Sara Lee 2011 Annual Report Download - page 58

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FINANCIAL REVIEW
• Remittance of Foreign Earnings – The 2010 effective tax rate
was 7 percentage points higher than 2009 primarily due to a tax
charge of $145 million related to foreign earnings in 2010 that are
no longer indefinitely reinvested. Of this total, $121 million was a
charge in connection with the corporation’s decision to no longer
reinvest overseas earnings primarily attributable to existing overseas
cash and the book value of the household and body care businesses.
• Finalization of Tax Reviews and Audits and Changes in Estimate
on Tax Contingencies – The 2010 effective tax rate was 18 percent-
age points lower than 2009 due to a $156 million increase in tax
benefits resulting from the resolution of tax audits, the expiration of
statutes of limitations, and changes in estimate on tax contingencies
in various countries and various state and local jurisdictions.
• Receipt of Contingent Sales Proceeds – In 2010, the corporation
recognized a tax benefit of $47 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 $53 million
benefit in 2009.
• Foreign Earnings – The 2010 effective tax rate was 11 percentage
points higher than 2009 as a result of a change in the corporation’s
global mix of earnings, the tax characteristics of the corporation’s
income, and the benefit from certain foreign jurisdictions that have
lower tax rates.
Income from Continuing Operations and Diluted Earnings Per
Share (EPS) from Continuing Operations Income from continuing
operations in 2011 was $338 million, a decrease of $244 million
over the prior year. The decline was due to the lower results for the
business segments, the non-recurrence of $133 million of contin-
gent sale proceeds, $55 million of debt extinguishment costs and
an increase in income taxes. Income from continuing operations in
2010 was $582 million, an increase of $398 million over the prior
year. The improvement was due to a $270 million after tax decline
in impairment charges and improved business segment results.
The net income from continuing operations attributable to
Sara Lee, which excludes the results of noncontrolling interests,
was income of $338 million in 2011, $582 million in 2010 and
$184 million in 2009.
• Finalization of Tax Reviews and Audits and Changes in Estimate
on Tax Contingencies – The 2011 effective tax rate was 21 percent-
age points higher than 2010 due to a $158 million decrease in tax
benefits resulting from the resolution of tax audits, the expiration
of statutes of limitations, and changes in estimate on tax contin-
gencies in various countries and various state and local jurisdictions.
Currently, the corporation believes that it is reasonably possible that
the liability for unrecognized tax benefits will decrease by approxi-
mately $15 million to $40 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 juris-
dictions. 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 Taxes
under Critical Accounting
Estimates included in Management’s Discussion and Analysis.
• Receipt of Contingent Sales Proceeds – In 2010, the corporation
recognized a tax benefit of $47 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 no benefit
in 2011. The 2010 payment represented the final payment under
the sales agreement and, as a result, 2010 was the final year the
corporation recognized a tax rate reduction related to the contin-
gent sales proceeds.
• Foreign Earnings – The 2011 effective tax rate was 4 percentage
points lower than 2010 as a result of a change in the corporation’s
global mix of earnings, the tax characteristics of the corporation’s
income, and the benefit from certain foreign jurisdictions that have
lower tax rates. As specifically highlighted in Part I. Item 1A. Risk
Factors, of the corporation’s Form 10-K, the corporation expects
that its effective tax rate will be impacted in future fiscal years as
a result of its global mix of earnings.
2010 vs. 2009
In 2010, the corporation recognized tax expense
on continuing operations of $124 million, or an effective tax rate of
17.6%, compared to tax expense of $114 million, or an effective tax
rate of 38.4%, in 2009. The significant components impacting the
change in the corporation’s 2010 effective tax rate are as follows: