Diluted EPS as reported of $0.53, compared to $(0.02) in the prior-year second quarter
Adjusted EPS¹ of $0.36, compared to $0.19 a year ago, driven by strong operating performance
Company raises guidance for fiscal 2010 Adjusted EPS to $1.00 – $1.05 per share
Pricing actions and innovation drove improved volume trends in the second quarter
Cash flow from operations of $472 million in the first six months, up $258 million year-over-year
DOWNERS GROVE, Ill. (Feb. 4, 2010) – Sara Lee Corp. (NYSE: SLE) today reported strong operating income growth for the second quarter of fiscal 2010, driven by significant improvement in operating segment income across the company, particularly in the North American Retail and International Beverage business
segments, and lower corporate expenses. Net income also rose sharply, driven by higher income from continuing and discontinued operations, partially due to one-time tax benefits and lower charges for significant items. Net sales were unchanged in the second quarter as favorable foreign currency exchange
rates were offset by slightly lower corporate unit volumes, lower prices and the impact of divestitures. Cash from operations continued to improve, primarily due to higher operating income.
“We’re pleased to report a strong second quarter, which was even better than our first quarter, and was highlighted by significant profit growth,” said Sara Lee Corp. chairman and chief executive officer Brenda C.
Barnes. “On an adjusted basis, every segment of our continuing business, along with Household and Body Care, delivered income growth in the quarter. During this period we recalibrated pricing, which helped us deliver improved volume trends. Based on the strong first half performance, we have raised guidance and feel very confident in our full year outlook. We also are making significant investments across our business designed to drive growth this year and beyond. We believe that we will have a strong 2010 and are confident
that in 2011 we can deliver meaningful additional profit improvement.”
Barnes added, “We made further progress toward completing the divestiture of our Household and Body Care businesses, thus far receiving binding offers for body care and air care for a combined 1.595 billion euros.
We are also making progress toward selling the remainder of the business.”
Financial Review
Net Sales and Unit Volumes
Net sales for the second quarter of fiscal 2010 were $2.9 billion, unchanged versus the year-ago period as favorable foreign currency exchange rates were offset by the impact of divestitures, slightly lower unit volumes and lower selling prices. The company’s adjusted net sales decreased 2.7%. Total Sara Lee unit volumes were 1.0% lower in the second quarter, but increased 0.7% excluding the impact of planned exits from commodity and kosher meats in the North American Retail segment. On a comparable basis, in the first
quarter of fiscal 2010, volumes decreased 2.4%. Unit volume trends generally showed improvement in the second quarter driven by innovative new products, successful trade spending and strategic pricing initiatives.
¹ The term “adjusted EPS” and other “adjusted” financial measures are explained and reconciled to each item’s most
comparable U.S. generally accepted accounting principles measure at the end of this release.
Operating Income
Sara Lee reported second quarter operating income of $282 million, compared to an operating loss of $(4) million in the prior-year period. Adjusted operating income increased to $319 million in the second quarter, up 75.8%. The improvement in adjusted operating income included a $103 million increase in total adjusted operating segment income for all continuing business segments, $27 million of favorable mark-to-market variances on commodity derivatives and lower corporate costs.
Discontinued Operations
Net sales for the international household and body care businesses, which are being reported as discontinued operations, were $565 million in the second quarter of fiscal 2010, compared to $484 million in the prior-year
period, a 16.8% increase. This was primarily due to strength in most of the core categories and favorable foreign currency exchange rates. Adjusted net sales increased 5.4%.
Operating segment income in the second quarter was $63 million, an increase of $19 million compared to the year-ago period. The increase was driven by higher net sales, Project Accelerate and continuous improvement savings, lower commodity costs and favorable foreign currency exchange rates, which were
partially offset by higher media advertising and promotion (MAP) spending. Adjusted operating segment income was up 44.9% in the second quarter.
Net income was $66 million in the second quarter versus $23 million in the year-ago period, primarily due to improved business performance, the recognition of $27 million of net tax benefits and $8 million in benefit
from the cessation of depreciation and amortization in compliance with U.S. GAAP rules, which were partially offset by $19 million in charges for various significant items.
Earnings Per Share
Diluted EPS as reported were $0.53 per diluted share in the second quarter compared to a loss of $(0.02) in the year-ago period. Diluted EPS from continuing operations were $0.43 per diluted share, compared to a
loss of $(0.06) in the year-ago period, while diluted EPS from discontinued operations were $0.09 per diluted share, versus $0.03 in the comparable period last year.
During the quarter, results in both continuing and discontinued operations were influenced by a number of significant items, including:
Continuing Operations
After-tax charges of $24 million, or $(0.03) per diluted share, for business exits, Project Accelerate costs and asset impairments, the latter associated with the write-down of fixed assets at the North American
Foodservice and International Bakery segments.
Income of $119 million, or $0.17 per diluted share, from significant tax items, primarily resulting from the favorable conclusion of various tax audits in jurisdictions around the world, the release of Brazilian
valuation allowances and the utilization of current-year United Kingdom net operating losses.
Discontinued Operations
After-tax charges of $19 million, or $(0.02) per diluted share, for benefit plan curtailment losses, business disposition transaction costs and retention bonuses.
Income of $27 million, or $0.04 per diluted share, from significant tax items, primarily related to the benefit of capital loss carryforwards, the utilization of prior-year United Kingdom net operating losses
and various tax settlements in jurisdictions around the world.
