Hillshire Brands

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Hillshire Brands Reports Third Quarter Results

Expects Full Year EPS to Be at High End of Guidance Range

CHICAGO--(BUSINESS WIRE)--May. 2, 2013-- The Hillshire Brands Company (NYSE: HSH) today reported earnings for the third quarter and first nine months of fiscal 2013.

  • On-track executing first year of three-year plan
  • Net sales fell slightly, driven by a decline in the Foodservice/Other segment
  • Adjusted1 operating income declined 12.9% on planned increases in MAP and SG&A; reported operating income increased 18.8%
  • Adjusted diluted EPS of $0.35 better than anticipated and down 14.6%; reported diluted EPS of $0.34 up 47.8%
  • Fiscal 2013 adjusted diluted EPS expected to be at high end of previous guidance range of $1.60-$1.70

CEO Perspective

“We continue to make progress in executing our three-year plan, making strides in brand building, innovation and rigorous cost management,” said Sean Connolly, president and chief executive officer, The Hillshire Brands Company.

“We saw a strong response where we increased our advertising investment in the quarter. We also continued to build out our innovation pipeline. On the cost side, we have now identified opportunities to exceed the $100 million savings target we announced at our investor day in June. These initiatives will provide additional support for our growth strategy and further strengthen our confidence that we will deliver our mid-term targets.

“Our efforts to stabilize challenged businesses also progressed, but clearly our work here is not done. Overall, we are pleased with our efforts to date. In fact, we now expect full year EPS to be at the high end of our previous guidance,” added Connolly.

Discussion of Third Quarter Continuing Operations Results

Net sales declined slightly, driven by a decline in the Foodservice/Other segment. MAP investment increased to 4.2% of revenue versus 3.4% in the prior year's third quarter. Operating income was also impacted by planned increases in SG&A as transition service agreements expired and the company approached targeted staffing levels.

 
1 The term “adjusted diluted EPS” and other financial measures identified as “adjusted” are explained and reconciled to comparable GAAP measures at the end of this release.
 
 

Key Financial Data, Continuing Operations

$ in millions, except per share

             
Third Quarter First Nine Months
2013     2012     % Change 2013     2012     % Change
Adjusted Net Sales $ 924 $ 932 (1.0 )% $ 2,958 $ 2,920 1.3 %
Reported Net Sales 924 935 (1.3 )% 2,958 2,975 (0.6 )%
Adj. Operating Income 72 83 (12.9 )% 300 241 24.6 %
Rep. Operating Income 65 54 18.8 % 248 101 NM
Adj. Diluted EPS $ 0.35 $ 0.41 (14.6 )% $ 1.46 $ 1.14 28.1 %
Rep. Diluted EPS $ 0.34 $ 0.23 47.8 % $ 1.21 $ 0.36 NM
 

Retail

Net sales and volume in the Retail segment were flat compared to the prior year's third quarter. Investments in innovation offset gains in pricing and mix.

Progress in the meat-centric food portfolio continued as both volume and sales grew. Jimmy Dean continued its strong performance behind increased MAP spending which drove growth in breakfast sandwiches and bowls. Ball Park grew as increased MAP spending behind Flame Grilled Patties drove sales. The company's artisanal brands, Aidells and Gallo, continued to grow behind new product launches. Hillshire Farm lunchmeat declined, as anticipated, as the company pulled back on MAP and merchandising support to accommodate the supply chain transition to the new lunchmeat package. This transition to the new packaging was more challenging than expected. The company will be implementing solutions to address these challenges in the fourth quarter.

Frozen bakery sales declined in the quarter as a result of planned product discontinuations of low margin SKUs and pricing actions.

Adjusted operating segment income decreased by 3.3% behind planned increases in SG&A and increased investment behind brand building and innovation.

Foodservice/Other

Adjusted net sales declined 3.9% and reported net sales declined 5.0% from the prior year's third quarter. Increased volumes, driven by commodity turkey sales, were offset by unfavorable mix and lower pricing.

While the segment had pockets of growth in the quarter, including volume growth in its convenience store and upscale dessert businesses, macroeconomic pressure on our foodservice customers and continued weak industry trends remain a challenge.

Adjusted and reported operating segment income declined by 41.5% and 47.3%, respectively. The decreases are primarily the result of lower net sales.

Corporate

Excluding significant items, $13 million of corporate expenses is $1 million higher than the third quarter of fiscal 2012.

Guidance and Outlook

The company expects fiscal 2013 adjusted diluted EPS to be at the high end of the previous guidance range of $1.60 - $1.70. This guidance takes into account the expected sales impact and one-time expenses to resolve the previously discussed challenges with the Hillshire Farm lunchmeat package transition.

New Cost Savings Initiatives

At the June 2012 Investor Day presentation, the company announced that it expected to deliver $100 million of savings between fiscal 2013 and fiscal 2015 in support of mid-term targets. At that time, initiatives to deliver $65 million of savings had been identified and are on-track to be realized.

