-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I8jNty/4VV+AB/bE171BUfwdQo3AUP1+LkdFtOAlA9h+cj+L0oQiwtWOm+JPT++J 1bCYIwry0AbizqhzYX4spA== 0000950131-02-001881.txt : 20020510 0000950131-02-001881.hdr.sgml : 20020510 ACCESSION NUMBER: 0000950131-02-001881 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020330 FILED AS OF DATE: 20020510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEE SARA CORP CENTRAL INDEX KEY: 0000023666 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 362089049 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03344 FILM NUMBER: 02640574 BUSINESS ADDRESS: STREET 1: THREE FIRST NATIONAL PLZ STREET 2: STE 4600 CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3127262600 MAIL ADDRESS: STREET 1: THREE FIRST NATL PLZ STREET 2: SUITE 4600 CITY: CHICAGO STATE: IL ZIP: 60602 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED FOODS CORP DATE OF NAME CHANGE: 19850402 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED GROCERD CORP DATE OF NAME CHANGE: 19731220 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-3344 Sara Lee Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 36-2089049 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Three First National Plaza, Suite 4600, Chicago, Illinois 60602-4260 -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (312) 726-2600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- On March 30, 2002, the Registrant had 784,494,778 outstanding shares of common stock $.01 par value, which is the Registrant's only class of common stock. The document contains 50 pages. SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- INDEX -----
PART I - ITEM 1 - FINANCIAL STATEMENTS Preface 3 Condensed Consolidated Balance Sheets - At March 30, 2002 and June 30, 2001 4 Consolidated Statements of Income - For the thirteen and thirty-nine weeks ended March 30, 2002 and March 31, 2001 5 Consolidated Statements of Common Stockholders' Equity - For the period July 1, 2000 to March 30, 2002 6 Consolidated Statements of Cash Flows - For the thirty-nine weeks ended March 30, 2002 and March 31, 2001 7 Notes to Consolidated Financial Statements 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 18 PART II - ITEM 1. - LEGAL PROCEEDINGS 36 ITEM 5. - OTHER INFORMATION 36 ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 37 SIGNATURE 38 EXHIBIT 10.1 - Consulting and Retirement Agreement Between Sara Lee Corporation and Paul J. Lustig 39 EXHIBIT 12.1 - Computation of Ratio of Earnings to Fixed Charges 49 EXHIBIT 12.2 - Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements 50
2 PART I SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- Preface ------- The consolidated financial statements for the thirteen and thirty-nine weeks ended March 30, 2002 and March 31, 2001 and the balance sheet as of March 30, 2002 included herein have not been audited by independent public accountants, but in the opinion of Sara Lee Corporation ("the Corporation"), all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 30, 2002 and the results of operations and the cash flows for the periods presented herein have been made. The results of operations for the thirteen and thirty-nine weeks ended March 30, 2002 are not necessarily indicative of the operating results to be expected for the full fiscal year. The consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Corporation believes the disclosures made are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation's Form 10-K for the year ended June 30, 2001 and other financial information filed with the Securities and Exchange Commission. 3 SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- Condensed Consolidated Balance Sheets at March 30, 2002 and June 30, 2001 - ------------------------------------------------------------------------- (In millions) -------------
(Unaudited) March 30, June 30, 2002 2001 ------------------- ------------------- ASSETS ------ Cash and equivalents $ 661 $ 548 Trade accounts receivable, less allowances 1,789 1,538 Inventories: Finished goods 1,591 1,715 Work in process 409 454 Materials and supplies 452 413 ------------------- ------------------- 2,452 2,582 Other current assets 311 321 Net assets of businesses held for sale 16 94 ------------------- ------------------- Total current assets 5,229 5,083 Other non-current assets 199 264 Property, net 3,024 2,146 Trademarks and other identifiable intangibles, net 2,016 1,137 Goodwill, net 3,274 1,537 ------------------- ------------------- $ 13,742 $ 10,167 =================== =================== LIABILITIES AND EQUITY ---------------------- Notes payable $ 1,250 $ 101 Accounts payable 1,181 1,505 Accrued liabilities 2,956 2,872 Current maturities of long-term debt 497 480 ------------------- ------------------- Total current liabilities 5,884 4,958 Long-term debt 4,302 2,640 Deferred income taxes 510 244 Other non-current liabilities 935 563 Minority interest in subsidiaries 636 625 ESOP convertible preferred stock 230 238 Unearned deferred compensation (221) (223) Common stockholders' equity 1,466 1,122 ------------------- ------------------- $ 13,742 $ 10,167 =================== ===================
See accompanying Notes to Consolidated Financial Statements. Page 4 SARA LEE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income For the Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001 (In millions, except per share data) (Unaudited)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------ ----------------------- March 30, March 31, March 30, March 31, 2002 2001 2002 2001 --------- --------- --------- --------- Net sales $ 4,200 $ 4,044 $ 13,133 $ 12,705 --------- --------- --------- --------- Cost of sales 2,547 2,519 8,095 7,851 Cost of sales - product line exit costs (3) -- (7) 24 Selling, general and administrative expenses 1,300 1,188 3,938 3,637 Interest expense 70 60 224 211 Interest income (19) (23) (62) (62) Unusual items - business reshaping: Gain in connection with initial public offering -- -- -- (105) Business dispositions and other charges (2) (12) 190 308 --------- --------- --------- --------- 3,893 3,732 12,378 11,864 --------- --------- --------- --------- Income from continuing operations before income taxes 307 312 755 841 Income taxes 50 71 96 211 --------- --------- --------- --------- Income from continuing operations 257 241 659 630 Income from discontinued operations, net of income taxes -- -- -- 25 Gain on disposal of discontinued operations, net of income taxes -- -- -- 638 --------- --------- --------- --------- Net income 257 241 659 1,293 Preferred stock dividends, net of tax 3 3 8 9 --------- --------- --------- --------- Income available for common stockholders $ 254 $ 238 $ 651 $ 1,284 ========= ========= ========= ========= Income from continuing operations per common share Basic $ 0.32 $ 0.29 $ 0.83 $ 0.75 ========= ========= ========= ========= Diluted $ 0.31 $ 0.28 $ 0.80 $ 0.72 ========= ========= ========= ========= Net income per common share Basic $ 0.32 $ 0.29 $ 0.83 $ 1.54 ========= ========= ========= ========= Diluted $ 0.31 $ 0.28 $ 0.80 $ 1.48 ========= ========= ========= ========= Average shares outstanding Basic 786 828 784 833 ========= ========= ========= ========= Diluted 819 865 818 870 ========= ========= ========= ========= Cash dividends per common share $ 0.150 $ 0.145 $ 0.445 $ 0.425 ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. Page 5 SARA LEE CORPORATION AND SUBSIDIARIES Consolidated Statements of Common Stockholders' Equity For the Period July 1, 2000 to March 30, 2002 (In millions, except per share data)
ACCUMULATED OTHER COMPREHENSIVE COMPREHENSIVE COMMON CAPITAL RETAINED UNEARNED INCOME INCOME TOTAL STOCK SURPLUS EARNINGS STOCK (LOSS) (LOSS) -------- ------ ------- -------- -------- ------------- ------------- Balances at July 1, 2000 $ 1,234 $ 8 $ -- $ 2,393 $ (21) $ (1,146) Net income 1,293 -- -- 1,293 -- -- $ 1,293 Translation adjustments, net of tax (171) -- -- -- -- (171) (171) Transition adjustment related to change in accounting for derivative instruments and hedging activities, net of tax 6 -- -- -- -- 6 6 Net unrealized gain on qualifying cash flow hedges, net of tax 2 -- -- -- -- 2 2 ------------- Comprehensive income $ 1,130 ============= Cash dividends - Common ($0.425 per share) (353) -- -- (353) -- -- ESOP convertible preferred ($4.08 per share) (14) -- -- (14) -- -- Stock issuances (cancelations) - Stock option and benefit plans 86 -- 86 -- -- -- Restricted stock (13) -- -- (34) 21 -- Tax benefit related to incentive stock options 9 -- 9 -- -- -- Reacquired shares (510) -- (78) (432) -- -- ESOP tax benefit, redemptions, and other 14 -- 9 5 -- -- -------- ------ ------- -------- -------- ------------- Balances at March 31, 2001 1,583 8 26 2,858 -- (1,309) Net income 973 -- -- 973 -- -- $ 973 Translation adjustments, net of tax (92) -- -- -- -- (92) (92) Minimum pension liability, net of tax (107) -- -- -- -- (107) (107) Net unrealized gain on qualifying cash flow hedges, net of tax (13) -- -- -- -- (13) (13) ------------- Comprehensive income $ 761 ============= Cash dividends - Common ($.145 per share) (115) -- -- (115) -- -- ESOP convertible preferred ($1.36 per share) (4) -- -- (4) -- -- Stock issuances (cancelations) - Stock option and benefit plans 18 -- 18 -- -- -- Tax benefit related to incentive stock options 1 -- 1 -- -- -- Reacquired shares (133) -- (51) (82) -- -- Exchange offer for Coach common stock (998) -- -- (998) -- -- ESOP tax benefit, redemptions and other 9 -- 6 3 -- -- -------- ------ ------- -------- -------- ------------- Balances at June 30, 2001 1,122 8 -- 2,635 -- (1,521) Net income 659 -- -- 659 -- -- $ 659 Translation adjustments, net of tax 6 -- -- -- -- 6 6 Net unrealized gain on qualifying cash flow hedges, net of tax (5) -- -- -- -- (5) (5) ------------- Comprehensive income $ 660 ============= Cash dividends - Common ($0.445 per share) (349) -- -- (349) -- -- ESOP convertible preferred ($4.08 per share) (13) -- -- (13) -- -- Stock issuances (cancelations) - Stock option and benefit plans 75 -- 75 -- -- -- Business acquisitions (1) -- (1) -- -- -- Restricted stock 5 -- 5 -- -- -- Reacquired shares (85) -- (85) -- -- -- Acquisition of Earthgrains' ESOP -- -- 30 -- (30) -- Earthgrains stock option conversion 26 -- 26 -- -- -- ESOP tax benefit, redemptions and other 26 -- 16 5 5 -- -------- ------ ------- -------- -------- ------------- Balances at March 30, 2002 $ 1,466 $ 8 $ 66 $ 2,937 $ (25) $ (1,520) ======== ====== ======= ======== ======== =============
Interim period balances are unaudited See accompanying Notes to Consolidated Financial Statements. Page 6 SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- Consolidated Statements of Cash Flows ------------------------------------- For the Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001 ----------------------------------------------------------------- (In millions) ------------- (Unaudited) -----------
THIRTY-NINE WEEKS ENDED ------------------------------------- March 30, March 31, 2002 2001 ---------------- --------------- OPERATING ACTIVITIES - Income from continuing operations $ 659 $ 630 Adjustments for non-cash charges included in net income: Depreciation 350 307 Amortization of intangibles 73 155 (Decrease) in deferred income taxes (28) (11) Other 10 (54) Unusual items - business reshaping Business dispositions and other charges 111 332 Gain in connection with initial public offering - (105) Changes in current assets and liabilities, excluding businesses acquired and sold (245) (496) ---------------- ---------------- Net cash from operating activities - continuing operations 930 758 Operating cash flows (used in) discontinued operations - (24) ---------------- ---------------- Net cash from operating activities 930 734 ---------------- ---------------- INVESTMENT ACTIVITIES - Purchases of property and equipment (394) (348) Acquisitions of businesses and investments (1,922) (282) Dispositions of businesses and investments 23 1,651 Sales of assets 85 41 Other (26) 10 ---------------- ---------------- Net cash (used in) from investment activities (2,234) 1,072 ---------------- ---------------- FINANCING ACTIVITIES - Issuances of common stock 75 86 Purchases of common stock (85) (510) Issuance of equity securities by subsidiary - 122 Borrowings of long-term debt 1,355 1,022 Repayments of long-term debt (476) (317) Short-term borrowings (repayments), net 908 (1,535) Payments of dividends (362) (367) ---------------- ---------------- Net cash from (used in) financing activities 1,415 (1,499) ---------------- ---------------- Effect of changes in foreign exchange rates on cash 2 (15) ---------------- ---------------- Increase in cash and equivalents 113 292 Cash and equivalents at beginning of year 548 314 ---------------- ---------------- Cash and equivalents at end of quarter $ 661 $ 606 ================ ================ COMPONENTS OF CHANGES IN CURRENT ASSETS AND LIABILITIES: Decrease (increase) in trade accounts receivable $ 2 $ (14) Decrease (increase) in inventories 221 (39) Decrease in other current assets 31 28 (Decrease) in accounts payable (493) (364) (Decrease) in accrued liabilities (6) (107) ---------------- ---------------- Changes in current assets and liabilities $ (245) $ (496) ================ ================
See accompanying Notes to Consolidated Financial Statements. Page 7 SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- Notes to Consolidated Financial Statements ------------------------------------------ 1. Computation of Basic and Diluted Earnings Per Share Net income per share - basic is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Net income per share - diluted reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Options to purchase shares of the Corporation's common stock which have an exercise price in excess of the average market price of those shares for a reporting period are excluded from the determination of the diluted earnings per share denominator. For both the thirteen and thirty-nine week periods ending March 30, 2002, options to purchase 42.7 million shares of the Corporation's common stock had exercise prices which were greater than the average market price of those shares during the respective reporting periods. For the thirteen and thirty-nine week periods ending March 31, 2001, options to purchase 32.6 million and 33.6 million shares of the Corporation's common stock had exercise prices which were greater than the average market price of those shares during the respective reporting periods. The following is a reconciliation of net income to net income per share - basic and diluted for the thirteen and thirty-nine weeks ended March 30, 2002 and March 31, 2001: Computation of Basic and Diluted Earnings Per Share (In millions, except per share data)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------ ------------------------------ March 30, March 31, March 30, March 31, 2002 2001 2002 2001 ------------ ------------- ------------ ------------- Income from continuing operations $ 257 $ 241 $ 659 $ 630 Income from discontinued operations, net of income taxes - - - 25 Gain on disposal of discontinued operations, net of income taxes - - - 638 ------------ ------------- ------------ ------------- Net income 257 241 659 1,293 Less dividends on preferred stock, net of tax benefit (3) (3) (8) (9) ------------ ------------- ------------ ------------- Income available to common stockholders - basic 254 238 651 1,284 Adjustment for assumed conversion of ESOP shares 3 2 7 7 ------------ ------------- ------------ ------------- Income available to common stockholders - diluted $ 257 $ 240 $ 658 $ 1,291 ============ ============= ============ ============= Average shares outstanding - basic 786 828 784 833 Dilutive effect of stock option and award plans 8 10 9 10 Dilutive effect of ESOP plan 25 27 25 27 ------------ ------------- ------------ ------------- Average shares outstanding - diluted 819 865 818 870 ============ ============= ============ ============= Earnings per share - basic Income from continuing operations $ 0.32 $ 0.29 $ 0.83 $ 0.75 ============ ============= ============ ============= Income from discontinued operations $ 0.80 ============= Net income $ 0.32 $ 0.29 $ 0.83 $ 1.54 ============ ============= ============ ============= Earnings per share - diluted Income from continuing operations $ 0.31 $ 0.28 $ 0.80 $ 0.72 ============ ============= ============ ============= Income from discontinued operations $ 0.76 ============= Net income $ 0.31 $ 0.28 $ 0.80 $ 1.48 ============ ============= ============ =============
