EX-99.1 3 a991hsh10-kfinancials.htm HSH 2013 10K 99.1 hsh 10-K financials
EX 99.1

Audited consolidated financial statements of The Hillshire Brands Company
as of June 29, 2013 and June 30, 2012 and for each of the three years in the period ended June 29, 2013














Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders
of The Hillshire Brands Company

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, equity and cash flows present fairly, in all material respects, the financial position of The Hillshire Brands Company and its subsidiaries at June 29, 2013 and June 30, 2012, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 2013 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.




/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
August 23, 2013



EX 99.1

CONSOLIDATED STATEMENTS OF INCOME
 
In millions except per share data Years ended


June 29, 2013
 
June 30, 2012
 
July 2, 2011
Continuing Operations
 
 
 
 
 
 
Net sales
 
$
3,920

 
$
3,958

 
$
3,884

Cost of sales
 
2,758

 
2,857

 
2,721

Selling, general and administrative expenses
 
855

 
930

 
883

Net charges for exit activities, asset and business dispositions
 
9

 
81

 
38

Impairment charges
 
1

 
14

 
15

Operating income
 
297

 
76

 
227

Interest expense
 
48

 
77

 
92

Interest income
 
(7
)
 
(5
)
 
(5
)
Debt extinguishment costs
 
—

 
39

 
55

Income (loss) from continuing operations before income taxes
 
256

 
(35
)
 
85

Income tax expense (benefit)
 
72

 
(15
)
 
27

Income (loss) from continuing operations
 
184

 
(20
)
 
58

Discontinued Operations
 
 
 
 
 
 
Income from discontinued operations net of tax expense (benefit) of $(8), $(603) and $82
 
15

 
463

 
483

Gain on sale of discontinued operations, net of tax expense of $15, $367 and $573
 
53

 
405

 
731

Net income from discontinued operations
 
68

 
868

 
1,214

Net income
 
252

 
848

 
1,272

Less: Income from noncontrolling interests, net of tax
 
 
 
 
 
 
Discontinued operations
 
—

 
3

 
9

Net income attributable to Hillshire Brands
 
$
252

 
$
845

 
$
1,263

Amounts attributable to Hillshire Brands
 
 
 
 
 
 
   Net income (loss) from continuing operations
 
$
184

 
$
(20
)
 
$
58

   Net income from discontinued operations
 
68

 
865

 
1,205

Net income attributable to Hillshire Brands
 
$
252

 
$
845

 
$
1,263

Earnings per share of common stock
 
 
 
 
 
 
Basic
 
 
 
 
 
 
   Income (loss) from continuing operations
 
$
1.50

 
$
(0.16
)
 
$
0.47

   Net income
 
$
2.05

 
$
7.13

 
$
10.16

Diluted
 
 
 
 
 
 
   Income (loss) from continuing operations
 
$
1.49

 
$
(0.16
)
 
$
0.46

   Net income
 
$
2.04

 
$
7.13

 
$
10.11

The accompanying Notes to Financial Statements are an integral part of these statements.

2
EX 99.1

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In millions
 
Years ended
 
June 29, 2013
 
June 30, 2012
 
July 2, 2011
Net income (loss)
 
 
 
$
252

 
$
848

 
$
1,272

Translation adjustments, net of tax of $(6), $(17), $47 respectively
 
 
 
(21
)
 
(23
)
 
325

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $4, nil, $(5) respectively
 
 
 
(8
)
 
2

 
7

Pension/Postretirement activity, net of tax of $(14), $26, $(125) respectively
 
 
 
26

 
(21
)
 
317

Comprehensive income
 
 
 
249

 
806

 
1,921

Comprehensive income attributable to non-controlling interests
 
 
 
—

 
3

 
9

Comprehensive income attributable to Hillshire Brands
 
 
 
$
249

 
$
803

 
$
1,912

The accompanying Notes to Financial Statements are an integral part of these statements.

3
EX 99.1

CONSOLIDATED BALANCE SHEETS
 
In millions
 
June 29, 2013
 
June 30, 2012
Assets
 
 
 
 
Cash and equivalents
 
$
400

 
$
235

Trade accounts receivable, less allowances of $2 in 2013 and $11 in 2012
 
219

 
248

Inventories
 
 
 
 
   Finished goods
 
207

 
196

   Work in process
 
15

 
17

   Materials and supplies
 
91

 
75

 
 
313

 
288

Current deferred income taxes
 
71

 
114

Income tax receivable
 
18

 
52

Other current assets
 
85

 
65

Total current assets
 
1,106

 
1,002

Property
 
 
 
 
   Land
 
25

 
25

   Buildings and improvements
 
790

 
756

   Machinery and equipment
 
1,095

 
1,137

   Construction in progress
 
93

 
174

 
 
2,003

 
2,092

   Accumulated depreciation
 
1,185

 
1,245

   Property, net
 
818

 
847

Trademarks and other identifiable intangibles, net
 
121

 
132

Goodwill
 
348

 
348

Deferred income taxes
 
20

 
36

Other noncurrent assets
 
21

 
80

Noncurrent assets held for disposal
 
—

 
5

 
 
$
2,434

 
$
2,450

Liabilities and Equity
 
 
 
 
Accounts payable
 
$
295

 
$
359

Accrued liabilities
 
 
 
 
   Payroll and employee benefits
 
110

 
127

   Advertising and promotion
 
124

 
116

   Other accrued liabilities
 
123

 
226

   Current maturities of long-term debt
 
19

 
5

Total current liabilities
 
671

 
833

Long-term debt
 
932

 
939

Pension obligation
 
119

 
166

Other liabilities
 
228

 
277

Contingencies and commitments (Note 14)
 
 
 
 
Equity
 
 
 
 
   Hillshire Brands common stockholders' equity:
 
 
 
 
   Common stock: (authorized 1,200,000,000 shares; $0.01 par value) Issued and outstanding- 123,247,815 shares in 2013 and 120,644,345 shares in 2012
 
1

 
1

   Capital surplus
 
200

 
144

   Retained earnings
 
477

 
295

   Unearned stock of ESOP
 
(53
)
 
(61
)
   Accumulated other comprehensive (loss)
 
(141
)
 
(144
)
Total equity
 
484

 
235

 
 
$
2,434

 
$
2,450

The accompanying Notes to Financial Statements are an integral part of these statements.

4
EX 99.1

CONSOLIDATED STATEMENTS OF EQUITY
 
 
 
 
 
Hillshire Brands Common Stockholders' Equity
 
 
 
In millions
 
Total

 
Common
Stock

 
Capital
Surplus

 
Retained
Earnings

 
Unearned
Stock

 
Accumulated Other
Comprehensive
Income (Loss)

 
Noncontrolling
Interest

BALANCES AT JULY 3, 2010
 
$
1,459

 
$
7

 
$
11

 
$
2,424

 
$
(97
)
 
$
(914
)
 
$
28

Net income
 
1,272

 
—

 
—

 
1,263

 
—

 
—

 
9

Translation adjustments, net of tax of $47
 
325

 
—

 
—

 
—

 
—

 
325

 
—

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $(5)
 
7

 
—

 
—

 
—

 
—

 
7

 
—

Pension/Postretirement activity, net of tax of $(125)
 
317

 
—

 
—

 
—

 
—

 
317

 
—

Dividends on common stock
 
(278
)
 
—

 
—

 
(278
)
 
—

 
—

 
—

Dividends paid on noncontrolling interest/Other
 
(5
)
 
—

 
—

 
—

 
—

 
—

 
(5
)
Disposition of noncontrolling interest
 
(3
)
 
—

 
—

 
—

 
—

 
—

 
(3
)
Stock issuances - restricted stock
 
34

 
—

 
25

 
9

 
—

 
—

 
—

Stock option and benefit plans
 
58

 
—

 
58

 
—

 
—

 
—

 
—

Share repurchases and retirement
 
(1,313
)
 
(1
)
 
(55
)
 
(1,257
)
 
—

 
—

 
—

ESOP tax benefit, redemptions and other
 
20

 
—

 
—

 
—

 
20

 
—

 
—

BALANCES AT JULY 2, 2011
 
1,893

 
6

 
39

 
2,161

 
(77
)
 
(265
)
 
29

Net income
 
848

 
—

 
—

 
845

 
—

 
—

 
3

Translation adjustments, net of tax of $(17)
 
(23
)
 
—

 
—

 
—

 
—

 
(23
)
 
—

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of nil
 
2

 
—

 
—

 
—

 
—

 
2

 
—

Pension/Postretirement activity, net of tax of $26
 
(21
)
 
—

 
—

 
—

 
—

 
(21
)
 
—

Dividends on common stock
 
(138
)
 
—

 
—

 
(138
)
 
—

 
—

 
—

Dividends paid on noncontrolling interest/Other
 
(2
)
 
—

 
—

 
—

 
—

 
—

 
(2
)
Disposition of noncontrolling interest
 
(29
)
 
—

 
—

 
—

 
—

 
—

 
(29
)
Repurchase of noncontrolling interest
 
(10
)
 
—

 
(9
)
 
—

 
—

 
—

 
(1
)
Spin-off of International Coffee and Tea business
 
(2,408
)
 
—

 
(5
)
 
(2,566
)
 
—

 
163

 
—

Stock issuances - restricted stock
 
14

 
—

 
21

 
(7
)
 
—

 
—

 
—

Stock option and benefit plans
 
94

 
—

 
94

 
—

 
—

 
—

 
—

Reverse stock split
 
—

 
(5
)
 
5

 
—

 
—

 
—

 
—

ESOP tax benefit, redemptions and other
 
15

 
—

 
(1
)
 
—

 
16

 
—

 
—

BALANCES AT JUNE 30, 2012
 
235

 
1

 
144

 
295

 
(61
)
 
(144
)
 
—

Net income
 
252

 
—

 
—

 
252

 
—

 
—

 
—

Translation adjustments, net of tax of $(6)
 
(21
)
 
—

 
—

 
—

 
—

 
(21
)
 
—

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $4
 
(8
)
 
—

 
—

 
—

 
—

 
(8
)
 
—

Pension/Postretirement activity, net of tax of $(14)
 
26

 
—

 
—

 
—

 
—

 
26

 
—

Dividends on common stock
 
(61
)
 
—

 
—

 
(61
)
 
—

 
—

 
—

Spin-off of International Coffee and Tea
 
(3
)
 
—

 
—

 
(9
)
 
—

 
6

 
—

Stock issuances - restricted stock
 
3

 
—

 
3

 
—

 
—

 
—

 
—

Stock option and benefit plans
 
52

 
—

 
52

 
—

 
—

 
—

 
—

ESOP tax benefit, redemptions and other
 
9

 
—

 
1

 
—

 
8

 
—

 
—

BALANCES AT JUNE 29, 2013
 
$
484

 
$
1

 
$
200

 
$
477

 
$
(53
)
 
$
(141
)
 
$
—

The accompanying Notes to Financial Statements are an integral part of these statements.

5
EX 99.1

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
In millions
 
June 29, 2013
 
June 30, 2012
 
July 2, 2011
Operating Activities
 
 
 
 
 
 
Net income
 
$
252

 
$
848

 
$
1,272

Adjustments to reconcile net income to net cash from operating activities
 
 
 
 
 
 
   Depreciation
 
148

 
266

 
302

   Amortization
 
18

 
46

 
84

   Impairment charges
 
1

 
428

 
21

   Net (gain) on business dispositions
 
(75
)
 
(772
)
 
(1,305
)
   Increase (decrease) in deferred income taxes
 
44

 
(400
)
 
180

   Pension contributions, net of income/expense
 
(14
)
 
(226
)
 
(80
)
   Refundable tax on Senseo payments
 
—

 
(43
)
 
—

   Debt extinguishment costs
 
—

 
39

 
55

   Other
 
(11
)
 
(70
)
 
(19
)
   Change in current assets and liabilities, net of businesses acquired and sold
 
 
 
 
 
 
      Trade accounts receivable
 
19

 
66

 
116

       Inventories
 
(38
)
 
34

 
(206
)
      Other current assets
 
30

 
(30
)
 
(42
)
      Accounts payable
 
(52
)
 
29

 
62

      Accrued liabilities
 
(89
)
 
94

 
(171
)
      Income taxes
 
20

 
(60
)
 
178

Net cash from operating activities
 
253

 
249

 
447

Investing Activities
 
 
 
 
 
 
Purchases of property and equipment
 
(135
)
 
(314
)
 
(337
)
Purchase of software and other intangibles
 
(5
)
 
(188
)
 
(18
)
Acquisitions of businesses and investments
 
—

 
(30
)
 
(119
)
Dispositions of businesses and investments
 
96

 
2,033

 
2,305

Cash balance of International Coffee and Tea business at spin-off
 
—

 
(2,061
)
 
—

Deposit on business disposition
 
—

 
—

 
203

Cash received from (used in) derivative transactions
 
—

 
31

 
81

Sales of assets
 
3

 
8

 
14

Net cash from (used in) investing activities
 
(41
)
 
(521
)
 
2,129

Financing Activities
 
 
 
 
 
 
Issuances of common stock
 
47

 
84

 
52

Purchases of common stock
 
—

 
—

 
(1,313
)
Borrowings of other debt
 
—

 
851

 
1,054

Repayments of other debt and derivatives
 
(46
)
 
(1,811
)
 
(1,431
)
Net change in financing with less than 90-day maturities
 
—

 
(204
)
 
172

Stock compensation income tax benefits
 
—

 
15

 
—

Purchase of non-controlling interest
 
—

 
(10
)
 
—

Payments of dividends
 
(46
)
 
(271
)
 
(285
)
Net cash used in financing activities
 
(45
)
 
(1,346
)
 
(1,751
)
Effect of changes in foreign exchange rates on cash
 
(2
)
 
(213
)
 
286

Increase (decrease) in cash and equivalents
 
165

 
(1,831
)
 
1,111

Add: Cash balance of discontinued operations at beginning of year
 
—

 
1,992

 
911

Less: Cash balance of discontinued operations at end of year
 
—

 
—

 
(1,992
)
Cash and equivalents at beginning of year
 
235

 
74

 
44

Cash and equivalents at end of year
 
$
400

 
$
235

 
$
74

Supplemental Cash Flow Data
 
 
 
 
 
 
    Cash paid for restructuring charges
 
$
102

 
$
512

 
$
177

    Cash contributions to pension plans
 
$
8

 
$
213

 
$
124

    Cash paid for income taxes
 
$
15

 
$
209

 
$
325

The accompanying Notes to Financial Statements are an integral part of these statements.


6
EX 99.1


Note 1 - Nature of Operations and Basis of Presentation

Nature of Operations
The Hillshire Brands Company (corporation, company or Hillshire Brands) is a U.S.-based company that primarily focuses on meat and meat-centric food products. The company's principal product lines are branded packaged meat products and frozen bakery products. Sales are made in both the retail channel, to supermarkets, warehouse clubs and national chains, and the foodservice channel.

The relative importance of each of the company's business segments over the past three years, as measured by sales and operating segment income, is presented in Note 19 - Business Segment Information, of these financial statements.

Basis of Presentation
The Consolidated Financial Statements include the accounts of the company and all subsidiaries where we have a controlling financial interest. The consolidated financial statements include the accounts of a variable interest entity (VIE) for which the company is deemed the primary beneficiary. The results of companies acquired or disposed of during the year are included in the consolidated financial statements from the effective date of acquisition, or up to the date of disposal. All significant intercompany balances and transactions have been eliminated in consolidation.

The fiscal year ends on the Saturday closest to June 30. Fiscal 2013, 2012 and 2011 were 52-week years. Unless otherwise stated, references to years relate to fiscal years.

Discontinued Operations The Australian bakery business is reported as discontinued operations beginning in 2013. The results of the international coffee and tea, North American foodservice beverage, European bakery, North American fresh bakery, North American refrigerated dough, and international household and body care businesses had previously been reported as discontinued operations in the company's 2012 annual report. The results of operations of these businesses through the date of disposition are presented as discontinued operations in the Consolidated Statements of Income for all periods presented. For business dispositions completed prior to 2013, the assets and liabilities of discontinued operations, prior to disposition, were aggregated and reported on separate lines of the Consolidated Balance Sheets.

Financial Statement Corrections During 2013, the company corrected certain balance sheet accounts as well as SG&A and income tax expense in the income statement related to continuing operations for errors that included the understatement of an asset for deposits held as collateral by insurance companies and the understatement of non-current deferred tax assets related to an employee benefit plan. It also corrected certain errors related to the tax provisions associated with the operating results for discontinued operations and the gain/loss on sale of discontinued operations. For the full year 2013, the correction of these errors increased income for continuing operations by $9.5 million pretax ($8.3 million after tax) and net income by $11.0 million. The company evaluated these errors in relation to the period in which they were corrected, as well as the periods in which they originated, and concluded that these errors did not materially misstate the 2013 financial statements or any previously issued financial statements.


7
EX 99.1

Note 2 - Summary of Significant Accounting Policies

The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the U.S. (GAAP).

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenues 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, sales incentives, useful lives of property and identifiable intangible assets, the evaluation of the recoverability of property, identifiable intangible assets and goodwill, self-insurance reserves, 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.

Reacquired Shares
The Company is incorporated in the State of Maryland and under the laws of that state shares of its own stock that are acquired by the Company constitute authorized but unissued shares. The cost of the acquisition by the Company of shares of its own stock in excess of the aggregate par value of the shares first reduces capital surplus, to the extent available, with any residual cost applied against retained earnings.

Sales Recognition and Incentives
The company recognizes sales when they are realized or realizable and earned. The company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price charged is fixed or determinable, and collectability is reasonably assured. For the company, this generally means that we recognize sales when title to and risk of loss of our products pass to our resellers or other customers. In particular, title usually transfers upon receipt of our product at our customers' locations, or upon shipment, as determined by the specific sales terms of the transactions.

Sales are recognized as the net amount to be received after deducting estimated amounts for sales incentives, trade allowances and product returns. The company estimates trade allowances and product returns based on historical results taking into consideration the customer, transaction and specifics of each arrangement. The company provides a variety of sales incentives to resellers and consumers of its products, and the policies regarding the recognition and display of these incentives within the Consolidated Statements of Income are as follows:

Discounts, Coupons and Rebates The cost of these incentives is recognized at the later of the date at which the related sale is recognized or the date at which the incentive is offered. The cost of these incentives is estimated using a number of factors, including historical utilization and redemption rates. Substantially all cash incentives of this type are included in the determination of net sales. Incentives offered in the form of free product are included in the determination of cost of sales.

Slotting Fees Certain retailers require the payment of slotting fees in order to obtain space for the company's products on the retailer's store shelves. These amounts are included in the determination of net sales when a liability to the retailer is created.

Volume-Based Incentives These incentives typically involve rebates or refunds of a specified amount of cash only if the reseller reaches a specified level of sales. Under incentive programs of this nature, the company estimates the incentive and allocates a portion of the incentive to reduce each underlying sales transaction with the customer.
 
Cooperative Advertising Under these arrangements, the company agrees to reimburse the reseller for a portion of the costs incurred by the reseller to advertise and promote certain of the company's products. The company recognizes the cost of cooperative advertising programs in the period in which the advertising and promotional activity first takes place. The costs of these incentives are generally included in the determination of net sales.

Fixtures and Racks Store fixtures and racks are given to retailers to display certain of the company's products. The costs of these fixtures and racks are recognized as expense in the period in which they are delivered to the retailer.


8
EX 99.1

Advertising Expense
Advertising costs, which include the development and production of advertising materials and the communication of this material through various forms of media, are expensed in the period the advertising first takes place. Advertising expense is recognized in the "Selling, general and administrative expenses" line in the Consolidated Statements of Income. Total media advertising expense for continuing operations was $113 million in 2013, $86 million in 2012 and $81 million in 2011.

Cash and Equivalents
All highly liquid investments purchased with a maturity of three months or less at the time of purchase are considered to be cash equivalents.

Accounts Receivable Valuation
Accounts receivable are stated at their net realizable value. The allowance for doubtful accounts reflects the company's best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information.

Shipping and Handling Costs
Shipping and handling costs are $249 million in 2013, $258 million in 2012 and $240 million in 2011. These costs are recognized in the "Selling, general and administrative expenses" line of the Consolidated Statements of Income.

Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases are reflected as a reduction in the cost of the related inventory item, and are therefore, reflected in cost of sales when the related inventory item is sold.

Recognition and Reporting of Planned Business Dispositions
When a decision to dispose of a business component is made, it is necessary to determine how the results will be presented within the financial statements and whether the net assets of that business are recoverable. The following summarizes the significant accounting policies and judgments associated with a decision to dispose of a business.

Discontinued Operations A discontinued operation is a business component that meets several criteria. First, it must be possible to clearly distinguish the operations and cash flows of the component from other portions of the business. Second, the operations need to have been sold, spun-off or classified as held for sale. Finally, after the disposal, the cash flows of the component must be eliminated from continuing operations and the company may not have any significant continuing involvement in the business. Significant judgments are involved in determining whether a business component meets the criteria for discontinued operation reporting and the period in which these criteria are met. The results for a business to be spun-off do not meet the criteria for discontinued operations reporting until the completion of the spin-off.

If a business component is reported as a discontinued operation, the results of operations through the date of sale are presented on a separate line of the income statement. Interest on corporate level debt is not allocated to discontinued operations. Any gain or loss recognized upon the disposition of a discontinued operation is also reported on a separate line of the income statement. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines of the balance sheet.

Gains and losses related to the sale of business components that do not meet the discontinued operation criteria are reported in continuing operations and separately disclosed, if significant.


9
EX 99.1

Businesses Held for Sale In order for a business to be classified as held for sale, several criteria must be achieved. These criteria include, among others, an active program to market the business and locate a buyer, as well as the probable disposition of the business within one year. Upon being classified as held for sale, the recoverability of the carrying value of a business must be assessed. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, intangible assets not subject to amortization and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell and no additional depreciation expense is recognized related to property. The carrying value of a held for sale business includes the portion of the cumulative translation adjustment related to the operation. Once a business is classified as held for sale, all of its historical balance sheet information is included in assets and liabilities held for sale in the balance sheet.
 
Businesses Held for Use If a decision to dispose of a business is made and the held for sale criteria are not met, the business is considered held for use and its assets are evaluated for recoverability in the following order: assets other than goodwill; property and intangibles subject to amortization; and finally, goodwill. In evaluating the recoverability of property and intangible assets subject to amortization, in a held for use business, the carrying value of the business is first compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the operation. If the carrying value exceeds the undiscounted expected cash flows, then an impairment is recognized if the carrying value of the business exceeds its fair value.

There are inherent judgments and estimates used in determining future cash flows and it is possible that additional impairment charges may occur in future periods. In addition, the sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to the closing date.

Property
Property is stated at historical cost and depreciation is computed using the straight-line method over the lives of the assets. Machinery and equipment are depreciated over periods ranging from 3 to 25 years and buildings and building improvements over periods of up to 40 years. Additions and improvements that substantially extend the useful life of a particular asset and interest costs incurred during the construction period of major properties are capitalized. Leasehold improvements are capitalized and amortized over the shorter of the remaining lease term or remaining economic useful life. Repairs and maintenance costs are charged to expense. Upon the sale or disposition of property, the cost and related accumulated depreciation are removed from the accounts. Capitalized interest was $2 million in 2013, $5 million in 2012 and $10 million in 2011.

Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in the business climate, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life or spun-off. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If the carrying amount exceeds the estimated future undiscounted cash flows then an asset is not recoverable. The impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value using discounted estimated future cash flows.

Assets that are to be disposed of by sale are recognized in the financial statements at the lower of carrying amount or fair value, less cost to sell, and are not depreciated after being classified as held for sale. In order for an asset to be classified as held for sale, the asset must be actively marketed, be available for immediate sale and meet certain other specified criteria.

Trademarks and Other Identifiable Intangible Assets
The primary identifiable intangible assets of the company are trademarks and customer relationships acquired in business combinations and computer software. The company capitalizes direct costs of materials and services used in the development and purchase of internal-use software. Identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of a finite-lived identifiable intangible asset is based upon a number of factors, including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows.


10
EX 99.1

Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used in evaluating the recoverability of property, plant and equipment. Identifiable intangible assets not subject to amortization are assessed for impairment at least annually and as triggering events may occur. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. In making this assessment, management relies on a number of factors to discount estimated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent assumptions and judgments required in the analysis of intangible asset impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

Goodwill
Goodwill is the difference between the purchase price and the fair value of the assets acquired and liabilities assumed in a business combination. When a business combination is completed, the assets acquired and liabilities assumed are assigned to the reporting unit or units of the company given responsibility for managing, controlling and generating returns on these assets and liabilities. Reporting units are business components at or one level below the operating segment level for which discrete financial information is available and reviewed by segment management. In many instances, all of the acquired assets and liabilities are assigned to a single reporting unit and in these cases all of the goodwill is assigned to the same reporting unit. In those situations in which the acquired assets and liabilities are allocated to more than one reporting unit, the goodwill to be assigned to each reporting unit is determined in a manner similar to how the amount of goodwill recognized in the business combination is determined.

Goodwill is not amortized; however, it is assessed for impairment at least annually and as triggering events may occur. The company performs its annual review for impairment in the fourth quarter of each fiscal year. The company uses accounting standards regarding goodwill impairment reviews that permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. Some of the factors considered in the qualitative assessment process were the overall financial performance of the business including current and expected cash flows, revenues and earnings; changes in macroeconomic or industry conditions; changes in cost factors such as raw materials and labor; and changes in management, strategy or customers. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value is less than the carrying amount, then the two-step process of impairment testing is unnecessary.

However, if the qualitative assessment discussed above indicates that there may be a possible impairment then the first step of the goodwill impairment test is required to be performed. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process is necessary and involves a comparison of the implied fair value and the carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

In evaluating the recoverability of goodwill, it is necessary to estimate the fair values of the reporting units. In making this assessment, management relies on a number of factors to discount anticipated future cash flows, including operating results, business plans and present value techniques. The fair value of reporting units is estimated based on a discounted cash flow model. The discounted cash flow model uses management's business plans and projections as the basis for expected future cash flows for the first three years and a residual growth rate thereafter. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for our reporting units. A separate discount rate derived from published sources was utilized for each reporting unit. Rates used to discount cash flows are dependent upon interest rates, market-based risk premium and the cost of capital at a point in time. Because some of the inherent assumptions and estimates used in determining the fair value of these reporting units are outside the control of management, including interest rates, market-based risk premium, the cost of capital, and tax rates, changes in these underlying assumptions and our credit rating can also adversely impact the business units' fair values. The amount of any impairment is dependent on these factors, which cannot be predicted with certainty.


11
EX 99.1

Exit and Disposal Activities
Exit and disposal activities primarily consist of various actions to sever employees, exit certain contractual obligations and dispose of certain assets. Charges are recognized for these actions in the period in which the liability is incurred. Adjustments to previously recorded charges resulting from a change in estimated liability are recognized in the period in which the change is identified. Our methodology used to record these charges is described below.

Severance Severance actions initiated by the company are generally covered under previously communicated benefit arrangements, which provides for termination benefits in the event that an employee is involuntarily terminated. Liabilities are recorded under these arrangements when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. This generally occurs when management with the appropriate level of authority approves an action to terminate employees who have been identified and targeted for termination within one year.

Noncancelable Lease and Contractual Obligations Liabilities are incurred for noncancelable lease and other contractual obligations when the company terminates the contract in accordance with contract terms or when the company ceases using the right conveyed by the contract or exits the leased space. The charge for these items is determined based on the fair value of remaining lease rentals reduced by the fair value of estimated sublease rentals that could reasonably be obtained for the property, estimated using an expected present value technique.
 
Other For other costs associated with exit and disposal activities, a charge is recognized at its fair value in the period in which the liability is incurred, estimated using an expected present value technique, generally when the services are rendered.
 
Stock-Based Compensation
The company recognizes the cost of employee services received in exchange for awards of equity instruments over the vesting period based upon the grant date fair value of those awards.

Income Taxes
The company's tax rate from period to period is affected by many factors. The most significant of these factors includes changes in tax legislation, the tax characteristics of the company's income, the timing and recognition of goodwill impairments and acquisitions and dispositions. In addition, the company's tax returns are routinely audited and finalization of issues raised in these audits sometimes affects the tax provision. It is reasonably possible that tax legislation in the jurisdictions in which the company does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the company's tax assets and obligations will need to be measured and recognized in the financial statements.

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates for the years in which the differences are expected to reverse. Federal income taxes are provided on that portion of the income of foreign subsidiaries that are expected to be remitted to the U.S. and be taxable.

The management of the company periodically estimates the probable tax obligations of the company using historical experience in tax jurisdictions and informed judgments in accordance with GAAP. For a tax benefit to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the taxing authority. The company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these situations, the ultimate payment may be materially different from the estimated recorded amounts. Any adjustment to a tax reserve impacts the company's tax expense in the period in which the adjustment is made.


12
EX 99.1

Defined Benefit, Postretirement and Life-Insurance Plans
The company recognizes the funded status of defined pension and postretirement plans in the Consolidated Balance Sheet. The funded status is measured as the difference between the fair market value of the plan assets and the benefit obligation. The company measures its plan assets and liabilities as of its fiscal year end. For a defined benefit pension plan, the benefit obligation is the projected benefit obligation; for any other defined benefit postretirement plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. Any overfunded status should be recognized as an asset and any underfunded status should be recognized as a liability. Any transitional asset/(liability), prior service cost (credit) or actuarial (gain)/loss that has not yet been recognized as a component of net periodic cost is recognized in the accumulated other comprehensive income section of the Consolidated Statements of Equity, net of tax. Accumulated other comprehensive income will be adjusted as these amounts are subsequently recognized as a component of net periodic benefit costs in future periods.

