUITY SECURITIES BY THE ISSUER		75

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		75

ITEM 6 - EXHIBITS		76

SIGNATURE		77

PART I

SARA LEE CORPORATION AND SUBSIDIARIES

Preface

The preparation of the Consolidated Financial Statements requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenue and expenses and certain financial statement disclosures. Significant estimates in these Consolidated Financial Statements include allowances for doubtful accounts receivable, net realizable value of inventories, the cost of sales incentives, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, identifiable intangible assets and goodwill, income tax and valuation reserves, the valuation of assets and liabilities acquired in business combinations, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans and the volatility, expected lives and forfeiture rates for stock compensation instruments granted to employees. Actual results could differ from these estimates.

The Consolidated Financial Statements for the thirteen and twenty-six weeks ended December 31, 2005 and January 1, 2005 and the balance sheets as of December 31, 2005 and July 2, 2005 included herein have not been audited by an independent registered public accounting firm, but in the opinion of Sara Lee Corporation (“the corporation”), all adjustments (which include only normal recurring adjustments) necessary to make a fair statement of the financial position at December 31, 2005 and the results of operations and the cash flows for the periods presented herein have been made. The Condensed Consolidated Balance Sheet as of July 2, 2005 and the Consolidated Statement of Common Stockholders’ Equity for the period July 3, 2004 to July 2, 2005 have been derived from the corporation’s audited financial statements included in our annual report on Form 10-K for the fiscal year ended July 2, 2005. The results of operations for the thirteen and twenty-six weeks ended December 31, 2005 are not necessarily indicative of the operating results to be expected for the full fiscal year.

The consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although the corporation believes the disclosures made are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the corporation’s Form 10-K for the year ended July 2, 2005 and other financial information filed with the Securities and Exchange Commission.

SARA LEE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets at December 31, 2005 and July 2, 2005

(In millions)

Unaudited


	December 31, 2005		July 2, 2005
ASSETS
Cash and equivalents	$	1,955	$	538
Trade accounts receivable, less allowances		1,746		1,798
Inventories:
Finished goods		1,518		1,621
Work in process		286		303
Materials and supplies		380		360

		2,184		2,284
Other current assets		482		336
Assets of discontinued operations held for sale		580		860

Total current assets		6,947		5,816
Other non-current assets		129		117
Deferred tax asset		391		303
Property, net		2,992		3,030
Trademarks and other identifiable intangibles, net		1,490		1,574
Goodwill		3,142		3,154
Assets of discontinued operations held for sale		52		429

	$	15,143	$	14,423

LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable	$	1,378	$	239
Accounts payable		1,244		1,255
Accrued liabilities		2,817		2,507
Current maturities of long-term debt		599		381
Liabilities of discontinued operations held for sale		386		591

Total current liabilities		6,424		4,973
Long-term debt		3,736		4,114
Pension obligation		858		858
Other liabilities		1,373		1,354
Liabilities of discontinued operations held for sale		119		124
Minority interests in subsidiaries		68		62
Common stockholders’ equity		2,565		2,938

	$	15,143	$	14,423

See accompanying Notes to Consolidated Financial Statements.

SARA LEE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

For the Thirteen and Twenty-six Weeks Ended December 31, 2005 and January 1, 2005

(In millions, except per share data)

Unaudited


	Thirteen Weeks Ended						Twenty-six Weeks Ended
	December 31, 2005			January 1, 2005			December 31, 2005			January 1, 2005
Net sales	$	4,448		$	4,512		$	8,640		$	8,763

Cost of sales		2,813			2,852			5,504			5,541
Selling, general and administrative expenses		1,281			1,270			2,534			2,488
Charges for (income from) exit activities and business dispositions		58			(10	)		57			(16	)
Contingent sale proceeds		—			—			(114	)		(117	)
Interest expense		76			71			150			137
Interest income		(19	)		(25	)		(40	)		(51	)

		4,209			4,158			8,091			7,982

Income from continuing operations before income taxes		239			354			549			781
Income taxes		46			45			111			128

Income from continuing operations		193			309			438			653

Discontinued operations
Net income (loss) from discontinued operations, net of tax		30			17			(148	)		25
Gain on sale of discontinued operations, net of tax		215			—			215			—

Net income	$	438		$	326		$	505		$	678

Income from continuing operations per common share
Basic	$	0.25		$	0.39		$	0.57		$	0.83

Diluted	$	0.25		$	0.39		$	0.56		$	0.82

Net income per common share
Basic	$	0.58		$	0.41		$	0.65		$	0.86

Diluted	$	0.57		$	0.41		$	0.65		$	0.85

Average shares outstanding
Basic		761			788			771			790

Diluted		765			795			775			796

Cash dividends per common share	$	0.1975		$	0.1975		$	0.3950		$	0.3850

See accompanying Notes to Consolidated Financial Statements.

SARA LEE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Common Stockholders’ Equity

For the Period July 3, 2004 to December 31, 2005

(In millions, except per share data)


	TOTAL			COMMON STOCK		CAPITAL SURPLUS			RETAINED EARNINGS			UNEARNED STOCK			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			COMPREHENSIVE INCOME (LOSS)
Balances at July 3, 2004	$	2,985		$	8	$	104		$	4,437		$	(170	)	$	(1,394	)
Net income		678			—		—			678			—			—		$	678
Translation adjustments, net of tax		468			—		—			—			—			468			468
Net unrealized gain / (loss) on qualifying cash flow hedges, net of tax		(62	)		—		—			—			—			(62	)		(62	)

Comprehensive income																		$	1,084

Cash dividends - Common ($0.385 per share)		(303	)		—		—			(303	)		—			—
Stock issuances (cancelations) -
Stock option and benefit plans		99			—		99			—			—			—
Restricted stock		22			—		22			—			—			—
Share repurchases and retirement		(239	)		—		(101	)		(138	)		—			—
ESOP contributions and other		9			—		3			—			6			—

Balances at January 1, 2005		3,657			8		127			4,674			(164	)		(988	)
Net income		41			—		—			41			—			—		$	41
Translation adjustments, net of tax		(406	)		—		—			—			—			(406	)		(406	)
Minimum pension liability, net of tax		(70	)		—		—			—			—			(70	)		(70	)
Net unrealized gain / (loss) on qualifying cash flow hedges, net of tax		62			—		—			—			—			62			62

Comprehensive income (loss)																		$	(373	)

Cash dividends - Common ($0.395 per share)		(311	)		—		—			(311	)		—			—
Stock issuances (cancelations) -
Stock option and benefit plans		62			—		62			—			—			—
Restricted stock		35			—		35			—			—			—
Tax benefit related to stock-based compensation		10			—		—			—			10			—
Share repurchases and retirement		(157	)		—		(157	)		—			—			—
ESOP contributions and other		15			—		12			4			(1	)		—

Balances at July 2, 2005		2,938			8		79			4,408			(155	)		(1,402	)
Net income		505			—		—			505			—			—		$	505
Translation adjustments, net of tax		(61	)		—		—			—			—			(61	)		(61	)
Net unrealized gain / (loss) on qualifying cash flow hedges, net of tax		(15	)		—		—			—			—			(15	)		(15	)

Comprehensive income																		$	429

Cash dividends-Common ($0.395 per share)		(305	)		—		—			(305	)		—			—
Stock issuances (cancelations) -
Stock option and benefit plans		21			—		21			—			—			—
Restricted stock		38			—		38			—			—			—
Share repurchases and retirement		(562	)		—		(108	)		(454	)		—			—
ESOP contributions and other		6			—		—			—			6			—

Balances at December 31, 2005	$	2,565		$	8	$	30		$	4,154		$	(149	)	$	(1,478	)

Interim period balances are unaudited.

See accompanying Notes to Consolidated Financial Statements.

SARA LEE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Twenty-six Weeks Ended December 31, 2005 and January 1, 2005

(In millions)

Unaudited


	Twenty-six Weeks Ended
	December 31, 2005			January 1, 2005
OPERATING ACTIVITIES -
Net Income	$	505		$	678
Less: Cash received from contingent sale proceeds		(114	)		(117	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		260			285
Amortization of intangibles		83			95
Impairment charges		224			—
Net gain on business dispositions		(349	)		(10	)
Decrease in deferred income taxes		(79	)		(31	)
Other		5			(17	)
Changes in current assets and liabilities, net of businesses acquired and sold		313			(80	)

Net cash from operating activities		848			803

INVESTMENT ACTIVITIES -
Purchases of property and equipment		(234	)		(201	)
Acquisitions of businesses		(7	)		—
Dispositions of businesses and investments		514			23
Cash received from contingent sale proceeds		114			117
Sales of assets		68			54

Net cash from (used in) investment activities		455			(7	)

FINANCING ACTIVITIES -
Issuances of common stock		17			99
Purchases of common stock		(562	)		(239	)
Borrowings of long-term debt		9			336
Repayments of long-term debt		(189	)		(945	)
Short-term borrowings, net		1,130			47
Cash received from loans receivable		34			—
Payments of dividends		(308	)		(152	)

Net cash from (used in) financing activities		131			(854	)

Effect of changes in foreign exchange rates on cash		(29	)		276

Increase in cash and equivalents during the period		1,405			218
Cash and equivalents at beginning of year		538			642
Discontinued operations cash activity included above:
Add cash balance of discontinued operations at beginning of period		31			27
Less cash balance of discontinued operations at end of period		(19	)		(48	)

Cash and equivalents at end of quarter	$	1,955		$	839

COMPONENTS OF CHANGES IN CURRENT ASSETS AND LIABILITIES:
Decrease (increase) in trade accounts receivable	$	30		$	(78	)
Decrease in inventories		167			108
(Increase) decrease in other current assets		(59	)		16
Decrease in accounts payable		(90	)		(141	)
Increase in accrued liabilities		265			15

Changes in current assets and liabilities, net of businesses acquired and sold	$	313		$	(80	)

See accompanying Notes to Consolidated Financial Statements.

SARA LEE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1.	Net Income Per Share

Net income per share – basic is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Net income per share – diluted reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. For the thirteen and twenty-six week periods ended December 31, 2005, options to purchase 49.0 million and 45.3 million shares of the corporation’s common stock had exercise prices that were greater than the average market price of those shares during the respective reporting periods. For the thirteen and twenty-six week periods ended January 1, 2005, options to purchase 16.4 million and 19.7 million shares of the corporation’s common stock had exercise prices that were greater than the average market price of those shares during the respective reporting periods. As a result, these shares are excluded from the earnings per share calculation, as they are anti-dilutive.

The average shares outstanding declined in the first six months of fiscal 2006 as a result of shares repurchased under the corporation’s ongoing share repurchase program. The corporation repurchases common stock at times management deems appropriate, given current market valuations. On August 1, 2005, the corporation’s Board of Directors authorized the repurchase of an additional 100 million shares of common stock. As a result of this action, the total number of shares authorized for repurchase increased to 116 million. At a $17 per share price, the additional authorization is equivalent to approximately $2 billion. During the first six months of fiscal 2006, the corporation repurchased 29.1 million shares of common stock for a purchase price of $562 million. Of this total, 20.9 million shares were purchased for $400 million under an accelerated share repurchase program where the final purchase price will be based upon the average daily share price over a period of time that will not exceed 6 months. The accelerated share repurchase program concluded on February 3, 2006 and the final purchase price settlement resulted in approximately 1.0 million additional shares of common stock being delivered to the corporation. During the accelerated share repurchase period, the corporation’s purchase of additional shares of its common stock was subject to conditions imposed by the counterparty to the transaction. At December 31, 2005, the corporation had approximately 87.2 million shares remaining on its existing share authorization. The corporation has repurchased shares with a value of $562 million in the first six months of fiscal 2006 and intends to repurchase additional shares with a value of up to $450 million in either the fourth quarter of fiscal 2006 or early in fiscal 2007. The repurchase will likely occur after the spin-off of Branded Apparel Americas / Asia, however, the timing and amount of future share repurchases may also be influenced by market conditions and other factors.

