Sara Lee 2008 Annual Report Download - page 18

Financial review
16 Sara Lee Corporation and Subsidiaries
Impairment Charges During 2008, the corporation recognized
an $851 million non-cash charge primarily for the impairment of
goodwill associated with the North American foodservice bakery
and Spanish bakery operations and writedowns of certain other
assets in North America. Both operations are not expected to gen-
erate sufficient profitability to support the goodwill balances. In 2007
and 2006, impairment charges of $172 million and $193 million,
respectively, were recognized and represent charges for the impair-
ment of goodwill, intangible assets, fixed assets, and investments
held by the corporation. These charges impacted each of the corpo-
ration’s business segments. Additional details regarding these
impairment charges are discussed in Note 3 to the Consolidated
Financial Statements, titled “Impairment Charges.”
Receipt of Contingent Sale Proceeds Under the terms of the sale
agreement for its cut tobacco business, the corporation will receive
annual cash payments of 95 million euros through July 2009, contin-
gent on tobacco continuing to be a legal product in the Netherlands,
Germany and Belgium. The U.S. dollar amounts received in 2008,
2007 and 2006 upon the expiration of the contingency were $130
million, $120 million and $114 million, respectively, based upon
respective foreign currency exchange rates on the date of receipt.
These amounts were recognized in the corporation’s earnings when
received and the payments increased diluted earnings per share
from continuing operations in 2008, 2007 and 2006 by $0.18,
$0.16 and $0.15, respectively.
Net Interest Expense Net interest expense decreased by $33 million
in 2008 to $100 million. The decrease was a result of a $74 million
decline in interest expense due to lower average debt levels, which
more than offset a $41 million reduction in interest income result-
ing from a decline in cash and cash equivalents, a portion of which
was used to repay debt. Net interest expense in 2007 was $94 mil-
lion lower than 2006 due to lower debt levels and higher interest
income partially offset by higher average interest rates.
Income Tax Expense The effective tax rate on continuing operations
in 2008, 2007 and 2006 was impacted by a number of significant
items that are shown in the reconciliation of the corporation’s effective
tax rate to the U.S. statutory rate in Note 21 to the Consolidated
Financial Statements. Additional information regarding income
taxes can be found in “Significant Accounting Policies and Critical
Estimates” within Management’s Discussion and Analysis.
2008 2007 2006
Continuing operations
Income before income taxes $÷«160 $429 $«189
Income tax expense (benefit) 201 (11) 158
Effective tax rates 125.6% (2.6) % 83.6%
Transformation costs, including accelerated depreciation, in 2008
were down $67 million from 2007 due to a reduction in costs asso-
ciated with the corporation’s decision to centralize the management
of its North American and European operations, which resulted in
costs being incurred in 2007 for employee relocation, recruitment
and retention bonuses in order to maintain business continuity.
These cost reductions were partially offset by $15 million of computer
software amortization expense related to systems that were put
into use in 2008.
The reduction in costs from 2006 to 2007 was driven primarily
by lower employee costs related to relocation, recruitment and
retention bonuses resulting from the centralization of the North
American and European operations.
Exit Activities, Asset and Business Dispositions Exit activities,
asset and business dispositions are as follows:
In millions 2008 2007 2006
Charges for (income from) exit activities
Severance $31 $«93 $159
Exit of leased and owned facilities 51314
Other 3–(7)
Asset and business dispositions (1) (12) (80)
$38 $«94 $««86
The net charges recognized in 2008 are $56 million lower than
the prior year primarily due to a $62 million reduction in employee
termination costs as well as lower charges related to the exit of
certain non-cancelable lease and other contractual obligations,
partially offset by an $11 million reduction in income related to
asset and business dispositions. Costs in 2007 were higher than
in 2006 because the corporation had implemented extensive
restructuring plans to terminate employees in all our North
American segments and the International Beverage segment.
In 2007, the corporation also recognized costs to exit leased space
in connection with the relocation of the corporation’s headquarters
to Downers Grove, Illinois. The decline in income from asset and
business dispositions from 2006 to 2007 is due to a nonrecurring
gain of $119 million in 2006 related to the sale of working capital
of a European rice product line, certain European skin care and
sunscreen assets, certain assets related to the French and Belgian
nuts and snacks business and certain other asset dispositions,
which was partially offset by a $39 million charge to prepare
businesses for disposition.