Financial Instruments
The company uses financial instruments, including options and futures to manage its exposures to movements in commodity prices. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the company. The company does not use derivatives for trading purposes and is not a party to leveraged derivatives.

The company uses either hedge accounting or mark-to-market accounting for its derivative instruments. Under hedge accounting, the company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivatives that are designated as hedges of specific assets, liabilities, firm commitments or forecasted transactions. The company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the company discontinues hedge accounting and any deferred gains or losses are recorded in the "Selling, general and administrative expenses" line in the Consolidated Statements of Income. Derivatives are recorded in the Consolidated Balance Sheets at fair value in other assets and other liabilities. For more information about accounting for derivatives see Note 15 - Financial Instruments.

Self-Insurance Reserves
The company purchases third-party insurance for workers' compensation, automobile and product and general liability claims that exceed a certain level. The company is responsible for the payment of claims under these insured limits. The undiscounted obligation associated with these claims is accrued based on estimates obtained from consulting actuaries. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. Accrued reserves, excluding any amounts covered by insurance, were $32 million as of June 29, 2013 and $41 million as of June 30, 2012.

Business Acquisitions
With respect to business acquisitions, the company is required to recognize and measure the identifiable assets acquired, liabilities assumed, contractual contingencies, contingent consideration and any noncontrolling interest in an acquired business at fair value on the acquisition date. In addition, the accounting guidance also requires expensing acquisition costs when incurred, restructuring costs in periods subsequent to the acquisition date, and any adjustments to deferred tax asset valuation allowances and acquired uncertain tax positions after the measurement period to be reflected in income tax expense.

Foreign Currency Translation
Foreign currency denominated assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income within common stockholders' equity. The company translates the results of operations of its foreign subsidiaries at the average exchange rates during the respective periods. Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in selling, general and administrative expense.


13
EX 99.1

Note 3 - Intangible Assets and Goodwill

The primary components of the intangible assets reported in continuing operations and the related amortization expense follows: 
In millions
 
Gross

 
Accumulated
Amortization

 
Net Book
Value

2013
 
 
 
 
 
 
Intangible assets subject to
amortization
 
 
 
 
 
 
Trademarks and brand names
 
$
31

 
$
4

 
$
27

Customer relationships
 
72

 
46

 
26

Computer software
 
133

 
112

 
21

Other contractual agreements
 
3

 
—

 
3

 
 
$
239

 
$
162

 
77

Trademarks and brand names not subject to amortization
 
 
 
 
 
44

Net book value of intangible assets
 
 
 
 
 
$
121

2012
 
 
 
 
 
 
Intangible assets subject to
amortization
 
 
 
 
 
 
Trademarks and brand names
 
31

 
2

 
29

Customer relationships
 
72

 
44

 
28

Computer software
 
128

 
100

 
28

Other contractual agreements
 
3

 
—

 
3

 
 
$
234

 
$
146

 
88

Trademarks and brand names not subject to amortization
 
 
 
 
 
44

Net book value of intangible assets
 
 
 
 
 
$
132


The year-over-year change in the value of trademarks and brand names and customer relationships is primarily due to the impact of amortization during the year. The amortization expense reported in continuing operations for intangible assets subject to amortization was $17 million in 2013, $21 million in 2012 and $31 million in 2011. The estimated amortization expense for the next five years, assuming no change in the estimated useful lives of identifiable intangible assets or changes in foreign exchange rates, is as follows: $17 million in 2014, $7 million in 2015, $6 million in 2016, $6 million in 2017 and $4 million in 2018. At June 29, 2013, the weighted average remaining useful life for trademarks is 18 years; customer relationships is 13 years; computer software is 2 years; and other contractual agreements is 8 years.

Goodwill
The goodwill reported in continuing operations associated with each business segment and the changes in those amounts during 2013 and 2012 are as follows: 
In millions
 
Retail

 
Foodservice/
Other

 
Total

Net Book Value at July 2, 2011
 
 
 
 
 
 
Gross goodwill
 
$
139

 
$
591

 
$
730

Accumulated impairment losses
 
—

 
(382
)
 
(382
)
Net goodwill
 
139

 
209

 
348

Net Book Value at June 30, 2012
 
 
 
 
 
 
Gross goodwill
 
139

 
591

 
730

Accumulated impairment losses
 
—

 
(382
)
 
(382
)
Net goodwill
 
139

 
209

 
348

Net Book Value at June 29, 2013
 
 
 
 
 
 
Gross goodwill
 
139

 
591

 
730

Accumulated impairment losses
 
—

 
(382
)
 
(382
)
Net goodwill
 
$
139

 
$
209

 
$
348

 


14
EX 99.1

Note 4 - Impairment Charges

The company recognized impairment charges in 2013, 2012 and 2011 and the significant impairments are reported on the "Impairment charges" line of the Consolidated Statements of Income. The impact of these charges is summarized in the following table: 
In millions
 
Pretax Impairment Charge

2013
 
 
Retail
 
$
1

2012
 
 
General corporate expenses
 
$
14

2011
 
 
Foodservice/Other
 
$
15


The company currently tests goodwill and intangible assets not subject to amortization for impairment in the fourth quarter of its fiscal year and whenever a significant event occurs or circumstances change that would more likely than not reduce the fair value of these intangible assets. Other long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. The following is a discussion of each impairment charge:

2013

Retail Property The company recognized a $1 million impairment charge related to machinery and equipment within the Retail segment which was determined to no longer have any future use by the company.

2012

Capitalized Computer Software The company recognized a $14 million impairment charge related to the write-down of capitalized computer software which was determined to no longer have any future use by the company. These charges were recognized as part of general corporate expenses.

2011

Foodservice/Other Property The company recognized a $15 million impairment charge related to the write-down of manufacturing equipment associated with the foodservice bakery operations of the Foodservice/Other segment.


Note 5 - Discontinued Operations

The results of the fresh bakery, refrigerated dough and foodservice beverage operations in North America and the international coffee and tea, household and body care, European bakery and Australian bakery businesses are classified as discontinued operations and are presented as discontinued operations in the condensed consolidated statements of income for all periods presented. The assets and liabilities for these businesses met the accounting criteria to be classified as held for sale and have been aggregated and reported on a separate line of the Condensed Consolidated Balance Sheet prior to disposition.

North American Operations
North American Fresh Bakery On October 21, 2011, the company announced an agreement with Grupo Bimbo that allowed the parties to complete the previously announced sale of its North American Fresh Bakery business for a purchase price of $709 million. The sale also included a small portion of business that was part of the North American Foodservice/Other segment which is not reflected as discontinued operations as it did not meet the definition of a component pursuant to the accounting rules. The transaction closed on November 4, 2011 and Hillshire Brands received $717 million, which included working capital and other purchase price adjustments. The company entered into a customary transition services agreement with the purchaser of this business to provide for the orderly separation of the business and transition of various administrative functions and processes which ended in the fourth quarter of 2013.

15
EX 99.1

The buyer of the North American Fresh Bakery business assumed all the pension and postretirement medical liabilities associated with these businesses, including any multi-employer pension liabilities. An actuarial analysis under ERISA guidelines was performed to determine the final plan assets that should be transferred to support the pension liabilities assumed by the buyer. The transfer of the benefit plan liabilities to the buyer resulted in the recognition of a $36 million settlement loss related to the defined benefit pension plans and a $71 million settlement gain and a $44 million curtailment gain related to the postretirement benefit plans. These amounts have been included in the gain on disposition of this business.
 
North American Foodservice Beverage On October 24, 2011, the company announced that it had entered into an agreement to sell the majority of its North American Foodservice Beverage operations to the J.M. Smucker Company (Smuckers) for $350 million. The transaction closed on December 31, 2011, resulting in the recognition of a pretax gain of $222 million in the second quarter of 2012. The company received $376 million of proceeds, which included a working capital adjustment. The company entered into a customary transition services agreement with Smuckers to provide for the orderly separation of the business and the transition of various administrative functions and processes which ended in the fourth quarter of 2012. The company also entered into a 10 year partnership to collaborate on liquid coffee innovation that will pay the company approximately $50 million plus growth-related royalties over the 10 year period. While this arrangement provided a continuation of cash flows subsequent to the divestiture, it did not represent significant continuing cash flows or significant continuing involvement that would have precluded classification of the North American Foodservice Beverage component as a discontinued operation. This partnership agreement was subsequently transferred to the international coffee and tea business as part of the spin-off. The company performed an updated impairment analysis for the remaining assets for sale in North American foodservice beverage and recognized a pretax impairment charge of $6 million in 2012 which has been recognized in the operating results for discontinued operations. The company has also recognized exit related costs for this business which is included in the operating results for discontinued operations.

North American Foodservice Refrigerated Dough On August 9, 2011, the company announced it had entered into an agreement to sell its North American Foodservice Refrigerated Dough business to Ralcorp for $545 million. The company received $552 million of proceeds, which included working capital adjustments. The company entered into a customary transitional services agreement with the purchaser of this business to provide for the orderly separation of the business and the orderly transition of various functions and processes which ended in the fourth quarter of 2012.

International Operations
Australian Bakery In February 2013, the company completed the sale of its Australian Bakery business. Using foreign currency exchange rates on the date of the transaction, the company received cash proceeds of $85 million and reported an after tax gain on disposition of $42 million.

International Coffee and Tea On June 28, 2012, the company's international coffee and tea business was spun off into a new public company called D.E MASTER BLENDERS 1753 N.V. The separation was effected as follows: a distribution of all of the common stock of a U.S. subsidiary that held all of the company's international coffee and tea business ("CoffeeCo") was made to an exchange agent on behalf of the company's shareholders of record. Immediately after the distribution of CoffeeCo common stock, CoffeeCo paid a $3.00 per share dividend, which totaled $1.8 billion. After the payment of the dividend, CoffeeCo merged with a subsidiary of D.E MASTER BLENDERS 1753 N.V. As a result of the spin-off, the historical results of the international coffee and tea business have been reported as a discontinued operation in the company's consolidated financial statements. The company entered into a master separation agreement that provided for the orderly separation of the business and transition of various administrative functions and processes and a separate tax sharing agreement whereby DEMB agreed to indemnify the company for certain tax liabilities that could result from the spin-off and certain related transactions. The company does not have any significant continuing involvement in the business and does not expect any material direct cash inflows or outflows with this business.

16
EX 99.1

European Bakery During the first quarter of 2012, management decided to divest the Spanish bakery and French refrigerated dough businesses, collectively referred to as European Bakery, requiring that these businesses be tested for impairment under the available for sale model. Based on an estimate of the anticipated proceeds for these businesses, the company recognized a pretax impairment charge of $379 million for the Spanish bakery and French refrigerated dough businesses in 2012. A tax benefit of $38 million was recognized on these impairment charges. On October 10, 2011, the company announced that it had signed an agreement to sell the Spanish bakery business to Grupo Bimbo for €115 million and closed the transaction in the second quarter of 2012. In the third quarter of 2012, the company also completed the disposition of its French refrigerated dough business for €115 million. A $11 million pretax gain was recognized in 2012 on the sale of both the Spanish bakery and French refrigerated dough businesses.

Global Body Care and European Detergents In December 2010, the company completed the disposition of its global body care and European detergents business. Using foreign currency exchange rates on the date of the transaction, the company received cash proceeds of $1.6 billion and reported an after tax gain on disposition of $488 million. The company entered into a customary transitional services agreement with the purchaser of this business to provide for the orderly separation of the business and the orderly transition of various functions and processes which was completed by the end of 2011.

Air Care Products Business In July 2010, the company sold a majority of its air care products business. Using foreign currency exchange rates on the date of the transaction, the company received cash proceeds of $411 million, which represented the majority of the proceeds received on the disposition of the Air Care business, and reported an after tax gain on disposition of $94 million. When this business was sold, certain operations were retained in Spain, until production related to non-air care businesses ceased at the facility. The sale of the Spanish facility closed in the third quarter of 2012 and the company received $44 million of proceeds and recognized a pretax loss on the sale of this facility of $10 million.
 
Australia/New Zealand Bleach In February 2011, the company completed the sale of its Australia/New Zealand Bleach business. Using foreign currency exchange rates on the date of the transaction, the company received cash proceeds of $53 million and reported an after tax gain on disposition of $31 million.

Shoe Care Business In May 2011, the company completed the sale of the majority of its shoe care businesses. Using foreign currency exchange rates on the date of the transaction, the company received cash proceeds of $276 million and reported an after tax gain on disposition of $117 million. Certain other shoe care businesses were to be sold on a delayed basis. In 2012, the company closed on the sale of its shoe care business in Malaysia, China and Indonesia and received $56 million of proceeds, which included working capital adjustments.

Non-Indian Insecticides Business The company entered into an agreement to sell all of its Non-Indian Insecticides business for €154 million to SC Johnson and received a deposit of €152 million in December 2010 on the sale of these businesses. Due to competition concerns raised by the European Commission, the two parties abandoned the transaction as originally agreed but were able to complete the sale of the insecticides businesses outside the European Union (Malaysia, Singapore, Kenya and Russia) as well as a limited number of businesses inside the European Union in 2012. The company also divested the remaining insecticides businesses inside the European Union to another buyer and transferred the net proceeds received from the divestiture of those businesses to SC Johnson.

The company recognized a pretax gain of $255 million on the dispositions in 2012.


17
EX 99.1

Results of Discontinued Operations
The amounts in the tables below reflect the operating results of the businesses reported as discontinued operations up through the date of disposition. The amounts of any gains or losses related to the disposal of these discontinued operations are excluded.
In millions
 
Net Sales

 
Pretax
Income
(Loss)

 
Income
(Loss)

2013
 
 
 
 
 
 
North American Fresh Bakery
 
$
—

 
$
1

 
$
1

North American Foodservice Beverage
 
—

 
3

 
2

International Coffee and Tea
 
—

 
—

 
6

European Bakery
 
—

 
—

 
(3
)
International Household and Body Care
 
—

 
—

 
1

Australian Bakery
 
80

 
3

 
8

Total
 
$
80

 
$
7

 
$
15

2012
 
 
 
 
 
 
North American Fresh Bakery
 
$
724

 
$
29

 
$
163

North American Refrigerated Dough
 
74

 
13

 
9

North American Foodservice Beverage
 
330

 
(15
)
 
(9
)
International Coffee and Tea
 
3,728

 
224

 
662

European Bakery
 
262

 
(384
)
 
(358
)
International Household and Body Care
 
111

 
(5
)
 
(2
)
Australian Bakery
 
136

 
(2
)
 
(2
)
Total
 
$
5,365

 
$
(140
)
 
$
463

2011
 
 
 
 
 
 
North American Fresh Bakery
 
$
2,037

 
$
58

 
$
159

North American Refrigerated Dough
 
307

 
42

 
27

North American Foodservice Beverage
 
538

 
5

 
3

International Coffee and Tea
 
3,537

 
399

 
276

European Bakery
 
591

 
(9
)
 
(16
)
International Household and Body Care
 
1,078

 
72

 
36

Australian Bakery
 
135

 
(2
)
 
(2
)
Total
 
$
8,223

 
$
565

 
$
483


In 2012, as a consequence of the spin-off, the company released approximately $623 million of deferred tax liabilities on its balance sheet related to the repatriation of foreign earnings with a corresponding reduction in the tax expense of the discontinued international coffee and tea business. In 2011, the North American fresh bakery operations recognized a $122 million tax benefit associated with the excess tax basis related to these assets.
 