The following is a reconciliation of net income to net income per share – basic and diluted for the thirteen and twenty-six weeks ended December 31, 2005 and January 1, 2005:

Computation of Net Income per Common Share

(In millions, except per share data)


	Thirteen Weeks Ended				Twenty-six Weeks Ended
	December 31, 2005		January 1, 2005		December 31, 2005		January 1, 2005
Income from continuing operations	$	193	$	309	$	438	$	653
Net income from discontinued operations		245		17		67		25

Net income	$	438	$	326	$	505	$	678

Average shares outstanding – basic		761		788		771		790
Dilutive effect of stock option and award plans		4		7		4		6

Diluted shares outstanding		765		795		775		796

Income from continuing operations per share
Basic	$	0.25	$	0.39	$	0.57	$	0.83

Diluted	$	0.25	$	0.39	$	0.56	$	0.82

Income from discontinued operations per common share
Basic	$	0.32	$	0.02	$	0.09	$	0.03

Diluted	$	0.32	$	0.02	$	0.09	$	0.03

Net income per common share
Basic	$	0.58	$	0.41	$	0.65	$	0.86

Diluted	$	0.57	$	0.41	$	0.65	$	0.85

2.	Segment Information

Effective in the first quarter of fiscal 2006, the corporation reorganized its business operations around distinct consumers, customers and geographic markets in order to build functional excellence, increase strategic focus and simplify the organization. As a result of these changes, the corporation reorganized its business operations and reported under a segment structure that included seven business segments. As part of this structure, at the end of the first quarter of fiscal 2006, the corporation’s European Meats business was reported as part of the International Beverage segment and the corporation was evaluating the disposal of this business under the corporation’s transformation plan. At the end of the second quarter of fiscal 2006, the corporation is continuing to evaluate its options relative to the European Meats business and it remains classified as held for use and reported in continuing operations. The corporation reorganized its business operations during the second quarter of fiscal 2006, and reported the European Meats business as a separate business segment. Historical results have been restated to present the business segments on a comparable basis. The following is a general description of the corporation’s eight business segments.

•

North American Retail Meats – sells a variety of packaged meat products to retail customers in North America.

•

North American Retail Bakery – sells a variety of bakery products to retail customers in North America and includes the corporation’s U.S. Senseo retail coffee business.

•

Foodservice – sells a variety of meats, bakery, and beverage products to foodservice customers in the U.S.

•

International Beverage – sells coffee and tea products to retail and foodservice customers in major markets around the world, including Europe, Australia and Brazil.

•

European Meats – sells a variety of packaged and processed meats, cooked and dry hams and sausage to retail customers in Europe.

•

International Bakery – sells a variety of bakery and dough products to retail and foodservice customers in Europe and Australia.

•

Household and Body Care – sells products in four primary categories – body care, air care, shoe care and insecticides.

•

Branded Apparel – sources, manufactures and markets basic branded apparel products under the categories of innerwear, outerwear and sheer hosiery in the Americas and Asia.

The following is a summary of sales and operating segment income by business segment for the thirteen and twenty-six weeks ended December 31, 2005 and January 1, 2005.


	Thirteen Weeks Ended
	Net Sales						Income From Continuing Operations Before Income Taxes
(In millions)	December 31, 2005			January 1, 2005			December 31, 2005			January 1, 2005
North American Retail Meats	$	672		$	650		$	50		$	49
North American Retail Bakery		463			449			(17	)		(11	)
Foodservice		609			580			56			62
International Beverage		598			592			64			111
European Meats		285			311			21			31
International Bakery		190			200			21			20
Household and Body Care		451			491			36			82
Branded Apparel		1,182			1,241			169			154

Total business segments		4,450			4,514			400			498
Intersegment sales		(2	)		(2	)		—			—

Total net sales and operating segment income, respectively		4,448			4,512			400			498
Amortization of intangibles		—			—			(24	)		(24	)
General corporate expenses		—			—			(80	)		(74	)

Total net sales and operating income, respectively		4,448			4,512			296			400
Net interest expense		—			—			(57	)		(46	)

Net sales and income from continuing operations before income taxes, respectively	$	4,448		$	4,512		$	239		$	354


	Twenty-six Weeks Ended
	Net Sales						Income From Continuing Operations Before Income Taxes
(In millions)	December 31, 2005			January 1, 2005			December 31, 2005			January 1, 2005
North American Retail Meats	$	1,287		$	1,246		$	67		$	73
North American Retail Bakery		923			920			(21	)		(2	)
Foodservice		1,145			1,118			72			105
International Beverage		1,123			1,096			126			210
European Meats		569			588			51			64
International Bakery		382			387			33			41
Household and Body Care		897			953			115			149
Branded Apparel		2,319			2,459			291			300

Total business segments		8,645			8,767			734			940
Intersegment sales		(5	)		(4	)		—			—

Total net sales and operating segment income, respectively		8,640			8,763			734			940
Amortization of intangibles		—			—			(48	)		(54	)
General corporate expenses		—			—			(141	)		(136	)
Contingent sale proceeds		—			—			114			117

Total net sales and operating income, respectively		8,640			8,763			659			867
Net interest expense		—			—			(110	)		(86	)

Net sales and income from continuing operations before income taxes, respectively	$	8,640		$	8,763		$	549		$	781

The following table summarizes the assets utilized in the corporation’s business segments as of December 31, 2005 and July 2, 2005.


	December 31, 2005		July, 2 2005
Assets
North American Retail Meats	$	1,114	$	1,187
North American Retail Bakery		1,351		1,448
Foodservice		1,679		1,647
International Beverage		2,047		1,414
European Meats		762		798
International Bakery		1,378		1,126
Household and Body Care		2,163		1,695
Branded Apparel		3,591		4,003

		14,085		13,318
Discontinued operations		632		1,289
Other¹		426		(184	)

Total assets	$	15,143	$	14,423

¹	Principally cash and equivalents, certain fixed assets, deferred tax assets and certain other noncurrent assets.

3.	Discontinued Operations

As part of the corporation’s transformation plan, steps were taken to dispose of several businesses. At the end of the second quarter of fiscal 2006, five businesses were reported as discontinued operations in the current and prior periods. The comparative financial results of the discontinued operations were as follows:


	Fiscal 2006
	Direct Selling		U.S. Retail Coffee			Branded Apparel Europe			U.K. Apparel			European Nuts & Snacks		Total
Second Quarter
Net Sales	$	90	$	60		$	266		$	136		$	15	$	567
Pretax Income (Loss)		9		—			(10	)		(3	)		2		(2	)
Income (Loss)		53		(1	)		(20	)		(4	)		2		30
Six Months
Net Sales	$	202	$	122		$	547		$	248		$	29	$	1,148
Pretax Income (Loss)		13		(45	)		(192	)		(8	)		4		(228	)
Income (Loss)		54		(40	)		(156	)		(8	)		2		(148	)


	Fiscal 2005
	Direct Selling		U.S. Retail Coffee		Branded Apparel Europe			U.K. Apparel		European Nuts & Snacks		Total
Second Quarter
Net Sales	$	126	$	56	$	318		$	171	$	17	$	688
Pretax Income (Loss)		17		1		(6	)		11		3		26
Income (Loss)		12		1		(8	)		11		1		17

Six Months
Net Sales	$	231	$	105	$	615		$	314	$	32	$	1,297
Pretax Income (Loss)		25		1		(1	)		11		5		41
Income (Loss)		17		1		(7	)		11		3		25

The amounts in the table above include the results of the discontinued operations and any impairment charges that have been recognized in these discontinued operations. Gains and losses on the disposal of discontinued operations are excluded from the table above and are discussed below.

In December 2005, the corporation closed on the sale of the Direct Selling business and the U.S. Retail Coffee business. In addition, the corporation closed on the sale of a Turkish sewing business that was part of the Branded Apparel Europe business. The disposal of these three operations resulted in a pretax and after tax gain of $318 million and $215 million, respectively. Virtually all of this gain is related to the sale of the Direct Selling business. The following is a description of each of these businesses, including a discussion of significant items impacting the results.

Businesses Sold in Second Quarter

Direct Selling – On August 10, 2005, the corporation announced that it had entered into a definitive agreement to sell this business, and in December 2005, the corporation completed the sale of substantially all of the operations to Tupperware and received the following consideration:

•

$370 million which consists of $413 million of cash received less $43 million of cash which was included in the net assets transferred to the buyer.

•

The liabilities transferred to the buyer included a $34 million obligation to a retained foreign subsidiary of the corporation. Subsequent to the closing, the buyer remitted cash to the corporation to settle this obligation. The payment of this obligation is reflected in the financing activities section of the Consolidated Statement of Cash Flows.

•

Subsequent to the closing, the buyer paid $93 million to settle certain tax obligations of Sara Lee that were directly related to the sale transaction.

The corporation recognized a pretax and after tax gain on the sale of Direct Selling of $314 million and $213 million, respectively.

The definitive sales agreement provides for the sale of the Direct Selling business in the Philippines, however, transfer of legal title to these assets is awaiting the receipt of local government approval. The selling price of this component of the business has been placed in escrow pending the receipt of these approvals. Upon receipt of the $38 million of escrowed funds and transfer of title to the assets, the corporation expects to recognize a pretax and after tax gain of $28 million and $19 million, respectively.

The sales agreement provides for working capital and other customary post closing adjustments relating to the assets transferred. The final resolution of these items may impact the gain recognized. Under the terms of the sales agreement, the corporation has no significant continuing involvement in the business after the disposal date and does not expect any material direct cash inflows or outflows with the sold entity.

In fiscal 2006, the Direct Selling business reported pretax profits of $13 million and after tax profits of $54 million from the beginning of the fiscal year through the date of sale. A $50 million tax benefit was recognized in the second quarter of fiscal 2006 as the corporation was able to credit amounts previously accrued through operations against taxes recognized upon the sale.

The Direct Selling business had previously been reported within the Household and Body Care segment.

U.S. Retail Coffee – On October 26, 2005, the corporation announced that it had entered into an agreement to sell its U.S. Retail Coffee business and in December 2005 the transaction closed. The corporation received $82.5 million of cash at closing and recognized a pretax and after tax gain of $5 million and $3 million, respectively, in the second quarter.

The sales agreement provides for working capital and other customary post closing adjustments relating to the assets transferred. The final resolution of these items may impact the gain recognized. In addition, the agreement provides for a future payment of up to $2.5 million if the business generates a defined level of profits in the first year after the disposal. Any amounts received will be recognized in income when they are received.

The assets of the U.S. Retail Coffee business were part of a larger reporting unit that also provided coffee products to the foodservice channel. In the first quarter of fiscal 2006, the U.S. Retail Coffee asset group was classified as held for sale and $29 million of the goodwill of the larger reporting unit was allocated to this asset group. Also in the first quarter of fiscal 2006, the corporation reported a pretax charge of $44 million to recognize the impairment of $29 million of goodwill allocated to the asset group and $15 million of other long-lived assets. The after tax impact of the impairment charge was $39 million and is the primary reason for the loss recognized by the discontinued operation through the date of sale.

Under the terms of the sales agreement, the corporation has no significant continuing involvement in the business after the disposal date and does not expect any material direct cash inflows or outflows with the sold entity.

Prior to the change in the corporation’s reportable segments, the U.S. Retail Coffee business had been reported as part of the Beverage segment.

Carrying Value of Assets Sold – The carrying value of the major classes of assets sold were as follows:


	Carrying Value of Assets and Liabilities Sold
	Direct Selling		U.S. Retail Coffee		Total
Current Assets	$	161	$	46	$	207
Property		36		17		53
Intangibles		96		35		131
Other Noncurrent Assets		13		—		13

Total Assets		306		98		404

Current Liabilities		102		24		126
Noncurrent Liabilities		37		—		37

Total Liabilities		139		24		163

Net Assets Sold	$	167	$	74	$	241

Businesses Sold Subsequent to the Second Quarter

European Branded Apparel Business – In the first quarter of fiscal 2006, the corporation announced that it had entered into an agreement to sell its European Branded Apparel business and also began reporting the business as a discontinued operation. Based upon the offer received to purchase this business, the corporation recognized an impairment charge of $179 million pretax and $132 million after tax in the first quarter of fiscal 2006. The loss recognized by this discontinued operation in the first six months of fiscal

2006 was primarily due to this impairment charge. The carrying value of the net assets held for sale is approximately $82 million.