8 2. Unusual Items The Corporation's results for the first three quarters of fiscal 2002 were affected by the Reshaping program initiated in May 2000. This program includes certain defined exit activities and the disposition of a number of businesses. No new Reshaping projects have been initiated after December 29, 2001, and at the present time, no new projects are anticipated for the remainder of fiscal 2002. A discussion of the adjustments made to these plans in the third quarter of fiscal 2002 and the actions taken since the initiation of the Reshaping program are as follows: Third Quarter and Full Fiscal 2002 Exit Plan - -------------------------------------------- During the third quarter of fiscal 2002, certain adjustments were made to previously recognized charges under the Reshaping program. These adjustments increased pre-tax income by $5 million, increased net income by $3 million, and had a neglible effect per diluted share. Of the total pre-tax adjustment, $2 million is reflected on the "business dispositions and other charges" line of the Consolidated Statement of Income and consists primarily of a reversal of termination benefits as a result of the departure of 166 employees who voluntarily left the Corporation in advance of their planned termination date, therefore forfeiting termination benefits. The effect of this adjustment has been included in a table presented on page 11, which indicates the location of all employees affected by the Reshaping program and the status of the planned actions. In addition, the Corporation also experienced better than expected results on the exit of certain third party contractual obligations, which resulted in the reversal of previously recognized charges. Also during the third quarter, the Corporation completed actions associated with the termination of certain licensing agreements and the exit of related manufacturing operations. Inventory related to these operations and licensing agreements was disposed and resulted in proceeds of $3 million more than originally anticipated in fiscal 2001. As a result, the related credit to earnings is displayed in the same line of the Consolidated Income Statement as the original charge ("cost of sales - product line exit costs"). Including the effects of the third quarter, the actions approved by the Corporation's management for the first three quarters of fiscal 2002 resulted in a pretax charge of $183 million and a decrease in net income of $111 million, or $.14 per diluted share. The $183 million pretax charge consists of a $177 million net charge for the cost of defined exit activities and a $6 million charge related to the net impact of certain planned business dispositions. These charges decreased operating income in the Corporation's business segments as follows: Intimates and Underwear - $90 million, Sara Lee Bakery - $51 million, Sara Lee Meats - $35 million, and Beverage - $7 million. For presentation purposes, the $6 million charge related to business dispositions and $184 million of the net charge related to defined exit activities are displayed in the "business dispositions and other charges" line of the Consolidated Statement of Income. The remaining $7 million credit related to defined exit activities is displayed in the "cost of sales - product line exit costs" line of the Consolidated Statement of Income. Cumulative Exit Plan and Status - ------------------------------- After combining the amounts recognized in fiscal 2001 and the first three quarters of fiscal 2002, the Corporation's ongoing Reshaping program has reduced pretax earnings and net income by $737 million and $609 million, respectively. Of the $737 million pretax charge, $3 million is for actions taken at the Corporate headquarters and $734 million is related to the following business segments: Intimates and Underwear - $500 million; Sara Lee Bakery - $110 million; Sara Lee Meats - $105 million; Beverage - $15 million; and Household Products - $4 million. The components of the $737 million pretax charge are as follows: 9 Business Dispositions - - $347 million of the charge represents the cost recognized in connection with the disposition of 18 businesses. As of March 30, 2002, the disposition of 17 of these businesses had been completed. The remaining business yet to be disposed is not significant and is located in China. This sale transaction must receive government approval before the transaction can be completed. The Corporation expects to complete the disposal of the business within the next several months. Exit of Defined Business Activities - - $228 million of the charge is for the cost of severance and other employee benefits associated with planned personnel reductions. Of this amount, $217 million relates to severance costs recognized in accordance with the provisions of Emerging Issues Task Force Issue 94-3. The remaining $11 million relates to pension benefit costs determined in accordance with the provisions of Statement of Financial Accounting Standards No. 88. All termination actions planned for under the Reshaping program will take place within one year of the date the respective charge was taken. To date, including adjustments made for unexpected voluntary departures of employees, these actions will result in the termination of 20,304 employees. The specific location of these employees and the status of the planned actions as of March 30, 2002 are summarized in a table contained on page 11. - - $66 million of the charge is for anticipated losses on the disposal of real estate and equipment at 21 owned facilities and the disposal of equipment at a number of leased facilities. The loss recognized is the difference between the estimated selling price and the carrying value of the assets held for sale. Selling prices were estimated based on offers received from third parties or third-party appraisals of real estate held for sale, as well as the Corporation's prior experience with comparable equipment disposals. The charge primarily relates to the planned exit of Intimates and Underwear manufacturing facilities in the United States, Mexico and Europe; 3 domestic meat-processing plants; and a Beverage facility in Europe. As of March 30, 2002, 14 of the 21 owned facilities had been closed and 7 of the 14 had been sold. All actions contemplated by the exit plan are expected to be completed within 12 months of the date of the related charge. The carrying value of the property and equipment awaiting sale at March 30, 2002 is $16 million and is recorded on the "Net assets of businesses held for sale" line in the Consolidated Balance Sheet. - - $19 million of the charge resulted from the decision to terminate product licensing agreements and exit related manufacturing operations. The $19 million charge was recorded in "cost of sales - product line exit costs" in the Consolidated Statement of Income and consisted of the following components: $24 million in the second quarter of fiscal 2001; $2 million in the fourth quarter of fiscal 2001; ($3) million in the first quarter of fiscal 2002; ($1) million in the second quarter of fiscal 2002; and ($3) million in the third quarter of fiscal 2002. The disposition of inventory related to product licensing agreements and manufacturing operations resulted in these losses. The loss recognized is the difference between the value of the inventory realized, based on the actual proceeds received, and the related carrying value. - - $68 million of the charge is related to certain contractual obligations that must be satisfied in connection with the exit activities approved by management. Of this amount, $56 million relates to non-cancelable lease payments on 36 leased facilities that are being exited. This charge represents the difference between the non-cancelable obligation after the facility is exited and the sublease income that is estimated to be received. As of March 30, 2002, 24 of the leased facilities had been exited. The remaining $12 million of the charge relates to certain other third party contractual obligations that must be satisfied, including settlement amounts to terminate distribution relationships and the remaining obligations due on product licensing agreements once these activities have ceased. 10 - - $9 million of the charge relates to moving and other related expenses for employees affected by the Reshaping program. These expenses are recognized by the Corporation in the period the related service is rendered by third party suppliers. Cash is expended to pay vendors in essentially the same period as the expense is recognized. The following table summarizes the charges taken for the approved exit of business activities and the related status as of March 30, 2002:
Exit Costs Recognized During ------------------------------------------------ Writedown First Second Third of Assets Accrued Quarter Quarter Quarter to Net Exit Costs as (In Millions) Fiscal Fiscal Fiscal Fiscal Realizable Cash of March 30, - ------------- 2001 2002 2002 2002 Value Payments 2002 -------- ------- ------- ------- ---------- -------- ------------- Employee termination and other benefits $ 122 $ 6 $ 101 $ (1) $ -- $ (112) $ 116 Expected losses on disposals of property and equipment and other related costs 37 2 27 -- (66) -- -- Expected losses on disposal of inventories 26 (3) (1) (3) (19) -- -- Other exit costs - includes non-cancelable lease and other contractual obligations 25 1 43 (1) -- (9) 59 Moving and other related costs 3 2 4 -- -- (9) -- -------- ------- ------ ------ ---------- -------- ------------ Total exit costs $ 213 $ 8 $ 174 $ (5) $ (85) $ (130) $ 175 ======== ======= ====== ====== ========== ======== ============
Of the $390 million of exit costs recognized, $305 million will require the use of cash and $85 million is a non-cash component. The Corporation expects to fund the cash costs of this charge from internal sources and proceeds generated from the sale of businesses. The following table summarizes the planned employee terminations by location and business segment, and the status of those actions as of March 30, 2002:
Sara Lee Intimates As of Sara Lee Bakery Household and March 30, Meats Group Beverage Products Underwear Corporate 2002 -------- --------- --------- ---------- ----------- ---------- ----------- United States 983 291 -- -- 2,012 20 3,306 Canada -- -- -- -- 101 -- 101 Puerto Rico, Mexico and Latin America 67 -- -- -- 12,352 -- 12,419 Europe 109 210 91 -- 2,839 -- 3,249 Asia and Africa -- 381 -- 48 800 -- 1,229 -------- ------- --------- ---------- ----------- ---------- ----------- 1,159 882 91 48 18,104 20 20,304 ======== ======= ========= ========== =========== ========== =========== As of March 30, 2002 Employees terminated 623 695 76 48 12,850 20 14,312 Employees to be terminated 536 187 15 -- 5,254 -- 5,992 -------- ------- --------- ---------- ----------- ---------- ----------- 1,159 882 91 48 18,104 20 20,304 ======== ======= ========= ========== =========== ========== ===========
11 3. Adoption of New Accounting Standards For Goodwill and Other Intangible Assets On July 1, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). This Statement is required to be applied to all goodwill and other intangible assets recognized by the Corporation as of July 1, 2001 and it changes the subsequent accounting for these assets in the following significant respects: - -Accounting standards in place through June 30, 2001 concluded that goodwill and all other intangible assets were wasting assets and thus amounts assigned to these assets were amortized in determining net income. SFAS No. 142 does not presume that these assets are wasting assets. Goodwill is not amortized under the provisions of this statement. Intangible assets are evaluated to determine if they have finite or indefinite useful lives. Intangible assets determined to have finite lives are amortized over those lives and intangible assets that have indefinite useful lives are not amortized. - -SFAS No. 142 sets forth a number of pertinent factors to be considered in establishing the useful life of intangible assets that differ from prior guidelines. These factors include product life cycles, market competitive and other economic trends, as well as the level of maintenance required to obtain future cash flows. The useful lives of all intangible assets as of July 1, 2001 are assessed using these criteria. In accordance with the adoption provisions of SFAS No. 142, the Corporation has completed the transitional impairment tests and no impairment was noted. The following is a reconciliation of net income, basic earnings per share and diluted earnings per share between the amounts reported by the Corporation in fiscal 2001 and the adjusted amounts reflecting these new accounting rules.
Thirteen Weeks Thirty-nine Weeks Ended Ended -------------- ----------------- March 31, March 31, (Amounts In Millions, Except Per Share Data) 2001 2001 -------------- ----------------- Net Income: Reported net income $241 $1,293 Goodwill amortization 23 70 Intangible amortization 5 15 ---- ------ Adjusted net income $269 $1,378 ==== ====== Basic Earning Per Share: Reported basic earnings per share $.29 $ 1.54 Goodwill amortization .03 .08 Intangible amortization - .02 ---- ------ Adjusted basic earnings per share $.32 $ 1.64 ==== ====== Diluted Earnings Per Share: Reported diluted earnings per share $.28 $ 1.48 Goodwill amortization .03 .08 Intangible amortization - .02 ---- ------ Adjusted diluted earnings per share $.31 $ 1.58 ==== ======
12 4. Accounting For Sales Incentives The Emerging Issues Task Force (EITF) of the FASB reached conclusions on a number of issues related to the measurement, recognition and income statement classification of a number of items that can be broadly characterized as sales incentives or promotions. These conclusions are summarized in the following EITF pronouncements. - - EITF Issue 00-14, "Accounting for Certain Sales Incentives" - This Issue addresses the recognition, measurement and income statement classification of sales incentives voluntarily offered by a vendor without charge to customers such as discounts, coupons, rebates and free products or services. The Corporation's procedures regarding the recognition and measurement of these types of sales incentives are in substantial compliance with this statement. The consensus reached by the EITF does however require that any cash sales incentives be recognized as a reduction to revenue and any incentives involving free products must be classified as cost of sales on the consolidated statement of income. - - EITF Issue 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor Products" - This Issue addresses the income statement classification of a number of common incentives offered to businesses that purchase products from the Corporation and then sell those products to third parties. The incentives include payments made to retailers to obtain space on store shelves; agreements to reimburse a retailer for a portion of the cost of product advertising; and agreements to reimburse retailers for shortfalls in the selling price of the Corporation's products. The consensus does not modify the policies followed by the Corporation in the recognition or measurement of these incentives, but it does require that these incentives be presented in the income statement as a reduction of revenue. Beginning in the third quarter of fiscal 2002, the Corporation recognized the impact of the new EITF guidelines on sales incentives in its financial statements and restated previously issued financial statements to reflect the provisions of these guidelines. The net impact from the adoption of these rules did not impact income from continuing operations, net income or the financial position of the Corporation, but resulted in the reclassification of certain selling, general and administrative expenses to cost of sales and net sales. 5. Acquisition of The Earthgrains Company On August 7, 2001, upon the completion of the initial tender offer period, the Corporation acquired The Earthgrains Company ("Earthgrains") when approximately 93% of the outstanding Earthgrains' common shares were tendered and accepted by the Corporation. Following the completion of a subsequent tender offer period, the Corporation acquired the remaining Earthgrains' common shares. The results of operations for Earthgrains have been included in the consolidated financial results of the Corporation since August 8, 2001. Earthgrains is a packaged bread and refrigerated dough business with operations in the United States and Europe. The Earthgrains' acquisition provides growth opportunities for our core bakery and other food businesses by leveraging Earthgrains' direct-store delivery system in the United States by introducing the Sara Lee brand into the fresh bread and refrigerated dough business and expanding the direct-store distribution options for other Sara Lee products. In Europe, Earthgrains also gives Sara Lee a strong position in the fresh bread and refrigerated dough business. The anticipated synergies of this business combination with the Corporation's Sara Lee brand name were a key factor associated with the determination of the purchase price and related goodwill. The sales and operating income of the Earthgrains business in the quarter ended March 30, 2002 were $642 million and $32 million, respectively. Under the terms of the agreement, the Corporation acquired all of the Earthgrains' common shares for $40.25 per share, or approximately $1.9 billion. Cash on the Earthgrains' balance sheet on the acquisition date reduced the purchase price to a net amount of approximately $1.8 billion. In addition, the Corporation assumed $755 million of Earthgrains' long-term debt. 13 The following is a summary of the preliminary opening balances of the Earthgrains' balance sheet as of August 7, 2001. These amounts reflect a preliminary purchase price allocation as the Corporation continues to refine estimates for certain environmental and other business exit costs.