18
EX 99.1

Gain (loss) on The Sale of Discontinued Operations
The gain (loss) on the sale of discontinued operations recognized in 2013, 2012 and 2011 are summarized in the following tables.
 
In millions
 
Pretax
Gain (Loss)
on Sale

 
Tax
(Expense)/
Benefit

 
After Tax
Gain (Loss)

2013
 
 
 
 
 
 
North American Fresh Bakery
 
$
10

 
$
(4
)
 
$
6

North American Foodservice Beverage
 
2

 
2

 
4

North American Refrigerated Dough
 
—

 
(1
)
 
(1
)
Non-European Insecticides
 
—

 
2

 
2

Australian Bakery
 
56

 
(14
)
 
42

Total
 
$
68

 
$
(15
)
 
$
53

2012
 
 
 
 
 
 
North American Fresh Bakery
 
$
94

 
$
(33
)
 
$
61

North American Foodservice Beverage
 
222

 
(76
)
 
146

North American Refrigerated Dough
 
198

 
(156
)
 
42

European Bakery
 
11

 
(45
)
 
(34
)
Non-European Insecticides
 
249

 
(59
)
 
190

Air Care Products
 
(10
)
 
(1
)
 
(11
)
Other Household and Body Care
 
8

 
3

 
11

Total
 
$
772

 
$
(367
)
 
$
405

2011
 
 
 
 
 
 
Global Body Care and European Detergents
 
$
867

 
$
(379
)
 
$
488

Air Care Products
 
273

 
(179
)
 
94

Australia/New Zealand Bleach
 
48

 
(17
)
 
31

Shoe Care Products
 
115

 
2

 
117

Other Household and Body Care Businesses
 
1

 
—

 
1

Total
 
$
1,304

 
$
(573
)
 
$
731


In 2012, the $156 million tax expense recognized on the sale of the North American Refrigerated Dough business was impacted by the $254 million of goodwill that had no tax basis and the $45 million of tax expense recognized on the sale of the European Bakery businesses was impacted by $140 million of cumulative translation adjustments that had no tax basis. The tax expense recognized on the sale of the household and body care businesses in 2011 includes a $190 million charge related to the anticipated repatriation of the cash proceeds received on the disposition of these businesses. In the fourth quarter of 2011, a repatriation tax benefit of $79 million was recognized on the gain transactions, which was reflected in the income taxes on the Shoe Care Products gain.

Discontinued Operations Cash Flows
The company's discontinued operations impacted the cash flows of the company as follows:
In millions
 
2013

 
2012

 
2011

Discontinued operations impact on
 
 
 
 
 
 
Cash from operating activities
 
$
10

 
$
122

 
$
309

Cash from (used in) investing activities
 
86

 
(368
)
 
2,291

Cash used in financing activities
 
(95
)
 
(1,530
)
 
(1,804
)
Effect of changes in foreign exchange rates on cash
 
(1
)
 
(216
)
 
285

Net cash impact of discontinued operations
 
$
—

 
$
(1,992
)
 
$
1,081

Cash balance of discontinued operations
 
 
 
 
 
 
At start of period
 
$
—

 
$
1,992

 
$
911

At end of period
 
—

 
—

 
1,992

Increase (decrease) in cash of discontinued operations
 
$
—

 
$
(1,992
)
 
$
1,081



19
EX 99.1

The cash used in financing activities primarily represents the net transfers of cash with the corporate office. The net assets of the discontinued operations includes only the cash noted above as most of the cash of those businesses, with the exception of the international coffee and tea business, has been retained as a corporate asset.

There were no assets held for sale or disposition as of June 29, 2013. The assets held for sale of $5 million as of June 30, 2012 represented property, plant and equipment. 

Note 6 - Exit, Disposal and Restructuring Activities

The company has incurred exit, disposition and restructuring charges for initiatives designed to improve its operational performance and reduce cost. Details on exited businesses is provided in Note 5 - Discontinued Operations, of these financial statements. In addition, in June 2012, the company completed the spin-off of its international coffee and tea operations into a new public company, which resulted in the company incurring certain costs in conjunction with the spin-off. These costs include restructuring actions such as employee termination costs and costs related to renegotiating contractual agreements; third-party professional fees for consulting and other services that are directly related to the spin-off; and the costs of employees solely dedicated to activities directly related to the spin-off.
 
The nature of the costs incurred includes the following:

Exit Activities, Asset and Business Disposition Actions
These amounts primarily relate to:
•
Employee termination costs
•
Lease and contractual obligation exit costs
•
Gains or losses on the disposition of assets or asset groupings that do not qualify as discontinued operations

Restructuring/Spin-off Costs Recognized in Cost of Sales and Selling, General and Administrative Expenses
These amounts primarily relate to:
•
Expenses associated with the installation of information systems
•
Consulting costs
•
Costs associated with the renegotiation of contracts for services with outside third-party vendors as part of the spin-off of the international coffee and tea operations

Certain of these costs are recognized in Cost of Sales or Selling, General and Administrative Expenses in the Consolidated Statements of Income as they do not qualify for treatment as an exit activity or asset and business disposition pursuant to the accounting rules for exit and disposal activities. However, management believes that the disclosure of these charges provides the reader with greater transparency to the total cost of the initiatives.

The following is a summary of the (income) expense associated with these actions, and also highlights where the costs are reflected in the Consolidated Statements of Income:
 
In millions
 
2013

 
2012

 
2011

Exit and business dispositions
 
$
9

 
$
81

 
$
38

Selling, general and administrative expenses
 
39

 
115

 
36

Total
 
$
48

 
$
196

 
$
74


The impact of these actions on the company's business segments and unallocated corporate expenses is summarized as follows:
 
In millions
 
2013

 
2012

 
2011

Retail
 
$
(1
)
 
$
14

 
$
11

Foodservice/Other
 
(2
)
 
4

 
3

(Increase) Decrease in business segment income
 
(3
)
 
18

 
14

Increase in general corporate expenses
 
51

 
178

 
60

Total
 
$
48

 
$
196

 
$
74



20
EX 99.1

The following table summarizes the activity during 2013 related to exit, disposal and restructuring related actions and the status of the related accruals as of June 29, 2013. The accrued amounts remaining represent the estimated cash expenditures necessary to satisfy remaining obligations. The majority of the cash payments to satisfy the accrued costs are expected to be paid in the next 12 months.
In Millions
 
Employee termination and other benefits

 
IT and other costs

 
Non-cancellable leases/ contractual obligations

 
Asset and business disposition actions

 
Total

Accrued costs as of June 30, 2012
 
$
42

 
$
16

 
$
21

 
$
—

 
$
79

Exit, disposal, and other costs (income) recognized during 2013
 
6

 
40

 
12

 
(6
)
 
52

Cash Payments
 
(28
)
 
(44
)
 
(27
)
 
—

 
(99
)
Noncash Charges
 
(5
)
 
(8
)
 
17

 
—

 
4

Charges (income) in discontinued operations
 
(2
)
 
2

 
—

 
—

 
—

Change in estimate
 
(3
)
 
(1
)
 
—

 
—

 
(4
)
Asset and business disposition action
 
—

 
—

 
—

 
6

 
6

Accrued costs as of June 29, 2013
 
$
10

 
$
5

 
$
23

 
$
—

 
$
38


The 2013 exit, disposal and restructuring related actions are summarized below:
•
Recognized third-party consulting costs related to cost saving and efficiency studies
•
Recognized severance charges associated with planned employee terminations
•
Recognized third-party costs associated with the spin-off of international coffee and tea operations
•
Recognized lease exit costs
•
Disposed of certain manufacturing facilities related to the Retail and Foodservice/Other segments and recognized a pretax gain of $6 million.

During 2013, the company began implementation of various cost saving and efficiency initiatives and recognized $17 million of charges primarily related to consulting costs.

In 2012, the company recognized a charge to implement a plan to terminate approximately 520 employees, related to the retail, foodservice and corporate office operations and provide them with severance benefits in accordance with benefit plans previously communicated to the affected employee group or with local employment laws. As of June 29, 2013 all of the employees affected under this plan have been terminated.
 
Note 7 - Common Stock

On June 28, 2012, the company effected a 1-for-5 reverse stock split of Hillshire Brands common stock. As a result, every five shares of Hillshire Brands common stock were converted into one share of Hillshire Brands common stock. Any reference to the number of shares outstanding or any per share amounts has been adjusted to reflect the impact of this reverse stock split.

Changes in outstanding shares of common stock for the past three years were: 
Shares in thousands
 
2013

 
2012

 
2011

Beginning balances
 
120,644

 
117,420

 
132,424

Stock issuances
 
 
 
 
 
 
Stock option and benefit plans
 
2,436

 
1,104

 
642

Restricted stock plans
 
155

 
2,119

 
398

Reacquired shares
 
—

 
—

 
(16,044
)
Other
 
13

 
1

 
—

Ending balances
 
123,248

 
120,644

 
117,420



21
EX 99.1

Common stock dividends and dividend-per-share amounts declared on outstanding shares of common stock were: 
In millions except per share data
 
2013

 
2012

 
2011

Common stock dividends declared
 
$
61

 
$
137

 
$
275

Dividends per share amount declared
 
$
0.50

 
$
1.15

 
$
2.30


During 2010, the company's Board of Directors had authorized a $3.0 billion share repurchase program. In March of 2010, the company repurchased 7.3 million shares at a cost of $500 million under this program using an accelerated share repurchase program (ASR). The ASR provided for a final settlement adjustment at termination in either shares of common stock or cash based on the final volume weighted average stock price. In 2011, the company paid $13 million as a final settlement on the ASR. During 2011, the company also repurchased 16 million shares at a cost of $1.3 billion.

As of June 29, 2013, the remaining amount authorized for repurchase is $1.2 billion of common stock under an existing share repurchase program, plus 2.7 million shares of common stock that remain authorized for repurchase under the company's prior share repurchase program.

Note 8 - Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are:

22


In millions
 
Cumulative
Translation
Adjustment

 
Net
Unrealized
Gain
(Loss) on
Qualifying
Cash Flow
Hedges/
Other

 
Pension/
Post-
retirement
Liability
Adjustmnt

 
Accumulated
Other
Comprehen-sive
Income
(Loss)

Balance at July 3, 2010
 
$
(106
)
 
$
(1
)
 
$
(807
)
 
$
(914
)
Disposition of Household & Body Care businesses
 
55

 
—

 
—

 
55

Amortization of net actuarial loss and prior service credit
 
—

 
—

 
16

 
16

Net actuarial gain arising during the period
 
—

 
—

 
326

 
326

Pension plan curtailment
 
—

 
—

 
25

 
25

Other comprehensive income (loss) activity
 
270

 
7

 
(50
)
 
227

Balance at July 2, 2011
 
219

 
6

 
(490
)
 
(265
)
Business dispositions
 
127

 
—

 
—

 
127

Amortization of net actuarial loss and prior service credit
 
—

 
—

 
(1
)
 
(1
)
Net actuarial loss arising during the period
 
—

 
—

 
(70
)
 
(70
)
Pension plan curtailments/
settlements
 
—

 
—

 
24

 
24

Spin-off of International Coffee and Tea business
 
(180
)
 
—

 
343

 
163

Other comprehensive income (loss) activity
 
(150
)
 
2

 
26

 
(122
)
Balance at June 30, 2012
 
16

 
8

 
(168
)
 
(144
)
Business dispositions
 
(15
)
 
—

 
—

 
(15
)
Amortization of net actuarial loss and prior service credit
 
—

 
—

 
(2
)
 
(2
)
Net actuarial gain arising during the period
 
—

 
—

 
27

 
27

Pension plan curtailments/settlements
 
—

 
—

 
1

 
1

Spin-off of International Coffee and Tea business
 
6

 
—

 
—

 
6

Other comprehensive income (loss) activity
 
(6
)
 
(8
)
 
—

 
(14
)
Balance at June 29, 2013
 
$
1

 
$
—

 
$
(142
)
 
$
(141
)


23
EX 99.1

Note 9 - Stock-Based Compensation

The company has various stock option and stock award plans. At June 29, 2013, 20.3 million shares were available for future grant in the form of options, stock unit awards, restricted shares or stock appreciation rights. The company will satisfy the requirement for common stock for share-based payments by issuing shares out of authorized but unissued common stock.

Stock Options
The exercise price of each stock option equals the market price of the company's stock on the date of grant. Options can generally be exercised over a maximum term of 10 years. Options generally cliff vest and expense is recognized on a straight-line basis during the vesting period.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions: 
 
 
2013

 
2012

 
2011

Weighted average expected lives
 
6.0

 
7.0

 
7.2

Weighted average risk-free interest rates
 
0.95
%
 
1.37
%
 
2.08
%
Range of risk-free interest rates
 
0.94 - 1.03%

 
1.28 - 1.38%

 
1.91 - 2.66%

Weighted average expected volatility
 
29.7
%
 
28.1
%
 
28.0
%
Range of expected volatility
 
29.7 - 30.0%

 
28.1 - 28.3%

 
27.3 - 30.0%

Dividend yield
 
2.0
%
 
2.5
%
 
2.9
%

The company uses historical volatility for a period of time that is comparable to the expected life of the option to determine volatility assumptions.

A summary of the changes in stock options outstanding under the company's option plans during 2013 is presented below: 
Shares in thousands
 
Shares

 
Weighted
Average
Exercise
Price

 
Weighted
Average
Remaining
Contractual
Term
(Years)

 
Aggregate
Intrinsic
Value (in
millions)

Options outstanding at June 30, 2012
 
6,264

 
$
23.01

 
3.2

 
$
38

Granted
 
2,525

 
25.99

 
—

 
—

Exercised
 
(2,563
)
 
19.34

 
—

 
—

Canceled/expired
 
(371
)
 
27.16

 
—

 
—

Options outstanding at June 29, 2013
 
5,855

 
$
25.59

 
6.3

 
$
44

Options exercisable at June 29, 2013
 
3,065

 
$
24.92

 
3.8

 
$
25


The company received cash from the exercise of stock options during 2013 of $47 million. As of June 29, 2013, the company had $10.1 million of total unrecognized compensation expense related to stock option plans that will be recognized over the weighted average period of 0.9 years. 
In millions except per share data
 
2013

 
2012

 
2011

Number of options exercisable at end of fiscal year
 
3,065

 
5,704

 
7,784

Weighted average exercise price of options exercisable at end of fiscal year
 
$
24.92

 
$
22.65

 
$
26.38

Weighted average grant date fair value of options granted during the fiscal year
 
$
6.08

 
$
6.35

 
$
5.29

Total intrinsic value of options exercised during the fiscal year
 
$
22.9

 
$
23.5

 
$
8.0

Fair value of options that vested during the fiscal year
 
$
0.3

 
$
16.9

 
$
4.5


Stock Unit Awards
Restricted stock units (RSUs) are granted to certain employees to incent performance and retention over periods ranging from 1 to 3 years. Upon the achievement of defined parameters, the RSUs are generally converted into shares of the company's common stock on a one-for-one basis and issued to the employees. A portion of all RSUs vest solely upon continued future service to the company. A portion of RSUs vest based upon continued future employment and the achievement of certain defined performance measures. The cost of these awards is determined using the fair value of the shares on the date of grant, and compensation is recognized over the period during which the employees provide the requisite service to the company.