On February 3, 2006, the corporation closed on the sale of this business and received cash proceeds of $120 million using foreign exchange rates on the date of the transaction. The corporation expects to recognize a gain on this transaction in the third quarter of fiscal 2006 and will have no continuing involvement in the business subsequent to the closing date.

Under the terms of the transaction, the corporation will receive additional cash proceeds if the buyer receives cash distributions as a result of certain events such as the sale of the business, the payment of dividends, or redemptions of capital or loans. Distributions of available cash from the sold business will be made in the following order:

•

The buyer will first receive any amounts owed as a result of working capital and other purchase price adjustments.

•

After the purchase price adjustments are satisfied, the corporation will receive 49% of the next $204 million of cash distributions.

•

If additional cash is distributed, the corporation may receive between 15% and 25% of these amounts.

If any amounts are received, they will be recognized in income when the cash is received. The corporation does not expect any material direct cash inflows or outflows with the sold entity.

The corporation retained certain under funded pension obligations when this business was sold and expects to contribute $85 million prior to the end of the current fiscal year to fully fund the retained obligations. It is anticipated that the trustees of these plans will use a substantial portion of the proceeds to purchase annuities for plan participants at a future date, and that this action will likely result in the recognition of a settlement loss. The exact timing of the settlement of these obligations has not been determined.

The European Apparel business was previously included in the corporation’s Branded Apparel segment.

Other Businesses Held for Sale

United Kingdom (U.K.) Apparel – The corporation’s apparel operations in the U.K. primarily consist of the design, manufacture and sale of private label apparel products. This business was reported as a discontinued operation in the second quarter of fiscal 2006 and based upon ongoing negotiations with prospective buyers, an impairment charge of $1 million was recognized in the quarter. The carrying value of the net assets held for sale are less than $10 million.

The corporation’s planned sale of its apparel operations in the U.K. will result in the corporation retaining the pension obligations associated with the businesses to be sold. The projected benefit obligation of these plans, using a 5.3% discount rate, exceeded plan assets by $483 million at the close of fiscal 2005. The fiscal 2006 net periodic benefit cost of these plans was $52 million and these costs are recognized in selling, general and administrative expenses of the corporation’s continuing operations. The corporation is currently in discussions with the trustees of all of its U.K. plans and representatives of the government agency responsible for the oversight of pension plans regarding the full funding of these plans over the next ten years. The exact amount of the annual contributions will depend upon the outcome of these discussions.

The corporation does not expect to have any significant continuing involvement in the U.K. Apparel business after it is sold and does not expect to have any material direct cash inflows or outflows with the sold entity.

The operations of this business were previously included in the Branded Apparel segment.

European Nuts and Snacks – During the second quarter of fiscal 2006, the corporation entered into a definitive agreement to sell its European Nuts and Snacks business for 130 million euro which is equivalent to $154 million at the end of the second quarter of fiscal 2006. The sale transaction is subject

to regulatory and other government approvals before the transaction can be completed. The carrying value of the net assets held for sale is approximately $30 million and the corporation expects to recognize a gain when this transaction closes. The closing date is expected to take place prior to the end of the current fiscal year.

The corporation does not expect to have any significant continuing involvement in this business after it is sold and does not expect to have any material direct cash inflows or outflows with the sold entity. The operations of this business were previously included in the International Food and Beverage segment.

The following is a summary of the net assets held for sale as of December 31, 2005. These amounts include the net assets of the Branded Apparel Europe business, the U.K. Apparel business, the European Nuts and Snacks business, as well as the net assets of the Direct Selling business in the Philippines. The summary below also includes certain assets that are held for sale and do not qualify as discontinued operations. The change in the net assets held for sale between July 2, 2005 and December 31, 2005 is primarily the result of the assets disposed of in completed sale transactions and impairments recognized in the first quarter of fiscal 2006.


	December 31, 2005		July 2, 2005
Cash and short-term investments	$	19	$	31
Trade accounts receivable		229		285
Inventories		275		474
Other current assets		57		70

Total current assets held for sale		580		860

Property		25		149
Trademarks and other intangibles		1		147
Goodwill		19		108
Other assets		7		25

Assets of discontinued operations held for sale	$	632	$	1,289

Notes payable	$	20	$	27
Accounts payable		146		239
Accrued expenses		220		325

Total current liabilities held for sale		386		591

Other liabilities		119		124

Liabilities of discontinued operations held for sale	$	505	$	715

4.	Exit Activities and Business Dispositions

The reported results for the second quarter and first six months of fiscal years 2006 and 2005 reflect amounts recognized for exit and disposal actions. Reported amounts also include the impact of certain activities that were completed for amounts more favorable than previously estimated. The following is a summary of the expense (income) associated with these actions. These amounts are recognized in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statements of Income.


	Thirteen Weeks Ended					Twenty-six Weeks Ended
(In millions)	December 31, 2005		January 1, 2005			December 31, 2005			January 1, 2005
Exit and disposal programs:
Fiscal 2006 restructuring actions	$	46	$	—		$	71		$	—
Other restructuring actions		—		(2	)		—			(4	)

Total exit costs (income)		46		(2	)		71			(4	)
Business dispositions		12		(8	)		(14	)		(12	)

Impact on income from continuing operations before income taxes	$	58	$	(10	)	$	57		$	(16	)

The impact of these actions on the corporation’s business segments and general corporate expenses is summarized as follows:


	Thirteen Weeks Ended					Twenty-six Weeks Ended
(In millions)	December 31, 2005		January 1, 2005			December 31, 2005			January 1, 2005
North American Retail Meats	$	6	$	(5	)	$	10		$	(5	)
North American Retail Bakery		1		(1	)		2			(1	)
Foodservice		—		—			—			—
International Beverage		29		—			45			—
European Meats		3		—			3			—
International Bakery		—		—			5			—
Household and Body Care		6		(14	)		(20	)		(14	)
Branded Apparel		—		(2	)		—			(8	)

Decrease (increase) in operating segment income		45		(22	)		45			(28	)
Increase in general corporate expenses		13		12			12			12

Total	$	58	$	(10	)	$	57		$	(16	)

The following provides a detailed description of the exit activities and business disposition actions impacting the reported results for the second quarter and first six months of fiscal years 2006 and 2005.

Fiscal 2006

The reported results for the second quarter and first six months of fiscal 2006 reflect amounts recognized for exit activities and disposal actions that decreased income from continuing operations before income taxes by $58 million and $57 million, respectively. During the second quarter and first six months, the corporation approved a series of actions to exit certain business activities and lower its cost structure. Each of these actions is to be completed within a 12-month period after being approved. Offsetting these charges, in part, were gains realized on the disposal of certain assets. The components of the net charges recognized in the second quarter and first six months of fiscal 2006 were as follows:

•

The corporation’s management approved a series of actions to terminate employees and provide them with severance benefits in accordance with benefit plans previously communicated to the affected employee groups. Actions to terminate 566 employees at a cost of $41 million were approved in the second quarter. For the first six months of fiscal 2006, actions to terminate 1,012 employees at a cost of $69 million were approved. The specific location of these employees and the status of the terminations are summarized in a table contained in this note.

•

During the second quarter and first six months of fiscal 2006, the corporation recognized a $5 million charge for the exit of two leased facilities in connection with the transformation efforts of the corporation. These costs consist of noncancelable lease and other contractual obligations.

•

Partially offsetting the charges noted above is a $3 million credit recognized in the first six months of fiscal 2006. This credit relates to the sale of a corporate aircraft for an amount more favorable than originally estimated.

•

During fiscal 2006, the corporation completed the disposal of certain trademarks and other assets and incurred costs associated with the preparation of certain businesses for disposal. The net effect of these actions was a net charge of $12 million for the second quarter and a net gain of $14 million for the first six months of fiscal 2006. The most significant of these transactions is a $28 million gain realized on the sale of certain trademarks and inventory related to a line of skin care and sunscreen products. In addition, another $4 million gain was realized on the disposal of an investment in a foreign branded apparel business. Offsetting these gains is $18 million of professional fees incurred in connection with preparing certain businesses for disposition. The total cash proceeds from the investment and asset dispositions were $62 million.

The following table summarizes the charges recognized for exit activities approved during fiscal 2006, excluding business dispositions, and the related status as of December 31, 2005. Any accrued liabilities remaining in the Condensed Consolidated Balance Sheet represent those cash expenditures necessary to satisfy remaining obligations.


(In millions)	Exit Costs Recognized			Non-Cash Credits and (Charges)		Cash Payments			Accrued Exit Costs as of Dec. 31, 2005
Employee termination and other benefits	$	69		$	—	$	(9	)	$	60
Noncancelable lease and other contractual obligations		5			—		(1	)		4
Disposal of assets		(3	)		3		—			—

	$	71		$	3	$	(10	)	$	64

The following table summarizes the employee terminations by location and business segment:


Number of Employees	North American Retail Meats	North American Retail Bakery	Food- service	International Beverage	European Meats	International Bakery	Household and Body Care	Branded Apparel	Corporate	Total
United States	94	65	8	—	—	—	1	—	11	179
Europe	—	—	—	452	50	174	48	—	—	724
Australia	—	—	—	16	—	17	76	—	—	109

	94	65	8	468	50	191	125	—	11	1,012

As of December 31, 2005:
Actions completed	59	42	6	344	3	8	38	—	5	505
Actions remaining	35	23	2	124	47	183	87	—	6	507

	94	65	8	468	50	191	125	—	11	1,012

Fiscal 2005

The reported results for the second quarter and first six months of fiscal 2005 reflected amounts recognized for exit activities and disposal actions that increased income from continuing operations before income taxes by $10 million and $16 million, respectively. During the second quarter and first six months, the corporation approved actions to exit certain business activities and lower its cost structure. In addition, certain exit activities were completed for amounts that were less than previously anticipated. The components of the net credits recognized in the second quarter and first six months of fiscal 2005 were as follows:

•

During the first six months of fiscal 2005, the corporation completed certain previously approved exit activities for amounts that were less than originally anticipated. The completion of these actions resulted in the recognition of income in the second quarter and first six months of fiscal 2005 of $2 million and $4 million, respectively.

•

During the second quarter of fiscal 2005, the corporation recognized a $20 million gain from the sale of inventory and trademarks related to certain product lines and other previously completed business dispositions. This amount consisted of a $14 million gain related to the disposal of an ethnic skin care products line primarily sold in the U.S., a $4 million gain recognized as a result of the disposal of a line of meat products sold in the southern portion of the U.S., and $2 million of credits related to certain previously completed business dispositions. Offsetting these amounts was $12 million of professional service fees resulting from a strategic evaluation of certain businesses. During the first six months of fiscal 2006, an additional credit of $4 million was recognized resulting from the completion of certain previously approved business disposition activities.

Status of Restructuring Reserves

Fiscal 2005 Exit Activities

During fiscal 2005, the corporation approved a series of actions to exit certain defined business activities and lower its cost structure. Each of these actions was to be completed within a 12-month period after being approved. The net impact was to reduce income from continuing operations before income taxes by $131 million. The components of this charge are as follows:

•

$123 million of the charge was for the cost associated with terminating 1,882 employees and providing them with severance benefits in accordance with benefits plans previously communicated to the affected employee groups. Certain changes have been made to the originally targeted headcount due to voluntary departures and other plan changes. Adjustments have been made to reflect the actual cost of these terminations and are reflected in the net charge. The specific location of the employees and the status of the terminations is summarized in a table contained in this note.

