Sara Lee 2009 Annual Report Download - page 24

Financial review
future fiscal years as a result of goodwill impairments. However, such
impact is wholly dependent on whether any of the corporation’s
reporting units are required to record a goodwill impairment charge,
the magnitude of any potential charge, and the extent of the corpo-
ration’s tax basis in the goodwill. As a result, management is not
able to predict the potential impact any future goodwill impairment
charges may have on the corporation’s effective tax rate.
•Remittance of Foreign Earnings – The corporation incurred a tax
charge of $58 million related to the repatriation of earnings from
certain foreign subsidiaries, compared to a $118 million tax charge
in 2008. This 2009 charge increased the effective rate by 9.8%.
The corporation expects to incur charges in future fiscal years from
the remittance of foreign earnings. See the discussion of
Repatriation
of Foreign Earnings and Income Taxes
in the Liquidity section of
Management’s Discussion and Analysis for more information.
•Finalization of Tax Reviews and Audits and Changes in Estimate
on Tax Contingencies – A $16 million benefit resulted from the
resolution of tax audits, the expiration of statutes of limitations,
and changes in estimate on tax contingencies, in various countries
including China, France, Greece, Italy, Kenya, Morocco, Spain, the
United Kingdom, the United States, and various state and local
jurisdictions. Of this amount, $3 million related to the resolution
of tax audits, $4 million related to the expiration of statutes of
limitations, and $9 million related to changes in estimate on tax
contingencies. In 2008, the corporation realized a $96 million tax
benefit upon reducing its tax contingency reserves related to uncertain
tax positions. The corporation expects that its effective tax rate will
continue to be impacted in future fiscal years due to the resolution
of tax contingencies. Currently, the corporation believes that it is
reasonably possible that the liability for unrecognized tax benefits
will decrease by approximately $100 million to $160 million within
the next 12 months from a variety of uncertain tax positions as a
result of the resolution of audits and the expiration of statutes of
limitations in several jurisdictions. A majority of this decrease would
impact the corporation’s effective tax rate. For a summary of open
audit years by significant jurisdiction and other critical estimates
surrounding the finalization of tax reviews and audits, see
Income
Tax es
under Critical Accounting Estimates included in Management’s
Discussion and Analysis.
•Receipt of Contingent Sales Proceeds – The corporation
recognized a tax benefit of $53 million related to its receipt of non-
taxable contingent sales proceeds pursuant to the sale terms of its
European cut tobacco business in 1999, compared to a $46 million
benefit in 2008. The corporation will continue to recognize a tax
rate reduction related to contingent sales proceeds received during
the agreement term, which is effective through July 2009.
22 Sara Lee Corporation and Subsidiaries
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 2009,
2008 and 2007 by $0.21, $0.18 and $0.16, respectively. Tobacco
continued to be a legal product in the required countries through
the final payment date in July 2009 and the corporation will
recognize income associated with the final scheduled payment
in the first quarter of 2010.
Net Interest Expense Net interest expense increased by $25 million
in 2009 to $125 million. The increase in net interest expense was
a result of a $42 million reduction in interest income resulting from
a decline in cash and cash equivalents, a portion of which was used
to repay debt. This increase was partially offset by a $17 million
decline in interest expense due to lower average debt levels. Net
interest expense declined by $33 million in 2008 as compared to the
prior year. 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 resulting from a
decline in cash and cash equivalents, a portion of which was used
to repay debt.
Income Tax Expense The effective tax rate on continuing operations
in 2009, 2008 and 2007 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 “Critical Accounting Estimates” within Management’s
Discussion and Analysis.
In millions 2009 2008 2007
Continuing operations
Income before income taxes $÷«588 $÷«160 $429
Income tax expense (benefit) 224 201 (11)
Effective tax rates 38.1% 125.6% (2.6) %
2009 vs. 2008 In 2009, the corporation recognized tax expense
on continuing operations of $224 million, or an effective tax rate
of 38.1%, compared to tax expense of $201 million in 2008, or an
effective tax rate of 125.6%. The significant components impacting
the corporation’s 2009 effective tax rate are as follows:
•Goodwill Impairment – The corporation’s 2009 effective tax rate
increased by 14.4% as a result of recognizing $242 million of non-
deductible goodwill impairments during the year, compared to
$790 million of non-deductible goodwill impairments in 2008. The
corporation expects that its effective tax rate may be impacted in