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Basis of Presentation
 9 Months Ended
Mar. 30, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
Basis of Presentation
The Hillshire Brands Company is a manufacturer and marketer of high-quality, brand name food products and a leader in meat-centric food solutions for the retail and foodservice markets. References to “we,” “our,” “us,” “Hillshire Brands” and “the company” refer to The Hillshire Brands Company and its consolidated subsidiaries as a whole, unless the context otherwise requires. The company’s reportable segments are Retail and Foodservice/Other.
The consolidated financial statements for the quarter and nine months ended March 30, 2013 and March 31, 2012 have not been audited by an independent registered public accounting firm, but in the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair presentation of our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The results of operations for the nine months ended March 30, 2013 are not necessarily indicative of the operating results to be expected for the full fiscal year.
The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although management believes the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from these estimates. These unaudited interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Form 10-K for the year ended June 30, 2012 and other financial information filed with the Securities and Exchange Commission.
The company’s fiscal year ends on the Saturday closest to June 30. Fiscal 2013 ends on June 29, 2013. The third quarter and first nine months of fiscal 2013 ended on March 30, 2013, and the third quarter and first nine months of fiscal 2012 ended on March 31, 2012. Each of the quarters was a thirteen-week period, and each of the nine month periods was a thirty-nine week period. Fiscal 2013 and fiscal 2012 are both 52-week years. Unless otherwise stated, references to years relate to fiscal years.
The condensed consolidated balance sheet as of June 30, 2012 has been derived from the company’s audited financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2012. The balance sheet information for the Australian bakery business met the criteria to be classified as held for sale in the second quarter of 2013 and as a result, these balances were reported in the asset and liabilities held for sale lines of the condensed consolidated balance sheet beginning in the second quarter of 2013 up until the sale was completed on February 4, 2013. The fresh bakery, refrigerated dough and foodservice beverage businesses in North America as well as the international coffee and tea, household and body care, European bakery and Australian bakery businesses are presented as discontinued operations in the company’s condensed consolidated income statements. See Note 5 – “Discontinued Operations” for additional information regarding these discontinued operations. Unless stated otherwise, any reference to income statement items in these financial statements refers to results from continuing operations.
Financial Statement Corrections - current year — During the third quarter of 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 third quarter and first nine months of 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 and the periods in which they originated and concluded that these errors did not materially misstate the third quarter 2013 financial statements or any previously issued financial statements. The company also does not believe that these errors will materially misstate the full year 2013 results.
Financial Statement Corrections - prior year — As disclosed in Note 1, Nature of Operations and Basis of Presentation, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, Hillshire Brands restated its previously issued financial statements for fiscal years 2010 and 2011, and the unaudited financial data for the first three quarters of fiscal 2011 and 2012 to recognize the correction of the following accounting errors.
On August 1, 2012, D.E Master Blenders 1753 N.V. (DEMB) announced that it had discovered accounting irregularities involving previously issued financial results for its Brazilian operations, which would require the restatement of their previously issued financial statements for the periods from fiscal 2009 to 2012. The financial results of the Brazilian operations are reported as part of discontinued operations in the Hillshire Brands financial statements as a result of the spin-off of the international coffee and tea operations. Hillshire Brands reflected the correction of the accounting irregularities by first restating the “as reported” historical financial results of the Brazilian operations and then recognizing the restated results as part of discontinued operations along with the other businesses that comprised the international coffee and tea business. As such, the adjustments to net sales noted in the following tables represent corrections associated with the accounting irregularities in Brazil and do not relate to any businesses included in continuing operations. The accounting irregularities identified in the Brazil operations included the overstatement of accounts receivable due to the failure to write-off uncollectible customer discounts, improper recognition of sales revenues prior to shipments to customers, the understatement of accruals for various litigation issues, and the failure to write-off obsolete inventory and other inventory valuation issues. These accounting irregularities resulted from an ineffective control environment maintained by management in Brazil, including intentional overrides of internal controls, and extensive cross-functional collusion by company personnel and third parties in Brazil. These actions were designed to meet earnings targets in Brazil.
As a result of these error corrections, income from discontinued operations was reduced by $10 million in the first nine months of 2012. The cumulative impact of the error corrections prior to fiscal 2012 reduced stockholders’ equity at July 2, 2011 by $70 million.
In addition to the error corrections noted above, Hillshire Brands has also corrected several errors related to continuing and discontinued operations and has restated its previously issued financial statements for 2010 and 2011 and the unaudited financial data for the first three quarters of 2011 and 2012 for these items. These errors had been previously identified and corrected in fiscal years subsequent to their origination. The company originally recorded the error corrections in the periods in which they were discovered. Management continues to believe that these errors did not materially misstate the financial results of the periods in which the errors originated or the periods in which the errors were corrected but management has decided to record these adjustments in the periods in which they originated in conjunction with the financial statement corrections noted above. As a result of these error corrections, Income from continuing operations was increased by $8 million and Income from discontinued operations was reduced by $1 million for the first nine months of 2012. The cumulative impact of the error corrections prior to fiscal 2012 reduced stockholders’ equity at July 2, 2011 by $11 million.
Income Statement Impact
The impact of these error corrections on the income statement for the third quarter and first nine months of 2012 is summarized in the following table:
 
(in millions)
Quarter ended March 31, 2012
 
Nine months ended March 31, 2012
(Unaudited)
As Reported 1
 
Adjustment
 
Disc.Ops.
 
As Restated
 
As Reported 1
 
Adjustment
 
Disc.Ops.
 
As Restated
Continuing Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,899

 
$
(5
)
 
$
(959
)
 
$
935

 
$
5,923

 
$
(3
)
 
$
(2,945
)
 
$
2,975

Cost of sales
1,312

 
(3
)
 
(634
)
 
675

 
4,024

 
—

 
(1,880
)
 
2,144

Selling, general and administrative expenses
458

 
3

 
(259
)
 
202

 
1,410

 
—

 
(764
)
 
646

Net charges for exit activities, asset and business dispositions
63

 
7

 
(66
)
 
4

 
179

 
2

 
(111
)
 
70

Impairment charges
—

 
—

 
—

 
—

 
32

 
—

 
(18
)
 
14

Operating income
66

 
(12
)
 
—

 
54

 
278

 
(5
)
 
(172
)
 
101

Interest expense
29

 
—

 
(7
)
 
22

 
88

 
—

 
(21
)
 
67

Interest income
(11
)
 
—

 
9

 
(2
)
 
(31
)
 
—

 
27

 
(4
)
Income from continuing operations before tax
48

 
(12
)
 
(2
)
 
34

 
221

 
(5
)
 
(178
)
 
38

Income tax expense (benefit)
10

 
(9
)
 
6

 
7

 
184

 
(3
)
 
(185
)
 
(4
)
Income (loss) from Continuing Operations
38

 
(3
)
 
(8
)
 
27

 
37

 
(2
)
 
7

 
42

Income (loss) from disc. operations, net of tax
20

 
—

 
8

 
28

 
(188
)
 
—

 
(7
)
 
(195
)
Gain (loss) on sale of disc. operations, net of tax
(60
)
 
2

 
—

 
(58
)
 
403

 
(1
)
 
—

 
402

Net income (loss) from discontinued operations
(40
)
 
2

 
8

 
(30
)
 
215

 
(1
)
 
(7
)
 
207

Net income (loss)
(2
)
 
(1
)
 
—

 
(3
)
 
252

 
(3
)
 
—

 
249

Net income from non-controlling interest
—

 
—

 
—

 
—

 
3

 
—

 
—

 
3

Net income (loss) attributable to Hillshire Brands
$
(2
)
 
$
(1
)
 
$
—

 
$
(3
)
 
$
249

 
$
(3
)
 
$
—

 
$
246

Earnings per share—Basic
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.31

 
$
(0.03
)
 
$
(0.06
)
 
$
0.23

 
$
0.31

 
$
(0.01
)
 
$
0.07

 
$
0.36

Net income (loss)
(0.02
)
 
(0.01
)
 
0.00

 
(0.02
)
 
2.10

 
(0.02)

 
0.00

 
2.08

Earnings per share—Diluted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
0.31

 
(0.03)

 
(0.06)

 
0.23

 
0.31

 
(0.01)

 
0.07

 
0.36

Net income (loss)
(0.02)

 
(0.01)

 
0.00

 
(0.02
)
 
2.09

 
(0.02)

 
0.00

 
2.07

 
1 
Amounts as reported in the company's financial statements in its Quarterly Report on Form 10-Q for the period ended March 31, 2012

Comprehensive Income Impact
The following tables summarize the comprehensive income (loss) previously reported in the company’s filings and the restated amounts.
 
(in millions)
(Unaudited)
Quarter ended March 31, 2012
As
Reported 1
 
As
Restated
Comprehensive income (loss)
 
 
 
Net Income (loss)
$
(2
)
 
$
(3
)
Translation adjustments, net of tax
193

 
192

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax
(2
)
 
(2
)
Pension/Postretirement activity, net of tax
(8
)
 
(8
)
Comprehensive income
$
181

 
$
179

 
(in millions)
(Unaudited)
Nine months ended March 31, 2012
As
Reported 1
 
As
Restated
Comprehensive Income
 
 
 
Net Income
$
252

 
$
249

Translation adjustments, net of tax
65

 
75

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax
(12
)
 
(12
)
Pension/Postretirement activity, net of tax
(10
)
 
(10
)
Comprehensive income
$
295

 
$
302

 
1 
Amounts as reported in the company's financial statements in its Quarterly Report on Form 10-Q for the period ended March 31, 2012
Consolidated Statement of Cash Flow Impact
The restatement did not change the total cash flows from operating, investing or financing activities for any of the quarters or full years impacted by the restatements. However, certain amounts within Cash from Operating Activities were impacted by the non-cash adjustments to correct the errors. The following table shows the impact of the restatements on the previously reported cash flow items within Cash from Operating Activities for the first nine months of 2012.
 
(in millions)
(Unaudited)
Nine months ended March 31, 2012
As
Reported1
 
As
Restated
Net Income
$
252

 
$
249

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Net (gain) loss on business dispositions
(771
)
 
(769
)
Changes in current assets and liabilities, net of businesses acquired and sold
 
 
 
Trade accounts receivable
42

 
43

Inventories
(77
)
 
(76
)
Other current assets
31

 
34

Accrued liabilities
(133
)
 
(132
)
Accrued taxes
70

 
64

Net cash from (used in) operating activities
$
(140
)
 
$
(140
)
 
1 
Amounts as reported in the company's financial statements in its Quarterly Report on Form 10-Q for the period ended March 31, 2012