The company has now identified initiatives to deliver the remaining $35 million of cost savings as well as approximately $45 million of additional savings through fiscal 2016. One-time cash investments of $80 to $100 million between fiscal 2013 and fiscal 2016 are expected to deliver ongoing savings of $80 million annually. Non-cash charges may also be taken as the company implements the initiatives.

These initiatives will unlock efficiencies in revenue management, supply chain, and support processes to fuel the company's growth agenda. Additionally, the initiatives will strengthen capabilities that will further position the company for sustained growth and profitability.

Webcast

The Hillshire Brands Company's review of its results for the third quarter and first nine months of fiscal 2013 will be broadcast live via the Internet today at 9:30 a.m. CDT. The live webcast, together with the slides reviewed during the webcast, can be accessed in the Investor Relations section on www.hillshirebrands.com. For people who are unable to listen to the webcast live, a recording will be available on the website at 2:00 p.m. CDT on the day of the webcast until November 1, 2013.

About The Hillshire Brands Company

The Hillshire Brands Company (NYSE: HSH) is a leader in meat-centric food solutions for the retail and foodservice markets. The company generates approximately $4 billion in annual sales and has approximately 9,500 employees. Hillshire Brands' portfolio includes iconic brands such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery and Chef Pierre pies, as well as artisanal brands Aidells and Gallo Salame. For more information on the company, please visit www.hillshirebrands.com.

Forward-Looking Statements

This release contains forward-looking statements regarding Hillshire Brands' business prospects and future financial results and metrics, including statements contained under the heading “CEO Perspective” and “Guidance and Outlook”. Forward-looking statements are typically preceded by terms such as “will,” “anticipates,” “intends,” “expects,” “likely” or “believes” and other similar terms. These forward-looking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events and are inherently uncertain.

Investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements, and the company wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could cause Hillshire Brands' actual results to differ from such forward-looking statements are those described under Item 1A, Risk Factors, in Hillshire Brands' most recent Annual Report on Form 10-K, as well as factors relating to:

  • Hillshire Brands' spin-off of its international coffee and tea business in June 2012, including (i) Hillshire Brands' ability to generate the anticipated benefits from the spin-off; (ii) the transition of leadership to a new senior management team and the departure of key personnel with historical knowledge; and (iii) potential tax liabilities and other indemnification obligations;
  • The consumer marketplace, such as (i) intense competition, including advertising, promotional and price competition; (ii) changes in consumer behavior due to economic conditions, such as a shift in consumer demand toward private label; (iii) fluctuations in raw material costs, Hillshire Brands' ability to increase or maintain product prices in response to cost fluctuations and the impact on profitability; (iv) the impact of various food safety issues and regulations on sales and profitability of Hillshire Brands' products; and (v) inherent risks in the marketplace associated with product innovations, including uncertainties related to execution and trade and consumer acceptance;
  • Hillshire Brands' relationship with its customers, such as (i) a significant change in Hillshire Brands' business with any of its major customers, such as Wal-Mart, its largest customer; and (ii) credit and other business risks associated with customers operating in a highly competitive retail environment; and
  • Other factors, such as (i) Hillshire Brands' ability to generate margin improvement through cost reduction and productivity improvement initiatives; (ii) Hillshire Brands' credit ratings, the impact of Hillshire Brands' capital plans on such credit ratings and the impact these ratings and changes in these ratings may have on Hillshire Brands' cost to borrow funds and access to capital/debt markets; and (iii) the settlement of a number of ongoing reviews of Hillshire Brands' income tax filing positions and inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which Hillshire Brands transacts or has transacted business.
 
 
Consolidated Statements of Income

For the Quarter and Nine Months ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

         
Quarter ended Nine Months ended
March 30,   March 31, March 30,   March 31,
2013 2012 2013 2012
Continuing Operations
Net sales $ 924   $ 935   $ 2,958   $ 2,975  
Cost of sales 652 675 2,060 2,144
Selling, general and administrative expenses 205 202 642 646
Net charges for exit activities, asset and business dispositions 1 4 7 70
Impairment charges 1     1   14  
Operating income 65 54 248 101
Interest expense 13 22 35 67
Interest income (2 ) (2 ) (5 ) (4 )
Income from continuing operations before income taxes 54 34 218 38
Income tax expense (benefit) 12   7   69   (4 )
Income from continuing operations 42   27   149   42  
Discontinued operations
Income (loss) from discontinued operations, net of tax expense (benefit) of $(5), $(29), $(7) and $28 4 28 13 (195 )
Gain (loss) on sale of discontinued operations, net of tax expense of $13, $29, $14 and $367 47   (58 ) 49   402  
Net income (loss) from discontinued operations 51   (30 ) 62   207  
Net income (loss) 93 (3 ) 211 249
Less: Income from noncontrolling interests, net of tax
Discontinued operations       3  
Net income (loss) attributable to Hillshire Brands $ 93   $ (3 ) $ 211   $ 246  
Amounts attributable to Hillshire Brands:
Net income from continuing operations $ 42 $ 27 $ 149 $ 42
Net income (loss) from discontinued operations 51 (30 ) 62 204
Earnings per share of common stock
Basic
Income from continuing operations $0.34 $0.23 $1.22 $0.36
Net income (loss) $0.76 $(0.02 ) $1.72 $2.08
Average shares outstanding 123 119 123 118
Diluted
Income from continuing operations $0.34 $0.23 $1.21 $0.36
Net income (loss) $0.75 $(0.02 ) $1.72 $2.07
Average shares outstanding 124 119 123 119
Cash dividends declared per share of common stock $0.125 $0.575 $0.375 $1.150
 