•

$8 million of the net charge was for the cost of certain noncancelable lease and other contractual obligations. The lease costs related to the exit of 11 retail stores for the Branded Apparel segment. The other contractual obligations related to the exit of a German distribution agreement for the International Beverage business. The retail spaces had been exited by the end of fiscal 2005 and there are no remaining obligations owed to third parties.

The following table summarizes the charges taken for the exit activities approved during fiscal 2005 and the related status as of December 31, 2005. Any accrued liabilities remaining in the Condensed Consolidated Balance Sheet represent those cash expenditures necessary to satisfy remaining obligations.


(In millions)	Exit Costs Recognized		Cash Payments			Accrued Exit Costs as of Dec. 31, 2005
Employee termination and other benefits	$	123	$	(28	)	$	95
Noncancelable lease and other contractual obligations		8		(3	)		5

	$	131	$	(31	)	$	100

The following table summarizes the employee terminations by location and business segment.


Number of Employees	North American Retail Meats	North American Retail Bakery	Food- service	International Beverage	European Meats	International Bakery	Household and Body Care	Branded Apparel	Corporate	Total
United States	24	152	241	—	—	—	—	716	10	1,143
Canada	—	—	—	—	—	—	—	216	—	216
Mexico	—	—	—	—	—	—	—	139	—	139
Europe	—	—	—	122	—	60	139	—	1	322
Australia	—	—	—	—	—	—	62	—	—	62

	24	152	241	122	—	60	201	1,071	11	1,882

As of December 31, 2005:
Actions Completed	23	110	124	62	—	42	14	692	11	1,078
Actions Remaining	1	42	117	60	—	18	187	379	—	804

	24	152	241	122	—	60	201	1,071	11	1,882

Other Restructuring Actions

In prior periods, the corporation had approved various actions to exit certain defined business activities and lower its cost structure. As of the end of the second quarter of fiscal 2006, these actions had been completed. The accrued liabilities remaining in the Condensed Consolidated Balance Sheet related to these actions total $16 million and represent various severance and noncancelable lease obligations. These accrued amounts are expected to be satisfied in cash and will be funded from operations.

Pensions

The components of the net periodic pension cost and the postretirement medical cost related to continuing operations for the second quarter and first six months of fiscal 2006 and 2005 are as follows:


	Thirteen Weeks Ended December 31, 2005						Thirteen Weeks Ended January 1, 2005
(In millions)	Pension			Postretirement Medical and Life Insurance			Pension			Postretirement Medical and Life Insurance
Service cost	$	35		$	3		$	36		$	4
Interest cost		69			5			68			6
Expected return on plan assets		(65	)		—			(61	)		—
Amortization of
Transition (asset) obligation		—			—			—			—
Prior service cost		—			(5	)		1			(4	)
Net actuarial loss		21			—			21			—

Net periodic benefit cost	$	60		$	3		$	65		$	6

Curtailment gain	$	—		$	—		$	—		$	10


	Twenty-six Weeks Ended December 31, 2005						Twenty-six Weeks Ended January 1, 2005
(In millions)	Pension			Postretirement Medical and Life Insurance			Pension			Postretirement Medical and Life Insurance
Service cost	$	70		$	6		$	71		$	8
Interest cost		138			10			134			12
Expected return on plan assets		(131	)		—			(121	)		—
Amortization of
Transition (asset) obligation		—			(1	)		—			(1	)
Prior service cost		1			(9	)		2			(8	)
Net actuarial loss		42			1			42			1

Net periodic benefit cost	$	120		$	7		$	128		$	12

Curtailment gain	$	—		$	—		$	—		$	26

As indicated in the above table, the net periodic benefit cost of the corporation’s defined benefit pension plans was lower in the second quarter and first half of fiscal 2006 than in the comparable periods of fiscal 2005, primarily as a result of the expected return on plan assets increasing by a greater amount than the interest on plan obligations increased.

•

The expected return on plan assets is based upon the fair value of plan assets and the assumed rate of return on those assets at the start of the year. The higher level of expected returns in fiscal 2006 is primarily due to an increase in the fair value of plan assets during fiscal 2005.

•

The interest on plan obligations is based upon the projected benefit obligation of the plans and the discount rate assumption at the start of the fiscal year. The higher level of interest on plan obligations in fiscal 2006 is primarily due to an increase in plan obligations in fiscal 2005.

The net periodic benefit cost of the corporation’s postretirement medical and life insurance plans declined primarily as a result of plan amendments instituted in fiscal 2005 which eliminated post-65 coverage and increased cost sharing by covered employees in the North American bakery operations. These benefit changes reduced plan obligations and the interest on those obligations. In addition, the amendments

increased the level of negative prior service cost being amortized in the determination of the net periodic benefit expense.

The curtailment gain recognized in fiscal 2005 was as a result of the termination of certain bakery employees. The postretirement medical benefit plan in which these individuals participated had negative prior service cost from a previous plan amendment that was recognized upon termination of the employees.

In the first six months of fiscal 2006, the corporation contributed $52 million in cash to its defined benefit pension plans. At the present time, the corporation expects to contribute $324 million of cash to its pension plans in fiscal 2006.

•

Approximately $3 million of the full year funding is related to pension plans which have been transferred to the buyers of certain businesses as a result of transactions completed in fiscal 2006.

•

Included in the current year estimate is the anticipated payment of $85 million to fully fund certain pension obligations associated with the Branded Apparel Europe business. These obligations were retained when the business was sold on February 3, 2006. It is anticipated that the trustees of these plans will use a substantial portion of the proceeds to purchase annuities for plan participants at a future date, and that this action will likely result in the recognition of a settlement loss. The exact timing of the settlement of these obligations has not been determined.

•

The corporation’s planned sale of its apparel operations in the U.K. will result in the corporation retaining the pension obligations associated with the businesses to be sold. The projected benefit obligation of these plans, using a 5.3% discount rate, exceeded plan assets by $483 million at the close of fiscal 2005. The fiscal 2006 net periodic benefit cost of these plans was $52 million and these costs are recognized in selling, general and administrative expenses of the corporation’s continuing operations. The corporation is currently in discussions with the trustees of all of its U.K. plans and representatives of the government agency responsible for the oversight of pension plans regarding the full funding of the U.K. plans over the next ten years. The exact amount of the annual contributions will depend upon the outcome of these discussions. The estimated 2006 cash contributions reflect the corporation’s best estimate of the funding that will result from these ongoing discussions.

The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors including minimum funding requirements in the jurisdictions in which the company operates. In addition, the corporation has announced its intent to dispose of certain businesses and the terms of those transactions may impact the timing and amount of future contributions to these plans. As a result, the actual funding in fiscal 2006 may differ from the current estimate.

6.	Impairment Review and Goodwill

The corporation tests goodwill and intangible assets not subject to amortization for impairment in the second quarter of each fiscal year. As a result of the annual review, the corporation:

•

Recognized a $1 million charge to write off goodwill related to an International Beverage business. The remaining change in the goodwill balance between July 2, 2005, and December 31, 2005, is due to changes in foreign currency exchange rates.

•

Concluded that an apparel trademark with a carrying value of $79 million no longer had an indefinite life and it would be amortized in future periods.

At the end of the second quarter of fiscal 2006, $1,281 million of the corporation’s total intangible assets of $1,490 million were subject to amortization. After reclassifying these intangible assets to the finite lived category, the annual amortization expense is expected to be approximately $160 million.

7.	Contingent Sale

The corporation sold its European cut tobacco business in fiscal 1999. Under the terms of that agreement, the corporation will receive an annual cash payment of 95 million euros if tobacco continues to be a legal product in the Netherlands, Germany and Belgium through 2010. The legal status of tobacco in

each country accounts for a portion of the total contingency with the Netherlands accounting for 67%, Germany 22% and Belgium 11%. If tobacco ceases to be a legal product within any of these countries, the corporation forfeits the receipt of all future amounts related to that country. The contingencies associated with the fiscal 2006 and fiscal 2005 payments each passed in the first quarter, respectively, of each fiscal year and the corporation received the annual payments. The fiscal 2006 annual payment was equivalent to $114 million, and the fiscal 2005 annual payment was equivalent to $117 million based upon the respective exchange rates on the dates of receipt. Each of these amounts was recognized in the corporation’s earnings when received and each of the payments increased diluted earnings per share by $0.15 when they were recognized.

8.	Acquisitions

During the first quarter of fiscal 2006, the corporation acquired National Textiles, LLC, a domestic yarn and textile production company for $3 million in cash and the assumption of $84 million of debt. The fair value of the assets acquired, net of liabilities assumed, approximated the $3 million purchase price based upon preliminary valuations and no goodwill has been recognized as a result of the transaction. The corporation expects to finalize the purchase price allocation after third party appraisers have completed their valuation work. Substantially all of the yarn and textiles produced by the acquired business will be used in products produced by the domestic Branded Apparel business.

9.	Stock Based Compensation

On July 3, 2005, the corporation adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (FAS No. 123(R)) using the modified prospective method. FAS No. 123(R) requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. Under the modified prospective method of adopting FAS No. 123(R), the corporation will recognize compensation cost for all share-based payments granted after July 3, 2005, plus any awards granted to employees prior to July 3, 2005 that remain unvested at that time. Under this method of adoption, no restatement of prior periods is made. The impact of adopting FAS No. 123(R) did not have a significant impact on income from continuing operations, income before income taxes, net income, cash flow from operations, or earnings per share during the period. Financial statement disclosures relating to the corporation’s various stock option, employee stock purchase and stock award plans under FAS 123(R) can be found in the corporation’s first quarter 10-Q, which was filed with the Securities and Exchange Commission, for the period ended October 1, 2005.

Prior to July 3, 2005, the corporation recognized the cost of employee services received in exchange for equity instruments in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). APB No. 25 required the use of the intrinsic value method, which measures compensation cost as the excess, if any, of the quoted market price of the stock over the amount the employee must pay for the stock. Compensation expense for substantially all of the corporation’s equity-based awards was measured under APB No. 25 on the date the shares were granted. Under APB No. 25, no compensation expense has been recognized for stock options, replacement stock options and shares sold under the Employee Stock Purchase Plan. Compensation expense was recognized under APB No. 25 for the cost of restricted share unit awards granted to employees.

During the thirteen and twenty-six weeks ended January 1, 2005, had the cost of employee services received in exchange for equity instruments been recognized based on the grant date fair value of those instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-based Compensation,” the corporation’s net income and earnings per share would have been impacted as shown in the following table.


(In millions)	Thirteen Weeks Ended January 1, 2005			Twenty-six Weeks Ended January 1, 2005
Reported net income	$	326		$	678
Plus – Stock-based employee compensation included in reported net income, net of related tax effects		8			16
Less – Total stock-based employee compensation expense determined under the fair-value method for all awards, net of related tax effects		(13	)		(25	)

Pro forma net income	$	321		$	669

Earnings per share:
Basic – as reported	$	0.41		$	0.86

Basic – pro forma	$	0.41		$	0.85

Diluted – as reported	$	0.41		$	0.85

Diluted – pro forma	$	0.40		$	0.84

10.	Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are as follows:


	Cumulative Translation Adjustment			Net Unrealized Gain (Loss) on Qualifying Cash Flow Hedges			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at July 3, 2004	$	(793	)	$	(14	)	$	(587	)	$	(1,394	)
Other comprehensive income (loss) activity		468			(62	)		—			406

Balance at January 1, 2005		(325	)		(76	)		(587	)		(988	)

Other comprehensive income (loss) activity		(406	)		62			(70	)		(414	)

Balance at July 2, 2005		(731	)		(14	)		(657	)		(1,402	)

Other comprehensive income (loss) activity		(61	)		(15	)		—			(76	)

Balance at December 31, 2005	$	(792	)	$	(29	)	$	(657	)	$	(1,478	)

Comprehensive income in second quarters of fiscal 2006 and 2005 was $401 million and $657 million, respectively. Comprehensive income in the first six months of fiscal 2006 and 2005 was $429 million and $1,084 million, respectively.

