Sara Lee 2011 Annual Report Download - page 51

48/49 Sara Lee Corporation and Subsidiaries
The company’s international operations also provide a significant
portion of the company’s cash flow from operating activities, which has required and is expected to continue to require the company to repatriate a greater portion of cash generated outside of the U.S. The repatriation of these funds has resulted in higher income tax expense and cash tax payments.
In preparation for the spin-off, the corporation has identified
cost reduction opportunities of $180 million to $200 million, com- pared to fiscal 2011, achievable within the next two years. These cost reductions result from the downsizing of corporate resources, the reduction of overhead within both the North American meat businesses and the international coffee and tea businesses as well as the completion of Project Accelerate initiatives. These savings are expected to more than offset the $50 million to $60 million of stranded costs from business dispositions.
In 2012, the corporation expects charges of approximately
$425 million relating to the above cost savings initiatives and other actions. These costs are comprised of $300 million in restructuring actions and $125 million for transaction-related costs. Non-GAAP Measures Management measures and reports Sara Lee’s financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). In this report, Sara Lee highlights certain items that have significantly impacted the corporation’s financial results and uses several non-GAAP financial measures to help investors understand the financial impact of these significant items. The non- GAAP financial measures used by Sara Lee in this annual report are adjusted net sales, adjusted operating segment income, and adjusted operating income, which exclude from a financial measure computed in accordance with GAAP the impact of significant items, the receipt of contingent sale proceeds, the impact of acquisitions and dispositions, the impact of the 53rd week and changes in foreign currency exchange rates. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of Sara Lee’s business that, when viewed together with Sara Lee’s financial results computed in accordance with GAAP, provide a more complete understanding of factors and trends affecting Sara Lee’s historical financial performance and projected future operating results, greater transparency of underlying profit trends and greater comparability of results across periods. These non-GAAP financial measures are not intended to be a substitute for the comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Challenges and Risks As an international consumer products company, we face certain risks and challenges that impact our business and financial performance. The risks and challenges described below have impacted our performance and are likely to impact our future results as well.
The food and consumer products businesses are highly
competitive. In many product categories, we compete not only with widely advertised branded products, but also with private label prod- ucts that are generally sold at lower prices. As a result, from time to time, we may need to reduce the prices for some of our products to respond to competitive pressures. Economic uncertainty may result in increased pressure to reduce the prices for some of our products, limit our ability to increase or maintain prices or lead to a continued shift toward private label products. Any reduction in prices or our inability to increase prices when raw material costs increase could negatively impact profit margins and the overall profitability of our reporting units, which could potentially trigger a goodwill impairment.
Commodity prices directly impact our business because of their
effect on the cost of raw materials used to make our products and the cost of inputs to manufacture, package and ship our products. Many of the commodities we use, including beef, pork, coffee, wheat, corn, corn syrup, soybean and corn oils, butter, sugar and energy, have experienced price volatility due to factors beyond our control. The company’s objective is to offset commodity price increases with pricing actions and to offset any operating costs increases with continuous improvement savings. During 2011, commodity costs, excluding mark-to-market derivative gains/losses, increased approx- imately $646 million over the prior year, including $55 million of currency mark-to-market losses related to coffee purchases recognized by the International Beverage segment. This increase in commodity costs was only partially offset by approximately $468 million in pricing actions. The company expects commodity costs to continue to increase in 2012.
The company’s business results are also heavily influenced by
changes in foreign currency exchange rates. For the most recently completed fiscal year, approximately 50% of net sales and operating segment income related to continuing operations were generated outside of the U.S. As a result, changes in foreign currency exchange rates, particularly the European euro, can have a significant impact on the reported results. A three cent movement in the euro exchange rate is expected to have approximately a one cent impact on the corporation’s diluted earnings per share.