 

Financial Summary—As Adjusted (1)

For the Quarter and Nine Months ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

         
Quarter ended Nine Months ended

March 30,
2013

 

March 31,
2012

  %

Change

March 30,
2013

 

March 31,
2012

  %

Change

Continuing operations:
Adjusted net sales:
Retail $ 692 $ 691 % $ 2,188 $ 2,150 1.8 %
Foodservice/Other 232 241 (3.9 ) 770 776 (0.8 )
Intersegment         (6 )  
Total adjusted net sales $ 924   $ 932   (1.0 )% $ 2,958   $ 2,920   1.3 %
Adjusted operating income/(loss)
Retail $ 76 $ 79 (3.3 )% $ 272 $ 228 19.7 %
Foodservice/Other 9   16   (41.5 ) 62   65   (3.1 )
Adjusted operating segment income 85 95 (9.8 )% 334 293 14.6 %
General corporate expenses (12 ) (12 ) (32 ) (49 )
Mark-to-market derivatives gains/(losses) 1 1
Amortization of trademarks & intangibles (1 ) (1 )   (3 ) (3 )  
Total adjusted operating income $ 72   $ 83   (12.9 )% $ 300   $ 241   24.6 %
Adjusted income from continuing operations $ 43   $ 48   (9.5 )% $ 179   $ 135   32.0 %
Adjusted net income $ 47   $ 119   (59.6 )% $ 188   $ 423   (55.3 )%
Adjusted net income attributable to Hillshire Brands:
Continuing operations $ 43 $ 48 (9.5 )% $ 179 $ 135 32.0 %
Discontinued operations $ 4 $ 71 (94.4 )% $ 9 $ 285 (96.7 )%
Adjusted diluted earnings per share:
Income from continuing operations $ 0.35   $ 0.41   (14.6 )% $ 1.46   $ 1.14   28.1 %
Net income $ 0.38   $ 0.99   (61.6 )% $ 1.53   $ 3.53   (56.7 )%
Adjusted operating margin:
Retail 11.0 % 11.4 % (0.4 )% 12.4 % 10.6 % 1.8 %
Foodservice/Other 4.1 6.7 (2.6 ) 8.1 8.3 (0.2 )
Total Hillshire Brands 7.8 % 8.8 % (1.0 )% 10.1 % 8.2 % 1.9 %
 
  (1)   Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.
 
 
Financial Summary—As Reported

For the Quarter and Nine Months ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

         
Quarter ended Nine Months ended

March 30,
2013

 

March 31,
2012

  %
Change

March 30,
2013

 

March 31,
2012

  %
Change
Continuing operations:
Net sales:
Retail $ 692 $ 691 % $ 2,188 $ 2,150 1.8 %
Foodservice/Other 232 244 (5.0 ) 770 831 (7.3 )
Intersegment         (6 )  
Total net sales $ 924   $ 935   (1.3 )% $ 2,958   $ 2,975   (0.6 )%
Operating income/(loss)
Retail $ 74 $ 73 1.9 % $ 272 $ 202 35.0 %
Foodservice/Other 8   16   (47.3 ) 61   70   (12.6 )
Operating segment income 82 89 (7.1 )% 333 272 22.7 %
General corporate expenses (16 ) (35 ) (83 ) (168 )
Mark-to-market derivatives gains/(losses) 1 1
Amortization of trademarks & intangibles (1 ) (1 )   (3 ) (3 )  
Total operating income $ 65   $ 54   18.8 % $ 248   $ 101   NM
Income from continuing operations $ 42   $ 27   52.2 % $ 149   $ 42   NM
Net income (loss) $ 93   $ (3 ) NM $ 211   $ 249   (15.3 )%
Net income (loss) attributable to Hillshire Brands:
Continuing operations $ 42 $ 27 52.2 % $ 149 $ 42 NM
Discontinued operations $ 51 $ (30 ) NM $ 62 $ 204 (69.4 )%
Diluted earnings per share:
Income from continuing operations $ 0.34   $ 0.23   47.8 % $ 1.21   $ 0.36   NM
Net income (loss) $ 0.75   $ (0.02 ) NM $ 1.72   $ 2.07   (16.9 )%
Operating margin:
Retail 10.7 % 10.5 % 0.2 % 12.4 % 9.4 % 3.0 %
Foodservice/Other 3.7 6.7 (3.0 ) 8.0 8.5 (0.5 )
Total Hillshire Brands 7.0 % 5.8 % 1.2 % 8.4 % 3.4 % 5.0 %
 