11.	Derivative Reporting

The corporation is exposed to changes in interest rates, foreign exchange rates and commodity prices. To manage the risk from these changes, the corporation uses derivative instruments and enters into various hedging transactions. A description of the corporation’s hedging programs and instruments is included in the corporation’s 2005 annual report on Form 10-K which is filed with the Securities and Exchange Commission. As of July 2, 2005, the net accumulated derivative loss recorded in Accumulated Other Comprehensive Income was $14 million. During the six months ended December 31, 2005, $16 million of accumulated net derivative gains were deferred into Accumulated Other Comprehensive Income and $31 million of accumulated net derivative gains were released from Accumulated Other Comprehensive Income into earnings since the related hedged item was realized during the period, resulting in a balance in Accumulated Other Comprehensive Income at December 31, 2005 of an accumulated loss of $29 million. At December 31, 2005, the maximum maturity date of any cash flow hedge was approximately 1¹/2 years, excluding derivative hedges related to the payment of variable

interest on existing financial instruments. The corporation expects to reclassify into earnings during the next twelve months, net gains from Accumulated Other Comprehensive Income of approximately $7 million, at the time the underlying hedged transaction is realized.

During the first six months of fiscal 2006, the corporation recognized a gain of $3 million for certain amounts that were excluded from the assessment of effectiveness. Other disclosures related to hedge ineffectiveness and amounts reclassified into earnings as a result of the discontinuation of hedge accounting because it was probable that the original forecasted transaction would not occur, have been omitted due to the insignificance of these amounts. During the six months ended December 31, 2005, a net gain of $29 million arising from effective hedges of net investments has been reflected in the cumulative translation adjustments account within consolidated stockholders’ equity.

12.	Issued But Not Yet Effective Accounting Standards

Accounting Changes and Error Corrections

The FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (Statement No. 154), which requires retroactive application of a voluntary change in accounting principle to prior period financial statements unless it is impractical. Statement No. 154 also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. Statement No. 154 replaces APB Opinion 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” The corporation will adopt the provisions of Statement No. 154, effective in fiscal 2007. Management currently believes that adoption of the provisions of Statement No. 154 will not have a significant impact on the corporation’s consolidated financial statements.

Rental Costs Incurred During a Construction Period

The FASB issued FASB Staff Position FAS 13-1 (FSP 13-1), which requires companies to expense rental costs associated with ground or building operating leases that are incurred during a construction period. As a result, entities that are currently capitalizing these rental costs are required to expense them beginning in its first reporting period beginning after December 15, 2005. FSP 13-1 is effective for the corporation as of the third quarter of fiscal 2006. The corporation does not believe that the adoption of FSP 13-1 will have a material impact on the corporation’s financial condition or results of operations.

13.	Subsequent Events

In January 2006, the corporation entered into a definitive agreement to acquire Butter-Krust Baking, a Northeastern United States based fresh bread and baking company, for approximately $72 million. The transaction is subject to regulatory approval and other customary closing conditions.

On February 3, 2006, the corporation completed the sale of its European Branded Apparel business that has been reported as a discontinued operation and received cash proceeds of $120 million. This transaction will be reported in the corporation’s third quarter of fiscal 2006.

Item II

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following is management’s discussion and analysis of the results of operations for the second quarter and first six months of fiscal 2006 compared with the second quarter and first six months of fiscal 2005 and a discussion of the changes in financial condition and liquidity during the first six months of fiscal 2006. The following is an outline of the analyses included herein:

•

Overview

•

Second Quarter of Fiscal 2006

•

First Six Months of Fiscal 2006

•

Cash Flow

•

Description of the Business Segments

•

Transformation Plan

•

Consolidated Results – Second Quarter of Fiscal 2006 Compared with Second Quarter of Fiscal 2005

•

Operating Results by Business Segment – Second Quarter of Fiscal 2006 Compared with Second Quarter of Fiscal 2005

•

Consolidated Results – First Six Months of Fiscal 2006 Compared with First Six Months of Fiscal 2005

•

Operating Results by Business Segment – First Six Months of Fiscal 2006 Compared with First Six Months of Fiscal 2005

•

Financial Condition

•

Liquidity

•

Significant Accounting Policies and Critical Estimates

•

Forward-looking Information

Overview

Second Quarter of Fiscal 2006

Continuing Operations – During the second quarter of fiscal 2006, net sales decreased by $64 million, or 1.4%, over the second quarter of fiscal 2005, to $4,448 million. Changes in foreign currencies, particularly in the European euro and the British pound, decreased reported net sales by $93 million, or 2.1%. Net sales were impacted by acquisitions and dispositions in the first quarters of both fiscal 2006 and 2005 and these reduced net sales by $36 million, or 0.8%. The remaining net sales increase was $65 million, or 1.5%, as sales increases in the North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage and International Bakery segments were partially offset by declines in the European Meats, Household and Body Care and Branded Apparel segments.

Operating income for the corporation in the second quarter of fiscal 2006 declined by $104 million, or 26.3%, and was composed of the following:

•

The corporation’s gross profit declined by $25 million, primarily as a result of the $64 million decline in sales and a slight decline in the gross profit margin.

•

SG&A expenses in the second quarter of fiscal 2006 increased by $11 million over the comparable period of the prior year. As a percent of sales, SG&A expenses increased from 28.2% in the second quarter of fiscal 2005 to 28.8% in the second quarter of fiscal 2006. The

impact of the ongoing transformation expenses and other cost increases more than offset savings from the transformation plan and lower advertising and promotion costs.

•

In the second quarter of fiscal 2006, the corporation recognized a $58 million charge for exit activities and business dispositions, while in the second quarter of fiscal 2005, the corporation recognized $10 million of income.

Pretax income from continuing operations declined $115 million or 32.8% as result of the $104 million decline in operating income and an $11 million increase in interest expense. The effective tax rate on continuing operations was 19.2% in the second quarter of fiscal 2006 as compared to 12.7% in the comparable period of the prior year. The lower effective tax rate in fiscal 2005 was primarily attributable to a reduction in the statutory tax rate in the Netherlands that reduced deferred tax obligations in that jurisdiction. As a result of these factors, income from continuing operations declined by $116 million or 37.8%.

Discontinued Operations - The corporation has reported its Direct Selling, U.S. Retail Coffee, European Branded Apparel, U.K. Apparel and European Nuts and Snacks businesses as discontinued operations and several operations were sold in the second quarter.

•

The operating results of the discontinued businesses are presented in Note 3 to the Consolidated Financial Statements. In the second quarter of fiscal 2006, these businesses reported income of $30 million as compared to $17 million of income in the comparable period of the prior year. This increase was primarily due to a $50 million tax benefit attributable to the Direct Selling business, as the corporation was able to credit taxes previously recognized in the operation of this business against taxes paid upon the sale.

•

During the second quarter of fiscal 2006, the corporation sold its Direct Selling and U.S. Retail Coffee operations and also disposed of certain Turkish manufacturing assets of its European Branded Apparel business. As a result of these transactions, the corporation recognized pretax and after tax gains of $318 million and $215 million, respectively.

Net income in the second quarter of fiscal 2006 increased by $112 million, or 34.4%, and diluted EPS increased $0.16, or 39%, as a $228 million increase in income from discontinued operations offset a $116 million decline in income from continuing operations.

First Six Months of Fiscal 2006

Continuing Operations – During the first six months of fiscal 2006, net sales decreased by $123 million, or 1.4%, over the first six months of fiscal 2005, to $8,640 million. Changes in foreign currencies, particularly in the European euro and the British pound, decreased reported net sales by $67 million, or 0.8%. Net sales were impacted by acquisitions and dispositions in the first six months of both fiscal 2006 and 2005 and the impact of these transactions reduced net sales by $55 million, or 0.6%. The remaining net sales decrease was $1 million as sales decreased in the Household and Body Care and Branded Apparel segments and increased in each of the other segments.

Operating income for the corporation in the first six months of fiscal 2006 declined by $208 million, or 24.1%, and was composed of the following:

•

The corporation’s gross profit declined by $86 million primarily as a result of the $123 million decline in sales and a 0.5% decline in the gross profit margin.

•

SG&A expenses in the first six months of fiscal 2006 increased by $46 million over the comparable period of the prior year. As a percent of sales, SG&A expenses increased from 28.4% in the first six months of fiscal 2005 to 29.3% in the first six months of fiscal 2006. The impact of the ongoing transformation expenses and other cost increases more than offset savings from the transformation plan and lower advertising and promotion costs.

•

In the first six months of fiscal 2006, the corporation recognized a charge of $57 million for exit activities and business dispositions, while in the first six months of fiscal 2005, the corporation recognized $16 million of income from exit and business disposition activities.

•

The corporation received and recognized contingent sales proceeds of $114 million in the first six months of fiscal 2006 and $117 million of contingent sales proceeds in the first six months of fiscal 2005 from the sale of the corporation’s cut tobacco business. These payments represent the annual payments for fiscal 2006 and 2005.

Income from continuing operations before income taxes declined by $232 million or 29.8% as a result of the $208 million decline in operating income and higher short term interest rates which increased interest expense by $24 million. The effective tax on continuing operations was 20.2% for the first six months of fiscal 2006 as compared to 16.4% in fiscal 2005. The lower effective tax rate in fiscal 2005 was primarily attributable to the change in the statutory tax rate in the Netherlands. As a result of these factors, income from continuing operations declined by $215 million or 32.9%.

Discontinued Operations – The corporation reported its Direct Selling, U.S. Retail Coffee, European Branded Apparel, U.K. Apparel and European Nuts and Snacks businesses as discontinued operations and several operations were sold prior to the close of the period.

•

The operating results of the discontinued businesses are presented in Note 3 to the financial statements. For the first six months of fiscal 2006, these businesses reported a loss of $148 million as compared to income of $25 million in the prior year. This is a change of $173 million between the periods. The operating loss recognized by discontinued businesses was primarily due to a $130 million impairment charge recognized for the Branded Apparel Europe operations, a $39 million impairment charge recognized for the U.S. Retail Coffee operation and a $1 million impairment charge in the U.K. Apparel operations.

•

As noted earlier, the corporation also recognized an after tax gain of $215 million as a result of disposing of several businesses in the second quarter of fiscal 2006.

Net income in the first six months of fiscal 2006 decreased by $173 million, or 25.6% and diluted EPS decreased by $0.20, or 23.5%, as a $215 million decline in income from continuing operations more than offset a $42 million increase in income from discontinued operations.

A table which summarizes the significant items that impacted the second quarters and first six months of fiscal 2006 and 2005 is presented below.

Impact of Significant Items on Income From Continuing Operations and Net Income


	13 Weeks Ended December 31, 2005												13 Weeks Ended January 1, 2005
In millions, except per share data	Pretax Impact			Tax			Net Income			Diluted EPS Impact(1)			Pretax Impact			Tax			Net Income			Diluted EPS Impact (1)
Income from continuing operations	$	239		$	(46	)	$	193		$	0.25		$	354		$	(45	)	$	309		$	0.39

Net income							$	438		$	0.57								$	326		$	0.41

Significant items affecting comparability of income from continuing operations and net income:
(Charges for) income from exit activities and business dispositions
(Charges for) income from exit activities	$	(46	)	$	15		$	(31	)	$	(0.04	)	$	2		$	(1	)	$	1		$	—
(Charges for) income from business disposition activities		(12	)		5			(7	)		(0.01	)		8			(2	)		6			0.01

Subtotal		(58	)		20			(38	)		(0.05	)		10			(3	)		7			0.01
(Charges) income to cost of sales and SG&A expenses
Transformation charges in cost of sales and SG&A		(42	)		14			(28	)		(0.04	)		—			—			—			—
Hurricane losses		(2	)		1			(1	)		—			—			—			—			—
Accelerated depreciation and amortization		(11	)		4			(7	)		(0.01	)		(7	)		2			(5	)		(0.01	)
Change in vacation policy		14			(5	)		9			0.01			—			—			—			—
Bakery curtailment gain		—			—			—			—			10			(4	)		6			0.01

Impact of significant items on income from continuing operations before income taxes:		(99	)		34			(65	)		(0.09	)		13			(5	)		8			0.01

Significant tax matters affecting comparability
Dutch tax rate change		—			—			—			—			—			24			24			0.03

Impact of significant items on income from continuing operations:		(99	)		34			(65	)		(0.09	)		13			19			32			0.04

Significant items impacting discontinued operations
European Branded Apparel impairment		—			2			2			—			—			—			—			—
U.K. Branded Apparel impairment		(1	)		—			(1	)		—			—			—			—			—
Charges for exit activities and transformation expenses		(3	)		2			(1	)		—			—			—			—			—
Tax benefit on Direct Selling transaction		—			50			50			0.07			—			—			—			—
Gain on sale of Direct Selling and other businesses		318			(103	)		215			0.28			—			—			—			—

Impact of significant items on net income	$	215		$	(15	)	$	200		$	0.26		$	13		$	19		$	32		$	0.04

Notes:

(1)	EPS amounts are rounded to the nearest $0.01 and may not add to the total.

Impact of Significant Items on Income From Continuing Operations and Net Income


	26 Weeks Ended December 31, 2005												26 Weeks Ended January 1, 2005
In millions, except per share data	Pretax Impact			Tax			Net Income			Diluted EPS Impact(1)			Pretax Impact			Tax			Net Income			Diluted EPS Impact (1)
Income from continuing operations	$	549		$	(111	)	$	438		$	0.56		$	781		$	(128	)	$	653		$	0.82

Net income							$	505		$	0.65								$	678		$	0.85

Significant items affecting comparability of income from continuing operations and net income:
(Charges for) income from exit activities and business dispositions
(Charges for) income from exit activities	$	(71	)	$	24		$	(47	)	$	(0.06	)	$	4		$	(2	)	$	2		$	—
(Charges for) income from business disposition activities		14			(5	)		9			0.01			12			(2	)		10			0.01

Subtotal		(57	)		19			(38	)		(0.05	)		16			(4	)		12			0.02
(Charges) income to cost of sales and SG&A expenses
Transformation charges in cost of sales and SG&A		(68	)		23			(45	)		(0.06	)		—			—			—			—
Hurricane losses		(5	)		2			(3	)		—			—			—			—			—
Accelerated depreciation and amortization		(21	)		8			(13	)		(0.02	)		(25	)		7			(18	)		(0.02	)
Change in vacation policy		14			(5	)		9			0.01			—			—			—			—
Bakery curtailment gain		—			—			—			—			26			(10	)		16			0.02

Impact of significant items on income from continuing operations before income taxes:		(137	)		47			(90	)		(0.12	)		17			(7	)		10			0.01

Significant tax matters affecting comparability
Dutch tax rate change		—			—			—			—			—			24			24			0.03

Impact of significant items on income from continuing operations:		(137	)		47			(90	)		(0.12	)		17			17			34			0.04

Significant items impacting discontinued operations
European Branded Apparel impairment		(179	)		49			(130	)		(0.17	)		—			—			—			—
U.S. Retail Coffee impairment		(44	)		5			(39	)		(0.05	)		—			—			—			—
U.K. Branded Apparel impairment		(1	)		—			(1	)		—			—			—			—			—
Charges for exit activities and transformation expenses		(4	)		2			(2	)		—			—			—			—			—
Tax benefit on Direct Selling transaction		—			50			50			0.07			—			—			—			—
Gain on sale of Direct Selling and other businesses		318			(103	)		215			0.28			—			—			—			—

Impact of significant items on net income	$	(47	)	$	50		$	3		$	—		$	17		$	17		$	34		$	0.04

Notes:

(1)	EPS amounts are rounded to the nearest $0.01 and may not add to the total.

Cash Flow

The corporation’s cash flow from operations in the first six months of fiscal 2006 was $848 million as compared to $803 million in the comparable period of fiscal 2005. The following significant factors impacted these results:

•

The corporation’s income from continuing operations in the six months ended December 31, 2005 declined by $215 million as compared to the comparable period of the prior year. In addition, the operating results of discontinued businesses were lower than the comparable period of the prior year.

•

The lower profitability of the business was largely offset by a $393 million improvement in working capital. Significant factors impacting working capital were:

•

a $108 million reduction in outstanding receivables as a result of lower sales and improved collection efforts,

•

a $59 million reduction in inventory which was largely attributable to better inventory management in the North American branded apparel business,

•

a $51 million improvement in the amount of cash used in the settlement of trade payables, and

•

a $99 million reduction in the amount of cash contributed to the corporation’s defined benefit pension plans, as well as lower cash bonus payments.

Cash generated from investment activities was $455 million in the first six months of fiscal 2006, as compared to cash used of $7 million in the comparable period of fiscal 2005. At the end of the second quarter of fiscal 2006, the corporation did not utilize cash on the balance sheet to repay outstanding notes payable borrowings as it had done at the end of the second quarter of fiscal 2005 or the end of fiscal 2005. At the end of the second quarter of fiscal 2005 and the end of fiscal 2005, the corporation scheduled certain notes payable obligations, primarily in the form of short-term commercial paper, to mature prior to the end of the fiscal period. Cash generated from operations, which includes cash on hand in various operating units in different geographic locations, was utilized to repay these commitments when they matured. At the beginning of the subsequent quarter, issuances of commercial paper were made and cash was returned to the corporation’s operating locations. Shortly before the end of fiscal 2005, using cash on hand, the corporation repaid $2,080 million of outstanding notes payable. Notes payable and cash would have been higher at the end of fiscal 2005 by $2,080 million had the cash repayments not been made. As a result of the decision not to utilize cash on hand to repay outstanding notes payable, the corporation had $1,955 million of cash on the balance sheet at the end of the second quarter of fiscal 2006, versus $538 million at the end of fiscal 2005, and had outstanding notes payable of $1,378 million at the end of the second quarter of fiscal 2006, versus $239 million at the end of fiscal 2005.

During the first six months of fiscal 2006 and 2005, the corporation repaid borrowings of long-term debt of $189 million and $945 million, respectively, by utilizing a combination of cash on hand and the issuance of short- and long-term debt.

During the first six months of fiscal 2006, the corporation repurchased 29.1 million shares of its common stock for $562 million under the corporation’s ongoing share repurchase program. Of this total, 20.9 million shares were repurchased for $400 million under an accelerated share repurchase program where the final purchase price will be based upon the average daily share price over a period of time not to exceed 6 months. The accelerated share repurchase program concluded on February 3, 2006 and the final purchase price settlement resulted in approximately 1.0 million additional shares of common stock being delivered to the corporation. During the accelerated share repurchase period, the corporation’s purchase of additional shares of its common stock was subject to conditions imposed by the counterparty to the transaction.

Further information and details regarding the performance of the corporation and its business segments follows.

Description of the Business Segments

During fiscal 2006, the corporation reorganized its business operations around distinct customers, consumers and geographic markets in order to build functional excellence, increase strategic focus and simplify the organization. As a result of these changes, the corporation reorganized its business operations and reports its results in eight business segments. Historical results have been restated to present the business segments on a comparable basis. The following is a general description of the corporation’s eight business segments.

•

North American Retail Meats – sells a variety of meat products, including hot dogs, corn dogs, breakfast sausages and sandwiches, bacon, smoked and dinner sausages, as well as premium deli and luncheon meats.

•

North American Retail Bakery – sells a wide variety of fresh and frozen baked products including bread, buns and bagels as well as specialty items including frozen pies, cakes, and cheesecakes.

•

Foodservice – sells meats, bakery and coffee products to foodservice customers in the U.S.

•

International Beverage – sells coffee and tea products to retail and foodservice customers primarily in Europe, Brazil and Australia.

•

European Meats – sells a variety of packaged and processed meats as well as cooked and dry hams and sausage products to retail customers in Europe. Previously, the operations of this business were grouped with the International Beverage business.

•

International Bakery – sells frozen bakery, dough products and a variety of fresh bread products to retail and foodservice customers in Europe and Australia.

•

Household and Body Care – sells products in four primary categories – body care, air care, shoe care and insecticides.

•

Branded Apparel – sources, manufactures and markets basic branded apparel products including men’s and women’s underwear, intimate apparel, casualwear, socks and sheer hosiery in the Americas and Asia.

Transformation Plan

In February 2005, the corporation announced a transformation plan designed to improve the corporation’s performance and better position Sara Lee for long-term growth. The plan is expected to be completed by fiscal 2010 and a number of significant gains and losses are anticipated to be recognized over this period. The following is an update on the actions taken in the transformation plan and the impact on the second quarter and first six months of fiscal 2006.

Organization Structure

The corporation reorganized its operations around distinct consumers, customers and geographic markets in order to build functional excellence, increase strategic focus and simplify the organization. The corporation’s new structure is organized around eight business segments, which were described above.

The corporation announced plans to locate the management of its North American businesses along with a majority of its corporate staff at a single site in suburban Chicago (Downers Grove, Illinois). As a result of this change:

•

Costs are being incurred to relocate those individuals who were requested to remain with the organization and elected to do so.

•

A number of individuals elected not to relocate to Chicago and it was necessary to pay certain of these personnel stay bonuses to preserve business continuity while replacements were hired.

•

Certain positions and employees are being eliminated from the organization structure and severance benefits are being paid to these individuals.

•

Costs were incurred to recruit new employees to work in the Chicago area as well as to staff positions in newly created functions. During the first six months of fiscal 2006, the corporation hired more than 500 new employees in the United States.

•

Bonuses are being accrued for certain employees deemed critical to the success of the transformation effort. These amounts are to incent individuals to remain with the organization and compensate them for an increased workload.

The corporation expects to finalize the employee centralization in the fall of 2006. In the third quarter of fiscal 2006, management expects to approve a formal plan to centralize the research and development activities for North America into a temporary single site by the summer of 2006, while management starts construction on a permanent North American research center.

In Europe, the corporation has started executing plans to centralize management into a single location per country or region. Each centralized location would be supported by a shared services organization which will provide back-office functions. As a result of the plans to centralize management and eliminate operating locations, certain planned work-force reductions are in process.

As a result of these actions, pretax charges of $99 million were recognized in the second quarter of fiscal 2006 related to exit activities, transformation costs and accelerated depreciation and amortization in order to simplify the organizational structure. In the first six months of fiscal 2006, the corporation has recognized pretax charges from transformation and exit activities of $160 million, including $69 million of severance costs, $21 million of accelerated depreciation and amortization, $17 million of employee retention costs, $13 million of relocation costs, $8 million of recruiting costs, and $32 million related to consulting, information technology and other transformation and exit efforts. Additional restructuring actions are expected over the life of the transformation plan and further details regarding these actions is contained in this Management Discussion and Analysis section and in Note 4, titled “Exit Activities and Business Dispositions” to the Consolidated Financial Statements.

Portfolio Changes

The corporation announced plans to dispose of seven businesses in order to concentrate financial and management resources on a smaller number of entities that are better positioned for growth. At the close of the second quarter of fiscal 2006, five of these businesses had been reported as discontinued operations. The status of the announced portfolio changes is as follows:

•

Direct Selling – Substantially all of this business was sold in December 2005 and an after tax gain of $213 million was recognized as a result of this transaction. The disposition of the Direct Selling operations in the Philippines is expected to close in fiscal 2006 after receiving government approval.

•

U.S. Retail Coffee – This business was sold in December 2005. An after tax gain of $3 million was recognized as a result of this transaction.

•

Branded Apparel Europe – This business was sold on February 3, 2006 and the transaction will be recognized in the third quarter of fiscal 2006.

