Sara Lee 2011 Annual Report Download - page 70

FINANCIAL REVIEW
Cash and Equivalents, Short-Term Investments and Cash Flow The majority of the corporation’s cash balance of $2.066 billion at the end of 2011 was invested in interest-bearing bank deposits that are redeemable on demand by the corporation. A significant portion of
cash and equivalents are held by the corporation’s subsidiaries out- side of the U.S. A portion of these balances will be used to fund future working capital and other funding requirements.
The corporation has also recognized amounts for Project Accelerate
and other restructuring charges and at the end of 2011 recognized a liability of approximately $200 million that relates primarily to future severance and other lease and contractual payments. These amounts will be paid when the obligation becomes due, and the corporation expects a significant portion of these amounts will be paid in 2012. The anticipated 2012 payments of cash taxes and severance associated with previously recognized exit activities will have a significant negative impact on cash from operating activities. Dividend The corporation’s annualized dividend amounts per share were $0.46 in 2011 and $0.44 in 2010 and 2009. As previously noted, the board of directors intends to declare a $3.00 per share dividend on the corporation’s common stock, the majority of which will be funded from proceeds from the sale of the North American Fresh Bakery business. This special dividend is expected to be declared and paid in fiscal 2012 before the completion of the spin- off. Future dividends are determined by the corporation’s Board of Directors and are not guaranteed. Credit Facilities and Ratings In June 2011, the corporation amended its $1.85 billion five-year revolving credit facility that was set to expire in December 2011. The amendment lowered the dollar amount of the facility to $1.2 billion and extended the maturity date to the earlier of June 4, 2013 or the date on which the spin-off of the international beverage business is consummated. The credit facility has an annual fee of 0.05% as of July 2, 2011 and pricing under this facility is based on the corporation’s current credit rating. At July 2, 2011, the corporation did not have any borrowings outstanding under this facility but it did have approximately $150 million of letters of credit outstanding under this credit facility, of which $100 million relates to the North American fresh bakery operations. 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 July 2, 2011, the corporation’s interest coverage ratio was 7.0 to 1.0.
In addition to regular contributions, the corporation could be
obligated to pay additional contributions (known as a complete or partial withdrawal liability) if a MEPP has unfunded vested benefits. These withdrawal liabilities, which would be triggered if the corpora- tion ceases to make contributions to a MEPP with respect to one or more collective bargaining units, would equal the corporation’s proportionate share of the unfunded vested benefits based on the year in which liability is triggered. The corporation believes that certain of the MEPPs in which it participates have unfunded vested benefits, and some are significantly underfunded. Withdrawal liabil- ity triggers could include the corporation’s decision to close a plant or the dissolution of a collective bargaining unit. Due to uncertainty regarding future withdrawal liability triggers, we are unable to deter- mine the amount and timing of the corporation’s future withdrawal liability, if any, or whether the corporation’s participation in these MEPPs could have any material adverse impact on its financial condition, results of operations or liquidity. Disagreements over potential withdrawal liability may lead to legal disputes.
The corporation’s regular scheduled contributions to MEPPs
related to continuing operations totaled approximately $3 million in 2011, $4 million in 2010, and $5 million in 2009. For continuing operations, the corporation incurred withdrawal liabilities of an immaterial amount in 2011, 2010 and 2009. Repatriation of Foreign Earnings and Income Taxes The corporation anticipates that it will continue to repatriate a portion of its foreign subsidiary’s future earnings. The tax expense associated with any return of foreign earnings will be recognized as such earnings are realized. However, the corporation pays the liability upon completing the repatriation action. The repatriation of foreign sourced earnings is not the only source of liquidity for the corporation. In addition to cash flow derived from operations, the corporation has access to the commercial paper market, a $1.2 billion revolving credit facility, and access to public and private debt markets as a means to gen- erate liquidity sufficient to meet its U.S. cash flow needs.
In 2011, the continuing operations tax expense for repatriating
a portion of 2011 and prior year earnings to the U.S. is $14 million, with the majority of these taxes paid during 2011. In addition, the corporation has recognized $180 million of tax expense in discon- tinued operations related to the repatriation of the gain on the sale of the household and body care businesses of which $190 million was recognized in gains on sales and a credit of $10 million was recognized in discontinued operating results. It is anticipated that a majority of the cash taxes related to this repatriation action will be paid after calendar 2011. The deferred tax liability at the end of 2011 is $769 million and relates primarily to repatriation taxes recognized in 2010 and 2011.