NM = Not meaningful

 
 
Net Sales Bridge

For the Quarter and Nine Months ended March 30, 2013 (unaudited)

 

The following table illustrates the components of the change in net sales versus the prior year

           
Third quarter ended March 30, 2013 Retail Foodservice/

Other

Total

Business

Segments

Volume % 1.3 % 0.4 %
Mix 0.1 (3.2 ) (0.8 )
Price 0.2 (1.3 ) (0.2 )
Other (0.3 ) (0.7 ) (0.4 )
Adjusted net sales* change (3.9 ) (1.0 )
Dispositions   (1.1 ) (0.3 )
Total Net Sales Change % (5.0 )% (1.3 )%
First Nine Months ended March 30, 2013 Retail Foodservice/

Other

Total

Business

Segments

Volume 1.2 % 4.5 % 2.3 %
Mix 0.7 (3.7 ) (0.5 )
Price (0.2 ) (1.2 ) (0.4 )
Other 0.1   (0.4 ) (0.1 )
Adjusted net sales* change 1.8 (0.8 ) 1.3
Dispositions   (6.5 ) (1.9 )
Total Net Sales Change 1.8 % (7.3 )% (0.6 )%
 
  *   Adjusted net sales is a non-GAAP measure that excludes the impact of dispositions.
See detailed explanation of this and other non-GAAP measures in this release.
 
 
Condensed Consolidated Balance Sheet Data

At March 30, 2013 and June 30, 2012 (in millions—unaudited)

         
March 30, 2013 June 30, 2012
Assets
Cash and equivalents $ 416 $ 235
Trade accounts receivable, less allowances 206 248
Inventories 316 288
Current deferred income taxes 105 114
Income tax receivable 9 52
Other current assets 47   65
Total current assets 1,099 1,002
Property, net of accumulated depreciation of $1,176 and $1,245, respectively 824 847
Trademarks and other identifiable intangibles 124 132
Goodwill 348 348
Deferred income taxes 14 36
Other noncurrent assets 77 80
Noncurrent assets held for sale   5
$ 2,486   $ 2,450
Liabilities and Equity
Accounts payable $ 275 $ 359
Accrued liabilities 416 469
Current maturities of long-term debt 19   5
Total current liabilities 710 833
Long-term debt 930 939
Pension obligation 151 166
Other liabilities 273 277
Equity
Hillshire Brands common stockholders’ equity 422   235
$ 2,486   $ 2,450
 
 
Consolidated Statements of Cash Flows

For the Nine Months ended March 30, 2013 and March 31, 2012 (in millions—unaudited)

     
Nine Months ended
March 30, 2013     March 31, 2012
Operating activities -
Net income/(loss) $ 211 $ 249
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 110 197
Amortization 13 35
Impairment charges 1 418
Net (gain) loss on business dispositions (69 ) (769 )
Pension contributions, net of expense (9 ) (196 )
Refundable tax on Senseo payments (43 )
Increase (decrease) in deferred income taxes 31 147
Other (5 ) (41 )
Changes in current assets and liabilities, net of businesses acquired and sold:
Trade accounts receivable 32 43
Inventories (42 ) (76 )
Other current assets 17 34
Accounts payable (72 ) (70 )
Accrued liabilities (76 ) (132 )
Accrued taxes 40   64  
Net cash from (used in) operating activities 182   (140 )
Investing activities—
Purchases of property and equipment (103 ) (193 )
Purchases of software and other intangibles (4 ) (178 )
Acquisitions of businesses (29 )
Dispositions of businesses and investments 96 2,035
Cash received from derivative transactions 3 49
Sales of assets 1   2  
Net cash received from (used in) investing activities (7 ) 1,686  
Financing activities—
Issuances of common stock 42 62
Borrowings of other debt 173
Repayments of other debt and derivatives (5 ) (715 )
Net change in financing with less than 90-day maturities (109 )
Purchase of noncontrolling interest (10 )
Payments of dividends (31 ) (203 )

Net cash from (used in) financing activities

6   (802 )
Effect of changes in foreign exchange rates on cash   (155 )
Increase in cash and equivalents 181 589
Add: Cash balances of discontinued operations at beginning of year 1,992
Less: Cash balances of discontinued operations at end of period (2,555 )
Cash and equivalents at beginning of year 235   74  
Cash and equivalents at end of period $ 416   $ 100  
Supplemental cash flow data:
Cash paid for restructuring actions $ 69 $ 354
Cash contributions to pension plans 5 187
Cash paid for income taxes 5 180
 
 
Operating Results by Business Segment

For the Quarters ended March 30, 2013 and March 31, 2012 (in millions—unaudited)

             
As

Reported

Dispositions As

Adjusted (1)

Third Quarter 2013
Net sales:
Retail $ 692 $ $ 692
Foodservice/Other 232 232
Intersegment    
Total net sales $ 924   $   $ 924
Third Quarter 2012
Net sales:
Retail $ 691 $ $ 691
Foodservice/Other 244 3 241
Intersegment    
Total net sales $ 935   $ 3   $ 932
               
Third Quarter 2013 As

Reported

Dispositions Restructuring

Actions

Accelerated

Depreciation

Impairment

Charges

Other

Significant

Items

As

Adjusted (1)

Operating income:
Retail $ 74 $ $ $ (1 ) $ (1 ) $ $ 76
Foodservice/Other 8   1     (2 )     9  
Total operating segment income 82   1     (3 ) (1 )   85  
General corporate expenses (16 ) (10 ) 6 (12 )
Mark-to-market derivative gains/(losses)
Amortization of trademarks/intangibles (1 )           (1 )
Operating income $ 65   $ 1   $ (10 ) $ (3 ) $ (1 ) $ 6   $ 72  
Operating margin 7.0 % 7.8 %
Third Quarter 2012
Operating income:
Retail $ 73 $ $ $ (6 ) $ $ $ 79
Foodservice/Other 16   1     (1 )     16  
Total operating segment income 89   1     (7 )     95  
General corporate expenses (35 ) (13 ) (10 ) (12 )
Mark-to-market derivative gains/(losses) 1 1
Amortization of trademarks/intangibles (1 )           (1 )
Operating income $ 54   $ 1   $ (13 ) $ (17 ) $   $   $ 83  
Operating margin 5.8 % 8.8 %
 
  (1)   Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.
 
 
Operating Results by Business Segment

For the Nine Months ended March 30, 2013 and March 31, 2012 (in millions—unaudited)

             
As

Reported

Dispositions As

Adjusted (1)

First Nine Months of 2013
Net sales:
Retail $ 2,188 $ $ 2,188
Foodservice/Other 770 770
Intersegment      
Total net sales $ 2,958   $   $ 2,958  
First Nine Months of 2012
Net sales:
Retail $ 2,150 $ $ 2,150
Foodservice/Other 831 55 776
Intersegment (6 )   (6 )
Total net sales $ 2,975   $ 55   $ 2,920  
               
As

Reported

Dispositions Restructuring

Actions

Accelerated

Depreciation

Impairment

Charges

Other

Significant

Items

As

Adjusted (1)

First Nine Months of 2013
Operating income:
Retail $ 272 $ 3 $ $ (2 ) $ (1 ) $ $ 272
Foodservice/Other 61   3     (4 )     62  
Total operating segment income 333   6     (6 ) (1 )   334  
General corporate expenses (83 ) (36 ) (18 ) 3 (32 )
Mark-to-market derivative gains/(losses) 1 1
Amortization of trademarks/intangibles (3 )           (3 )
Operating income $ 248   $ 6   $ (36 ) $ (24 ) $ (1 ) $ 3   $ 300  
Operating margin 8.4 % 10.1 %
First Nine Months of 2012
Operating income:
Retail $ 202 $ $ (8 ) $ (18 ) $ $ $ 228
Foodservice/Other 70   8   (2 ) (1 )     65  
Total operating segment income 272   8   (10 ) (19 )     293  
General corporate expenses (168 ) (102 ) (10 ) (14 ) 7 (49 )
Mark-to-market derivative gains/(losses)
Amortization of trademarks/intangibles (3 )           (3 )
Operating income $ 101   $ 8   $ (112 ) $ (29 ) $ (14 ) $ 7   $ 241  
Operating margin 3.4 % 8.2 %
 
  (1)   Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.
 
 
Significant Items

Quarters ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

         
Quarter Ended March 30, 2013 Quarter Ended March 31, 2012
(In millions except per share data) Pretax

Impact

 

Net

Income/
(loss)

 

Diluted
EPS
Impact(1)

Pretax

Impact

 

Net

Income/
(loss)

 

Diluted
EPS
Impact(1)