•

European Nuts and Snacks – The corporation has entered into an agreement to sell this business and expects to close on this transaction in fiscal 2006. The timing of the closing date is dependent upon the receipt of regulatory and government approvals.

•

United Kingdom (U.K.) Apparel – The corporation anticipates that this business will be sold prior to the end of the fiscal year.

•

European Meats – At the end of the second quarter of fiscal 2006, the corporation is continuing to evaluate its options relative to the European Meats business and it remains classified as held for use and reported in continuing operations.

•

Branded Apparel Americas / Asia – The corporation is in the process of preparing to spin-off this business in the early part of fiscal 2007.

Note 3 to the Consolidated Financial Statement contains a detailed discussion of the businesses reported as discontinued operations, the significant terms of the transactions completed to date and the impact these discontinued operations had on the reported results of the corporation.

Improving Operational Efficiency

The third element of the transformation plan involves several initiatives to improve the operational efficiency of the corporation. These initiatives include the following:

•

The simplification of the organization structure will result in the termination of a number of employees and the elimination of certain manufacturing facilities. The exit activities initiated by the corporation in fiscal 2006 are fully explained in other sections of this Management Discussion and Analysis and in Note 4, titled “Exit Activities and Business Dispositions,” in the Consolidated Financial Statements. In the remaining portion of fiscal 2006, the corporation expects to recognize additional exit costs to reduce employment levels in the organization and eliminate manufacturing capacity.

•

The company expects to reduce the number of brands utilized in its North American Retail Bakery business as well as to increase the research and development and marketing spending behind a smaller group of large brands. The carrying value of the trademarks in the North American Bakery operations at the end of the second quarter of fiscal 2006 was $319 million. The North American bakery customer relationship intangible asset may also be impacted by any decision to exit regional bakery brands. The carrying value of this asset was $137 million at December 31, 2005. When a plan is developed and approved by management to exit certain of these trademarks, the ongoing amortization will increase and a charge to recognize the impairment of these assets may result.

•

The corporation expects to make a substantial investment to improve information technology systems and processes. This is primarily related to the costs to implement a standardized information technology platform in the North American operations and the continued consolidation of information processing. There are a number of variables that impact the cost of installing and transitioning to new information systems. At the present time, the corporation expects that from fiscal 2006 through 2010, the cost of these information technology initiatives will be $190 million, with a substantial portion of the cost being incurred after fiscal 2006.

Consolidated Results – Second Quarter of Fiscal 2006 Compared with Second Quarter of Fiscal 2005

Continuing Operations – Operating results by business segment in the second quarter of fiscal 2006 compared with the second quarter of fiscal 2005 are as follows:


	Thirteen Weeks Ended
	Net Sales						Income From Continuing Operations Before Income Taxes
(In millions)	December 31, 2005			January 1, 2005			December 31, 2005			January 1, 2005
North American Retail Meats	$	672		$	650		$	50		$	49
North American Retail Bakery		463			449			(17	)		(11	)
Foodservice		609			580			56			62
International Beverage		598			592			64			111
European Meats		285			311			21			31
International Bakery		190			200			21			20
Household and Body Care		451			491			36			82
Branded Apparel		1,182			1,241			169			154

Total business segments		4,450			4,514			400			498
Intersegment sales		(2	)		(2	)		—			—

Total net sales and operating segment income, respectively		4,448			4,512			400			498
Amortization of intangibles		—			—			(24	)		(24	)
General corporate expenses		—			—			(80	)		(74	)

Total net sales and operating income, respectively		4,448			4,512			296			400
Net interest expense		—			—			(57	)		(46	)

Net sales and income from continuing operations before income taxes, respectively	$	4,448		$	4,512		$	239		$	354

The following table summarizes net sales and operating income performance for the second quarter of fiscal 2006 and 2005 and certain significant items that affected the comparability of these amounts.


	Thirteen Weeks Ended
Corporate Performance - (In millions)	December 31, 2005			January 1, 2005			Change			Percent Change
Net sales	$	4,448		$	4,512		$	(64	)	(1.4	)%

Increase / (decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	93		$	(93	)
Acquisitions / dispositions		14			50			(36	)

Total	$	14		$	143		$	(129	)

Operating income	$	296		$	400		$	(104	)	(26.3	)%

Increase / (decrease) in operating income from
Receipt of contingent sale proceeds	$	—		$	—		$	—
Changes in foreign currency exchange rates		—			17			(17	)
Exit activities and business dispositions		(58	)		10			(68	)
Curtailment gain		—			9			(9	)
Accelerated depreciation on facilities sold		(11	)		(6	)		(5	)
Accelerated amortization of intangibles		—			(1	)		1
Hurricane losses		(2	)		—			(2	)
Transformation charges		(42	)		—			(42	)
Change in vacation policy		14			—			14
Acquisitions/dispositions		1			4			(3	)

Total	$	(98	)	$	33		$	(131	)

Net Sales

Consolidated net sales decreased $64 million, or 1.4%, in the second quarter of fiscal 2006 over the second quarter of fiscal 2005, to $4,448 million. Changes in foreign currency, particularly in the European euro and British pound, decreased reported net sales by 2.1%, or $93 million. The net impact of acquisitions and dispositions between the second quarter of fiscal 2006 versus the second quarter of fiscal 2005 reduced net sales by $36 million, or 0.8%. The remaining net sales increase of $65 million, or 1.5%, resulted from increases in net sales in the North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage and the International Bakery segments. The North American Retail Meats and Foodservice segments each experienced higher sales, primarily as a result of increases in unit volume. The North American Retail Bakery and International Beverage segments also had higher unit volumes, but sales also increased as higher raw material costs were passed along in these segments. In the International Bakery segment, unit volumes were unchanged, but sales increased as higher raw material costs were passed along to customers. In European Meats, higher selling prices, which included the impact of higher raw materials costs, led to lower sales. In the Household and Body Care segment, net sales declined as unit volumes declined, primarily attributable to the air care category and lower unit selling prices. The Branded Apparel segment also experienced lower net sales as a result of lower unit volumes and certain product lines that were exited.

Unit Volumes

Unit volumes in the North American Retail Meats segment increased 8% with increases coming in both the U.S. and Mexico. Sales of branded fresh bread products led the North American Retail Bakery segment with increases in unit volumes of 1%. This segment also includes the corporation’s Senseo single serve coffee products which contributed to the unit volume increase. Unit volumes increased 5% in the Foodservice segment as higher unit sales of meat and bakery products offset declines for coffee products. In the International Beverage segment, unit volumes increased by 1%, primarily as unit volumes rebounded in Brazil after they were reduced in the prior quarter from an announced price increase. Unit volumes declined 1% in the European Meats segment as higher selling prices, which were a result of higher raw material costs, led to lower unit volumes. In the International Bakery segment, unit volumes were unchanged as increases in dough products in Europe were offset by declines for fresh bread in Europe and frozen bakery products in Australia. The unit volumes for the four core categories of the Household and Body Care segment decreased 2% in the second quarter primarily due to lower shipments of air care products that resulted from a competitive marketplace. In the second quarter, unit volumes declined 3% in the Branded Apparel segment based upon declines in the three categories of innerwear, outerwear and sheer hosiery as the segment experienced increased competition from specialty stores and other competitors and exited certain low margin product lines.

Gross Margin Percent

The gross margin percentage for the corporation declined by 0.1% in the second quarter of fiscal 2006, from 36.8% in the second quarter of fiscal 2005 to 36.7% in the second quarter of fiscal 2006, as three of the segments experienced higher gross margins, four of the segments experienced lower gross margins, and one was unchanged. The North American Retail Meats, International Bakery and Branded Apparel segments each experienced increases in their gross margin percentages of between 1 and 2 points. Both the North American Retail Meats and Branded Apparel segments experienced lower commodity costs during the quarter, while the International Bakery segment experienced higher average selling prices as a result of higher raw material costs.

The North American Retail Bakery, Foodservice, International Beverage, and Household and Body Care segments each experienced lower gross margin percentages. The International Beverage

segment gross margin percentage declined by 5 points as the segment experienced higher raw material costs and competitive pricing in the marketplace. The Household and Body Care segment’s gross margin percentage declined by 2 points primarily from declines in unit volumes for air care products and competitive pricing in the marketplace. The North American Retail Bakery gross margin percentage declined by less than 1 point as the segment experienced higher costs for certain key ingredients, while the Foodservice segment gross margin percentage declined by less than 1 point as the segment experienced higher commodity costs and an unfavorable comparison to the prior year when a curtailment gain was recognized. The gross margin percentage was unchanged in the European Meats segment.

Selling, General and Administrative Expenses


	Thirteen Weeks Ended
(In millions)	December 31, 2005		January 1, 2005		Change		Percent Change
Selling, general and administrative expenses:
SG&A expenses in the business segment results	$	1,177	$	1,172	$	5	0.4	%
Amortization of identifiable intangibles		24		24		—	—
General corporate expenses		80		74		6	8.6

Total SG&A expenses	$	1,281	$	1,270	$	11	0.9	%

Total selling, general and administrative (SG&A) expenses increased $11 million, or 0.9%, in the second quarter of fiscal 2006 over the comparable prior year quarter. Changes in foreign currency exchange rates, primarily in the euro, decreased SG&A expenses by $35 million, or 2.8%. Therefore, the remaining increase in SG&A expenses was $46 million, or 3.7%. Measured as a percent of sales, SG&A expenses increased from 28.2% in the second quarter of fiscal 2005 to 28.8% in the second quarter of fiscal 2006. SG&A expenses as a percentage of sales increased in each business segment other than Branded Apparel as each segment experienced costs related to the corporation’s transformation activities. Transformation expenses are recognized in SG&A in the business segments and in general corporate expenses and generally include accelerated depreciation on facilities that will be exited, relocation and recruiting expenses related to the centralization of the corporation’s management team, and costs associated with the disposition of various businesses. During the second quarter, the corporation modified its employee vacation policy for U.S. employees. This change resulted in the forfeiture of certain vacation benefits that had been earned by employees and the corporation recognized a benefit of $14 million in SG&A. Of this amount, $10 million was recognized in the business segments and $4 million was recognized in general corporate expenses.

Total SG&A expenses reported in the business segments increased by $5 million, or 0.4%, between the second quarter of fiscal 2005 and the second quarter of fiscal 2006, primarily due to costs associated with the corporation’s transformation program. Amortization of intangibles was unchanged between the periods. General corporate expenses, which are not allocated to the individual business segments, increased by $6 million, or 8.6%, as higher transformation expenses were partially offset by favorable foreign currency impacts.

As more fully described in Note 3 to the Consolidated Financial Statements, titled “Discontinued Operations,” the corporation has reported the U.K. Apparel business as a discontinued operation. The corporation expects that the sale of the U.K. Apparel business will result in the corporation retaining the pension plan for its U.K. employees and its related liabilities, and certain other liabilities for workers’ compensation claims. As a result, the corporation has recognized the net periodic costs associated with benefit plans being retained in general corporate expenses in all periods presented and will report future expenses related to these liabilities also as general corporate expenses.

Transformation Actions and Other Significant Items

The reported results for the second quarters of fiscal 2006 and fiscal 2005 reflect amounts recognized for actions associated with the corporation’s ongoing business transformation program and other significant amounts. These amounts include:

•

Business Transformation Costs – This includes costs to retain and relocate existing employees, recruit new employees, third party consulting costs associated with transformation efforts and incremental depreciation costs associated with decisions to close facilities at dates sooner than originally anticipated. In addition, the business transformation effort has resulted in the corporation eliminating certain employee benefits which has reduced costs and positively impacted reported results.

•

Exit and Business Disposition Activities – These costs are reported on a separate line in the Consolidated Statement of Income. Exit activities primarily relate to charges taken to recognize severance actions approved by the corporation’s management and the exit of leased facilities or other contractual arrangements. Business disposition activities include costs associated with separating businesses targeted for sale and preparing financial statements for these businesses, as well as gains and losses associated with the disposition of asset groups that do not qualify for discontinued operations reporting.

