Sara Lee 2008 Annual Report Download - page 14

Financial review
Summary of Results
2008 Compared with 2007 The business highlights for 2008
include the following:
•Net sales increased by 10.3% to $13.2 billion, reflecting the
positive impact of changes in foreign currency exchange rates, price
increases to offset higher commodity costs, higher unit volumes
and an improved sales mix.
•Reported operating income declined by $302 million to $260 mil-
lion. The current year results were negatively impacted by $851 million
of impairment charges.
•The $851 million non-cash pretax impairment charge in 2008
was related to the goodwill associated with the North American
foodservice bakery and Spanish bakery businesses and the write-
downs of certain other assets in the North American operations.
•Operating segment income increased at each of the business
segments, with the exception of Foodservice and International
Bakery, driven by favorable changes in foreign currency exchange
rates, pricing actions, improved volumes and sales mix, and cost
savings achieved from continuous improvement initiatives.
•The results for continuing operations were a loss of $41 million,
or $0.06 per share on a diluted basis, reflecting the impact of the
impairment charges noted above.
•Cash from operating activities increased by $114 million due
to improved earnings, excluding non-cash impairment and other
charges, partially offset by an increase in cash used to fund
working capital requirements.
•Capital expenditures for property, plant and equipment and
computer software declined $116 million due in part to reduced
spending on information technology systems.
•The company’s total debt declined by $1,032 million as cash
on hand was used to repay maturing long-term debt.
•The company expended $315 million to repurchase 20 million
shares of its common stock under a share repurchase program.
Significant Items Affecting Comparability The reported results
for 2008, 2007 and 2006 reflect amounts recognized for actions
associated with the corporation’s ongoing business transformation
program, which was announced in February 2005 and other
significant amounts that impact comparability. The nature of these
items includes the following:
Exit Activities, Asset and Business Dispositions These costs
are reported on a separate line of the Consolidated Statements of
Income. Exit activities primarily relate to charges taken to recognize
severance actions approved by the corporation’s management and
the exit of leased facilities or other contractual arrangements.
Asset and business disposition activities include costs associated
with separating businesses targeted for sale and preparing financial
statements for these businesses, as well as gains and losses
associated with the disposition of asset groups that do not qualify
for discontinued operations reporting. More information on these
costs can be found in Note 5 to the Consolidated Financial
Statements, “Exit, Disposal and Transformation Activities.”
Business Transformation Costs In February 2005, the corporation
announced a transformation plan designed to improve performance
and better position the corporation for long-term growth. The plan
involved significant changes in the organization structure, portfolio
changes including the disposition of a significant portion of the corpo-
ration’s businesses and initiatives to improve operational efficiency.
The costs related to the transformation include costs to retain
and relocate existing employees, recruit new employees, third-party
consulting costs associated with transformation efforts, and amorti-
zation costs for new enterprise-wide software. In addition, these
costs include incremental depreciation associated with decisions to
close facilities at dates sooner than originally anticipated, pursuant
to an exit plan. These costs are recognized in Cost of Sales or
Selling, General and Administrative Expenses in the Consolidated
Statements of Income as they do not qualify for treatment as an
exit activity or asset and business disposition under Statement of
Financial Accounting Standards No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” However, management
believes that the disclosure of these transformation related charges
provides the reader greater transparency to the total cost of the
transformation plan. More information on these costs can be found
in Note 5 to the Consolidated Financial Statements, “Exit, Disposal
and Transformation Activities.”
The savings resulting from these transformation actions were
$218 million in 2008, $160 million in 2007 and $62 million in
2006. The incremental benefits resulting from the ongoing exit
and business transformation activities are a significant factor in
the operating performance of the continuing businesses. The
corporation anticipates annual savings in 2009 for these actions
to be approximately $220 million.
Impairment Charges These costs are included on a separate line
of the Consolidated Statements of Income and represent charges
for the impairment of fixed assets, intangible assets, goodwill and
investments held by the corporation. More information regarding
impairment charges can be found in Note 3 to the Consolidated
Financial Statements, “Impairment Charges.”
The reported results were also impacted by certain discrete
tax matters that affect comparability. They include contingent tax
obligation adjustments, tax on repatriation of prior years’ earnings,
valuation allowance adjustments and various other tax matters.
The impact of the above items on net income and diluted earnings
per share is summarized on the following page.
12 Sara Lee Corporation and Subsidiaries