Continuing Operations:
Restructuring actions:
Severance/ retention costs $ (1 ) $ (1 ) $ $ (2 ) $ (1 ) $ (0.01 )
Lease and contractual obligation exit costs (3 ) (2 ) (0.02 )
Consulting/advisory and other costs (9 ) (5 ) (0.05 ) (8 ) (11 ) (0.09 )
Income from asset dispositions 1 1
Accelerated depreciation (3 ) (2 ) (0.01 ) (17 ) (11 ) (0.09 )
Total restructuring actions (12 ) (7 ) (0.06 ) (30 ) (25 ) (0.20 )
Impairment charges (1 ) (1 ) (0.01 )
Pension settlement/withdrawal/other (1 ) (1 ) (0.01 )
Workers' compensation deposit adjustment 7   5   0.04        
Impact of significant items on income (loss) from continuing operations before significant tax matters (7 ) (4 ) (0.04 ) (30 ) (25 ) (0.20 )
Tax audit settlement/reserve adjustments   3   0.02     4   0.03  
Impact of significant items on income (loss) from continuing operations (7 ) (1 ) (0.01 ) (30 ) (21 ) (0.18 )
Discontinued operations:
Severance/ retention costs (1 ) (1 ) (10 ) (8 ) (0.07 )
Lease and contractual obligation exit costs (74 ) (56 ) (0.47 )
Consulting, advisory & other costs (24 ) (8 ) (0.07 )
Gain on the sale of discontinued operations 60 47 0.38 (29 ) (58 ) (0.48 )
Tax basis difference adjustment (3 ) (0.03 )
Tax audit settlement/reserve adjustment 1 0.01 36 0.31
Tax valuation allowance adjustment 1 0.01
Tax on unremitted earnings         (5 ) (0.04 )
Impact of significant items on income/(loss) from discontinued operations 59   47   0.38   (137 ) (101 ) (0.84 )
Impact of significant items on net income/(loss) attributable to Hillshire Brands $ 52   $ 46   $ 0.37   $ (167 ) $ (122 ) $ (1.01 )
 
Impact of significant items on income from continuing operations before income taxes
Cost of sales $ (2 ) $ (7 )
Selling, general and administrative expenses (3 ) (19 )
Impairment charges (1 )
Exit and business dispositions (1 ) (4 )
Total $ (7 ) $ (30 )
Notes:
    (1) EPS amounts are rounded to the nearest $0.01 and may not add to the total.
 
 
Significant Items

Nine Months ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

         
Nine Months Ended March 30, 2013 Nine Months Ended March 31, 2012
(In millions except per share data) Pretax

Impact

  Net

Income/

(loss)

 

Diluted
EPS
Impact(1)

Pretax

Impact

  Net

Income/

(loss)

 

Diluted
EPS
Impact(1)

Continuing Operations:
Restructuring actions:
Severance/ retention costs $ (1 ) $ (1 ) $ $ (20 ) $ (13 ) $ (0.10 )
Lease and contractual obligation exit costs (13 ) (8 ) (0.07 ) (53 ) (34 ) (0.28 )
Consulting/advisory and other costs (22 ) (14 ) (0.12 ) (39 ) (35 ) (0.29 )
Income from asset dispositions 6 4 0.03
Accelerated depreciation (24 ) (15 ) (0.12 ) (29 ) (18 ) (0.16 )
Total restructuring actions (54 ) (34 ) (0.28 ) (141 ) (100 ) (0.84 )
Gain on HBI tax settlement 15 15 0.12
Impairment charges (1 ) (1 ) (0.01 ) (14 ) (9 ) (0.07 )
Litigation accrual (11 ) (7 ) (0.06 )
Pension settlement/withdrawal/other (4 ) (3 ) (0.02 )
Tax indemnification accrual adjustment 3 4 0.03
Workers' compensation deposit adjustment 7   5   0.04        
Impact of significant items on income (loss) from continuing operations before significant tax matters (52 ) (33 ) (0.27 ) (148 ) (97 ) (0.81 )
Tax audit settlement/reserve adjustments   3   0.02     4   0.03  
Impact of significant items on income (loss) from continuing operations (52 ) (30 ) (0.25 ) (148 ) (93 ) (0.78 )
Discontinued operations:
Severance/ retention costs (44 ) (32 ) (0.27 )
Lease and contractual obligation exit costs (106 ) (80 ) (0.67 )
Consulting, advisory & other costs (3 ) (2 ) (0.02 ) (78 ) (52 ) (0.43 )
Impairment charges (404 ) (358 ) (3.01 )
Gain on the sale of discontinued operations 63 49 0.40 769 402 3.38
Thailand flood loss (2 ) (1 ) (0.01 )
Pension curtailment/withdrawal/other 1 1 (3 ) (2 ) (0.01 )
Tax basis difference adjustment 4 0.03 186 1.56
Tax audit settlement/reserve adjustments 1 0.01 105 0.88
Tax valuation allowance adjustment (72 ) (0.60 )
Tax on unremitted earnings         (177 ) (1.48 )
Impact of significant items on income from discontinued operations 61   53   0.43   132   (81 ) (0.67 )
Impact of significant items on net income (loss) attributable to Hillshire Brands $ 9   $ 23   $ 0.19   $ (16 ) $ (174 ) $ (1.46 )
 
Impact of significant items on income from continuing operations before income taxes
Cost of sales $ (6 ) $ (18 )
Selling, general and administrative expenses (38 ) (46 )
Impairment charges (1 ) (14 )
Exit and business dispositions (7 ) (70 )
Total $ (52 ) $ (148 )
Notes:
    (1) EPS amounts are rounded to the nearest $0.01 and may not add to the total.
 