•

Hurricane Costs – Operating results were negatively impacted in the first half of fiscal 2006 as a result of Gulf Coast hurricanes.

The following is a summary of the transformation and other significant items that have impacted the second quarter of fiscal 2006 and the comparable period of fiscal 2005.


	Thirteen Weeks Ended
(In millions)	December 31, 2005			January 1, 2005
Cost of sales
Accelerated depreciation related to facility closures in the North American Retail Bakery, Foodservice and Household and Body Care segment:	$	1		$	6
Curtailment gain from bakery workforce reduction		—			(10	)
Selling, general and administrative expenses
Transformation charges		42			—
Accelerated amortization of intangibles		—			1
Accelerated depreciation		10			—
Change in vacation policy		(14	)		—
Hurricane losses		2			—
Charges for (income from)
Exit activities		46			(2	)
Business dispositions		12			(8	)

Impact on income from continuing operations before income taxes		99			(13	)
Income tax (benefit) expense		(34	)		5

Impact on income from continuing operations	$	65		$	(8	)

The costs (income) of the above actions on the corporation’s business segments and amortization expense are summarized as follows:


	Thirteen Weeks Ended
(In millions)	December 31, 2005		January 1, 2005
North American Retail Meats	$	12	$	(5	)
North American Retail Bakery		5		(5	)
Foodservice		1		(3	)
International Beverage		34		—
European Meats		3		—
International Bakery		1		—
Household and Body Care		13		(11	)
Branded Apparel		1		(2	)

Impact on the business segments		70		(26	)
General corporate expenses		29		12
Accelerated amortization of intangibles		—		1

Impact on income from continuing operations before income taxes	$	99	$	(13	)

Second Quarter of Fiscal 2006 – The amount recognized in “Cost of sales,” as noted in the table above, consists of $1 million of accelerated depreciation on a facility targeted for sale in the North American Retail Bakery segment. The amounts recognized in “Selling, general and administrative expenses” include a charge of $42 million for transformation actions related to the corporation’s transformation plan, $10 million of accelerated depreciation, $2 million of hurricane losses, and $14 million of income resulting from a change in the corporation’s vacation policy for U.S. employees. The corporation recognized a $58 million charge related to exit activities and business dispositions during the second quarter of fiscal 2006. The $58 million charge consists of a $46 million charge for exit activities and a net $12 million charge related to business dispositions. The $46 million charge for exit activities consists of a $41 million charge for management’s approved actions related to the termination of 566 employees and a $5 million charge for the exit of certain leased facilities. The $12 million charge for business dispositions consists of charges to prepare businesses for disposition. The net impact of these actions was to decrease income from continuing operations before income taxes and income from continuing operations by $99 million and $65 million, respectively, and reduce diluted EPS by $0.09.

Second Quarter of Fiscal 2005 – The amount recognized on the line titled “Cost of sales,” as noted in the table above, consists of a $10 million curtailment gain from the workforce reduction of certain bakery plants which was partially offset by a $6 million charge for accelerated depreciation on certain facilities to be sold in the North American Retail Bakery, Foodservice and the Household and Body Care segments. SG&A expenses include a $1 million charge for accelerated amortization for the cost to abandon and exit certain bakery intangible assets. The line titled “Charges for (income from) exit activities and business dispositions” includes income of $10 million which consists of the following components: $2 million of income from completing certain previously announced exit activities for amounts more favorable than originally estimated, and an $8 million net gain from business dispositions. The $8 million net gain consists of the following: an $18 million gain relates to the disposition of trademarks and inventory related to a non-core skin care products line and certain non-core regional meat brands, and a $2 million gain relates to amounts received from prior business dispositions. Offsetting these amounts is a $12 million charge that relates to the cost to evaluate the disposition of certain other businesses. The net impact of these actions was to increase income from continuing operations before income taxes and income from continuing operations by $13 million and $8 million, respectively, and increased diluted earnings per share by $0.01.

These actions are more fully described in the Exit Activities and Business Dispositions note to the Consolidated Financial Statements. As a result of exit activities taken since the beginning of fiscal 2004, and transformation actions taken since the beginning of the transformation plan in fiscal 2005, the corporation’s cost structure was reduced and efficiency was improved. The following table summarizes the actual and projected savings from these actions.


(In millions)	Actual Savings Recognized in Fiscal 2005		Anticipated Savings in Fiscal 2006		Actual Savings in the 2^nd Quarter of Fiscal 2005		Actual Savings in the 2^nd Quarter of Fiscal 2006
Restructuring Actions Approved in:
Fiscal 2004	$	62	$	92	$	12	$	21
Fiscal 2005		7		55		2		13
1^st six months of fiscal 2006		—		15		—		6

	$	69	$	162	$	14	$	40

In the remaining portion of fiscal 2006, the corporation expects to recognize additional transformation, exit and accelerated depreciation costs as the corporation reduces employment levels and eliminates manufacturing capacity.

Under the corporation’s transformation plan, which is described earlier in this document, a number of businesses have been targeted for sale, or have been sold. The Direct Selling, European Branded Apparel, U.K. Apparel, U.S. Retail Coffee, and European Nuts and Snacks businesses have been targeted for disposal and reported as discontinued operations. The Branded Apparel Americas / Asia business has also been targeted for disposal. However, this business was classified as held for use at the end of the second quarter of fiscal 2006. The following table summarizes the actual and projected savings related to only those businesses that are expected to be a part of continuing operations after the targeted businesses are disposed of.


(In millions)	Actual Savings Recognized in Fiscal 2005		Anticipated Savings in Fiscal 2006		Actual Savings in the 2^nd Quarter of Fiscal 2005		Actual Savings in the 2^nd Quarter of Fiscal 2006
Restructuring Actions Approved in:
Fiscal 2004	$	28	$	30	$	7	$	7
Fiscal 2005		7		20		2		7
1^st six months of fiscal 2006		—		15		—		6

	$	35	$	65	$	9	$	20

Net Interest Expense

Net interest expense increased by $11 million in the second quarter of fiscal 2006, to $57 million, primarily as a result of higher average interest rates.

Income Tax Expense

The effective tax rate on continuing operations increased from 12.7% in the second quarter of fiscal 2005 to 19.2% in the second quarter of fiscal 2006. In the second quarter of fiscal 2005, the government in the Netherlands enacted legislation that provides for a gradual reduction in the statutory rate for profits from 34.5% to 30.0% by calendar year 2007. The impact of the change reduced the corporation’s deferred tax liability by $24 million and this benefit was recognized in the

tax provision in the second quarter of fiscal 2005. The $24 million benefit reduced the tax rate in the second quarter of fiscal 2005 by 6.8%. The remaining portion of the change between the periods was primarily due to the country-by-country mix of earnings during the period. As a global enterprise, the corporation’s tax rate from period to period can be affected by many factors. The most significant of these factors are the corporation’s global mix of earnings, changes in tax legislation, the tax characteristics of the corporation’s income, acquisitions and dispositions, and the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable.

Income from Continuing Operations and Diluted Earnings Per Share (EPS)

Income from continuing operations in the second quarter of fiscal 2006 was $193 million, which was $116 million, or 37.8%, less than the prior year comparable period. The decline in income from continuing operations was primarily due to the following factors.

•

The corporation’s gross profit declined by $25 million, primarily as a result of the $64 million decline in sales and a slight decline in the gross margin percentage.

•

SG&A expenses in the second quarter of fiscal 2006 increased by $11 million over the comparable period of the prior year primarily due to costs associated with the corporation’s transformation, higher distribution costs primarily related to energy and higher employee costs. SG&A expenses as a percentage of sales increased from 28.2% in the second quarter of fiscal 2005 to 28.8% in the second quarter of fiscal 2006.

•

In the second quarter of fiscal 2006, the corporation recognized a charge of $58 million for exit activities and business dispositions, while in the second quarter of fiscal 2005, the corporation recognized $10 million of income.

•

Due to the increase in average borrowing rates, net interest expense increased by $11 million in the second quarter of fiscal 2006.

•

Income tax expense increased by $1 million in the second quarter of fiscal 2006 versus the second quarter of fiscal 2005.

Diluted EPS from continuing operations decreased from $0.39 in the second quarter of fiscal 2005 to $0.25 in the second quarter of fiscal 2006, a decrease of 35.9%. Diluted EPS declined at a lower rate than income from continuing operations as a result of lower average shares outstanding during the second quarter of fiscal 2006 than the second quarter of fiscal 2005. The corporation did not repurchase any shares in the second quarter of fiscal 2006, but had repurchased 29.1 million shares of common stock during the first quarter of fiscal 2006 under the corporation’s ongoing share repurchase program.

Discontinued Operations

Discontinued operations includes the results of the corporation’s Direct Selling, U.S. Retail Coffee, European Branded Apparel, U.K. Apparel and European Nuts and Snacks businesses. The following summarizes the results of the discontinued operations for the second quarters of fiscal 2006 and 2005.


In millions	Second Quarter of Fiscal 2006			Second Quarter of Fiscal 2005			Change			Percent Change
Net Sales	$	567		$	688		$	(121	)	(17.5	)%

(Loss) income before taxes	$	(2	)	$	26		$	(28	)
Income tax benefit (expense)		32			(9	)		41
Gain of sale of discontinued operations		318			—			318
Income tax expense on gain		(103	)		—			(103	)

Net income from discontinued operations	$	245		$	17		$	228

Results of Discontinued Operations

Net sales of the discontinued operations decreased by $121 million, or 17.5%, in the second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005. The corporation completed the sale of Direct Selling, U.S. Retail Coffee and a Turkish sewing operation in the European Branded Apparel business during the second quarter and, therefore, a full quarter of comparable sales was not included in the fiscal 2006 period. Additionally, the remaining businesses reported in discontinued operations reported lower sales in the second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005. Income before taxes declined by $28 million in the second quarter of fiscal 2006, as the second quarter of fiscal 2006 does not include a full quarter of results for the Direct Selling and U.S. Retail Coffee operations, plus the impact of lower profitability in the remaining discontinued operations and a $1 million impairment charge related to the U.K. Branded Apparel group that was recorded in the second quarter of fiscal 2006.

The corporation recognized a tax benefit in discontinued operations of $32 million in the second quarter of fiscal 2006, as compared to a tax provision of $9 million in the second quarter of fiscal 2005. The tax benefit reflected in the second quarter of fiscal 2006 was primarily due to the corporation receiving a tax benefit in the current period relating to certain foreign taxes incurred in a prior year.

Gain on Sale of Discontinued Operations

The corporation completed the sale of Direct Selling, U.S. Retail Coffee and a Turkish Branded Apparel sewing operation during the second quarter of fiscal 2006 and recognized a pretax and after tax gain of $318 million and $215 million, respectively.

Consolidated Net Income and Diluted Earnings Per Share

Net income of $438 million in the second quarter of fiscal 2006 was $112 million, or 34.4%, higher than reported in the prior year comparable period. The increase in net income was primarily due to the $215 million gain on the sale of the Direct Selling and U.S. Retail Coffee businesses and the sale of the Turkish sewing operation, which was partially offset by the $116 million decline in income from continuing operations. Diluted EPS increased from $0.41 in the second quarter of fiscal 2005 to $0.57 in the second quarter of fiscal 2006, an increase of 39.0%.

Operating Results by Business Segment – Second Quarter of Fiscal 2006 Compared with Second Quarter of Fiscal 2005

North American Retail Meats


	Thirteen Weeks Ended
(In millions)	December 31, 2005			January 1, 2005			Change			Percent Change
Change in unit volume										8	%

Net sales	$	672		$	650		$	22		3.5	%

Increase / (decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(3	)	$	3
Dispositions		—			22			(22	)

Total	$	—		$	19		$	(19	)

Operating segment income	$	50		$	49		$	1		1.1	%

Increase / (decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	—		$	—
Exit activities and business dispositions		(6	)		5			(11	)
Transformation charges		(8	)		—			(8	)