24
EX 99.1

The fair value of performance-based awards pegged to market-based targets is estimated on the date of grant using a Monte-Carlo simulation model containing the following assumptions:
 
2013

Range of risk-free interest rates
0.28 - 0.35%

Range of expected volatility
24.0 - 25.0%

Range of initial TSR
(7.3) - 13.1%

Dividend yield
2
%

The following is a summary of the changes in the stock unit awards outstanding under the company's benefit plans during 2013: 
Shares in thousands
 
Shares

 
Weighted
Average
Grant Date
Fair Value

 
Weighted
Average
Remaining
Contractual
Term
(Years)

 
Aggregate
Intrinsic
Value (in
millions)

Nonvested share units at June 30, 2012
 
340

 
$
26.24

 
0.7

 
$
10

Granted
 
734

 
25.02

 
—

 
—

Vested
 
(158
)
 
25.66

 
—

 
—

Forfeited
 
(71
)
 
26.64

 
—

 
—

Nonvested share units at June 29, 2013
 
845

 
$
25.26

 
1.6

 
$
28

Exercisable share units at June 29, 2013
 
57

 
$
22.07

 
5.7

 
$
2

 
As of June 29, 2013, the company had $12 million of total unrecognized compensation expense related to stock unit plans that will be recognized over the weighted average period of 1.8 years. 
In millions except per share data
 
2013

 
2012

 
2011

Stock Unit Awards
 
 
 
 
 
 
Fair value of share-based units that vested during the fiscal year
 
$
4

 
$
88

 
$
42

Weighted average grant date fair value of share based units granted during the fiscal year
 
$
25.02

 
$
29.09

 
$
23.40

All Stock-Based Compensation
 
 
 
 
 
 
Total compensation expense
 
$
13

 
$
35

 
$
41

Tax benefit on compensation expense
 
$
5

 
$
11

 
$
15


Note 10 - Employee Stock Ownership Plans (ESOP)

The company maintains an ESOP that holds common stock of the company that is used to fund a portion of the company's matching program for its 401(k) savings plan for domestic non-union employees. The purchase of the original stock by the ESOP was funded both with debt guaranteed by the company and loans from the company. The debt guaranteed by the company was fully paid in 2004 and only loans from the company to the ESOP remain. Each year, the company makes contributions that, with the dividends on the common stock held by the ESOP, are used to pay loan interest and principal. Shares are allocated to participants based upon the ratio of the current year's debt service to the sum of the total principal and interest payments over the remaining life of the loan. The number of unallocated shares in the ESOP was 3 million at June 29, 2013 and 5 million at June 30, 2012. Expense recognition for the ESOP is accounted for under the grandfathered provisions contained within US GAAP.

The expense for the 401(k) savings plan recognized by the ESOP amounted to $5 million in 2013, $14 million in 2012 and $15 million in 2011. Payments to the ESOP were $10 million in 2013, $6 million in 2012 and $23 million in 2011.


25
EX 99.1

Note 11 - Earnings Per Share

Net income (loss) per share - basic is computed by dividing income (loss) attributable to Hillshire Brands by the weighted average number of common shares outstanding for the period. Net income (loss) per share - diluted reflects the potential dilution that could occur if options and fixed awards to be issued under stock-based compensation arrangements were converted into common stock.

Options to purchase 2.2 million shares of common stock at June 29, 2013, 847 thousand shares of common stock at June 30, 2012 and 6.2 million shares of common stock at July 2, 2011 were not included in the computation of diluted earnings per share because these options were either anti-dilutive or the exercise price was greater than the average market price of the company's outstanding common stock. In 2012, the dilutive effect of stock options and award plans were excluded from the earnings per share calculation because they would be antidilutive given the loss in the period.The following is a reconciliation of net income to net income per share - basic and diluted - for the years ended June 29, 2013, June 30, 2012 and July 2, 2011:
 
In millions except earnings per share
 
2013

 
2012

 
2011

Income (loss) from continuing operations attributable to Hillshire Brands
 
$
184

 
$
(20
)
 
$
58

Net income from discontinued operations attributable to Hillshire Brands
 
68

 
865

 
1,205

Net income attributable to Hillshire Brands
 
$
252

 
$
845

 
$
1,263

Average shares outstanding - basic
 
123

 
119

 
124

Dilutive effect of stock compensation
 
—

 
—

 
1

Diluted shares outstanding
 
123

 
119

 
125

Income (loss) per common share - Basic
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
1.50

 
$
(0.16
)
 
$
0.47

Income from discontinued operations
 
0.55

 
7.29

 
9.69

Net income
 
$
2.05

 
$
7.13

 
$
10.16

Income (loss) per common share - Diluted
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
1.49

 
$
(0.16
)
 
$
0.46

Income from discontinued operations
 
0.55

 
7.29

 
9.65

Net income
 
$
2.04

 
$
7.13

 
$
10.11

 

Note 12 - Debt Instruments

The composition of the company's long-term debt, which includes capital lease obligations, is summarized in the following table: 
In millions
 
Maturity Date
 
2013
 
2012
Senior debt
 
 
 
 
 
 
10% zero coupon notes ($19 million face value)
 
2014
 
$
18

 
$
16

10% - 14.25% zero coupon notes ($105 million face value)
 
2015
 
93

 
82

2.75% notes
 
2016
 
400

 
400

4.1% notes
 
2021
 
278

 
278

6.125% notes
 
2033
 
152

 
152

Total senior debt
 
 
 
941

 
928

Obligations under capital lease
 
 
 
—

 
2

Other debt
 
 
 
11

 
15

Total debt
 
 
 
952

 
945

Unamortized discounts
 
 
 
(1
)
 
(1
)
Total long-term debt
 
 
 
951

 
944

Less current portion
 
 
 
(19
)
 
(5
)
 
 
 
 
$
932

 
$
939

 

26
EX 99.1

In May 2012, the company issued $650 million in senior notes through a private placement. The offering consisted of $232 million of 3.60% senior notes due May 15, 2019, $120 million of 3.81% senior notes due May 15, 2020, $124 million of 4.03% senior notes due May 15, 2021 and $174 million of 4.20% senior notes due May 15, 2022. The proceeds were used to payoff existing indebtedness and for general purposes. As part of the spin-off, the company satisfied its obligations under these notes by effectively transferring the $650 million of indebtedness as part of the spin-off.

In April 2012, the company completed a tender offer for up to $470 million of combined aggregate principal amount of three series of its outstanding debt securities: 6.125% Notes due Nov. 2032, 4.10% Notes due 2020 and 2.75% Notes due 2015. Upon the expiration of the tender, the company accepted for purchase $348.4 million of 6.125% Notes and $121.6 million of the 4.10% Notes and recognized $26 million of charges associated with the early extinguishment of this debt.

In April 2012, the company redeemed all of its 3.875% Notes due 2013, of which the aggregate principal amount outstanding was $500 million. A charge of $13 million was incurred related to the early extinguishment of this debt.

Payments required on long-term debt during the years ending 2014 through 2018 are $19 million, $93 million, $400 million, nil and nil, respectively. The company made cash interest payments of $35 million, $73 million and $99 million in 2013, 2012 and 2011, respectively.

The company had a $1.2 billion revolving credit facility that matured on the date on which the spin-off was consummated. It was replaced by a $750 million revolving credit facility that matures in June 2017. The credit facility has an annual fee of 0.15% of the facility size as of June 29, 2013. Pricing under this facility is based on the company's current credit rating. As of June 29, 2013, the company did not have any borrowings outstanding under the credit facility. This agreement supports commercial paper borrowings and other financial instruments. The company had $57 million of letters of credit under this facility outstanding as of June 29, 2013. The company's credit facility and debt agreements contain customary representations, warranties and events of default, as well as, affirmative, negative and financial covenants with which the company is in compliance. One financial covenant includes a requirement to maintain an interest coverage ratio of not less than 2.0 to 1.0. The interest coverage ratio is based on the ratio of EBIT to consolidated net interest expense with consolidated EBIT equal to net income plus interest expense, income tax expense, and extraordinary or non-recurring non-cash charges and gains. For the 12 months ended June 29, 2013, the company's interest coverage ratio was 9.0 to 1.0.

The financial covenants also include a requirement to maintain a leverage ratio of not more than 3.5 to 1.0. The leverage ratio is based on the ratio of consolidated total indebtedness to an adjusted consolidated EBITDA. For the 12 months ended June 29, 2013, the leverage ratio was 2.1 to 1.0.

Selected data on the company's short-term obligations follow: 
In millions
 
2012

 
2011

Maximum month-end borrowings
 
$
335

 
$
503

Average borrowings during the year
 
97

 
242

Year-end borrowings
 
—

 
198

Weighted average interest rate during the year
 
0.34
%
 
0.31
%
Weighted average interest rate at year-end
 
—
%
 
0.30
%

There were no short-term borrowings during 2013.

27
EX 99.1


Note 13 - Leases

The company leases certain facilities, equipment and vehicles under agreements that are classified as either operating or capital leases. The building leases have original terms that range from 10 to 15 years, while the equipment and vehicle leases have terms of generally less than seven years.
 
In millions
 
June 29, 2013

 
June 30, 2012

Gross book value of capital lease assets included in property
 
$
3

 
$
4

Net book value of capital lease assets included in property
 
—

 
2


Future minimum payments, by year and in the aggregate, under capital leases are less than $1 million at June 29, 2013. Future minimum payments, by year end in the aggregate, under noncancelable operating leases having an original term greater than one year at June 29, 2013 were as follows: 
 
 
 
In millions
Operating
Leases

2014
$
19

2015
15

2016
11

2017
10

2018
9

Thereafter
77

Total minimum lease payments
$
141

 
In millions
 
2013

 
2012

 
2011

Depreciation of capital lease assets
 
$
2

 
$
1

 
$
1

Rental expense under operating leases
 
23

 
22

 
27


Note 14 - Contingencies and Commitments

Contingent Liabilities
The company is a party to various pending legal proceedings, claims and environmental actions by government agencies. The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to the particular matter.

Aris This is a consolidation of cases filed by individual complainants with the Republic of the Philippines, Department of Labor and Employment and the National Labor Relations Commission (NLRC) from 1998 through July 1999. The complaint alleges unfair labor practices due to the termination of manufacturing operations in the Philippines by Aris Philippines, Inc. (Aris), a former subsidiary of the company. The complaint names the company as a party defendant. In 2006, the arbitrator ruled against the company and awarded the plaintiffs approximately $80 million in damages and fees. This ruling was appealed by the company and subsequently set aside by the NLRC in December 2006. Both the complainants and the company have filed motions for reconsideration. The company continues to believe that the plaintiffs' claims are without merit; however, it is reasonably possible that this case will be ruled against the company and have a material adverse impact on the company's results of operations and cash flows. The company has initiated settlement discussions for this case and has established an accrual for the estimated settlement amount.


28
EX 99.1

Multi-Employer Pension Plans The company participates in one multi-employer pension plan (MEPP) that provided retirement benefits to certain employees covered by collective bargaining agreements. Participating employers in a MEPP are jointly responsible for any plan underfunding. MEPP contributions are established by the applicable collective bargaining agreements; however, the MEPPs may impose increased contribution rates and surcharges based on the funded status of the plan and the provisions of the Pension Protection Act of 2006 (PPA). The PPA imposes minimum funding requirements on the plans. Plans that fail to meet certain funding standards as defined by the PPA are categorized as being either in a critical or endangered status. We have received notice that the plan to which we contribute has been designated in critical status. The trustees of critical status multi-employer plans must adopt a rehabilitation or funding improvement plan designed to improve the plan's funding within a prescribed period of time. Rehabilitation and funding improvement plans may include increased employer contributions, reductions in benefits or a combination of the two. Unless otherwise agreed upon, any requirement to increase employer contributions will not take effect until the current collective bargaining agreements expire. However, a five percent surcharge for the initial critical year (increasing to ten percent for the following and subsequent years) is imposed on contributions to plans in critical status and remains in effect until the bargaining parties agree on modifications consistent with the rehabilitation plan adopted by the trustees. In addition, the failure of a plan to meet funding improvement targets provided in its rehabilitation or funding improvement plan could result in the imposition of an excise tax on contributing employers.

Under current law regarding multi-employer pension plans, a withdrawal or partial withdrawal from any plan that was underfunded would render us liable for our proportionate share of that underfunding. This potential unfunded pension liability also applies ratably to other contributing employers. Information regarding underfunding is generally not provided by plan administrators and trustees on a current basis and when provided, is difficult to independently validate. Any public information available relative to multi-employer pension plans may be dated as well. In the event of a withdrawal or partial withdrawal was to occur with respect to the MEPP to which the company makes contributions, the impact to our consolidated financial statements could be material. Withdrawal liability triggers could include the company's decision to close a plant or the dissolution of a collective bargaining unit.

The company's regularly scheduled contributions to MEPPs related to continuing operations totaled approximately $1 million in 2013, $2 million in 2012 and $3 million in 2011.

Guarantees
The company is a party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts entered into by the company under which the company agrees to indemnify a third party against losses arising from a breach of representations and covenants related to matters such as title to assets sold, the collectibility of receivables, specified environmental matters, lease obligations assumed and certain tax matters. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow the company to challenge the other party's claims. In addition, the company's obligations under these agreements may be limited in terms of time and/or amount, and in some cases the company may have recourse against third parties for certain payments made by the company. It is not possible to predict the maximum potential amount of future payments under certain of these agreements, due to the conditional nature of the company's obligations and the unique facts and circumstances involved in each particular agreement.
Historically, payments made by the company under these agreements have not had a material effect on the company's business, financial condition or results of operations. The company believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the company's business, financial condition or results of operations.