Preliminary Opening Balance Sheet (Amounts in millions) Assets ------ Cash and marketable securities $ 86 Accounts receivable 246 Inventory 74 Other current assets 36 ------ Total current assets 442 ------ Property, plant and equipment 856 Other non-current assets 110 Identifiable intangibles 862 Goodwill 1,693 ------ Total Assets $3,963 ====== Liabilities and Equity ---------------------- Accounts and notes payable $ 406 Accrued liabilities 219 ------ Total current assets 625 ------ Long-term debt 748 Other non-current liabilities 681 Equity 1,909 ------ Total liabilities and equity $3,963 ======
Presented below are the pro forma financial results prepared under the assumption that the acquisition of Earthgrains had been completed at the beginning of fiscal year 2001. These pro forma financial results include the following significant assumptions: - - The acquisition has been accounted for under the provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and, accordingly, the purchase method has been used. The purchase price allocation is preliminary at this point. $862 million of intangibles have been identified and these primarily consist of trademarks, owned and licensed brands, customer relationships and distribution management system software with a weighted average life of 31 years. Goodwill of $1,693 million has been recognized in connection with this transaction. - - The Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets", as of the beginning of fiscal year 2002. Under the provisions of this Statement, intangible assets with an indefinite life and goodwill are no longer amortized after the date of adoption. Therefore, in the pro forma results, no amortization of intangible assets with an indefinite life or goodwill is included in the pro forma results for fiscal year 2002 periods. The pro forma results for fiscal year 2001 14 periods include amortization of intangible assets with an indefinite life and goodwill. If the amortization of intangible assets with an indefinite life and goodwill had been excluded from fiscal year 2001 results, amortization expense would have been reduced in the thirteen weeks and thirty-nine weeks ended March 31, 2001 by $39 million and $116 million, respectively. - - The acquisition price of approximately $1.8 billion was funded with the issuance of $1.0 billion of 6.25% fixed rate long-term debt and $.8 billion of short-term floating rate debt. The short-term floating rate debt had a weighted average interest rate during the first quarter of fiscal 2001 and 2002 of 6.0% and 3.6%, respectively. An increase of 0.125% in the average short-term interest rate would result in a change to interest expense of $1 million on an annual basis.
Thirteen Weeks Ended Thirty-Nine Weeks Ended ---------------------------- ---------------------------- (In millions, except March 30, March 31, March 30, March 31, per share data) 2002 2001 2002 2001 -------------------- --------- --------- --------- --------- Net Sales $4,200 $4,688 $13,415 $14,587 Net Income 257 221 660 565 Earnings per share - Basic $ 0.32 $ 0.26 $ 0.83 $ 0.67 - Diluted 0.31 0.25 0.81 0.65
6. Sale of PYA/Monarch On December 4, 2000, the Corporation sold its PYA/Monarch foodservice distribution business and received cash proceeds of $1,559 million. The disposition resulted in a gain before income taxes of $1,126 million and an after-tax gain of $638 million. The PYA/Monarch foodservice operation constituted a reportable business segment of the Corporation and this gain has been recognized in the discontinued operations section of the accompanying consolidated financial statements. 7. Gain on Initial Public Offering of Coach Gains and losses resulting from the issuance of common stock by a subsidiary of the Corporation are recognized in earnings in the period realized. In October 2000, the Corporation's Coach subsidiary completed an initial public offering of 19.5% (8,487,000 shares) of its common stock resulting in a gain of $105 million. The gain increased income from continuing operations in the nine months ended March 31, 2001 by $105 million. After deduction of underwriting fees and offering costs, the Corporation received proceeds of $122 million from the sale of these shares. Following the offering, the Corporation owned 80.5% (35,026,333 shares) of the outstanding common stock of Coach. In January 2001, the Corporation announced its intention to enter into a transaction in which it would offer to exchange its remaining 80.5% ownership interest in Coach for shares of Sara Lee common stock. This transaction was completed on April 4, 2001, and resulted in the Corporation exchanging the 35,026,333 Coach shares it held for 41,402,285 shares of Sara Lee common stock. The proceeds received by the Corporation from the initial public offering were not subject to income tax. Further, the Corporation did not provide deferred income taxes on the gain realized from the sale transaction since the exchange offering is expected to qualify as a tax-free distribution. On the April 4, 2001 exchange date, the market value of the Coach shares disposed of was $998 million. The Corporation recognized a gain on the disposal of the Coach shares in the fourth quarter of 15 fiscal 2001 and reduced the number of outstanding shares of its common stock by 41 million shares as a result of the exchange transaction. 8. Derivative Reporting As of June 30, 2001, the accumulated derivative loss in Accumulated Other Comprehensive Income was $5 million. As of March 30, 2002, the accumulated derivative loss in Accumulated Other Comprehensive Income was $10 million. During the nine months ended March 30, 2002, $10 million of accumulated net derivative losses were deferred into Accumulated Other Comprehensive Income, and $5 million of accumulated net derivative losses were reclassified from Accumulated Other Comprehensive Income into earnings since the related hedged item was realized during the quarter. At March 30, 2002, the maximum maturity date of any cash flow hedge was approximately 1.3 years, excluding derivative hedges related to the payment of variable interest on existing financial instruments. The Corporation expects to reclassify into earnings during the next twelve months net losses from Accumulated Other Comprehensive Income of approximately $9 million, at the time the underlying hedged transaction is realized. Other disclosures related to hedge ineffectiveness, gains and losses excluded from the assessment of hedge effectiveness, and gains and losses resulting from the disqualification of hedge accounting have been omitted due to the insignificance of these amounts. During the nine months ended March 30, 2002, net losses of $58 million arising from effective hedges of net investments have been reflected in the cumulative translation adjustments account within stockholders' equity. 9. Issued But Not Yet Effective Accounting Standards Accounting for the Impairment or Disposal of Long-Lived Assets - Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144) was issued in August 2001 and will become effective for the Corporation beginning in fiscal 2003. Prior period financial statements will not be restated upon the adoption of this Statement. This Statement establishes a number of rules for the recognition, measurement and display of long-lived assets which are impaired and either held for sale or continuing use within the business. In addition, the Statement broadly expands the definition of a discontinued operation to individual reporting units or asset groupings for which identifiable cash flows exist. The recognition of discontinued operations will become more common as a result of these new guidelines. 16 10. Segment Information The following is a summary of sales and operating income by business segment for the thirteen weeks ended March 30, 2002 and March 31, 2001.
THIRTEEN WEEKS ENDED ------------------------------------------------------------------ Sales Operating Income ----------------------------- -------------------------------- March 30, March 31, March 30, March 31, (In millions) 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Sara Lee Meats $ 869 $ 881 $ 78 $ 88 Sara Lee Bakery 774 186 29 5 Beverage 601 698 102 123 Household Products 464 491 78 79 Intimates and Underwear 1,495 1,789 167 162 ------ ------- ------ ------ Total business segments 4,203 4,045 454 457 Intersegment sales (3) (1) -- -- ------ ------- ------ ------ Total sales and operating companies income 4,200 4,044 454 457 Amortization of goodwill and trademarks -- -- (21) (48) Unallocated corporate expenses -- -- (75) (60) Net interest expense -- -- (51) (37) ------ ------- ------ ------ Net sales and income from continuing operations before income taxes $4,200 $4,044 $ 307 $ 312 ====== ====== ====== ======
The following is a summary of sales and operating income by business segment for the thirty-nine weeks ended March 30, 2002 and March 31, 2001.
THIRTY-NINE WEEKS ENDED ------------------------------------------------------------------- Sales Operating Income ----------------------------- --------------------------------- March 30, March 31, March 30, March 31, (In millions) 2002 2001 2002 2001 ---------- ---------- ---------- ----------- Sara Lee Meats $ 2,803 $ 2,787 $ 219 $ 213 Sara Lee Bakery 2,173 651 67 (63) Beverage 1,897 2,137 314 363 Household Products 1,428 1,390 233 229 Intimates and Underwear 4,840 5,817 354 536 ------- ------- ------ ------ Total business segments 13,141 12,782 1,187 1,278 Intersegment sales (8) (77) -- -- ------- ------- ------ ------ Total sales and operating companies income 13,133 12,705 1,187 1,278 Amortization of goodwill and trademarks -- -- (52) (142) Unallocated corporate expenses -- -- (218) (146) Net interest expense -- -- (162) (149) ------- ------- ------ ------ Net sales and income from continuing operations before income taxes $13,133 $12,705 $ 755 $ 841 ======= ======= ====== ======
11. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. 17 SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- Management's Discussion and Analysis of Results of Operations ------------------------------------------------------------- and Financial Condition ----------------------- Critical Accounting Policies Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requires all registrants to outline critical accounting policies or methods used in the preparation of the financial statements. Included in the footnotes to the financial statements in the fiscal 2001 annual report is a summary of all significant accounting policies used in the preparation of the Corporation's consolidated financial statements. The Corporation does not have any individual accounting policy that is critical to the preparation of the consolidated financial statements. The Corporation follows the accounting methods and practices as required by the United States Generally Accepted Accounting Principles (U.S. GAAP). The following is a summary of the more significant accounting policies and methods including those that require management's subjective and complex judgments, including management estimates regarding the effects of matters that are inherently uncertain. Revenue Recognition - The Corporation recognizes revenue when title and risk of loss pass to the customer. At the time of sale, management records appropriate provisions for any uncollectible accounts based upon available information and historical sales and collectibility history. Marketing Costs - The Corporation records marketing, advertising and promotion costs as an expense in the period such costs relate. The Corporation does not defer the recognition of any marketing or promotion amounts on its consolidated balance sheets with respect to these costs. Marketing expenditures are expensed as the costs are incurred. Advertising expenditures are expensed when the advertising first appears. Consumer and trade promotion costs are expensed in the period when these programs are offered, based on estimates of utilization and redemption rates that are developed from historical experience. Fees paid to a reseller of our products for shelf space or other agreed upon product placements are expensed as incurred. Employee Benefit Plans - The Corporation and its subsidiaries provide a range of benefits to its employees and retired employees, including pensions and postretirement health care benefits. The Corporation records expenses related to these plans based upon calculations specified in U.S. GAAP, which includes various actuarial assumptions, such as discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Corporation reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The Corporation retains outside actuaries who review the Corporation's assumptions and prepare the actuarial calculations. The effect of any modifications is generally recorded or amortized over future periods. Asset Impairment - Long-term assets are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair value based on the most recent valuation information available. Estimated fair market value is generally measured by discounting estimated future cash flows developed by management. Long-lived assets that are to be disposed of are recorded at the lower of the carrying value or the fair value less the cost to sell the business. Assumptions used in determining projected cash flows are consistent with internal forecasts. Goodwill and Intangible Assets with Indefinite Lives - These assets are tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of the reporting unit. 18 The first test is a screen for potential impairments, and the second step measures the amount of any impairment. These tests utilize fair value amounts that are developed by discounting estimated future cash flows developed by management. Assumptions used in determining projected cash flows are consistent with internal forecasts. Income Taxes - Sara Lee's tax returns are subject to audit by various domestic and foreign tax authorities. As part of these audits, the Corporation's tax positions can be questioned. The effective tax rate of the Corporation and the tax bases of our assets and liabilities reflect our best estimates of the ultimate outcome of various tax audits in the jurisdictions that the Corporation operates in. Commitments and Contingencies - The Corporation is subject to various claims and contingencies related to lawsuits and environmental matters. We recognize liabilities for contingencies and commitments when a loss is probable and can be estimated. Results of Operations The following is a discussion of the results of operations for the third quarter and first nine months of fiscal 2002 compared with the third quarter and first nine months of fiscal 2001, and a discussion of the changes in financial condition during the first nine months of fiscal 2002. Adoption of Accounting Standards For the Recording and Reporting of Sales Incentives - As is more thoroughly described in Note 9 to the Consolidated Financial Statements, at the beginning of the third quarter of fiscal 2002, the Corporation was required to adopt new accounting rules related to the measurement, recognition and presentation of certain sales incentives offered to the company's customers. These new accounting rules apply to certain sales incentives such as discounts, coupons, rebates and certain payments made to retailers for shelf space or reimbursement of advertising costs. These accounting rules generally require these incentives to be reflected as a reduction in revenue on the income statement rather than as a selling, general and administrative expense. Upon adoption of these rules at the beginning of this quarter, all prior financial statement results have been restated to reflect the impact of this change. Previously reported sales for the third quarter and first nine months of fiscal year 2001 were reduced by $264 million and $815 million respectively. In addition, previously reported sales for the first six months of fiscal year 2002 were reduced by $575 million to conform to the new accounting standards. The adoption of these accounting standards had no impact on the Corporation's income from continuing operations, net income or financial position. Items Affecting Comparability of the Third Quarter Fiscal 2002 with Third - ------------------------------------------------------------------------- Quarter Fiscal 2001 - ------------------- There are three significant items affecting the comparability of the Consolidated Statements of Income and segment operating results. A description of these items follows: Business Reshaping - The Corporation's results for the third quarter of fiscal 2002 and 2001 were affected by the Reshaping program initiated in May 2000 as follows: - - In the third quarter of fiscal 2002, no new reshaping projects were initiated, but the Corporation completed certain projects that were initiated in prior quarters. Reshaping actions completed during the quarter were executed for amounts that were more favorable than previously estimated, resulting in an increase in pretax income and net income of $5 million and $3 million, respectively. The impact of these reshaping actions did not have a significant impact on earning per share as diluted earnings per share both including and excluding the reshaping benefit was $.31 in the third quarter of fiscal 2002. The $5 million pretax reshaping benefit resulted from the completion of certain defined exit activities more favorably than estimated. These actions were reflected in the Intimates and Underwear segment. The net pretax benefit is displayed on the following lines in the Consolidated Statement of Income - a $3 million benefit in "Cost of sales - product line exit costs", 19 and a $2 million benefit in "Business dispositions and other charges". These actions and the related financial impacts are referred to as unusual items in this discussion of fiscal 2002 operating results. - - In the third quarter of fiscal 2001, the Corporation approved plans to dispose of certain non-core businesses and exit a number of defined business activities. The Corporation also completed a number of actions related to the Reshaping program during the quarter. As a result of these decisions and actions, the Corporation recognized a $21 million pretax gain related to the disposition of non-core businesses and a $9 million charge for the costs associated with certain defined exit activities, resulting in a net $12 million pretax gain. These activities increased net income and diluted earnings per share in the third quarter of fiscal 2001 by $5 million and $.01, respectively. The $12 million pretax gain from these activities increased operating income in the third quarter in the Corporation's business segments as follows: Sara Lee Meats - income of $18 million; Sara Lee Bakery - income of $2 million; Household Products - a charge of $1 million; and Intimates and Underwear - a charge of $7 million. The net pretax gain is displayed in the "Business Dispositions and Other Charges" line of the Consolidated Statements of Income. These actions and the related financial impacts are referred to as unusual items in this discussion of fiscal 2001 operating results. - - A complete description of the business reshaping activities in the third quarter of fiscal 2002 and the cumulative activity from the initiation of the program is presented in Note 2 to the Consolidated Financial Statements. - - Operating income in the third quarter of fiscal 2002 was favorably impacted by $24 million of cost savings associated with completed exit activities. Adoption of New Accounting Standards - As is more completely disclosed in Note 3 to the Consolidated Financial Statements, the Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets" as of July 1, 2001. Under the provisions of SFAS No. 142, goodwill is no longer amortized after the date of adoption. Intangible assets as of the date of adoption are evaluated to determine if they have finite or indefinite useful lives. Intangible assets determined to have finite lives are amortized over those lives and intangible assets that have indefinite useful lives are not amortized. SFAS No. 142 does not permit the restatement of previously issued financial statements, but does require the disclosure of prior results adjusted to exclude amortization expense related to goodwill and intangible assets which are no longer being amortized. Basic and diluted earnings per share for the third quarter of fiscal 2001, adjusted to exclude amounts no longer being amortized under the provisions of SFAS No. 142, were $.32 and $.31, respectively. Acquisition of Earthgrains - Under the terms of the purchase agreement, as is more completely disclosed in Note 4 to the Consolidated Financial Statements, the Corporation acquired Earthgrains' common stock for $40.25 per share, or approximately $1.9 billion. Cash on the Earthgrains' balance sheet on the acquisition date reduced the purchase price to a net amount of approximately $1.8 billion. In addition, the Corporation assumed $755 million of Earthgrains' long-term debt. In the third quarter of fiscal 2002, the sales and operating income of Earthgrains was $642 million and $32 million, respectively. Prior to the acquisition of Earthgrains, the Corporation's Bakery operations primarily consisted of products sold under the Sara Lee name (existing bakery business). The operations of the existing bakery business along with the Corporation's packaged meats business constituted the Sara Lee Foods segment. Subsequent to completing the Earthgrains' acquisition, the Corporation's management created the Sara Lee Bakery Group that consists of the Earthgrains' business and the Corporation's existing bakery business. The combined Bakery businesses constitute a reportable segment and are 20 now separately reported from the Sara Lee Meats segment. Prior year results have been restated to conform to the new management and segment organization. Operating results by business segment in the third quarter of fiscal 2002 compared with the third quarter of fiscal 2001 are as follows. These amounts include the impact of business reshaping, the adoption of new accounting standards regarding business combinations and the amortization of intangibles and the Earthgrains' acquisition.