 
EPS Reconciliation—Reported to Adjusted

Quarters ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

       
Quarter ended March 30, 2013 Quarter ended March 31, 2012
As

Reported

  Impact of

Significant

Items

  Adjusted (1) As

Reported

  Impact of

Significant

Items

  Adjusted (1)
Continuing operations:
Income from continuing operations before income taxes $ 54 $ (7 ) $ 61 $ 34 $ (30 ) $ 64
Income tax expense (benefit) 12   (6 ) 18   7   (9 ) 16  
Income from continuing operations 42   (1 ) 43   27   (21 ) 48  
Discontinued operations:
Income from discontinued operations, net of tax 4 4 28 (43 ) 71
Gain on sale of discontinued operations, net of tax 47   47     (58 ) (58 )  
Net income (loss) from discontinued operations 51   47   4   (30 ) (101 ) 71  
Net income (loss) 93 46 47 (3 ) (122 ) 119
Less: Income from noncontrolling interests, net of tax
Discontinued operations            
Net income (loss) attributable to Hillshire Brands $ 93   $ 46   $ 47   $ (3 ) $ (122 ) $ 119  
Amounts attributable to Hillshire Brands:
Net income from continuing operations $ 42 $ (1 ) $ 43 $ 27 $ (21 ) $ 48
Net income (loss) from discontinued operations 51 47 4 (30 ) (101 ) 71
Earnings per share of common stock:
Diluted
Income from continuing operations $ 0.34 $ (0.01 ) $ 0.35 $ 0.23 $ (0.18 ) $ 0.41
Net income (loss) $ 0.75 $ 0.37 $ 0.38 $ (0.02 ) $ (1.01 ) $ 0.99
Effective tax rate—continuing operations 22.3 % 28.3 % 20.0 % 23.4 %
 
  (1)  

Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.

 
 
EPS Reconciliation—Reported to Adjusted

Nine Months ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

       
Nine Months ended March 30, 2013 Nine Months ended March 31, 2012
As

Reported

  Impact of

Significant

Items

  Adjusted (1) As

Reported

  Impact of

Significant

Items

  Adjusted (1)
Continuing operations:
Income from continuing operations before income taxes $ 218 $ (52 ) $ 270 $ 38 $ (148 ) $ 186
Income tax expense (benefit) 69   (22 ) 91   (4 ) (55 ) 51  
Income from continuing operations 149   (30 ) 179   42   (93 ) 135  
Discontinued operations:
Income (loss) from discontinued operations, net of tax 13 4 9 (195 ) (483 ) 288
Gain on sale of discontinued operations, net of tax 49   49     402   402    
Net income from discontinued operations 62   53   9   207   (81 ) 288  
Net income 211 23 188 249 (174 ) 423
Less: Income from noncontrolling interests, net of tax
Discontinued operations       3     3  
Net income attributable to Hillshire Brands $ 211   $ 23   $ 188   $ 246   $ (174 ) $ 420  
Amounts attributable to Hillshire Brands:
Net income from continuing operations $ 149 $ (30 ) $ 179 $ 42 $ (93 ) $ 135
Net income from discontinued operations 62 53 9 204 (81 ) 285
Earnings per share of common stock:
Diluted
Income from continuing operations $ 1.21 $ (0.25 ) $ 1.46 $ 0.36 $ (0.78 ) $ 1.14
Net income $ 1.72 $ 0.19 $ 1.53 $ 2.07 $ (1.46 ) $ 3.53
Effective tax rate—continuing operations 31.7 % 33.6 % (11.7 )% 27.0 %
 
  (1)   Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.
 
 
Operating Income Reconciliation—Reported to Adjusted

Quarters ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

     
Quarter ended March 30, 2013
As

Reported

  Impact of

Significant

Items

  Dispositions   Adjusted (1)
Net Sales $ 924 $ $ $ 924
Cost of Sales 652   2     650
Gross Profit 272   (2 )   274
MAP Expense 39 39
SG&A (excluding MAP) 166 3 163
Net charges for exit activities, asset and business dispositions 1 1
Impairment charges 1   1    
Operating income $ 65   $ (7 ) $   $ 72
 
Quarter ended March 31, 2012
As

Reported

Impact of

Significant

Items

Dispositions Adjusted (1)
Net Sales $ 935 $ $ 3 $ 932
Cost of Sales 675   7   2   666
Gross Profit 260   (7 ) 1   266
MAP Expense 32 1 31
SG&A (excluding MAP) 170 19 (1 ) 152
Net charges for exit activities, asset and business dispositions 4 4
Impairment charges      
Operating income $ 54   $ (30 ) $ 1   $ 83
 
  (1)   Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.
 
