Sara Lee 2011 Annual Report Download - page 72

FINANCIAL REVIEW Guarantees The corporation is a party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts entered into by the corporation under which the corporation agrees to indemnify a third party against losses arising from a breach of representations and covenants related to such matters as title to assets sold, the collectibility of receivables, specified environmental matters, lease obligations assumed and certain tax matters. In each of these circumstances, payment by the corporation is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow the corporation to challenge the other party’s claims. In addition, the corporation’s obligations under these agreements may be limited in terms of time and/or amount, and in some cases the corporation may have recourse against third parties for certain payments made by the corporation. It is not possible to predict the maximum potential amount of future payments under certain of these agreements, due to the conditional nature of the corporation’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the corporation under these agreements have not had a material effect on the corporation’s business, financial condition or results of operations. The corporation believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the corporation’s business, financial condition or results of operations.
Payments Due by Fiscal Year
In millions Total 2012 2013 2014 2015 2016 Thereafter Long-term debt $2,409 $÷«473 $÷«521 $÷20 $÷77 $405 $÷«913 Interest on debt obligations1957 96 86 73 63 52 587
Operating lease obligations 243 58 43 31 25 17 69 Purchase obligations23,420 1,732 817 384 233 186 68
Other long-term liabilities3380 75 86 75 69 42 33
Subtotal 7,409 2,434 1,553 583 467 702 1,670
Contingent lease obligations474 15 11 10 8 2 28
Total5$7,483 $2,449 $1,564 $593 $475 $704 $1,698
1 Interest obligations on floating rate debt instruments are calculated for future periods using interest rates in effect at the end of 2011. See Note 12 to the Consolidated Financial Statements
for further details on the corporation’s long-term debt.
2 Purchase obligations include expenditures to purchase goods and services in the ordinary course of business for production and inventory needs (such as raw materials, supplies, packaging,
manufacturing arrangements, storage, distribution and union wage agreements); capital expenditures; marketing services; information technology services; and maintenance and other profes- sional services where, as of the end of 2011, the corporation has agreed upon a fixed or minimum quantity to purchase, a fixed, minimum or variable pricing arrangement and the approximate delivery date. Future cash expenditures will vary from the amounts shown in the table above. The corporation enters into purchase obligations when terms or conditions are favorable or when a long-term commitment is necessary. Many of these arrangements are cancelable after a notice period without a significant penalty. Additionally, certain costs of the corporation are not included in the table since at the end of 2011 an obligation did not exist. An example of these includes situations where purchasing decisions for these future periods have not been made at the end of 2011. Ultimately, the corporation’s decisions and cash expenditures to purchase these various items will be based upon the corporation’s sales of products, which are driven by consumer demand. The corporation’s obligations for accounts payable and accrued liabilities recorded on the balance sheet are also excluded from the table.
3 Represents the projected payment for long-term liabilities recorded on the balance sheet for deferred compensation, restructuring costs, deferred income, sales and other incentives. It also includes
the projected annual pension contribution of 32 million British pounds through 2016 related to the terms of an agreement to fully fund certain U.K. pension obligations. The corporation has employee benefit obligations consisting of pensions and other postretirement benefits, including medical; other than the U.K. pension funding amounts, noted previously, pension and postretirement obliga- tions, including any contingent amounts that may be due related to multi-employer pension plans, have been excluded from the table. A discussion of the corporation’s pension and postretirement plans, including funding matters, is included in Notes 16 and 17 to the Consolidated Financial Statements. The corporation’s obligations for employee health and property and casualty losses are also excluded from the table. Finally, the amount does not include any reserves for income taxes because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes. See Note 18 to the corporation’s consolidated financial statements regarding income taxes for further details.
4 Contingent lease obligations represent leases on property operated by others that only become an obligation of the corporation in the event that the owners of the businesses are unable to
satisfy the lease liability. A significant portion of these amounts relates to leases operated by Coach, Inc. At July 2, 2011, the corporation has not recognized a contingent lease liability on the Consolidated Balance Sheets.
5 Contractual commitments and obligations identified under the accounting rules associated with accounting for contingencies are reflected and disclosed on the Consolidated Balance Sheets
and in the related notes. Amounts exclude any payments related to deferred tax balances including any tax related to future repatriation of foreign earnings. See Note 18 to the corporation’s Consolidated Financial Statements regarding income taxes for further details.
In 2010, the corporation recognized a $26 million charge for
a tax indemnification related to the corporation’s direct selling busi- ness that was divested in 2006. In October 2009, the Spanish tax administration upheld the challenge made by its local field exami- nation against tax positions taken by the corporation’s Spanish subsidiaries. In November 2009, the corporation filed an appeal against this claim with the Spanish Tax Court. In April 2010, the Spanish Chief Inspector upheld a portion of the claim raised by the Spanish tax authorities, which the corporation will appeal. The cor- poration believes it is adequately reserved for the claim upheld by the Spanish Chief Inspector. The corporation is currently appealing the Court’s decision and has obtained a bank guarantee of €64
million as security against all allegations.
The material guarantees for which the maximum potential amount
of future payments can be determined, include the corporation’s contingent liability on leases on property operated by others that is described above, and the corporation’s guarantees of certain third-party debt. These debt guarantees require the corporation to make payments under specific debt arrangements in the event that the third parties default on their debt obligations. The maximum potential amount of future payments that the corporation could be required to make in the event that these third parties default on their debt obligations is approximately $12 million. At the present time, the corporation does not believe it is probable that any of these third parties will default on the amount subject to guarantee.