THIRTEEN WEEKS ENDED ----------------------------------------------------------------------- (Unusual Items Allocated to Industry Segments) Sales Operating Income --------------------------------- --------------------------------- March 30, March 31, March 30, March 31, (In millions) 2002 2001 2002 2001 ------------- --------------- -------------- --------------- -------------- Sara Lee Meats $ 869 $ 881 $ 78 $ 88 Sara Lee Bakery 774 186 29 5 Beverage 601 698 102 123 Household Products 464 491 78 79 Intimates and Underwear 1,495 1,789 167 162 --------- --------- -------- --------- Total business segments 4,203 4,045 454 457 Intersegment sales (3) (1) -- -- --------- --------- -------- -------- Total sales and operating companies income 4,200 4,044 454 457 Amortization of goodwill and trademarks -- -- (21) (48) Unallocated corporate expenses -- -- (75) (60) Net interest expense -- -- (51) (37) --------- --------- -------- -------- Net sales and income from continuing operations before income taxes $ 4,200 $ 4,044 $ 307 $ 312 ========= ========= ======== ========
Consolidated Results - Third Quarter of Fiscal 2002 Compared with Third Quarter of Fiscal 2001 Continuing Operations - Consolidated net sales increased 3.9% over the year ago quarter. Businesses acquired net of businesses sold subsequent to the start of the third quarter of the prior fiscal year increased reported sales by 10.3%. The weakening of key foreign currencies, particularly the euro, in relation to the U.S. dollar, had the effect of reducing reported sales by 2.0% in the quarter. Thus, on a comparable basis, excluding the impact of acquisitions, dispositions and changes in foreign currency exchange rates, sales decreased 4.4%. Comparable sales growth in Household Products was offset by sales declines in Sara Lee Meats, Bakery, Beverage and Intimates and Underwear. In the third quarter of fiscal 2002, the gross profit margin was 39.4% as compared to 37.7% in the comparable period of the prior year. Reduced gross profit margins in the Intimates and Underwear and Household Products businesses were offset by improved gross profit margins in the Corporation's other business segments. Selling, general and administrative (SG&A) expenses increased 9.6% over the same quarter last year due principally to increased spending on systems and technology development and costs associated with centralizing certain manufacturing and administrative functions. When measured as a percentage of sales, SG&A expenses were 31.0% in the third quarter of fiscal 2002 and 29.3% in the comparable period of the prior fiscal year. Excluding unusual items, operating income (defined as pretax income before interest, intangible amortization and unallocated corporate expenses) increased 0.9% versus the comparable period of the prior year. Businesses acquired net of businesses sold subsequent to the start of the third quarter of the prior fiscal year increased operating income by 3.7%. The weakening of key foreign currencies versus the U.S. dollar had the effect of decreasing operating income by approximately 1.1%. As a 21 result, on a comparable basis, excluding the impact of business acquisitions, dispositions and changes in foreign currency exchange rates, operating income declined 1.7%. On a comparable basis, operating income declined in the Sara Lee Bakery, Beverage and Household Products segments and increased in the Sara Lee Meats and Intimates and Underwear segments. The higher level of operating income reflects improved gross profit margins offset by increased levels of selling, general and administrative expenses in the quarter. Net interest expense increased $14 million to $51 million due to higher outstanding borrowing levels in the quarter from the year ago period. The increased debt levels resulted from the Corporation's acquisition of Earthgrains in the first quarter. Unallocated corporate expenses, which are costs not directly attributable to specific business segment operations, increased $15 million to $75 million in the quarter. This increase is primarily attributable to company-wide spending on systems and information technology, increased benefit plan costs and unfavorable foreign currency comparisons with the prior year. Trademark and goodwill amortization decreased from $48 million in fiscal 2001 to $21 million in the current year's quarter as a result of the adoption of SFAS No. 142 as of July 1, 2001. The effective tax rate in the quarter decreased from 22.9% in last year's third quarter to 16.2% of pretax income in the third quarter of fiscal 2002. Excluding the unusual items, the comparative effective tax rate fell from 21.7% to 15.9%. The reduction during the quarter is the result of the elimination of non-deductible goodwill, the favorable completion of certain tax audits in several foreign countries including the Netherlands, the United Kingdom, France and Germany, and increased earnings in certain foreign jurisdictions with lower tax rates. Consolidated Net Income - Consolidated net income was $257 million in the third quarter of 2002 as compared to $241 million in the comparable period of the prior year, an increase of 6.8%. Diluted earnings per share was $.31 in the third quarter of fiscal 2002 compared to $.28 in the prior year quarter, an increase of 10.7%. Both of these amounts include unusual items. Excluding the unusual items, diluted earnings per share increased 14.8% from $.27 in the third quarter of fiscal 2001 to $.31 in the third quarter of fiscal 2002. This increase reflects the reduction in the number of diluted shares outstanding and improved profitability during the quarter. As previously indicated, the quarter's results were impacted by unusual items during the current and prior year quarter. The following table summarizes the impact of unusual items relating to the business reshaping activities and the impact of the SFAS No. 142 adoption on net income and diluted EPS.
THIRTEEN WEEKS ENDED --------------------------------- March 30, March 31, % (In Millions Except Per Share Data) 2002 2001 Change - ----------------------------------- ------------- ------------ ----------- Net income $ 257 $ 241 6.8% Exclude unusual items relating to business reshaping, net of tax (3) (5) (44.0) ----------- ----------- ----------- Net income excluding unusual items 254 236 8.0 Adjust prior year for change in accounting for amortization of goodwill and intangibles -- 28 NM ----------- ----------- ----------- Net income adjusted for amortization change and excluding unusual items $ 254 $ 264 (3.6)% =========== =========== =========== Diluted EPS $ 0.31 $ 0.28 10.7% Excluding unusual charges relating to business reshaping -- (.01) NM ----------- ----------- ----------- Diluted EPS - excluding unusual items 0.31 0.27 14.8
22
Adjust prior year for change in accounting for amortization of goodwill and intangibles -- 0.03 NM ------------ ------------ ---------- Diluted EPS - adjusted for amortization change and excluding unusual items $ 0.31 $ 0.30 3.3% ============ ============ ==========
Operating Results by Business Segment - Third Quarter of Fiscal 2002 Compared with Third Quarter of Fiscal 2001 The following discussion comparing segment performance for the third quarter of fiscal 2002 with the third quarter of fiscal 2001 excludes the unusual items described above. Operating results by business segment in the third quarter of fiscal 2002 compared to fiscal 2001, excluding unusual items are as follows.
THIRTEEN WEEKS ENDED -------------------------------------------------------------------- (Unusual Items Not Allocated to Industry Segments) Sales Operating Income ------------------------------ ------------------------------- March 30, March 31, March 30, March 31, (In millions) 2002 2001 2002 2001 ------------- ----------- ----------- ----------- ------------ Sara Lee Meats $ 869 $ 881 $ 78 $ 70 Sara Lee Bakery 774 186 29 3 Beverage 601 698 102 123 Household Products 464 491 78 80 Intimates and Underwear 1,495 1,789 162 169 ----------- ---------- ----------- ----------- Total business segments 4,203 4,045 449 445 Intersegment sales (3) (1) -- -- ----------- ---------- ----------- ----------- Total sales and operating companies income 4,200 4,044 449 445 Amortization of goodwill and trademarks -- -- (21) (48) Unallocated corporate expenses -- -- (75) (60) Business dispositions and other charges -- -- 5 12 Net interest expense -- -- (51) (37) ----------- ---------- ----------- ----------- Net sales and income from continuing operations before income taxes $ 4,200 $ 4,044 $ 307 $ 312 =========== ========== =========== ===========
Net sales in the Sara Lee Meats segment decreased 1.3% to $869 million from $881 million in the prior year quarterly period. Excluding acquisitions and dispositions completed subsequent to the start of the third quarter of the previous fiscal year, net sales decreased 1.4% while unit volumes declined by 2%. The impact of foreign currency changes during the period decreased net sales by 0.8%. Therefore, excluding the impact of acquisitions, dispositions and changes in foreign currencies, sales in the Sara Lee Meats segment decreased 0.6%. Operating income in Sara Lee Meats increased 12.2% in the quarter primarily due to lower raw material costs during the quarter and increased sales of higher margin products. Excluding acquisitions and dispositions completed subsequent to the start of the third quarter of the previous fiscal year, operating income increased 8.1%. The impact of foreign currency changes during the quarter decreased operating income by 0.9%. On a comparable basis, excluding the impact of acquisitions, dispositions and changes in foreign currencies, operating income increased 9.0%. The Corporation acquired Earthgrains in the first quarter of 2002 and consolidated the existing bakery operations with Earthgrains to create the Sara Lee Bakery Group. The consolidated results of operations of the Bakery Group include Earthgrains' results from August 8, 2001. Including the acquisition results, reported net sales in the third quarter of 2002 increased by $588 million from $186 million to $774 million. Excluding the impact of acquisitions and divestitures, net sales and unit volumes 23 declined 10.5% and 6%, respectively, from the prior year quarter as low growth product lines were eliminated. Excluding acquisitions, divestitures and changes in foreign currency, net sales declined by 10.3%. Operating income in the Sara Lee Bakery segment improved by $26 million from $3 million in the prior year comparable period to $29 million in the current quarter. Operating income improved as a result of increased gross margins due to the acquisition of Earthgrains. Excluding the Earthgrains' acquisition, other dispositions and changes in foreign currency, operating income fell from $7 million in the prior year quarter to a loss of $3 million in the current quarter. Net sales in the Beverage segment declined 14.1% reflecting lower unit volumes, the impact of changes in foreign currency and reduced green coffee commodity prices that led to lower prices to consumers. Excluding acquisitions completed subsequent to the start of the third quarter of the previous fiscal year, net sales decreased 15.3% while unit volumes for roasted coffee and coffee concentrates, the segments' primary business, declined 13%. Excluding acquisitions and the impact of changes in foreign currency, net sales were down 12.6% compared to the prior year quarter. Operating income for the Beverage segment decreased 16.9% due to base unit volume declines, the impact of the lower commodity coffee costs, the negative impacts of foreign currency movements and increased advertising and promotions costs. Excluding the impact of acquisitions during the year, operating income declined 18.6%. The weakness of the U.S. dollar in the quarter decreased reported operating income by 3.1%. Thus, excluding acquisitions and the impact of foreign currencies, operating income declined 15.5%. Net sales in the Household Products segment decreased 5.4% and operating income decreased 2.7%. There were no acquisitions or dispositions impacting the reported results, however the quarter results were negatively impacted by the political and economic turmoil in Argentina. Excluding the results of the Argentina operations, operating income increased 7% in the quarter compared to the prior year quarter. Excluding the impact of changes in foreign currencies, sales and operating income in Household Products increased 0.4% and decreased 1.9%, respectively. Unit volumes for this segment's four core categories - shoe care, body care, insecticides and air fresheners - decreased 1% overall in the quarter, with strength in the air fresheners and insecticide categories offset by declines in body care and shoe care. Intimates and Underwear net sales declined 16.4% over the year ago quarter as the prior year quarter includes sales from certain non-core businesses that were disposed. Excluding the impact of acquisitions and dispositions, sales declined 5.0%. The impact of exchange rate changes during the quarter reduced reported sales during the quarter by 1.3%. As a result, on a comparable basis, sales decreased 3.7%. Unit volumes in this segment, excluding acquisitions and dispositions, increased 1% from the comparable prior year quarter. This net increase consisted of a 2% unit volume decrease at Knit Products, offset by a 4% unit volume increase in both Intimates and Worldwide Legwear. The impact of recent acquisitions on unit volume changes was not significant during the quarter. Intimates and Underwear operating income decreased 4.5% in the quarter. Excluding the impact of acquisitions and dispositions since the start of the prior year quarter, operating income increased 10.9%. The improvement in operating income performance was driven by increased unit volumes and the benefits of cost savings from the Corporation's Reshaping program. Changes in foreign currencies did not have a material impact on operating income in the quarter. 24 Items Affecting Comparability of the First Nine Months of Fiscal 2002 with First - -------------------------------------------------------------------------------- Nine Months of Fiscal 2001 - -------------------------- There are three items affecting the comparability of the Consolidated Statements of Income and segment operating results. A description of these items follows: Business Reshaping - The Corporation's results for the first nine months of fiscal 2002 and 2001 were affected by the Reshaping program initiated in May 2000 as follows: - - In the first nine months of fiscal 2002, the ongoing Reshaping program includes certain defined exit activities and the disposition of a number of businesses. The actions approved by the Corporation's management resulted in a pretax charge of $183 million and a reduction in net income of $111 million, or $.14 per diluted share. The $183 million pretax charge consists of a $177 million net charge for the cost of defined exit activities and a $6 million charge related to the net impact of certain planned business dispositions. The net pretax charge is recognized in the results of the operating segments as follows: Sara Lee Meats - a charge of $35 million; Sara Lee Bakery - a charge of $51 million; Beverage - a charge of $7 million; and Intimates and Underwear - a charge of $90 million. The net pretax charge is displayed in the following lines of the Consolidated Statements of Income - a $190 million charge is reflected on the "Unusual items - business dispositions and other charges" line and a $7 million credit is reflected on the "Cost of sales - product line exit costs". These actions and the related financial impacts are referred to as unusual items in this discussion of fiscal 2002 operating results. - - In the first nine months of fiscal 2001, management approved a plan to dispose of certain non-core businesses and exit a number of defined business activities. As a result, during the first nine months of 2001, the Corporation recognized the following: o A $332 million pretax charge related to certain defined exit activities and the disposal of a number of businesses. The $332 million charge consists of a $211 million charge related to the anticipated losses on the disposition of businesses and a $121 million charge related to the cost of certain defined exit activities. The charge reduced net income by $312 million and diluted earnings per share by $.36. The pretax charge reduced the operating income in the quarter ended in the Corporation's business segments as follows: Sara Lee Meats - a charge of $53 million; Sara Lee Bakery - a charge of $56 million; Beverage - a charge of $2 million; Household Products - a charge of $3 million; and Intimates and Underwear - a charge of $218 million. The net pretax charge is displayed in the following lines of the Consolidated Statements of Income - a $308 million charge is reflected on the "Unusual items - business dispositions and other charges" line and a $24 million charge is reflected on the "Cost of sales - product line exit costs". o In October 2000, the Corporation's Coach subsidiary, which was part of the Intimates and Underwear segment, completed an initial public offering of 19.5% of its common stock, resulting in a gain of $105 million in the second quarter of 2001. o The Corporation sold its PYA/Monarch foodservice business for a pretax gain of $1,126 million, an after-tax gain of $638 million, or $.73 per diluted share in the second quarter of fiscal 2001. o These actions and the related financial impacts are referred to as unusual items in this discussion of fiscal 2001 operating results. - - A complete description of the business reshaping activities from the initiation of the program is presented in Note 2 to the Consolidated Financial Statements. 25 - - The ongoing exit activities associated with the Reshaping plan to date are intended to improve the competitive structure of the Corporation and are expected to result in savings of $230 million in 2003. Operating income was favorably impacted during the first nine month of fiscal 2002 by $63 million of cost savings associated with completed exit activities. Adoption of New Accounting Standards - As is more completely disclosed in Note 3 to the Consolidated Financial Statements, the Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets" as of July 1, 2001. Under the provisions of SFAS No. 142, goodwill is no longer amortized after the date of adoption. Intangible assets as of the date of adoption are evaluated to determine if they have finite or indefinite useful lives. Intangible assets determined to have finite lives are amortized over those lives and intangible assets that have indefinite useful lives are not amortized. SFAS No. 142 does not permit the restatement of previously issued financial statements, but does require the disclosure of prior results adjusted to exclude amortization expense related to goodwill and intangible assets which are no longer being amortized. Basic and diluted earnings per share for the first nine months of fiscal 2001, adjusted to exclude amounts no longer being amortized under the provisions of SFAS No. 142, were $1.64 and $1.58, respectively. Acquisition of Earthgrains - Under the terms of the purchase agreement, as is more completely disclosed in Note 4 to the Consolidated Financial Statements, the Corporation acquired Earthgrains' common stock for $40.25 per share, or approximately $1.9 billion. Cash on the Earthgrains' balance sheet on the acquisition date reduced the purchase price to a net amount of approximately $1.8 billion. In addition, the Corporation assumed $755 million of Earthgrains' long-term debt. The sales and operating income of Earthgrains from the date of acquisition are $1,706 million and $104 million, respectively. Prior to the acquisition of Earthgrains, the Corporation's Bakery operations primarily consisted of products sold under the Sara Lee name (existing bakery business). The operations of the existing bakery business along with the Corporation's packaged meats business constituted the Sara Lee Foods segment. Subsequent to completing the Earthgrains' acquisition, the Corporation's management created the Sara Lee Bakery Group that consists of the Earthgrains' business and the Corporation's existing bakery business. The combined Bakery businesses constitute a reportable segment and are now separately reported from the Sara Lee Meats segment. Prior year results have been restated to conform to the new management and segment organization. Operating results by business segment for the first nine months of fiscal 2002 compared with the first nine months of fiscal 2001 are as follows. These amounts include the impact of business reshaping, the adoption of new accounting standards regarding business combinations and the amortization of intangibles and the Earthgrains' acquisition. 26
THIRTY-NINE WEEKS ENDED ----------------------------------------------------------------- (Unusual Items Allocated to Industry segments) Sales Operating Income ------------------------------ ------------------------------ March 30, March 31, March 30, March 31, (In millions) 2002 2001 2002 2001 ------------- --------- --------- --------- --------- Sara Lee Meats $ 2,803 $ 2,787 $ 219 $ 213 Sara Lee Bakery 2,173 651 67 (63) Beverage 1,897 2,137 314 363 Household Products 1,428 1,390 233 229 Intimates and Underwear 4,840 5,817 354 536 ------- ------- ------ ------ Total business segments 13,141 12,782 1,187 1,278 Intersegment sales (8) (77) -- -- ------- ------- ------ ------ Total sales and operating companies income 13,133 12,705 1,187 1,278 Amortization of goodwill and trademarks -- -- (52) (142) Unallocated corporate expenses -- -- (218) (146) Net interest expense -- -- (162) (149) ------- ------- ------ ------ Net sales and income from continuing operations before income taxes $13,133 $12,705 $ 755 $ 841 ======= ======= ====== ======
Consolidated Results - First Nine Months of Fiscal 2002 Compared with First Nine Months of Fiscal 2001 Continuing Operations - Consolidated net sales increased 3.4% over the year ago comparable period. Businesses acquired net of businesses sold subsequent to the start of the third quarter of the prior fiscal year increased reported sales by 7.1%. The strengthening of key foreign currencies during the nine-month period in relation to the U.S. dollar, particularly the euro, had the effect of reducing reported sales by 1.1%. Thus, on a comparable basis, excluding the impact of acquisitions, dispositions and changes in foreign currency exchange rates, sales decreased 2.6%. Comparable sales growth in Sara Lee Meats and Household Products were offset by sales declines in Bakery, Beverage and Intimates and Underwear. In the first nine months of fiscal 2002, the gross profit margin was 38.4% as compared to 38.2% in the comparable period of the prior year. Reduced gross profit margins in the Intimates and Underwear and Household Products were offset by improved gross profit margins in Sara Lee Meats, Bakery and Beverage segments. Selling, general and administrative (SG&A) expenses increased 8.3% over the same period last year due principally to increased spending on systems and technology development and costs associated with centralizing certain manufacturing and administrative functions. When measured as a percentage of sales, SG&A expenses were 30.0% in the first nine months of fiscal 2002 and 28.6% in the comparable period of the prior fiscal year. Excluding unusual items, operating income (defined as pretax income before interest, intangible amortization and unallocated corporate expenses) declined 8.9% versus the comparable nine-month period of the prior year. Businesses acquired net of businesses sold subsequent to the start of the prior fiscal year increased operating income by 1.9%. The strengthening of key foreign currencies versus the U.S. dollar had the effect of reducing operating income by approximately 0.7%. As a result, on a comparable basis, excluding the impact of business acquisitions, dispositions and changes in foreign currency exchange rates, operating income declined 10.1%. On a comparable basis, operating income declined in the Sara Lee Meats, Beverage and Intimates and Underwear segments and increased in 27 the Bakery and Household Products segments. The lower level of operating income reflects increased levels of selling, general and administrative expenses in the period. Net interest expense for the nine-month period increased $13 million to $162 million from $149 million in the comparable prior year period reflecting increased debt levels. The increased debt levels resulted from the Corporation's acquisition of Earthgrains in the first quarter. Unallocated corporate expenses, which are costs not directly attributable to specific business segment operations, increased $72 million to $218 million in the nine-month period. This increase is primarily attributable to company wide spending on systems and information technology, increased benefit plan costs and unfavorable foreign currency comparisons with the prior year. Trademark and goodwill amortization decreased from $142 million in the first nine months of fiscal 2001 to $52 million in the current year as a result of the adoption of SFAS No. 142 as of July 1, 2001. The effective tax rate for the first nine months decreased from 25.1% to 12.7% of pretax income from continuing operations, including unusual items in both years. Excluding the unusual items, the comparative effective tax rate fell from 21.7% to 18.0% primarily from the elimination of non-deductible goodwill, the favorable completion of certain tax audits in several foreign countries and increased earnings in certain foreign jurisdictions with lower tax rates. Including unusual items, income from continuing operations was $659 million in the first nine months of fiscal 2002 as compared to $630 million in the comparable period of the prior year, an increase of 4.7%. Diluted earnings per share from continuing operations was $.80 in the first nine months of fiscal 2002, 11.1% higher than the $.72 recognized in fiscal year 2001. These amounts were impacted by a number of events during the first nine months and in the prior year comparable period. The following table summarizes the impact of unusual items relating to the business reshaping activities and the impact of the SFAS No. 142 adoption on income from continuing operations and diluted earnings per share ("EPS"). 28
THIRTY-NINE WEEKS ENDED ----------------------------- March 30, March 31, % (In Millions Except Per Share Data) 2002 2001 Change --------- --------- ------ Income from continuing operations $ 659 $ 630 4.7 % Exclude gain in connection with initial public offering, net of tax -- (105) NM Exclude unusual charges relating to business reshaping, net of tax 111 312 (64.5) ----- ------ ----- Income from continuing operations excluding unusual items 770 837 (8.0) Adjust prior year for change in accounting for amortization of goodwill and intangibles -- 85 NM ----- ------ ----- Income from continuing operations adjusted for amortization change and excluding unusual items $ 770 $ 922 (16.4)% ===== ====== ===== Diluted EPS - continuing operations $0.80 $ 0.72 11.1 % Exclude gain in connection with initial public offering -- (0.12) NM Exclude unusual charges relating to business reshaping 0.14 0.36 (61.1) ----- ------ ----- Diluted EPS - continuing operations excluding unusual items 0.94 0.96 (2.1) Adjust prior year for change in accounting for amortization of goodwill and intangibles -- 0.10 NM ----- ------ ----- Diluted EPS - continuing operations adjusted for amortization change and excluding unusual items $0.94 $ 1.06 (11.3)% ===== ====== =====
Discontinued Operations - The first nine months of fiscal 2001 includes both $25 million of net income from the operations of the PYA/Monarch foodservice businesses and a gain of $638 million from the sale of this business. The PYA/Monarch business has been accounted for as a discontinued operation. The gain on the sale of the PYA/Monarch business added $.73 per diluted share for the first nine months of 2001. Consolidated Net Income - Consolidated net income for the first nine months of fiscal 2002 was $659 million as compared to $1,293 million in the comparable period of the prior year, a decrease of 49.0%. Diluted earnings per share was $.80 in the first nine months of 2002 compared to $1.48 in the comparable prior year period. Both the current year and prior amounts include unusual items, including the $638 million gain on the sale of the PYA/Monarch business. Excluding unusual items, diluted net income per share dropped from $.99 in the first nine months of 2001 to $.94 in the first nine months of 2002, a decrease of 5.1%. This decrease reflects the reduction in the number of diluted shares outstanding offset by a larger reduction in net income. As previously indicated, these amounts were impacted by a number of events during the current nine-month period and the comparable prior year period. The following table summarizes the impact of unusual items relating to the business reshaping activities and the impact of the SFAS No. 142 adoption on net income and diluted EPS. 29
THIRTY-NINE WEEKS ENDED ----------------------- March 30, March 31, % (In Millions Except Per Share Data) 2002 2001 Change - ----------------------------------- --------- --------- --------- Net income $ 659 $ 1,293 (49.0) % Exclude gain on disposal of discontinued operations, net of tax -- (638) NM Exclude gain in connection with initial public offering, net of tax -- (105) NM Exclude unusual charges relating to business reshaping, net of tax 111 312 (64.5) --------- --------- --------- Net income excluding unusual items 770 862 (10.7) Adjust prior year for change in accounting for amortization of goodwill and intangibles -- 85 NM --------- --------- --------- Net income adjusted for amortization change and excluding unusual items $ 770 $ 947 (18.7) % ========= ========= ========= Diluted EPS $ 0.80 $ 1.48 (45.9) % Exclude gain on disposal of discontinued operations, net of tax -- (0.73) NM Exclude gain in connection with initial public offering -- (0.12) NM Exclude unusual charges relating to business reshaping 0.14 0.36 (61.1) --------- --------- --------- Diluted EPS - excluding unusual items 0.94 0.99 (5.1) Adjust prior year for change in accounting for amortization of goodwill and intangibles -- 0.10 NM --------- --------- --------- Diluted EPS - adjusted for amortization change and excluding unusual items $ 0.94 $ 1.09 (13.8) % ========= ======== =========
30 Operating Results By Business Segment - First Nine Months of Fiscal 2002 Compared with First Nine Months of Fiscal 2001 The following discussion comparing business segment performance for the first nine months of fiscal 2002 with the first nine months of fiscal 2001 excludes the unusual items. Operating results by business segment in the first nine months of fiscal 2002 compared to fiscal 2001, excluding unusual items are as follows.