The combination of these significant items resulted in a net benefit of $103 million, or $0.15 per diluted share, in the second quarter of fiscal 2010. Adjusted EPS were $0.36 in the second quarter, compared to $0.19 per share in the second quarter of fiscal 2009. For more detail on the impact of significant items on diluted EPS in the current- and prior-year periods, see page 18 of this release.
Cash from Operations
Net cash from operating activities was $285 million in the second quarter, compared to $252 million in the comparable period last year; primarily driven by higher operating income.
Financial Highlights
Project Accelerate is a company-wide cost saving and productivity initiative focused on outsourcing actions, supply chain efficiencies, SKU rationalization and organizational simplification. As compared to last year, the project is expected to generate between $75 million and $100 million of incremental benefits in fiscal 2010, of which $48 million has already been realized in the first six months of the year.
MAP spending increased 4.9% in the second quarter, primarily driven by a significant increase in spending at the North American Retail segment behind category-leading brands such as Jimmy Dean, Hillshire Farm and Ball Park.
Net interest expense was $32 million in the second quarter, compared to $36 million in last year’s period, due to lower interest rates and less average debt outstanding.
General corporate expenses declined to $60 million in the second quarter, compared to $91 million in the year-ago period, primarily due to $27 million of favorable mark-to-market variances on commodity derivatives and $4 million of lower corporate costs, on an as reported basis.
The effective tax rate for continuing operations in the second quarter was a negative (21.5)%, compared to a negative (0.8)% in the year-ago period, a decrease primarily driven by the impact of significant items in the quarter. Excluding significant items, the effective tax rate would have been 26.7%. For further detail on the tax rate, see page 18 of this release.
On December 11, 2009, Sara Lee announced it received a binding offer of 320 million euros from The Procter & Gamble Company to acquire the company’s Ambi Pur air care business. The proposed transaction, which is subject to customary closing conditions and regulatory clearances, is expected to close during fiscal year 2010. Sara Lee will consult with relevant works councils during the process. The company has also received significant interest in the remainder of its international household and body care businesses, which includes shoe care, insecticides and non-European cleaning brands, and is
continuing to pursue divestiture options for these businesses.
The company did not repurchase any shares of its common stock in the second quarter. Earlier in fiscal 2010, the board of directors authorized a $1.0 billion share repurchase program, in addition to the 13.5 million share authorization remaining under the prior program.
Six-Month Results
Continuing Operations
For the first six months of fiscal 2010, Sara Lee reported net sales of $5.4 billion, down 3.6% over the comparable period last year, while adjusted net sales decreased 3.0% in the first half. Operating income was $607 million in the first six months, compared to $289 million in the year-ago period, while adjusted operating income increased 77.1%.
Discontinued Operations
Net sales were $1.1 billion, up 4.6% in the first six months, while adjusted net sales rose 3.3%. Operating segment income was $132 million in the first half, versus $105 million last year, while adjusted operating segment income increased 41.0%.
EPS and Cash from Operations
Diluted EPS, as reported, were $0.94 in the first six months of fiscal 2010, compared to $0.30 for the first half of fiscal 2009. Adjusted EPS for the comparable six month periods were $0.60 versus $0.34 (see table on
page 18). Net cash from operating activities was $472 million in the first six months of fiscal 2010, compared to $214 million in the first half of fiscal 2009 – the $258 million increase was primarily driven by higher operating income and better inventory management.
Guidance
Sara Lee currently expects full-year fiscal 2010 total diluted EPS to be in the range of $1.36 to $1.41 per share, which includes $0.19 per share of contingent sale proceeds received in the first quarter of fiscal 2010
from the sale of its tobacco business in fiscal 1999, and a $0.17 per share gain from significant items realized in the first six months of fiscal 2010. Full-year 2010 adjusted EPS is expected to be in the range of $1.00 to $1.05 per share, compared to $0.82 in fiscal 2009. This represents an increase of $0.09 to $0.10 per share compared to the last guidance provided by the company. The $0.09 to $0.10 per share increase is comprised of our expectation of $0.03 to $0.04 per share of improved operational performance, $0.02 from a
lower anticipated tax rate and $0.04 from the cessation of depreciation and amortization expense for H&BC.
EPS guidance also includes anticipated benefits from a 53rd week and favorable currency exchange rates.
This adjusted EPS guidance implies that the second half of fiscal 2010 will be lower than the second half of the previous year. The primary drivers are comparisons to unusually low corporate expense in the second half
of last year (approximately $25 to $30 million lower than the expected expense in the second half of fiscal 2010), lapping a positive commodity mark-to-market variance of $40 million, and significant business reinvestment.
Sara Lee Reports Strong Second Quarter Earnings; Raises Guidance for Second Consecutive Quarter – Page 7
Guidance does not include any additional significant items that may occur during the remainder of fiscal 2010, such as one-time expenses related to Project Accelerate. If any of the household and body care
transactions closes before the end of fiscal 2010, this may have an impact on the fiscal 2010 guidance.
Looking at the business segments, Sara Lee currently expects four out of the five continuing business segments, as well as the discontinued international household and body care operations, to show an increase in adjusted operating segment income in fiscal 2010. The company continues to be cautious about the North American Foodservice segment, as market trends remain weak for that segment.
Actual results may differ from this guidance due to future significant events that may occur, the nature, timing and financial impact of which are not yet known.
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