29
EX 99.1

The material guarantees for which the maximum potential amount of future payments can be determined, are as follows:

Contingent Lease Obligations The company is contingently liable for leases on property operated by others. At June 29, 2013, the maximum potential amount of future payments the company could be required to make, if all of the current operators default on the rental arrangements, is $18 million. The minimum annual rentals under these leases are $9 million in 2014, $8 million in 2015 and $1 million in 2016. The largest components of these amounts relate to a number of retail store leases operated by Coach, Inc. Coach, Inc. is contractually obligated to provide the company, on an annual basis, with a standby letter of credit approximately equal to the next year's rental obligations. The letter of credit in place at the close of 2013 was $7 million. This obligation to provide a letter of credit expires when the company's contingent lease obligation is substantially extinguished. The company has not recognized a liability for the contingent obligation on the Coach, Inc. leases.

Contingent Debt Obligations and Other The company has guaranteed the payment of certain third-party debt. The maximum potential amount of future payments that the company could be required to make, in the event that these third parties default on their debt obligations, is $16 million. At the present time, the company does not believe it is probable that any of these third parties will default on the amount subject to guarantee.

In 2010, the company recognized a $26 million charge for a foreign tax indemnification related to the company's direct selling business that was sold in 2006. In 2013, the remaining tax indemnification issues were finalized and, as a result, the company recognized $10 million of pre-tax income related to the reversal of a portion of the amount originally charged to income.

Note 15 - Financial Instruments

Background Information
The company uses derivative financial instruments, including futures, options and swap contracts to manage its exposures to commodity prices and interest rate risks. The use of these derivative financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the company. The company does not use derivatives for trading or speculative purposes and is not a party to leveraged derivatives. More information concerning accounting for financial instruments can be found in Note 2, Summary of Significant Accounting Policies in the company’s 2013 Annual Report.
 
Types of Derivative Instruments
Interest Rate and Cross Currency Swaps The company had utilized interest rate swap derivatives to manage interest rate risk, in order to maintain a targeted amount of both fixed-rate and floating-rate long-term debt and notes payable. Interest rate swap agreements that are effective at hedging the fair value of fixed-rate debt agreements are designated and accounted for as fair value hedges. The company has a fixed interest rate on virtually all of its long-term debt, and as of June 29, 2013 the company is not a party to any interest rate swap agreements.

Prior to the spin-off of its international coffee and tea business in June 2012, the company issued certain foreign-denominated debt instruments and utilized cross currency swaps to reduce the variability of functional currency cash flows related to foreign currency debt. Cross currency swap agreements that are effective at hedging the variability of foreign-denominated cash flows are designated and accounted for as cash flow hedges. In the fourth quarter of 2012, the company entered into an offsetting cross currency swap to neutralize €229 million due under the company’s one remaining cross currency swap that matured in June 2013. The net cash paid on both derivative instruments was approximately $40 million.


30
EX 99.1

Commodity Futures and Options Contracts The company uses commodity futures and options to hedge a portion of its commodity price risk. The principal commodities hedged by the company include pork, beef, natural gas, diesel fuel, corn, wheat and other ingredients. The company does not use significant levels of commodity financial instruments to hedge commodity prices and primarily relies upon fixed rate supplier contracts to determine commodity pricing. In circumstances where commodity-derivative instruments are used, there is a high correlation between the commodity costs and the derivative instruments. For those instruments where the commodity instrument and underlying hedged item correlate between 80% -125%%, the company accounts for those contracts as cash flow hedges. However, the majority of commodity derivative instruments are accounted for as mark-to-market hedges. The company only enters into futures and options contracts that are traded on established, well-recognized exchanges that offer high liquidity, transparent pricing, daily cash settlement and collateralization through margin requirements.

Non-Derivative Instruments
Prior to the spin-off of its international coffee and tea business, the company used non-derivative instruments such as non-U.S. dollar financing transactions or non-U.S. dollar assets or liabilities, including intercompany loans, to hedge the exposure of changes in underlying foreign currency denominated subsidiary net assets, and they were declared as Net Investment Hedges.

The notional values of the various derivative instruments used by the company are summarized in the following table: 
In millions
 
June 29, 2013

 
June 30, 2012

 
Hedge
Coverage
(Number of Months)

Swap Contracts
 
 
 
 
 
 
Rec. fixed/pay fixed - cross currency swaps notional1
 
$
—

 
$
(40
)
 
—

Commodity contracts
 
 
 
 
 
 
Commodity future contracts2
 
 
 
 
 
 
Grains and oilseeds
 
$
34

 
$
56

 
5

Energy
 
29

 
27

 
11

Other commodities
 
20

 
25

 
6

1 The notional value is calculated using the exchange rates as the reporting date.
2 Commodity futures contracts are determined by the notional cost of the contract.

Cash Flow Presentation
The cash receipts and payments from a derivative instrument are classified according to the nature of the instrument, when realized, generally in investing activities unless otherwise disclosed. However, cash flows from a derivative instrument that are accounted for as a fair value hedge or cash flow hedge are classified in the same category as the cash flows from the items being hedged provided the derivative does not include a financing element at inception. If a derivative instrument includes a financing element at inception, all cash inflows and outflows of the derivative instrument are considered cash flows from financing activities. If, for any reason, hedge accounting is discontinued, any remaining cash flows after that date shall be classified consistent with mark-to-market instruments.

Contingent Features/ Concentration of Credit Risk
All of the company’s derivative instruments are governed by International Swaps and Derivatives Association (i.e., ISDA) master agreements, requiring the company to maintain an investment grade credit rating from both Moody’s and Standard & Poor’s credit rating agencies. If the company’s credit rating were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate collateralization on the derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position was nil on June 29, 2013 and $40 million on June 30, 2012, for which the company posted no collateral.


31
EX 99.1

A large number of major international financial institutions are counterparties to the company’s financial instruments. The company enters into financial instrument agreements only with counterparties meeting very stringent credit standards (a credit rating of A-/A3 or better), limiting the amount of agreements or contracts it enters into with any one party and, where legally available, executing master netting agreements. The company regularly monitors these positions. While the company may be exposed to credit losses in the event of nonperformance by individual counterparties of the entire group of counterparties, the company has not recognized any losses with these counterparties in the past and does not anticipate material losses in the future.

Trade accounts receivable due from customers that the company identified as having low or no credit ratings were $60 million at June 29, 2013 and $52 million at June 30, 2012.

Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value must be categorized into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while level 3 generally requires significant management judgment. Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement.

The carrying amounts of cash and equivalents, trade accounts receivables, accounts payable, derivative instruments and notes payable approximate fair values due to their short-term nature and are considered Level 1 based on the valuation inputs. The carrying value of derivative instruments approximate fair value but may be considered Level 1 or Level 2 based on the valuation inputs used (see balance sheet classification and fair value determination in the table presented later in this disclosure.) The fair value of the company’s long-term debt (considered Level 2 based on the valuation inputs used), including the current portion, is estimated using discounted cash flows based on the company’s current incremental borrowing rates for similar types of borrowing arrangements. 
  
 
June 29, 2013
 
 
June 30, 2012
 
In millions
 
Fair
Value

 
Carrying
Amount

 
Fair
Value

 
Carrying
Amount

Long-term debt, including current portion
 
$
981

 
$
951

 
$
1,004

 
$
945

 
Information on the location and amounts of derivative fair values in the Consolidated Balance Sheet at June 29, 2013 and June 30, 2012 is as follows:
 
 
Assets
 
 
Liabilities
 
 
 
Other
Current Assets
 
 
Accrued
Liabilities - Other
 
In millions
 
June 29,
2013

 
June 30,
2012

 
June 29,
2013

 
June 30,
2012

Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts(1)
 
$
—

 
$
—

 
$
—

 
$
40

Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts(1)
 
—

 
1

 
—

 
—

Total derivatives
 
$
—

 
$
1

 
$
—

 
$
40


1 Categorized as level 2: Fair value of level 2 assets and liabilities as of June 30, 2012 are $1 million and $40 million, respectively.

32
EX 99.1

Information related to our cash flow hedges, net investment hedges, fair value hedges and other derivatives not designated as hedging instruments for the periods ended June 29, 2013, and June 30, 2012, follows: 
 
 
  
 
Interest Rate
Contracts
 
 
Foreign  Exchange
Contracts
 
 
Commodity
Contracts
 
 
Total
 
In millions
 
Year 
ended
 
June 29,
2013

 
June 30,2012

 
June 29,
2013

 
June 30,2012

 
June 29,
2013

 
June 30, 2012

 
June 29,
2013

 
June 30,
2012

Cash Flow Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income (OCI)1
 
 
 
$
—

 
$
(8
)
 
$
—

 
$
—

 
$
6

 
$
13

 
$
6

 
$
5

Amount of gain (loss) reclassified from AOCI into earnings1, 2
 
 
 
—

 
(3
)
 
—

 
2

 
18

 
2

 
18

 
1

Amount of ineffectiveness recognized in earnings3, 4
 
 
 
—

 
—

 
—

 
(2
)
 
(1
)
 
2

 
(1
)
 
—

Amount of gain (loss) expected to be reclassified into earnings during the next twelve months
 
 
 
—

 
—

 
—

 
—

 
(2
)
 
10

 
(2
)
 
10

Net Investment Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in OCI1
 
 
 
—

 
—

 
—

 
604

 
—

 
—

 
—

 
604

Amount of gain (loss) recognized from OCI into earnings6
 
 
 
—

 
—

 
—

 
(446
)
 
—

 
—

 
—

 
(446
)
Amount of gain (loss) recognized from OCI into spin-off dividend7
 
 
 
—

 
—

 
—

 
324

 
—

 
—

 
—

 
324

Fair Value Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of derivative gain (loss) recognized in earnings5
 
 
 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
1

Amount of hedged item gain (loss) recognized in earnings5
 
 
 
—

 
4

 
—

 
—

 
—

 
—

 
—

 
4

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in Cost of Sales
 
 
 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
 
(2
)
 
(2
)
Amount of gain (loss) recognized in SG&A
 
 
 
—

 
—

 
—

 
(15
)
 
2

 
—

 
2

 
(15
)
1 Effective Portion
2 Gain (loss) reclassified from AOCI into earnings is reported in interest or debt extinguishment , for interest rate swaps, in selling, general, and administrative (SG&A) expenses for foreign exchange contracts and in cost of sales for commodity contracts.
3 Gain (loss) recognized in earnings is related to the ineffective portion and amounts excluded from the assessment of hedge effectiveness.
4 Gain (loss) recognized in earnings is reported in interest expense for foreign exchange contract and SG&A expenses for commodity contracts.
5 The amount of gain (loss) recognized in earnings on the derivative contracts and the related hedged item is reported in interest or debt extinguishment, for the interest rate contracts and SG&A for the foreign exchange contracts.
6 The gain (loss) recognized from OCI into earnings is reported in gain on sale of discontinued operations.
7 The gain/(loss) recognized from OCI into the spin-off dividend is reported in Retained Earnings as a result of the spin-off


33
EX 99.1

Note 16 - Defined Benefit Pension Plans

The company sponsors two U.S. and one Canadian pension plans to provide retirement benefits to certain employees. The benefits provided under these plans are based primarily on years of service and compensation levels.

Measurement Dates and Assumptions
A fiscal year end measurement date is utilized to value plan assets and obligations for all of the company's defined benefit pension plans.

The weighted average actuarial assumptions used in measuring the net periodic benefit cost and plan obligations of continuing operations were as follows: 
 
 
2013

 
2012

 
2011

Net periodic benefit cost
 
 
 
 
 
 
Discount rate
 
4.2
%
 
5.5
%
 
5.4
%
Long-term rate of return on plan assets
 
6.2
%
 
6.5
%
 
7.3
%
Plan obligations
 
 
 
 
 
 
Discount rate
 
4.8
%
 
4.2
%
 
5.5
%

The discount rate is determined by utilizing a yield curve based on high-quality fixed-income investments that have a AA bond rating to discount the expected future benefit payments to plan participants. Compensation increase assumptions are based upon historical experience and anticipated future management actions. Compensation changes for participants in the U.S. plans no longer have an impact on the benefit cost or plan obligations as the participants in the U.S. salaried plan will no longer accrue additional benefits. In determining the long-term rate of return on plan assets, the company assumes that the historical long-term compound growth rates of equity and fixed-income securities and other plan investments will predict the future returns of similar investments in the plan portfolio. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions.

Net Periodic Benefit Cost and Funded Status
The components of the net periodic benefit cost for continuing operations were as follows:
In millions
 
2013

 
2012

 
2011

Components of defined benefit net periodic benefit cost
 
 
 
 
 
 
Service cost
 
$
11

 
$
9

 
$
7

Interest cost
 
70

 
73

 
73

Expected return on assets
 
(92
)
 
(86
)
 
(81
)
Amortization of :
 
 
 
 
 
 
Prior service cost
 
1

 
1

 
1

Net actuarial loss
 
4

 
3

 
13

Settlement loss
 
6

 
1

 
—

Net periodic benefit cost
 
$
—

 
$
1

 
$
13


 
In 2013, the company recognized $1 million of settlement losses associated with settlement of two of the company's defined benefit pension plans in Canada. The losses resulted from recognition of the unamortized actuarial losses associated with these two plans. The company also recognized a $4 million loss related to the payout of the surplus assets associated with these plans, which were in an overfunded position. The remaining $1 million of settlement losses were associated with plan settlements resulting from the payment of lump-sum benefits to plan participants.

In 2012, the company recognized $1 million of settlement losses associated with plan settlements resulting from the payment of lump-sum benefits to plan participants. In 2012, the disposition of the North American fresh bakery business resulted in the recognition of a $36 million net settlement loss as a result of the assumption of the related plan liabilities by the buyer. The settlement loss was recognized as part of the gain on disposition of this business.


34
EX 99.1

In 2011, the company recognized a curtailment loss of $5 million associated with the fresh bakery businesses as a result of the expected decline in expected years of future service associated with the planned disposition of this business. The amounts recognized in 2011 were reported as part of the results of discontinued operations.

The net periodic benefit cost of the defined benefit pension plans in 2013 was virtually unchanged from 2012 as an increase settlement losses and amortization expense was offset by an increase in asset returns and lower interest expense.

The net periodic benefit cost of the defined benefit pension plans in 2012 was $12 million lower than in 2011. The decrease was primarily due to a reduction in the amortization of net actuarial losses due to actuarial gains recognized during 2011, which reduced the amount of actuarial losses to be amortized as of the end of 2011.

The amount of prior service cost and net actuarial loss that is expected to be amortized from accumulated other comprehensive income and reported as a component of net periodic benefit cost in continuing operations during 2014 is $1 million and $4 million, respectively.