THIRTY-NINE WEEKS ENDED ---------------------------------------------------- Sales Operating Income (Unusual items not allocated to Industry segments) ----------------------- ----------------------- March 30, March 31, March 30, March 31, (In millions) 2002 2001 2002 2001 - ------------- --------- --------- --------- --------- Sara Lee Meats $ 2,803 $ 2,787 $ 254 $ 266 Sara Lee Bakery 2,173 651 118 (7) Beverage 1,897 2,137 321 365 Household Products 1,428 1,390 233 232 Intimates and Underwear 4,840 5,817 444 649 --------- --------- --------- --------- Total business segments 13,141 12,782 1,370 1,505 Intersegment sales (8) (77) -- -- --------- --------- --------- --------- Total sales and operating companies income 13,133 12,705 1,370 1,505 Amortization of goodwill and trademarks -- -- (52) (142) Unallocated corporate expenses -- -- (218) (146) Gain in connection with initial public offering -- -- -- 105 Business dispositions and other charges -- -- (183) (332) Net interest expense -- -- (162) (149) --------- --------- --------- --------- Net sales and income from continuing operations before income taxes $ 13,133 $ 12,705 $ 755 $ 841 ========= ========= ========= =========
Net sales for the first nine months of fiscal 2002 in the Sara Lee Meats segment increased 0.6% compared to the prior year period. Excluding acquisitions and dispositions completed subsequent to the start of the previous fiscal year, net sales increased 2.1% while unit volumes declined 1%. The impact on sales of foreign currency changes during the period was not significant. Operating income in Sara Lee Meats for the first nine months of 2002 declined 4.3% due to increased media advertising and promotion spending. Excluding acquisitions and dispositions completed subsequent to the start of the previous fiscal year, operating income declined 5.7%. The impact on operating income of foreign currency changes during the period was not significant. The Corporation acquired Earthgrains in the first quarter of 2002 and consolidated the existing bakery operations with Earthgrains to create the Sara Lee Bakery Group. The consolidated results of operations of the Bakery Group include Earthgrains results from August 8, 2001. Including the Earthgrains' acquisition, reported net sales for the first nine months for 2002 increased by $1,522 million from $651 million to $2,173 million. Excluding the impact of acquisitions and divestitures, net sales declined 8.4% from the prior year period as low growth product lines were eliminated. Unit volumes declined 4% during the first nine months of 2002 again due to the elimination of low growth product lines. Excluding acquisitions, divestitures and changes in foreign currency, net sales declined by 7.7%. Operating income in the Sara Lee Bakery segment improved by $125 million from a loss of $7 million in the prior year nine-month period to $118 million in the first nine months of fiscal 2002. Operating income improved as a result of increased gross margins due to the elimination of low profit product lines and the results of Earthgrains. Excluding the Earthgrains acquisition, other dispositions and changes in 31 foreign currency, operating income increased from $8 million in the first nine months of fiscal 2001 to $14 million in the first nine months of fiscal 2002. Net sales in the Beverage segment for the first nine months of 2002 declined 11.2% reflecting reduced green coffee commodity prices that led to lower consumer prices. Excluding the impact of acquisitions, net sales for the nine month period declined 11.6%. The strengthening of the U.S. dollar in relation to foreign currencies decreased reported sales for the first nine months of 2002 by 1.9%. Thus, excluding the impact of acquisitions and changes in foreign currencies, net sales declined 9.7%. Unit volumes for roasted coffee and coffee concentrates, the segment's primary business, declined 6% in the first nine months of 2002. Operating income for the Beverage segment decreased 12.1% due to base unit volume declines, the impact of the lower commodity coffee costs and increased media advertising and promotions costs. Excluding acquisitions, operating income declined 12.7% compared to the prior year period. The strength of the U.S. dollar in the first nine months of 2002 decreased reported operating income by 1.5%. Thus, excluding the impact of foreign currencies, operating income declined 11.2%. Net sales in the Household Products segment increased 2.8% and operating income increased 0.5%. The impact of changes in foreign currency during the quarter reduced sales by 3.5% and operating income by 1.3%. Excluding the impact of changes in foreign currencies, sales and operating income in Household Products increased 6.3% and 1.8%, respectively. Sales increased at a rate in excess of operating income because of increased spending on media advertising and promotion for new product launches and continued brand building. Unit volumes for this segment's four core categories - shoe care, body care, insecticides and air fresheners - increased 5% for the first nine months of fiscal 2002, with strength in the air freshener, body care and insecticide categories and declines in shoe care. Intimates and Underwear net sales in the first nine months of 2002 declined 16.8% over the year ago comparable period. The prior year comparable nine-month period includes sales from certain non-core businesses that were sold. Excluding the impact of acquisitions and dispositions, sales declined 6.1%. The strength of the U.S. dollar in the first nine months of 2002 decreased net sales by 0.7%. As a result, on a comparable basis, sales decreased 5.4%. Unit volumes in this segment, excluding acquisitions and dispositions, increased 2% from the comparable prior year nine-month period. This net increase consisted of a 2% unit volume increase at both Knit Products and Intimates and a 1% increase in Worldwide Legwear. The impact of recent acquisitions on unit volume changes was not significant during the nine-month period. Intimates and Underwear operating income decreased 31.5% for the first nine months of 2002. Excluding the impact of acquisitions and dispositions since the start of the prior year, operating income declined 18.0%. This decrease reflects the profit impact of reduced operating margins in a competitive Knit Products marketplace. The strengthening of the U.S. dollar in the first nine months of 2002 decreased operating income by 0.1%. As a result, excluding the impact of acquisitions, dispositions and changes in foreign currency, operating income declined 17.9%. Media advertising and promotion expenses decreased 17% in the first nine months of 2002. However, media advertising and promotion spending was concentrated on the largest knit product brands including Hanes and Hanes Her Way, resulting in a 70% increase in media advertising expense for these brands as compared to the prior year period. Financial Condition Net cash provided from operating activities from continuing operations was $930 million in the first nine months of fiscal 2002 as compared to $758 million in the comparable period of the prior year. The increase in operating cash flow in fiscal 2002 was primarily due to improved inventory management. 32 As of March 30, 2002, the Corporation's current liabilities exceeded current assets by $655 million. This working capital deficit results from the Corporation's emphasis on the management of trade receivables, payables and inventories, as well as the decision to finance a portion of its capital needs with short-term debt. Net cash used in investment activities was $2,234 million in the first nine months of 2002 compared with net cash generated from investment activities of $1,072 million in the comparable period of fiscal 2001. The Corporation expended $1,823 million to fund the Earthgrains acquisition in the first quarter of fiscal 2002 and received $1,651 million from the sales of businesses in the first nine months of fiscal 2001. Net cash from financing activities was $1,415 million during the nine months ended March 2002 as the Corporation borrowed to fund the Earthgrains acquisition. This compares to net cash of $1,499 million used in financing activities in the prior year as the Corporation used the proceeds from the Coach and PYA/Monarch business dispositions to repay debt. The Corporation has an ongoing share repurchase program in place that allows the Corporation to repurchase the Corporation's common shares at times management deems appropriate given current market valuations. The Corporation has approximately 21 million shares remaining on its current repurchase authorization. Liquidity Notes Payable - Notes payable increased from $101 million at June 30, 2001 to $1,250 million at March 30, 2002 to fund a portion of the Earthgrains acquisition price and for general working capital needs. The Corporation's issuance of short-term commercial paper is recorded in notes payable as the Corporation funds a large portion of its working capital commercial paper denominated in either U.S. dollars or euros. Debt - The Corporation's total long-term debt increased $1,679 million from $3,120 million at June 30, 2001 to $4,799 million at the end of the third quarter of fiscal 2002. During the first nine months of fiscal 2002, the Corporation issued $1,355 million of floating rate and fixed rate notes that were used primarily to fund the Earthgrains acquisition and assumed $755 million of Earthgrains' previous long-term debt. During the first nine months of fiscal 2002, the Corporation repaid $476 million of previous issued long-term debt. The $1,355 million of term debt issued during the nine month period primarily consists of $1,101 million of 6.25% fixed rate debt due in 2011 and $250 million of floating rate debt due in 2003. The Corporation's total long-term debt of $4,799 million is due to be repaid as follows: $26 million in the fourth quarter of fiscal 2002; $655 million in fiscal 2003; $1,477 million in fiscal 2004 and 2005; $439 million in fiscal 2006 and 2007 and $2,202 million thereafter. Debt obligations due to mature in the next year are expected to be satisfied with a combination of short-term borrowings, new long-term debt issuances and operating cash flows. The Corporation's debt consists of 47% fixed rate debt as of March 30, 2002, as compared to 79% as of June 30, 2001. The increase in floating rate debt at March 30, 2002 versus June 30, 2001 is due to repayments of commercial paper at June 2001 with the proceeds from the Coach and PYA/Monarch business dispositions that occurred in fiscal 2001. The Corporation monitors the interest rate environments in the geographic regions it operates and modifies the components of the debt portfolio as necessary to manage interest rate and foreign currency risks. Credit Facilities and Ratings - The Corporation has numerous credit facilities available which management considers sufficient to satisfy its operating requirements. These credit facilities include $2.3 billion of available credit from a group of 29 banks and lending institutions. These facilities consist of a $1.5 billion 364-day credit facility and an $800 million 5-year facility. The 364-day $1.5 billion facility expires in fiscal 2003 and allows the Corporation, at its option, to extend any borrowings under this facility for an additional year. The Corporation expects to renew this facility under similar terms and 33 conditions. The 5-year $800 million facility expires in fiscal 2006 and based on the Corporation's credit rating, allows for an increase in the size of this facility up to $1.5 billion. At March 30, 2002, the Corporation had not borrowed under either of these facilities. Neither of these facilities mature nor terminate upon a credit rating downgrade. These facilities contain a number of covenants, including a requirement to maintain a certain interest coverage ratio. The Corporation's credit ratings by Moody's as of March 30, 2002 were A3 for long-term debt obligations and P-2 for commercial paper. The Corporation's credit ratings by Standard & Poor's ("S&P") at March 30, 2002 were A+ for long-term debt obligations and A-1 for commercial paper. The Company's credit ratings by Fitch Rating Services were A for long-term debt obligations and F-1 for commercial paper. Changes in the Corporation's credit ratings would result in changes in the Corporation's borrowing costs. A downgrade of the Corporation's commercial paper credit rating would restrict our ability to sell commercial paper. Leases - The Corporation has numerous operating leases for manufacturing facilities, warehouses, office space, vehicles and machinery and equipment. Operating lease obligations are scheduled to be paid as follows: $105 million in fiscal 2003, $82 million in fiscal 2004, $67 million in 2005, $58 million in fiscal 2006 and $152 million thereafter. The Corporation is contingently liable for certain long-term leases on property operated by others. These leased properties relate to certain businesses that have been sold. The Corporation continues to be liable for the remaining term of the lease on these properties in the event that the owner of the business in unable to satisfy the lease liability. The minimum annual rentals under these leases are as follows: $22 million in fiscal 2003, $21 million in fiscal 2004, $20 million is fiscal 2005, $19 million in fiscal 2006 and $69 million thereafter. Minority Interest - Certain subsidiaries of the Corporation have issued preferred stock that is recorded in minority interest on the Consolidated Balance Sheet. No gain or loss was recognized upon the issuance of these securities. A foreign subsidiary has issued $295 million of preferred equity securities. These securities provide a rate of return based upon the Euribor inter-bank borrowing rate. These securities are redeemable by the Corporation in 2004 in exchange for common shares of the issuer, which may then be put to the Corporation for preferred stock. In the event of this put, the Corporation's preferred stock would have a nominal value of $295 million with a dividend rate to be set based upon market factors at the time. A domestic subsidiary has issued preferred equity securities in the amount of $250 million. These securities provide the holder with a rate of return based upon the LIBOR interest rate plus 0.425%, are redeemable in 2005, and may be called at any time by the subsidiary. The subsidiary has the option of redeeming the securities with either cash, debt or shares of common stock of the Corporation with a value of $250 million. Kmart Bankruptcy On January 22, 2002, Kmart Corporation ("Kmart") filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. At the date of the bankruptcy filing, the carrying value of the Kmart receivable on the Corporation's balance sheet was $36.6 million. Prior to the Kmart bankruptcy filing, Sara Lee entered into agreements that allowed the Corporation to put these receivables to a third party. During the third quarter of fiscal 2002, the Corporation exercised the right to put its pre-bankruptcy petition Kmart receivables to the counter parties in the transaction and received cash equal to the carrying value of the receivable on the bankruptcy date. In fiscal 2001, the Corporation had sales to Kmart of $394 million making it the Corporation's fifth largest customer. In the first nine months of fiscal 2002, the Corporation had sales to Kmart of $277 million. The Corporation's Intimates and Underwear segment generates substantially all of these sales. The Corporation's Meats, Bakery, Beverage and Household Products segments sell products to a third party distributor (Fleming Corporation) which in turn resells product to Kmart. The Corporation has continued to sell product to 34 Kmart in the period after the bankruptcy filing. At this time, the Corporation cannot estimate the impact that the Kmart bankruptcy and reorganization plan will have on future revenues or profitability. EURO In January 2002, new Euro denominated bills and coins were issued as 11 of the 15 member countries of the European Union established one new common currency. The transition period for the euro continues through June 2002. In conjunction with the conversion process to the euro, the Corporation has taken steps to convert its information technology systems to handle the new currency, prepared for maintaining accounting, tax and other business records in the new currency and is continuing to evaluate the ability of all significant vendors and customers to accurately convert to the euro. The introduction and use of the euro has not had a material effect on the Corporation's foreign operations, foreign exchange practices or hedging and cash management activities. Based on currently available information, the Corporation does not believe that the introduction of the euro currency will have a material adverse impact on its consolidated financial condition, cash flows or results of operations. 35 PART II ------- ITEM 1 - LEGAL PROCEEDINGS -------------------------- In June 2000, The Earthgrains Company ("Earthgrains") received an information request from the United States Environmental Protection Agency ("EPA") relating to Earthgrains' refrigerant handling practices and, specifically, its consistency with the requirements of 40 C.F.R. Part 82 governing ozone depleting substances. Earthgrains was acquired by the Corporation in August 2001 and now constitutes part of the Sara Lee Bakery Group. The Corporation has cooperated with the EPA with respect to the information request and is engaged in settlement discussions relating to this matter. The EPA has not made a penalty demand; however, the Corporation believes that it may be required to pay a penalty once the settlement discussions have been concluded. Although the amount of any such penalty cannot be reasonably estimated at this time, the Corporation's management believes that the ultimate amount of liability arising from this matter will not have a material adverse effect on the Corporation's consolidated results of operations, financial position or cash flows. Item 5 - OTHER INFORMATION -------------------------- Forward-Looking Information From time to time, in oral statements and written reports, including this report, the Corporation discusses its expectations regarding future performance by making certain "forward-looking statements." These forward-looking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and actual results may differ materially from those expressed or implied herein. Consequently, the Corporation wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could impact the Corporation's ability to achieve its stated goals are the following: (i) impacts on reported earnings from fluctuations in foreign currency exchange rates - particularly the euro - given Sara Lee's significant concentration of business in Western Europe; (ii) significant competitive activity, including advertising, promotional and price competition, and changes in consumer demand for Sara Lee's products; (iii) adverse economic trends, including reduced consumer spending, relating in part to incidents of terrorism and the global repercussions from such incidents; (iv) Sara Lee's ability to continue to source production and conduct manufacturing and selling operations in various countries in the world due to changing political environments and the impacts on the related business environment; (v) Sara Lee's ability to successfully integrate acquisitions, particularly Earthgrains, into its existing operations and the availability of new acquisitions, joint ventures and alliance opportunities that build stockholder value; (vi) Sara Lee's ability to complete transactions anticipated in its business Reshaping initiative, and the ability to realize the estimated savings and productivity improvements associated with these programs; (vii) fluctuations in the cost and availability of various raw materials; (viii) the impact of foot-and-mouth viral disease in parts of Europe on the consumption of meat products in general and the cost of raw materials not affected by the disease but used in the production of food products; (ix) credit and other business risks associated with customers operating in a highly competitive retail environment; and (x) inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance. In addition, the Corporation's results may also be affected by general factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, taxes, and laws and regulations in markets where the Corporation competes. 