Sara Lee 2009 Annual Report Download - page 39

Sara Lee Corporation and Subsidiaries 37
Credit Facilities and Ratings The corporation has a $1.85 billion
five-year revolving credit facility available which management considers
sufficient to satisfy its operating requirements. This facility expires in
December 2011 and the pricing under this facility is based upon the
corporation’s current credit rating. At June 27, 2009, the corporation did
not have any borrowings outstanding under this facility and the facility
does not mature or terminate upon a credit rating downgrade. The
corporation’s debt agreements and credit facility contain customary
representations, warranties and events of default, as well as, affirmative,
negative and financial covenants with which the corporation is in
compliance. One financial covenant includes a requirement to maintain
an interest coverage ratio of not less than 2.0 to 1.0. The interest
coverage ratio is based on the ratio of EBIT to consolidated net interest
expense with consolidated EBIT equal to net income plus interest
expense, income tax expense, and extraordinary or non-recurring
non-cash charges and gains. For the 12 months ended June 27, 2009,
the corporation’s interest coverage ratio was 8.4 to 1.0.
The corporation’s credit ratings by Standard & Poor’s, Moody’s
Investors Service and FitchRatings, as of June 27, 2009, were
as follows.
Senior
Unsecured Short-term
Obligations Borrowings Outlook
Standard & Poor’s BBB+ A-2 Negative
Moody’s Baa1 P-2 Stable
FitchRatings BBB F-2 Positive
Changes in the corporation’s credit ratings result in changes in
the corporation’s borrowing costs. The corporation’s current short-term
credit rating allows it to participate in a commercial paper market
that has a number of potential investors and a historically high degree
of liquidity. A downgrade of the corporation’s short-term credit rating
would place the corporation in a commercial paper market that would
contain significantly less market liquidity than it currently operates
in with a rating of “A-2,” “P-2,” or “F-2.” This would reduce the
amount of commercial paper the corporation could issue and raise
its commercial paper borrowing cost and would require immediate
payment or the posting of collateral on the derivative instruments
in net liability positions in accordance with ISDA rules. See Note
18, “Financial Instruments” for more information. To the extent that
the corporation’s operating requirements were to exceed its ability
to issue commercial paper following a downgrade of its short-term
credit rating, the corporation has the ability to use available credit
facilities to satisfy operating requirements, if necessary.
Off-Balance Sheet Arrangements The off-balance sheet arrange-
ments that are reasonably likely to have a current or future effect on
the corporation’s financial condition are lease transactions for facilities,
warehouses, office space, vehicles and machinery and equipment.
Leases The corporation has numerous operating leases for manu-
facturing facilities, warehouses, office space, vehicles and machinery
and equipment. Operating lease obligations are scheduled to be paid
as follows: $101 million in 2010, $75 million in 2011, $52 million
in 2012, $35 million in 2013, $25 million in 2014 and $86 million
thereafter. The corporation is also 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 terms of
the leases on these properties in the event that the owners of the
businesses are unable to satisfy the lease liability. The minimum
annual rentals under these leases are as follows: $28 million
in 2010, $22 million in 2011, $17 million in 2012, $14 million
in 2013, $12 million in 2014 and $42 million thereafter.
Future Contractual Obligations and Commitments During 2007,
the corporation exited a U.S. meat production plant that included
a hog slaughtering operation. Certain purchase contracts for the
purchase of live hogs at this facility were not exited or transferred
after the closure of the facility. Currently, these contracts represent
a remaining purchase commitment of approximately 500 thousand
hogs through June 2012, approximately 45% of which will expire by
December 2009. Under the terms of these contracts, the corpora-
tion will continue to purchase these live hogs and therefore, the
corporation has entered into a hog sales contract under which these
hogs will be sold to another slaughter operator. The corporation’s
purchase price of these hogs is generally based on the price of corn
products, and the corporation’s selling price for these hogs is
generally based on USDA posted hog prices. Divergent movements
in these indices will result in either gains or losses on these hog
transactions. Expected losses from the sale of these hogs are
recognized when the loss is probable of occurring. At the end of
2009, based on current market pricing, the corporation deemed
that it was not probable that material future near-term losses
would occur. The contractual commitment for these purchases
is included in the table below.