Sara Lee 2013 Annual Report Download - page 21

The Hillshire Brands Company 19
have received notice that the plan to which we contribute has been
designated in critical status. The trustees of critical status multi-
employer plans must adopt a rehabilitation or funding improvement
plan designed to improve the plan’s funding within a prescribed
period of time. Rehabilitation and funding improvement plans may
include increased employer contributions, reductions in benefits
or a combination of the two. Unless otherwise agreed upon, any
requirement to increase employer contributions will not take effect
until the current collective bargaining agreements expire. However,
a five percent surcharge for the initial critical year (increasing to
ten percent for the following and subsequent years) is imposed on
contributions to plans in critical status and remains in effect until
the bargaining parties agree on modifications consistent with the
rehabilitation plan adopted by the trustees. In addition, the failure
of a plan to meet funding improvement targets provided in its
rehabilitation or funding improvement plan could result in the
imposition of an excise tax on contributing employers.
Under current law regarding multi-employer pension plans, a
withdrawal or partial withdrawal from any plan that was underfunded
would render us liable for our proportionate share of that underfund-
ing. This potential unfunded pension liability also applies ratably to
other contributing employers. Information regarding underfunding
is generally not provided by plan administrators and trustees on a
current basis and when provided, is difficult to independently validate.
Any public information available relative to multi-employer pension
plans may be dated as well. In the event a withdrawal or partial
withdrawal was to occur with respect to the MEPP to which the com-
pany makes contributions, the impact to our consolidated financial
statements could be material. Withdrawal liability triggers could
include the company’s decision to close a plant or the dissolution
of a collective bargaining unit.
The company’s regularly scheduled contributions to MEPPs
related to continuing operations totaled approximately $1 million
in 2013, $2 million in 2012 and $3 million in 2011. For continuing
operations, the company incurred withdrawal liabilities of an
immaterial amount in 2013 and 2011 and $3 million in 2012.
REPATRIATION OF FOREIGN EARNINGS
AND INCOME TAXES
The company intends to permanently reinvest all of its earnings
from continuing operations outside of the U.S. and, therefore, has not
recognized U.S. tax expense on these earnings. In 2012, the discontin-
ued operations of the international coffee and tea business recognized
$15.5 million of expense for repatriating a portion of 2012 and prior
year foreign earnings to the U.S. In addition, the company has recog-
nized $25 million of tax expense in 2012 related to the repatriation
of the proceeds on the sale of the insecticides business.
In the third quarter of 2010, the company established a deferred tax
liability in anticipation of the repatriation of foreign earnings required
to satisfy commitments to shareholders. This deferred liability was
subsequently updated each quarter as proceeds of non-US divestments
and other cash movements were realized. As a consequence of the
spin-off of the international coffee and tea business, the repatriation
of unremitted earnings was no longer required. As such, in 2012 the
company released approximately $623 million of deferred tax liabili-
ties on its balance sheet with a corresponding reduction in the tax
expense of the discontinued international coffee and tea business.
CREDIT FACILITIES AND RATINGS
The company has a $750 million credit facility that expires in June
2017. The $750 million credit facility has an annual fee of 0.15% as
of June 29, 2013 and pricing under this facility is based on the com-
pany’s current credit rating. At June 29, 2013, the company did not
have any borrowings outstanding under this facility but it did have
approximately $57 million of letters of credit outstanding under
this credit facility.
The company’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 company 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 29, 2013, the company’s interest coverage
ratio was 9.0 to 1.0.
The financial covenants also include a requirement to maintain
a leverage ratio of not more than 3.5 to 1.0. The leverage ratio is
based on the ratio of consolidated total indebtedness to an adjusted
consolidated EBITDA. For the 12 months ended June 29, 2013, the
leverage ratio was 2.1 to 1.0.
The company’s credit ratings by Standard & Poor’s, Moody’s
Investors Service and FitchRatings, as of June 29, 2013 were
as follows:
Senior
Unsecured Short-term
Obligations Borrowings Outlook
Standard & Poor’s BBB A-2 Stable
Moody’s Baa2 P-2 Stable
Fitch BBB F-2 Stable