The funded status of defined benefit pension plans at the respective year-ends was as follows: 
In millions
 
2013

 
2012

Projected benefit obligation
 
 
 
 
Beginning of year
 
$
1,680

 
$
1,377

Service cost
 
11

 
9

Interest cost
 
70

 
73

Plan amendments/other
 
1

 
1

Benefits paid
 
(81
)
 
(73
)
Actuarial (gain) loss
 
(123
)
 
294

Settlements
 
4

 
—

Foreign exchange
 
—

 
(1
)
End of year
 
$
1,562

 
$
1,680

Fair value of plan assets
 
 
 
 
Beginning of year
 
$
1,515

 
$
1,259

Actual return on plan assets
 
(3
)
 
321

Employer contributions
 
8

 
9

Benefits paid
 
(81
)
 
(73
)
Foreign exchange
 
—

 
(1
)
End of year
 
1,439

 
1,515

Funded status
 
$
(123
)
 
$
(165
)
Amounts recognized on the consolidated balance sheets
 
 
 
 
Noncurrent asset
 
$
1

 
$
5

Accrued liabilities
 
(5
)
 
(4
)
Pension obligation
 
(119
)
 
(166
)
Net asset (liability) recognized
 
$
(123
)
 
$
(165
)
Amounts recognized in accumulated other comprehensive income
 
 
 
 
Unamortized prior service cost
 
$
7

 
$
7

Unamortized actuarial loss, net
 
228

 
263

Total
 
$
235

 
$
270


The underfunded status of the plans decreased from $165 million in 2012 to $123 million in 2013, due to a $118 million decrease in plan obligations resulting from $123 million of actuarial gains driven by an increase in the discount rate which was only partially offset by a $76 million decrease in plan assets. The decrease in plan assets was the result of a decline in investment performance during the year.


35
EX 99.1

The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The accumulated benefit obligations of the company's pension plans as of the measurement dates in 2013 and 2012 were $1.562 billion and $1.680 billion, respectively.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were: 
 
In millions
 
2013

 
2012

Projected benefit obligation
 
$
1,555

 
$
1,351

Accumulated benefit obligation
 
1,555

 
1,350

Fair value of plan assets
 
1,431

 
1,180


Plan Assets, Expected Benefit Payments and Funding
The fair value of pension plan assets as of June 29, 2013 was determined as follows: 
In millions
 
Total Fair Value

 
Quoted
Prices in
Active
Market for
Identical
Assets (Level 1)

 
Significant
Other
Observable
Inputs (Level 2)

Equity securities
 
 
 
 
 
 
U.S. securities - pooled funds
 
$
85

 
$
85

 
$
—

Non-U.S. securities - pooled funds
 
102

 
102

 
—

Total equity securities
 
187

 
187

 
—

Fixed income securities
 
 
 
 
 
 
Government bonds
 
256

 
256

 
—

Corporate bonds
 
503

 
503

 
—

U.S. pooled funds
 
122

 
122

 
—

Non-U.S. pooled funds
 
5

 
5

 
—

Bond Fund
 
324

 
324

 
—

Total fixed income securities
 
1,210

 
1,210

 
—

Real estate
 
23

 
23

 
—

Cash and equivalents
 
6

 
6

 
—

Derivatives
 
—

 
—

 
—

Other
 
13

 
13

 
—

Total fair value of assets
 
$
1,439

 
$
1,439

 
$
—



36
EX 99.1

The fair value of pension plan assets as of June 30, 2012 was determined as follows: 
In millions
 
Total Fair Value

 
Quoted
Prices in
Active
Market for
Identical
Assets (Level 1)

 
Significant
Other
Observable
Inputs (Level 2)

Equity securities
 
 
 
 
 
 
Non-U.S. securities - pooled funds
 
$
38

 
$
38

 
$
—

Fixed income securities
 
 
 
 
 
 
Government bonds
 
247

 
247

 
—

Corporate bonds
 
593

 
593

 
—

U.S. pooled funds
 
168

 
168

 
—

Non-U.S. pooled funds
 
6

 
6

 
—

Bond fund
 
341

 
341

 
—

Total fixed income securities
 
1,355

 
1,355

 
—

Real estate
 
21

 
21

 
—

Cash and equivalents
 
14

 
14

 
—

Derivatives
 
83

 
74

 
9

Other
 
4

 
4

 
—

Total fair value of assets
 
$
1,515

 
$
1,506

 
$
9

 
Level 1 assets were valued using market prices based on daily net asset value (NAV) or prices available through a public stock exchange. Level 2 assets were valued primarily using market prices, derived from either an active market quoted price, which may require adjustments to account for the attributes of the asset, or an inactive market transaction. The company did not have any level 3 assets, which would include assets for which values are determined by non-observable inputs. See Note 15 - Financial Instruments for additional information as to the fair value hierarchy.

The percentage allocation of pension plan assets based on a fair value basis as of the respective year-end measurement dates is as follows: 
 
 
2013

 
2012

Asset category
 
 
 
 
Equity securities
 
13
%
 
6
%
Debt securities
 
84

 
91

Real estate
 
2

 
1

Cash and other
 
1

 
2

Total
 
100
%
 
100
%

The overall investment objective is to manage the plan assets so that they are sufficient to meet the plan's future obligations while maintaining adequate liquidity to meet current benefit payments and operating expenses. The actual amount for which these obligations will be settled depends on future events and actuarial assumptions. These assumptions include the life expectancy of the plan participants. The resulting estimated future obligations are discounted using an interest rate curve that represents a return that would be required from high quality corporate bonds. The company has adopted a liability driven investment (LDI) strategy which consists of investing in a portfolio of assets whose performance is driven by the performance of the associated pension liability. This means that plan assets managed under an LDI strategy may underperform general market returns, but should provide for lower volatility of funded status as its return is designed to match the pension liability movement. Over time, as pension obligations become better funded, the company will further de-risk its investments and increase the allocation to fixed income.


37
EX 99.1

As noted in the above table, on an aggregate fair value basis, the plan is currently at 84% fixed income securities and 13% equity securities. Fixed income securities can include, but are not limited to, direct bond investments, pooled or indirect bond investments and cash. Other investments can include, but are not limited to, international and domestic equities, real estate, commodities and private equity. Derivative instruments may also be used in concert with either fixed income or equity investments to achieve desired exposure or to hedge certain risks. Derivative instruments can include, but are not limited to, futures, options, swaps or swaptions. The assets are managed by professional investment firms and performance is evaluated against specific benchmarks. The responsibility for the investment strategies typically lies with an investment committee, which is composed of representatives appointed by the company.

Pension assets at the 2013 and 2012 measurement dates do not include any direct investment in the company's debt or equity securities. Substantially all pension benefit payments are made from assets of the pension plans. It is anticipated that the future benefit payments will be as follows: $71 million in 2014, $73 million in 2015, $76 million in 2016, $79 million in 2017, $82 million in 2018 and $454 million from 2019 to 2023. The company expects to contribute approximately $5 million to its pension plans in 2014.

Defined Contribution Plans
The company sponsors defined contribution plans, which cover certain salaried and hourly employees. The company's cost is determined by the amount of contributions it makes to these plans. The amounts charged to expense for contributions made to these defined contribution plans related to continuing operations totaled $25 million in 2013, $21 million in 2012 and $27 million in 2011.

Multi-Employer Plans
The company participates in a multi-employer plan that provides defined benefits to certain employees covered by collective bargaining agreements. Such plans are usually administered by a board of trustees composed of the management of the participating companies and labor representatives.

The company previously contributed to several multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that covered various union-represented employees but currently only contributes to one of these plans. The risks of participating in these multiemployer plans are different from single-employer plans. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligation of the plan may be borne by the remaining participating employers. If we stop participating in a plan, we may be required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. None of the contributions to the pension funds for continuing operations was in excess of 5% or more of the total plan contributions for plan years 2013, 2012 and 2011. There are no contractually required minimum contributions to the plans as of June 29, 2013.

The net pension cost of these plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. The contributions for plans related to continuing operations were $1 million in 2013, $2 million in 2012 and $3 million in 2011. Assets contributed to such plans are not segregated or otherwise restricted to provide benefits only to the employees of the company. The future cost of these plans is dependent on a number of factors including the funded status of the plans and the ability of the other participating companies to meet ongoing funding obligations.

The company's participation in these multiemployer plans for fiscal 2013 is outlined below. The EIN/Pension Plan Number column provides the Employer Identification Number (EIN) and the three digit plan number, if applicable. Unless otherwise noted, the most recent PPA zone status available in 2013 and 2012 is for the plan's year beginning January 1, 2013 and 2012, respectively. The zone status is based on information that the company has received from the plan and is certified by plans' actuaries. Among other factors, plans in the red zone are generally less than 65 percent funded. The FIP/RP Status Pending/Implemented column indicates plans for which a financial improvement plan (FIP) or rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date(s) of the collective-bargaining agreements to which the plans are subject. There have been no significant changes that affect the comparability of contributions from year to year.


38
EX 99.1

In addition to regular contributions, the company could be obligated to pay additional contributions (known as complete or partial withdrawal liabilities) if a MEPP has unfunded vested benefits.

 
 
 
 
PPA Zone Status
 
FIP/RP Status
 
Contributions  (in millions)
 
 
 
 
 
  
 
EIN/Pension
Plan Number
 
2013
 
2012
 
Pending/
Implemented
 
2013

 
2012

 
2011

 
2013 Surcharge
Imposed

 
Expiration Date of
Collective
Bargaining Agreement
Pension Fund Plan Name
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bakery and Confectionary Union & Industry Intl Pension Fund
 
52-6118572/001
 
Red
 
Red
 
Nov 2012
 
$
1

 
$
2

 
$
2

 
10
%
 
Oct 2014
All other plans
 
 
 
 
 
 
 
 
 
—

 
—

 
1

 
N/A

 
N/A

Note 17 - Postretirement Health-care and Life-insurance Plans

The company provides health-care and life-insurance benefits to certain retired employees and their covered dependents and beneficiaries. Generally, employees who have attained age 55 and have rendered 10 or more years of service are eligible for these postretirement benefits. Certain retirees are required to contribute to plans in order to maintain coverage.

Measurement Date and Assumptions
A fiscal year end measurement date is utilized to value plan assets and obligations for the company's postretirement health-care and life-insurance plans pursuant to the accounting rules.

The weighted average actuarial assumptions used in measuring the net periodic benefit cost and plan obligations for the three years ending June 29, 2013 were:
 
 
2013

 
2012

 
2011

Net periodic benefit cost
 
 
 
 
 
 
Discount rate
 
3.9
%
 
5.3
%
 
5.1
%
Plan obligations
 
 
 
 
 
 
Discount rate
 
4.4

 
3.8

 
5.3

Health-care cost trend assumed for the next year
 
7.5

 
7.5

 
8.0

Rate to which the cost trend is assumed to decline
 
5.0

 
5.0

 
5.0

Year that rate reaches the ultimate trend rate
 
2018

 
2017

 
2017


The discount rate is determined by utilizing a yield curve based on high-quality fixed-income investments that have a AA bond rating to discount the expected future benefit payments to plan participants. Assumed health-care trend rates are based on historical experience and management's expectations of future cost increases. A one-percentage-point change in assumed health-care cost trend rates would have the following effects: 

In millions
 
One
Percentage
Point
Increase

 
One
Percentage
Point
Decrease

Effect on total service and interest components
 
$
1

 
$
(1
)
Effect on postretirement benefit obligation
 
9

 
(8
)


39
EX 99.1

Net Periodic Benefit Cost and Funded Status
The components of the net periodic benefit income associated with continuing operations were as follows: 
In millions
 
2013

 
2012

 
2011

Components of defined benefit net periodic cost (income)
 
 
 
 
 
 
Service cost
 
$
2

 
$
2

 
$
2

Interest cost
 
4

 
3

 
5

Net amortization and deferral
 
(9
)
 
(8
)
 
(9
)
Net periodic benefit income
 
$
(3
)
 
$
(3
)
 
$
(2
)

The amount of the prior service credits and net actuarial loss that is expected to be amortized from accumulated other comprehensive income and reported as a component of net periodic benefit cost during 2014 is $8 million of income and $1 million of expense, respectively.

The funded status of postretirement health-care and life-insurance plans related to continuing operations at the respective year-ends were:
In millions
 
2013

 
2012

Accumulated postretirement benefit obligation
 
 
 
 
Beginning of year
 
$
101

 
$
84

Service cost
 
3

 
2

Interest cost
 
4

 
3

Net benefits paid
 
(5
)
 
(8
)
Plan participant contributions
 
1

 
2

Actuarial (gain) loss
 
(14
)
 
18

End of year
 
90

 
101

Fair value of plan assets
 
1

 
1

Funded status
 
$
(89
)
 
$
(100
)
Amounts recognized on the consolidated balance sheets
 
 
 
 
Accrued liabilities
 
$
(6
)
 
$
(6
)
Other liabilities
 
(83
)
 
(94
)
Total liability recognized
 
$
(89
)
 
$
(100
)
Amounts recognized in accumulated other comprehensive loss
 
 
 
 
Unamortized prior service credit
 
$
(20
)
 
$
(29
)
Unamortized net actuarial loss
 
10

 
25

Unamortized net initial asset
 
—

 
(1
)
Total
 
$
(10
)
 
$
(5
)
 
Expected Benefit Payments and Funding
Substantially all postretirement health-care and life-insurance benefit payments are made by the company. Using expected future service, it is anticipated that the future benefit payments that will be funded by the company will be as follows: $7 million in 2014, $6 million for 2015 through 2017, $7 million in 2018 and $36 million from 2019 to 2023.

The Medicare Part D subsidy received by the company was $1 million in 2013 and 2012. The subsidy received in 2011 was less than $1 million.

40
EX 99.1


Note 18 - Income Taxes

The provisions for income taxes on continuing operations computed by applying the U.S. statutory rate to income from continuing operations before taxes as reconciled to the actual provisions were: 
 
 
2013

 
2012

 
2011

Income (loss) from continuing operations before income taxes
 
 
 
 
 
 
United States
 
99.7
%
 
(97.9
)%
 
99.5
%
Foreign
 
0.3
%
 
(2.1
)%
 
0.5
%
Total
 
100.0
%
 
(100.0
)%
 
100.0
%
Tax expense (benefit) at U.S. statutory rate
 
35.0
%
 
(35.0
)%
 
35.0
%
State income taxes
 
2.1
%
 
0.4
 %
 
2.6
%
Finalization of tax reviews and audits and changes in estimate on tax contingencies
 
(2.1
)
 
(2.3
)
 
4.0

Domestic production deduction
 
(1.6
)
 
—

 
(3.8
)
Employee benefit deductions
 
(1.5
)
 
(8.5
)
 
(4.6
)
Non-taxable indemnification agreements
 
(1.7
)
 
(22
)
 
—

Non-deductible professional fees
 
0.2

 
28.9

 
3.5

Tax provision adjustments
 
(1.6
)
 
(6.5
)
 
(4.8
)
Other, net
 
(0.7
)
 
0.8

 
(0.1
)
Taxes at effective worldwide tax rates
 
28.1
%
 
(44.2
)%
 
31.8
%

The tax expense related to continuing operations increased $87 million in 2013 due primarily to an increase in pretax income from continuing operations of $291 million offset by $15 million of year-over-year increases in tax benefits for the items noted in the table above. The increase in tax benefits relate primarily to the release of certain contingent tax obligations after statutes in multiple jurisdictions lapsed and certain tax regulatory examinations and reviews were resolved, an increase in deductions associated with domestic production activities, and a decrease in the amount of non-deductible professional fees offset by a decrease in non-taxable indemnification income.

The tax expense related to continuing operations decreased $42 million in 2012 due primarily to a decline in pretax income from continuing operations of $120 million.

The tax expense related to continuing operations increased $92 million in 2011. The increase in tax expense in 2011 was due primarily to the year-over-year impact of a net tax benefit reported in 2010 that included a $90 million tax benefit for the release of certain contingent tax obligations after statutes in multiple jurisdictions lapsed and certain tax regulatory examinations and reviews were resolved.

The company intends to continue to reinvest all of its earnings outside of the U.S. and, therefore, has not recognized U.S. tax expense on these earnings. U.S. federal income tax and withholding tax on these foreign unremitted earnings would be immaterial.
 
Current and deferred tax provisions (benefits) were: 
In millions
 
  
 
2013

 
  

 
2012

 
  

 
2011

  
 
Current

 
Deferred

 
Current

 
Deferred

 
Current

 
Deferred

U.S.
 
$
27

 
$
38

 
$
(17
)
 
$
2

 
$
(6
)
 
$
29

Foreign
 
—

 
—

 
—

 
—

 
1

 
—

State
 
3

 
4

 
3

 
(3
)
 
5

 
(2
)
 
 
$
30

 
$
42

 
$
(14
)
 
$
(1
)
 
$
—

 
$
27


Cash payments for income taxes from continuing operations were $12 million in 2013, $26 million in 2012 and $36 million in 2011.


41
EX 99.1

Hillshire Brands and eligible subsidiaries file a consolidated U.S. federal income tax return. The company uses the asset-and-liability method to provide income taxes on all transactions recorded in the consolidated financial statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax liability or asset for each temporary difference is determined based upon the tax rates that the company expects to be in effect when the underlying items of income and expense are realized. The company's expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the company expects to realize.

The deferred tax liabilities (assets) at the respective year-ends were as follows: 
 
In millions
 
2013

 
2012

Deferred tax (assets)
 
 
 
 
Pension liability
 
$
(52
)
 
$
(73
)
Employee benefits
 
(90
)
 
(113
)
Nondeductible reserves
 
(54
)
 
(63
)
Net operating loss and other tax carryforwards
 
(51
)
 
(49
)
Other
 
(28
)
 
(16
)
Gross deferred tax (assets)
 
(275
)
 
(314
)
Less valuation allowances
 
58

 
60

Net deferred tax (assets)
 
(217
)
 
(254
)
Deferred tax liabilities
 
 
 
 
Property, plant and equipment
 
93

 
69

Intangibles
 
33

 
35

Deferred tax liabilities
 
126

 
104

Total net deferred tax liabilities
 
$
(91
)
 
$
(150
)
 
There are state net operating losses of $51 million that begin to expire in 2014 through 2032.

Valuation allowances have been established on net operating losses and other deferred tax assets in certain U.S. state jurisdictions as a result of the company's determination that there is less than a 50% likelihood that these assets will be realized.

The company records tax reserves for uncertain tax positions taken, or expected to be taken, on a tax return. For those tax benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon audit settlement.

Due to the inherent complexities arising from the nature of the company's businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between Hillshire Brands and the many tax jurisdictions in which the company files tax returns may not be finalized for several years. Thus, the company's final tax-related assets and liabilities may ultimately be different from those currently reported.

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were $65 million as of June 29, 2013. This amount differs from the balance of unrecognized tax benefits as of June 30, 2012 primarily due to uncertain tax positions that created deferred tax assets in jurisdictions which have not been realized due to a lack of profitability in the respective jurisdictions. At this time, the company estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by approximately $5 to $30 million in the next 12 months from a variety of uncertain tax positions as a result of the completion of various worldwide tax audits currently in process and the expiration of the statute of limitations in several jurisdictions.


42
EX 99.1

The company recognizes interest and penalties related to unrecognized tax benefits in tax expense. During the years ended June 29, 2013, June 30, 2012 and July 2, 2011, the company recognized a benefit of $1 million, benefit of $3 million and an expense of $2 million, respectively, of interest and penalties in continuing operations tax expense. The tax benefits in 2012 and 2013 were the result of the finalization of tax reviews and audits and changes in estimates of tax contingencies. As of June 29, 2013, June 30, 2012 and July 2, 2011, the company had accrued interest and penalties of approximately $8 million, $10 million and $21 million, respectively. 

The company's tax returns are routinely audited by federal, state and foreign tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service (IRS) has completed examinations of the company's U.S. income tax returns through June 28, 2008. With few exceptions, the company is no longer subject to state and local income tax examinations by tax authorities for years before July 2, 2005.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended June 29, 2013, June 30, 2012 and July 2, 2011: 
In millions Year ended
 
June 29,
2013

 
June 30,
2012

 
July 2,
2011

Unrecognized tax benefits
 
 
 
 
 
 
Beginning of year balance
 
$
74

 
$
83

 
$
88

Increases based on current period tax positions
 
—

 
5

 
8

Increases based on prior period tax positions
 
—

 
24

 
—

Decreases based on prior period tax positions
 
—

 
(4
)
 
(5
)
Decreases related to settlements with tax authorities
 
—

 
(33
)
 
(4
)
Decreases related to a lapse of applicable statute of limitation
(7
)
 
(1
)
 
(4
)
End of year balance
 
$
67

 
$
74

 
$
83


 

43
EX 99.1

Note 19 - Business Segment Information

The following are the company's two business segments and the types of products and services from which each reportable segment derives its revenues.

•
Retail sells a variety of packaged meat and frozen bakery products to retail customers in North America. It also includes gourmet artisanal sausage and salami products.
•
Foodservice/Other sells a variety of meats and bakery products to foodservice customers in North America such as broad-line foodservice distributors, restaurants, hospitals and other large institutions and includes commodity meat products.

The company's management uses operating segment income in order to evaluate segment performance and allocate resources, which is defined as operating income before general corporate expenses; mark-to-market derivative gains/(losses); and amortization of trademarks and customer relationship intangibles. Beginning in 2013, the reported operating results for the business segments also excludes significant items and the impact of businesses that have been exited or disposed. The business segment results reflect the above changes for all periods presented. Significant items represent various income and/or expense items related to restructuring actions and other gains and losses that are not considered to be part of the core business results. The company believes that these results are more indicative of the company's core operating results and improve the comparability of the underlying results from period to period. Interest and other debt expense, as well as income tax expense, are centrally managed, and accordingly, such items are not presented by segment since they are not included in the measure of segment profitability reviewed by management. The accounting policies of the segments are the same as those described in Note 2 - Summary of Significant Accounting Policies. 
In millions
 
2013

 
2012

 
2011

Sales
 
 
 
 
 
 
Retail
 
$
2,894

 
$
2,884

 
$
2,760

Foodservice/Other
 
1,026

 
1,025

 
1,001

 
 
3,920

 
3,909

 
3,761

Impact of businesses exited/disposed
 
—

 
55

 
135

Intersegment
 
—

 
(6
)
 
(12
)
Total
 
$
3,920

 
$
3,958

 
$
3,884

In millions
 
2013

 
2012

 
2011

Income (loss) from Continuing Operations before Income Taxes
 
 
 
 
Retail
 
$
329

 
$
313

 
$
314

Foodservice/Other
 
75

 
79

 
102

Total operating segment income
 
404

 
392

 
416

General corporate expenses
 
(93
)
 
(272
)
 
(159
)
Mark-to-market derivative gain/(loss)
 
(1
)
 
(1
)
 
2

Amortization of intangibles
 
(4
)
 
(4
)
 
(4
)
Significant items - business segments
 
(15
)
 
(47
)
 
(31
)
Impact of businesses exited/disposed
 
6

 
8

 
3

Total operating income
 
297

 
76

 
227

Net interest expense
 
(41
)
 
(72
)
 
(87
)
Debt extinguishment costs
 
—

 
(39
)
 
(55
)
Income (loss) from continuing operations before income taxes
 
$
256

 
$
(35
)
 
$
85


Net sales for a business segment may include sales between segments. Such sales are at transfer prices that are equivalent to market value.


44
EX 99.1

Revenues from Wal-Mart Stores Inc. represent approximately $1.0 billion of the company's consolidated revenues for continuing operations in 2013, 2012 and 2011. Each of the company's business segments sells to this customer.
 
In millions
 
2013

 
2012

 
2011

Assets
 
 
 
 
 
 
Retail
 
$
1,273

 
$
1,279

 
$
1,282

Foodservice/Other
 
542

 
530

 
530

 
 
1,815

 
1,809

 
1,812

Australian Bakery
 
—

 
58

 
66

Net assets held for sale/disposition
 
—

 
5

 
7,143

Other1
 
619

 
578

 
461

Total assets
 
$
2,434

 
$
2,450

 
$
9,482

Depreciation
 
 
 
 
 
 
Retail
 
$
90

 
$
101

 
$
79

Foodservice/Other
 
28

 
30

 
26

 
 
118

 
131

 
105

Discontinued operations
 
2

 
104

 
186

Other
 
28

 
31

 
11

Total depreciation
 
$
148

 
$
266

 
$
302

Additions to Long-Lived Assets
 
 
 
 
 
 
Retail
 
$
95

 
$
128

 
$
207

Foodservice/Other
 
28

 
38

 
28

 
 
123

 
166

 
235

Other
 
16

 
7

 
2

Total additions to long-lived assets
 
$
139

 
$
173

 
$
237

1 Principally cash and cash equivalents, certain corporate fixed assets, deferred tax assets and certain other non-current assets.

Net sales by product type within each business segment are as follows: 
In millions
 
2013

 
2012

 
2011

Sales
 
 
 
 
 
 
Retail
 
 
 
 
 
 
Meat
 
$
2,103

 
$
2,117

 
$
1,984

Meat-centric
 
685

 
647

 
639

Bakery
 
104

 
118

 
135

Commodities/Other
 
2

 
2

 
2

Total Retail
 
2,894

 
2,884

 
2,760

Foodservice/Other
 
 
 
 
 
 
Meat
 
507

 
520

 
501

Meat-centric
 
88

 
86

 
81

Bakery
 
343

 
344

 
358

Commodities/Other
 
88

 
75

 
61

Total Foodservice/Other
 
1,026

 
1,025

 
1,001

Total business segment sales
 
3,920

 
3,909

 
3,761

Impact of businesses exited/disposed
 
—

 
55

 
135

Intersegment elimination
 
—

 
(6
)
 
(12
)
Total net sales
 
$
3,920

 
$
3,958

 
$
3,884


Meat category includes lunchmeat, hot dogs, breakfast sausage, smoked sausage and other meat products. Meat-centric category includes breakfast sandwiches, breakfast convenience, corn dogs and other ready to eat meal items. Bakery category includes cakes, pies, cheesecakes and other bakery products. Commodities/Other category includes commodity turkey and pork.

Hillshire Brands operations are principally in the United States. With respect to operations outside of the United States, no single foreign country or geographic region was significant. Foreign net sales were $17 million, $18 million and $19 million in 2013, 2012, and 2011, respectively, all of which was in Canada. The long-lived assets located outside of the United States are not significant.

45
EX 99.1

Note 20 - Quarterly Financial data (Unaudited)

The company's quarterly results for 2013 and 2012 are as follows:
In millions Quarter
 
First

 
Second

 
Third

 
Fourth

2013
 
 
 
 
 
 
 
 
Continuing operations
 
 
 
 
 
 
 
 
Net sales
 
$
974

 
$
1,060

 
$
924

 
$
962

Gross profit
 
294

 
332

 
272

 
264

Income (loss)
 
49

 
58

 
42

 
35

Income (loss) per common share
 
 
 
 
 
 
 
 
Basic
 
0.40

 
0.47

 
0.34

 
0.29

Diluted
 
0.40

 
0.47

 
0.34

 
0.28

Net income (loss)
 
53

 
65

 
93

 
41

Net income (loss) per common share
 
 
 
 
 
 
 
 
Basic
 
0.43

 
0.53

 
0.76

 
0.33

Diluted
 
0.43

 
0.53

 
0.75

 
0.33

Cash dividends declared
 
0.125

 
0.125

 
0.125

 
0.125

Market price
 
 
 
 
 
 
 
 
High
 
30.43

 
28.74

 
35.19

 
37.28

Low
 
24.31

 
24.96

 
27.30

 
31.75

Close
 
26.78

 
27.49

 
35.15

 
33.08


In millions Quarter
 
First

 
Second

 
Third

 
Fourth

2012
 
 
 
 
 
 
 
 
Continuing operations
 
 
 
 
 
 
 
 
Net sales
 
$
987

 
$
1,053

 
$
935

 
$
983

Gross profit
 
273

 
298

 
260

 
270

Income (loss)
 
5

 
10

 
27

 
(62
)
Income (loss) per common share
 
 
 
 
 
 
 
 
Basic
 
0.04

 
0.09

 
0.23

 
(0.52
)
Diluted
 
0.04

 
0.09

 
0.23

 
(0.52
)
Net income (loss)
 
(218
)
 
470

 
(3
)
 
599

Net income (loss) per common share
 
 
 
 
 
 
 
 
Basic
 
(1.86
)
 
3.96

 
(0.02
)
 
5.02

Diluted
 
(1.85
)
 
3.94

 
(0.02
)
 
5.02

Cash dividends declared
 
—

 
0.58

 
0.58

 
—

Market price1
 
 
 
 
 
 
 
 
High
 
30.39

 
29.69

 
33.95

 
34.43

Low
 
24.54

 
24.12

 
28.67

 
27.56

Close
 
25.19

 
29.15

 
33.17

 
28.99

1 The historical market prices for fiscal 2012 have been adjusted to reflect the impact of the spin-off of the international coffee and tea business and a 1-for-5 reverse stock split on June 28, 2012. A portion of the original market price was allocated to Hillshire Brands (approximately 30%) and a portion to the international coffee and tea business (approximately 70%) based on the same percentages to be used to allocate the cost of a share of common stock for tax basis purposes. After the market price attributable to Hillshire Brands was determined, it was adjusted to reflect the 1-for-5 reverse stock split.


46
EX 99.1

The quarterly financial data shown above includes the impact of significant items. Significant items may include, but are not limited to: charges for exit activities; restructuring costs; spin-off costs; impairment charges; pension partial withdrawal liability charges; benefit plan curtailment gains and losses; tax charges on deemed repatriated earnings; tax costs and benefits resulting from the disposition of a business; impact of tax law changes; changes in tax valuation allowances and favorable or unfavorable resolution of open tax matters based on the finalization of tax authority examinations or the expiration of statutes of limitations. Further details of these items are included in the Financial Review section of the Annual Report.

Refer to Note 1 - Nature of Operations and Basis of Presentation, for information regarding financial statement corrections recorded in the third quarter of 2013.


47