36 Item 6 - Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) Page Number or Exhibit Incorporated herein Number Description by Reference to ------- ------------------------- ------------------- 10.1 Consulting and Retirement Agreement Between Sara Lee Corporation and Paul J. Lustig 39 12.1 Computation of Ratio of Earnings to Fixed Charges 49 12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements 50 (b) Reports on Form 8-K On March 20, 2002, the Corporation filed a Current Report on Form 8-K with the Securities and Exchange Commission to report that on March 14, 2002 the Corporation had dismissed its independent public accountants, Arthur Andersen LLP and that, on March 18, 2002, the Corporation had retained PricewaterhouseCoopers LLP as its new independent public accountants. No other reports on Form 8-K were filed during the quarter. 37 S I G N A T U R E ----------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SARA LEE CORPORATION -------------------- (Registrant) By: /s/ Wayne R. Szypulski -------------------------------------- Wayne R. Szypulski Senior Vice President and Controller DATE: May 10, 2002 38 EX-10.1 3 dex101.txt CONSULTING AND RETIREMENT AGREEMENT Exhibit 10.1 CONSULTING AND RETIREMENT AGREEMENT ----------------------------------- Sara Lee Corporation (the "Company") and Paul J. Lustig ("Executive") enter into this Consulting and Retirement Agreement (this "Agreement") on the 30th day of January, 2002. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Executive is employed by the Company as an Executive Vice President; WHEREAS, Executive and the Company desire to enter into an agreement relating to Executive's retirement. NOW, THEREFORE, in consideration of the covenants and mutual promises herein contained, it is agreed as follows: 1. Retirement Date. The Executive's Retirement Date shall be November 1, 2001. Until the Retirement Date, Executive shall continue as an employee of the Company. Executive hereby resigns his employment and all appointments he holds with the Company and its affiliates effective as of the Retirement Date. Executive understands and agrees that his employment with the Company will conclude on the close of business on the Retirement Date. 2. Salary Continuation Payments. (a) The Company agrees to continue to pay Executive, commencing on the day following the Retirement Date and ending on June 30, 2005 (the "Salary Continuation Period"), the gross amount of $1,312,500.00 in 44 equal monthly installments of $29,829.55 in accordance with the Company's normal payroll practices (collectively, the "Salary Continuation Payments"), less all applicable withholding taxes and other customary payroll deductions. The Salary Continuation Payments will commence on the first payroll date following the Retirement Date or following the eighth day after the Executive has signed this Agreement without revoking it pursuant to Paragraph 16(b) below, whichever is later. (b) In the event of the Executive's death during the Salary Continuation Period, the Salary Continuation Payments, and any awards under the LTPIP and GIS referred to in Subparagraphs 6(b) and 6(c), shall be payable to the beneficiary designated by the Executive under this Agreement and delivered to the Company or, if none, to his estate and, except to the extent benefits contemplated by this Agreement are provided by their terms to be paid to Executive's heirs and beneficiaries, the Company shall have no further obligations to Executive's beneficiaries under this Agreement. (c) The Salary Continuation Payments shall cease if the Executive becomes reemployed by the Company or any enterprise in which the Company owns a controlling interest, provided the Company owns such controlling interest at the time Executive commences such employment. 3. Receipt of Other Compensation. Executive acknowledges and agrees that, other than as specifically set forth in this Agreement, following the Retirement Date, he is not and will not be due any compensation, including, but not limited to, compensation for unpaid salary (except for amounts unpaid and owing for Executive's employment with the Company and its affiliates prior to the Retirement Date), unpaid bonus, severance and 39 accrued or unused vacation time or vacation pay from the Company or any of its affiliates, and as of and after the Retirement Date, except as provided herein, he will not be eligible to participate, except as a retired employee, in any of the compensation or benefit plans of the Company or any of its affiliates, including, without limitation, the Company's Consolidated Pension and Retirement Plan, Employee Stock Ownership Plan ("ESOP"), 401(k) Supplemental Savings Plan, stock purchase plan, travel accident insurance, personal accident insurance, accidental death and dismemberment insurance and short-term and long-term disability insurance. Executive will be entitled to receive benefits, which are vested and accrued prior to the Retirement Date, pursuant to the employee benefit plans of the Company, and any participation by the Executive (if any) in any of the compensation or benefits plans of the Company or any of its affiliates as of and after the Retirement Date shall be subject to and determined in accordance with the terms and conditions of such plans, except as otherwise expressly set forth in this Agreement. The Company shall promptly reimburse Executive for business expenses incurred in the ordinary course of Executive's employment on or before the Retirement Date, but not previously reimbursed, provided the Company's policies of documentation and approval are satisfied. 4. Short-Term Bonus. Executive shall receive a prorated portion of Executive's bonus earned under the Annual Incentive Plan of the Company for the 2002 fiscal year. Executive's bonus shall be prorated at 33.3% reflecting his employment for one-third of the 2002 fiscal year. For purposes of calculating the bonus, the Company will assume a Superior level of performance by the Executive. The bonus payment provided for in this Paragraph 4 shall be in lieu of, not in addition to, all bonuses payable to the Executive and shall be paid to Executive on the same date or dates on which active participants under such Annual Incentive Plan are paid bonuses for the applicable bonus periods. The bonus payment, if any, made by the Company shall be made in cash and shall be reduced by applicable withholding and other customary payroll deductions. Executive shall not be entitled to participate in any annual bonus plan of the Company for any fiscal year ending after the 2002 fiscal year. 5. Supplemental Non-qualified ESOP and Retirement Plan Benefits. For purposes of determining the amount of Executive's supplemental pension benefit under the Sara Lee Corporation Supplemental Benefit Plan ("Supplemental Plan") and Executive's eligibility for such supplemental pension, the Salary Continuation Period shall be considered as vesting and benefit service and Executive's Salary Continuation Payments (and any bonus paid pursuant to Section 4) shall be considered compensation. In the event of Executive's death prior to the end of the Salary Continuation Period, Executive shall be considered to have attained age 55 for purposes of determining any benefit his spouse is entitled to receive under the Supplemental Plan and Executive's spouse shall be entitled to commence payment of her surviving spouse's benefit beginning on the date Executive would have attained age 55. Executive has been provided a copy of the calculation of his estimated pension which is attached as Schedule A to this Agreement. In addition, for purposes of determining the amount of Executive's supplemental ESOP benefit under the Supplemental Plan, the Salary Continuation Period shall be considered as vesting service and Executive's Salary Continuation Payments shall be considered compensation. 6. Stock Options, LTPIP, GIS and Retention Grant. (a) Executive shall not be granted any and shall not be entitled to receive any new stock options or restricted stock awards after November 1, 2001. Executive's existing stock options as set forth on Schedule B to this Agreement will continue to vest during the Salary Continuation Period in accordance with their vesting schedules. Following the end of the Salary Continuation Period or upon Executive's death during the Salary Continuation Period, Executive shall be treated as a Retired Participant under the Company's stock option plans. As a Retired Participant, Executive's then outstanding 40 stock options will continue to vest and may be exercised until the earlier of (i) the expiration date of the option or (ii) June 30, 2010; provided, however, that with respect to any options granted on or after January 27, 2000, such options may be exercised at any time prior to the expiration date of the option. From and after November 1, 2001, Executive shall not be eligible to be issued replacement stock options upon exercise of any options held by him. Notwithstanding anything contained in this Section 6, if, at any time prior to the date of exercise of any stock option, Executive engages in: (i) conduct for which Executive is convicted of a felony, (ii) conduct that would constitute a breach of this Agreement under Paragraphs 11, or 12 or 13; or (iii) violation of the Company's Global Business Standards, in effect on the date of the Agreement, a copy of which is attached as Schedule C to this Agreement, in a manner that would constitute a material violation; then the Executive's unexercised stock options shall terminate effective the date on which Executive enters into such activity. (b) Subject to the determination of the Compensation and Employee Benefits Committee of the Company's Board of Directors (the "Committee"), Executive will be entitled to a distribution of his awards under the Company's Long-Term Performance Incentive Plans ("LTPIP") for FY00-02 and FY01-03. The award for FY00-02 shall be prorated at 28/36th, and the award for FY01-03 shall be prorated at 16/36th of the respective award earned under the LTPIP for the relevant performance period. The awards shall be calculated in a manner consistent with the methodology used to calculate awards generally for other similar situated participants in the LTPIP. The Company shall recommend to the Committee that Executive receive an award under the LTPIP. (c) Executive's April 27, 2000 award of 20,200 Growth Initiative Shares ("GIS") shall continue to vest during the Salary Continuation Period and shall be paid on the same date or dates on which Growth Initiative Shares are distributed to Participants in the Plan. The award shall be reduced by applicable withholding and other customary payroll deductions. (d) Executive shall forfeit his August 1999 retention award of 15,000 restricted shares of the Company's common stock. 7. Health Insurance Continuation, Universal Life. Beginning on the Retirement Date, Executive shall be eligible to elect COBRA continuation coverage under the group medical and dental plan available to corporate officers of the Company. If Executive elects COBRA continuation coverage, the Company will subsidize the premium for such continuation coverage during the Salary Continuation Period, to the extent the Executive would otherwise be required to pay more for such coverage during the Salary Continuation Period than a similarly situated active employee would be required to pay for comparable coverage. If the Salary Continuation Period exceeds the COBRA continuation period, the Company will continue to subsidize the premium for such continuation coverage during the Salary Continuation Period and the Executive will continue to receive group medical and dental coverage on the same terms and conditions as during the COBRA continuation period, until the end of the Salary Continuation Period, subject to the terms of all applicable group medical and dental plans in effect from time to time. Executive may elect, during the 30 day period commencing on the Retirement Date, to participate, effective as of the end of the Salary Continuation Period, in the Sara Lee Corporation Retiree Medical Plan available to the Executive Benefit Group of the Company in accordance with the terms and 41 conditions of the plan in effect from time to time; provided that, such coverage shall not be available to the Executive at the conclusion of the Salary Continuation Period unless he elects such coverage within thirty (30) days following the Retirement Date. If Executive dies prior to the end of the Salary Continuation Period and Executive had elected COBRA continuation coverage under the group medical and dental plan, COBRA continuation coverage shall continue for Executive's surviving spouse and dependents until the end of the Salary Continuation Period under the same terms and conditions that coverage would have been provided to Executive under this Agreement. If Executive dies prior to the end of the Salary Continuation Period and Executive had elected coverage under the Sara Lee Retiree Medical Plan effective as of the end of the Salary Continuation Period, coverage under the Retiree Medical Plan shall be provided to Executive's surviving spouse and dependents, subject to the terms and conditions of the plan, beginning as of the end of the Salary Continuation Period. The premium charged Executive or his surviving spouse or dependents for such retiree medical coverage may be different from the premium charged an active employee of the Company for similar coverage. The Company further agrees to continue to fund the individual universal life insurance policy (in an amount equal to Executive's base salary) provided to Executive by the Company under the Company's Executive Life Insurance Plan in accordance with the terms and conditions of such plan, as such plan is in effect from time to time. 8. Automobile. Following his Retirement Date, Executive may continue to use the automobile provided to him by the Company in accordance with the terms of the Company's leased automobile policy until the earlier of (i) the end of the Salary Continuation Period, (ii) the date on which he accepts full-time employment with another employer or (iii) the end of the lease term and provided further that the Company shall only be responsible for the lease payments and insurance premiums; Executive shall be responsible for all other operating expenses, including all fuel and maintenance expenses related to the automobile. Executive shall have the option to purchase the automobile at any time during the term of this Agreement or upon the termination of this Agreement. In the event the Executive elects to purchase the automobile, the purchase price shall be determined in accordance with the Company's then current policy. During the term of the lease, the Company shall continue to insure or provide insurance (including collision, comprehensive and liability) for the automobile. 9. Other Benefits. (a) Executive will be entitled to fulfillment of any matching grant obligations under the Company's Matching Grants Program with respect to commitments made by Executive prior to November 1, 2001. (b) Executive's participation in the Company's Deferred Compensation Plan shall continue to be governed by all terms and conditions of the Deferred Compensation Plan. A copy of the amounts deferred and the terms thereof is attached as Schedule D to this Agreement.10. 10. Consulting Services and Reimbursement of Expenses. Following the Retirement Date, Executive agrees to make available to Company, during the Salary Continuation Period, at mutually agreeable times, Executive's services, experience and knowledge with respect to the operations, practices and policies of the Company's Branded Apparel Group. Nothing contained in this Section 10 shall be deemed to create an employment relationship between the Company and Executive. In providing such consulting services, Executive shall be an independent contractor and shall not have the authority to bind the Company with respect to any matter. During the Salary Continuation Period, the Company shall reimburse Executive for all out-of-pocket expenses reasonably 42 and necessarily incurred in the performance of such consulting services, provided that such expenses are incurred at the request of the Company. Reimbursement shall be made against the submission by Executive of signed itemized expense reports in accordance with the travel and business expense reimbursement policies of the Company in effect from time to time. The Company's sole remedy for breach of this Section 10 shall be an action for specific performance. The Company may not set off any amounts due to Executive hereunder in the event Executive fails to render consulting services. 11. Non-Solicitation and Non-Competition. In consideration for receiving the payments and the other benefits provided herein, Executive agrees that, during the Salary Continuation Period, Executive: a. will not, without the prior written consent of Company, solicit for employment or assist or encourage the solicitation for employment, any employee of the Company, or any of its operating divisions, subsidiaries or affiliates. b. will not, without the prior written consent of Company, counsel or be employed by, or otherwise engage or participate in any Competing Business (regardless of whether Executive receives any compensation of any kind). Notwithstanding the foregoing, Executive's passive ownership of not more than 4.9% of any publicly held entity that is a Competing Business shall not be deemed a breach of this provision. For purposes of this Agreement, Competing Business means each of the following entities (and any of their respective parents, subsidiaries, affiliates, successors or assigns, including any successors or assigns through a plan of reorganization): VF Corporation; Fruit of the Loom; The Warnaco Group; Maidenform; Jockey International; Intimate Brands; Russell Corporation; Gildan Activewear; Triumph; Delta Galil Industries; Kellwood Company; Mast; Adidas; Golden Lady; Kayser Roth; Reebok; Tultex; or Nike. "Competing Business" shall also include any entity which acquires any material portion of the apparel business of any of the entities described above, whether by acquisition, merger, reorganization or other method or manner. 12. Confidentiality. At all times hereafter, Executive will maintain the confidentiality of all information in whatever form concerning the Company or any of its affiliates relating to its or their businesses, customers, finances, strategic or other plans, marketing, employees, trade practices, trade secrets, know-how or other matters which are not generally known outside the Company, and Executive will not, directly or indirectly, make any disclosure thereof to anyone, or make any use thereof, on his own behalf or on behalf of any third party, unless specifically requested by or agreed to in writing by an executive officer of the Company. Executive will promptly after the Retirement Date return to the Company all reports, files, memoranda, records, computer equipment and software, credit cards, cardkey passes, door and file keys, computer access codes or disks and instructional manuals, and other physical or personal property which he received or prepared or helped prepare in connection with his employment with the Company, its subsidiaries and affiliates, and Executive will not retain any copies, duplicates, reproductions or excerpts thereof. 43 13. Non-Disparagement. At all times hereafter, Executive will not disparage or criticize, orally or in writing, the business, products, policies, decisions, directors, officers or employees of the Company or any of its operating divisions, subsidiaries or affiliates to any person. 14. Breach of Agreement. (a) In the event of any dispute under this Agreement, the party who has the claim under this Agreement shall give the other party written notice, and except in the case of a breach of this Agreement which is not susceptible to being cured (such as the disclosure of confidential information), ten calendar days from the date notice is deemed given. (b) In the event of a breach of this Agreement, including, but not limited to Paragraphs 11, 12 and 13 by Executive (i) the Company shall have the right, in addition to and without waiving any other rights that may be available to the Company at law or in equity, to immediately discontinue any remaining Salary Continuation Payments and other obligations of the Company to Executive under this Agreement, but excluding any obligation to provide vested and accrued pension benefits under any qualified Company pension plan and any payments due Executive under any deferred compensation plan of the Company, and (ii) the Salary Continuation Period shall thereupon cease. (c) If the Company pursues a claim for actual damages for a breach of Paragraphs 11, 12, or 13 by Executive, any award will first be offset by any monies remaining owed to the Executive under this Agreement, but excluding any obligation to provide vested and accrued pension benefits under any qualified Company pension plan and any payments due Executive under any deferred compensation plan of the Company. (d) Executive and the Company acknowledge and agree that the Company will or would suffer irreparable injury in the event of a breach or violation or threatened breach or violation of the provisions set forth in Paragraphs 11, 12 or 13 and agree that in event of actual or threatened breach or violation of such provisions the Company shall be awarded injunctive relief in the federal or state courts located in Illinois to prohibit any such violation or breach or threatened violation or breach, without necessity of posting any bond or security and without first complying with the provisions of Paragraph 16, and such right to injunctive relief shall be in addition to any other right available under this Agreement. 15. Release. (a) Executive on behalf of himself, his heirs, executors, administrators and assigns, does hereby knowingly and voluntarily release, acquit and forever discharge the Company and any affiliates, legal representatives, successors, assigns and past, present and future directors, officers, employees, trustees and shareholders (collectively, the "Released Parties") from and against any and all charges, complaints, claims, cross-claims, third-party claims, counterclaims, contribution claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including without limitation attorneys' fees of any nature whatsoever, known or unknown, suspected or unsuspected, foreseen or unforeseen, matured or unmatured, which, at any time up to and including the date on which the Executive signs this Agreement, exists, have existed, or may arise from any matter whatsoever occurring, including, but not limited to, any claims arising out of or in any way related to Executive's employment with the Company or its affiliates and the conclusion thereof, which Executive, or any of his heirs, executors, administrators and assigns and affiliates and agents ever had, now has or at any time hereafter may have, own or hold against any of the Released Parties based on any matter existing on or before the date on which the Executive signs this Agreement. Executive acknowledges that in exchange for this release, the Company is providing Executive with a total consideration, financial or otherwise, which exceeds what Executive would have been given or entitled to without the release. By executing this 44 Agreement, Executive is waiving, without limitation, all claims against the Released Parties arising under federal, state and local labor and antidiscrimination laws and any other restriction on the right to terminate employment, including, without limitation, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act of 1990, as amended, and the Illinois Human Rights Act, as amended. Executive represents and warrants that he has not filed or initiated any legal or equitable proceeding, or any proceeding involving a private right of action, against any of the Released Parties and that no such proceedings have been initiated against any of the Released Parties on his behalf. Executive will not cause or encourage any lawsuit or any action involving a private right to be maintained or instituted against any of the Released Parties, and he will not participate in any manner in any such proceedings against any of the Released Parties, except as required by law. Nothing herein shall release any party from any obligation under this Agreement. (b) EXECUTIVE SPECIFICALLY WAIVES AND RELEASES THE RELEASED PARTIES FROM ALL CLAIMS EXECUTIVE MAY HAVE AS OF THE DATE EXECUTIVE SIGNS THIS AGREEMENT REGARDING CLAIMS OR RIGHTS ARISING UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, AS AMENDED, 29 U.S.C. ss. 621 ("ADEA"). EXECUTIVE FURTHER AGREES: (A) THAT EXECUTIVE'S WAIVER OF RIGHTS UNDER THIS RELEASE IS KNOWING AND VOLUNTARY AND IN COMPLIANCE WITH THE OLDER WORKER'S BENEFIT PROTECTION ACT OF 1990; (B) THAT EXECUTIVE UNDERSTANDS THE TERMS OF THIS RELEASE; (C) THAT THE SALARY CONTINUATION PAYMENTS AND OTHER BENEFITS CALLED FOR IN THIS AGREEMENT WOULD NOT BE PROVIDED TO ANY EXECUTIVE TERMINATING HIS OR HER EMPLOYMENT WITH THE COMPANY WHO DID NOT SIGN A RELEASE SIMILAR TO THIS RELEASE, THAT SUCH PAYMENTS AND BENEFITS WOULD NOT HAVE BEEN PROVIDED, AND WOULD NOT OTHERWISE BE OWING TO EXECUTIVE PURSUANT TO ANY PREEXISTING OBLIGATION OF ANY KIND, HAD EXECUTIVE NOT SIGNED THIS RELEASE, AND THAT THE PAYMENTS AND BENEFITS ARE IN EXCHANGE FOR THE SIGNING OF THIS RELEASE; (D) THAT EXECUTIVE HEREBY IS AND HAS BEEN ADVISED IN WRITING BY THE COMPANY TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS RELEASE; (E) THAT THE COMPANY HAS GIVEN EXECUTIVE A PERIOD OF AT LEAST TWENTY-ONE (21) DAYS WITHIN WHICH TO CONSIDER THIS RELEASE; (F) THAT EXECUTIVE REALIZES THAT FOLLOWING EXECUTIVE'S EXECUTION OF THIS RELEASE, EXECUTIVE HAS SEVEN (7) DAYS IN WHICH TO REVOKE THIS RELEASE BY WRITTEN NOTICE TO THE UNDERSIGNED, AND (G) THAT THIS ENTIRE AGREEMENT SHALL BE VOID AND OF NO FORCE AND EFFECT IF EXECUTIVE CHOOSES TO SO REVOKE, AND IF EXECUTIVE CHOOSES NOT TO SO REVOKE, THAT THIS AGREEMENT AND RELEASE THEN BECOME EFFECTIVE AND ENFORCEABLE UPON THE EIGHTH DAY AFTER HE SIGNS THIS AGREEMENT. (c) To the maximum extent permitted by law, Executive covenants not to sue or to institute or cause to be instituted any action in any federal, state, or local agency or court against any of the Released Parties, including, but not limited to, any of the claims released in this Agreement. Notwithstanding the foregoing, nothing herein shall prevent Executive or any of the Released Parties from instituting any action required to enforce the terms of the Agreement and this release. In addition, noting herein shall be construed to prevent Executive from enforcing any rights Executive may have under the Employee Retirement Income Security Act of 1974. 16. Dispute Resolution. (a) In the event of any dispute between the parties (other than pursuant to Paragraph 14(d) above), the party who has the claim under this Agreement shall give the other party reasonable notice and, except in an emergency situation, a reasonable opportunity 45 to cure. The party who has the claim agrees to promptly submit such dispute to binding arbitration. The arbitration hearing shall be completed within ninety (90) days of the first to occur of the notice referred to above or submission to arbitration if no such notice is given. (b) Such arbitration shall be conducted in accordance with this Agreement and, where not inconsistent, the appropriate commercial arbitration rules of the American Arbitration Association (the "AAA"), and shall be held in Chicago, Illinois, at such location within Chicago as shall be determined by the AAA. Each side shall name one arbitrator. The two arbitrators shall select a third arbitrator either by mutual agreement or from a list submitted by the AAA in accordance with AAA rules. The arbitrators shall permit reasonable discovery in accordance with Federal Rules of Civil Procedure and the local Rules of the U.S. District Court for the Northern District of Illinois. The arbitrators shall make written findings of fact and conclusions of law reflecting the appropriate substantive law. The decision of the arbitrators shall be rendered within 30 days of the close of the arbitration hearing and shall be final and binding. The parties shall pay their own expenses of arbitration and legal fees, and the expenses of the arbitrators and the AAA shall be equally shared; providing, however, that if, in the opinion of the arbitrators, any claim under the Agreement or any defense in objection thereto was unreasonable, the arbitrator may assess, as part of their award, all or any party of the arbitration expenses (including reasonable attorneys' fees of the other party and arbitrators' fees under the standards and law applicable under Rules 11 and 27 of the Federal Rules of Civil Procedure) against the party raising such unreasonable claim, defense or objection. (c) In any arbitration proceeding pursuant to Paragraph 16(b) hereof, this Agreement shall be governed as to all matters, including validity, construction and performance, by the laws of the State of Illinois, except as superseded by the laws of the United States. (d) The parties agree that any attempt to avoid arbitration by instituting procedures in any other forum except as provided in Paragraph 14(d) will constitute a material breach of this Agreement and will cause irreparable harm to the other party, including, but not limited to disrupting business and incurring legal expenses, thereby requiring an immediate judicial order to return the cause to arbitration and terminate any other proceedings. Judicial orders to enforce the arbitration provisions of this Agreement and otherwise in aid of arbitration may be entered by the federal and state courts located in Cook County, Illinois, at any time prior to or after a final decision by the arbitrators, and the parties hereby submit to personal jurisdiction in the State of Illinois and to venue in such courts. 17. Executive's Understanding. Executive acknowledges by signing this Agreement that Executive has read and understands this document, that Executive has conferred with or had opportunity to confer with Executive's attorney regarding the terms and meaning of this Agreement, that Executive has had sufficient time to consider the terms provided for in this Agreement, that no representatives or inducements have been made to Executive except as set forth in this Agreement, and that Executive has signed the same KNOWINGLY AND VOLUNTARILY. 18. Non-Reliance. Executive represents to the Company and the Company represents to Executive that in executing this Agreement they do not rely and have not relied upon any representation or statement not set forth herein made by the other or by any of the other's agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or otherwise. 19. Severability of Provisions. In the event that any one or more of the provisions of this Agreement is held to be invalid, illegal or unenforceable, the validity, legality and 46 enforceability of the remaining provisions will not in any way be affected or impaired thereby. Moreover, if any one or more of the provisions contained in this Agreement are held to be excessively broad as to duration, scope, activity or subject, such provisions will be construed by limiting and reducing them so as to be enforceable to the maximum extent compatible with applicable law. 20. Non-Admission of Liability. Executive agrees that neither this Agreement nor the performance by the parties hereunder constitutes an admission by any of the Released Parties of any violation of any federal, state, or local law, regulation, common law, breach of any contract, or any other wrongdoing of any type. 21. Non-Assignability. The rights and benefits under this Agreement are personal to Executive and such rights and benefits shall not be subject to assignment, alienation or transfer, except to the extent such rights and benefits are lawfully available to the estate or beneficiaries of Executive upon death. 22. Entire Agreement. This Agreement sets forth all the terms and conditions with respect to the compensation, remuneration of payments and benefits due Executive from the Company and supersedes and replaces any and all other agreements or understandings Executive may have had with respect thereto. It may not be modified or amended except in writing and signed by both Executive and an authorized representative of the Company. [This space intentionally left blank] 47 23. Notice. Any notice to be given hereunder shall be in writing and shall be deemed given (a) when delivered by hand, or (b) three days after being mailed by certified mail, return receipt requested, in each case addressed as follows: To Executive at: [Intentionally Omitted] To the Company at: Sara Lee Corporation Three First National Plaza Chicago, Illinois 60602-4260 Attention: General Counsel IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EXECUTIVE SARA LEE CORPORATION /s/ Paul J. Lustig By: /s/ Lee A. Chaden - ---------------------------------- ---------------------------------- Paul J. Lustig Name: Lee A. Chaden Title: Senior Vice President - Human Resources 48 EX-12.1 4 dex121.txt COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.1 SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- Computation of Ratio of Earnings to Fixed Charges ------------------------------------------------- (In millions, except ratios) ----------------------------
Thirty-Nine Weeks Ended ------------------------------------ March 30, March 31, 2002 (1) 2001 (2) --------- -------- Fixed charges: Interest expense $ 224 $ 211 Interest portion of rental expense 46 49 ------ ------ Total fixed charges before capitalized interest 270 260 Capitalized interest 4 14 ------ ------ Total fixed charges $ 274 $ 274 ====== ====== Earnings available for fixed charges: Income from continuing operations before income taxes $ 755 $ 841 Less undistributed income in minority-owned companies (4) (4) Add minority interest in majority-owned subsidiaries 24 43 Add amortization of capitalized interest 18 18 Add fixed charges before capitalized interest 270 260 ------ ------ Total earnings available for fixed charges $1,063 $1,158 ====== ====== Ratio of earnings to fixed charges 3.9 4.2 ====== ======
(1) - During the first nine months of fiscal 2002, the Corporation recorded a pretax charge of $183 million in connection with certain reshaping actions. (2) - During the first nine months of fiscal 2001, the Corporation recorded a pretax charge of $332 million in connection with certain reshaping actions. During the first nine months of fiscal 2001, the Corporation recorded a pretax gain of $105 million in connection with the initial public offering of its Coach division. Page 49 EX-12.2 5 dex122.txt COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.2 SARA LEE CORPORATION AND SUBSIDIARIES ------------------------------------- Computation of Ratio of Earnings to Fixed Charges ------------------------------------------------- And Preferred Stock Dividend Requirements ----------------------------------------- (In millions, except ratios) ----------------------------
Thirty-Nine Weeks Ended ------------------------------------ March 30, March 31, 2002 (1) 2001 (2) --------- -------- Fixed charges and preferred stock dividend requirements: Interest expense $ 224 $ 211 Interest portion of rental expense 46 49 ------ ------ Total fixed charges before capitalized interest and preferred stock dividend requirements 270 260 Capitalized interest 4 14 Preferred stock dividend requirements (3) 13 14 ------ ------ Total fixed charges and preferred stock dividend requirements $ 287 $ 288 ====== ====== Earnings available for fixed charges and preferred stock dividend requirements: Income from continuing operations before income taxes $ 755 $ 841 Less undistributed income in minority-owned companies (4) (4) Add minority interest in majority-owned subsidiaries 24 43 Add amortization of capitalized interest 18 18 Add fixed charges before capitalized interest and preferred stock dividend requirements 270 260 ------ ------ Total earnings available for fixed charges and preferred stock dividend requirements $1,063 $1,158 ====== ====== Ratio of earnings to fixed charges and preferred stock dividend requirements 3.7 4.0 ====== ======
(1) - During the first nine months of fiscal 2002, the Corporation recorded a pretax charge of $183 million in connection with certain reshaping actions. (2) - During the first nine months of fiscal 2001, the Corporation recorded a pretax charge of $332 million in connection with certain reshaping actions. During the first nine months of fiscal 2001, the Corporation recorded a pretax gain of $105 million in connection with the initial public offering of its Coach division. (3) - Preferred stock dividends in the computation have been increased to an amount representing the pretax earnings that would have been required to cover such dividends. Page 50 -----END PRIVACY-ENHANCED MESSAGE-----