 
Operating Income Reconciliation—Reported to Adjusted

Nine Months ended March 30, 2013 and March 31, 2012 (in millions, except per share data—unaudited)

     
Nine Months ended March 30, 2013
As

Reported

  Impact of

Significant

Items

  Dispositions   Adjusted (1)
Net Sales $ 2,958 $ $ $ 2,958
Cost of Sales 2,060   6     2,054
Gross Profit 898   (6 )   904
MAP Expense 127 127
SG&A (excluding MAP) 515 38 477
Net charges for exit activities, asset and business dispositions 7 7
Impairment charges 1   1    
Operating income $ 248   $ (52 ) $   $ 300
 
Nine Months ended March 31, 2012
As

Reported

Impact of

Significant

Items

Dispositions Adjusted (1)
Net Sales $ 2,975 $ $ 55 $ 2,920
Cost of Sales 2,144   18   39   2,087
Gross Profit 831   (18 ) 16   833
MAP Expense 109 2 107
SG&A (excluding MAP) 537 46 6 485
Net charges for exit activities, asset and business dispositions 70 70
Impairment charges 14   14    
Operating income $ 101   $ (148 ) $ 8   $ 241
 
  (1)   Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.
 

Explanation of Non-GAAP Financial Measures

Management measures and reports Hillshire Brands’ financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). In this release, Hillshire Brands highlights certain items that have significantly impacted the company’s financial results and uses several non-GAAP financial measures to help investors understand the financial impact of these significant items. Other companies may calculate these non-GAAP financial measures differently than Hillshire Brands.

“Significant items” are income or charges (and related tax impact) that management believes have had or are likely to have a significant impact on the earnings of the applicable business segment or on the total company for the period in which the item is recognized, are not indicative of the company’s core operating results and affect the comparability of underlying results from period to period. Significant items may include, but are not limited to: charges for exit activities; consulting and advisory costs; lease and contractual obligation exit costs; impairment charges; tax charges on deemed repatriated earnings; tax costs and benefits resulting from the disposition of a business; impact of tax law changes; gains on the sale of discontinued operations; changes in tax valuation allowances; and favorable or unfavorable resolution of open tax matters based on the finalization of tax authority examinations or the expiration of statutes of limitations. Management highlights significant items to provide greater transparency into the underlying sales or profit trends of Hillshire Brands or the applicable business segment or discontinued operations and to enable more meaningful comparability between financial results from period to period. Additionally, Hillshire Brands believes that investors desire to understand the impact of these factors to better project and assess the longer term trends and future financial performance of the company.

This release contains certain non-GAAP financial measures that exclude from a financial measure computed in accordance with GAAP the impact of the significant items and the impact of dispositions. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of Hillshire Brands’ business that, when viewed together with Hillshire Brands’ financial results computed in accordance with GAAP, provide a more complete understanding of factors and trends affecting Hillshire Brands’ 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.

In addition, investors frequently have requested information from management regarding the impact of significant items. Management believes, based on feedback it has received during earnings calls and discussions with investors, that these non-GAAP measures enhance investors’ ability to assess Hillshire Brands’ historical and projected future financial performance. Management also uses certain of these non-GAAP financial measures, in conjunction with the GAAP financial measures, to understand, manage and evaluate our businesses, in planning for and forecasting financial results for future periods, and as one factor in determining achievement of incentive compensation. Two of the five performance measures under Hillshire Brands’ annual incentive plan are net sales and earnings before interest and taxes (EBIT), which are the reported amounts as adjusted for significant items and other items. Many of the significant items will recur in future periods; however, the amount and frequency of each significant item varies from period to period.

The following is an explanation of the non-GAAP financial measures presented in this release.

“Adjusted Diluted EPS” excludes from diluted EPS for continuing operations the per share impact of significant items.

“Adjusted Net Income” excludes from net income the impact of significant items related to both continuing and discontinued operations recognized in the fiscal period presented. It does not exclude the impact of businesses that have been exited or divested and does not exclude the impact of businesses acquired after the start of the fiscal period presented. Results for businesses acquired are included from the date of acquisition onward.

“Adjusted Net Sales” for continuing operations for all segments combined or for an indicated business segment excludes from net sales as reported the impact of businesses that have been exited or divested for all periods presented but does not exclude the impact of businesses acquired after the start of the fiscal period presented. Results for businesses acquired are included from the date of acquisition onward.

“Adjusted Operating Income” for continuing operations excludes from operating income the impact of significant items. It also excludes the results of businesses that have been exited or divested for all periods presented but does not exclude the impact of businesses acquired after the start of the fiscal period presented. Results for businesses acquired are included from the date of acquisition onward.

“Adjusted Operating Segment Margin” for continuing operations or an indicated business segment equals adjusted operating segment income for a business segment divided by adjusted net sales for that business segment.

“Adjusted Operating Segment Income” for all business segments combined or for an indicated business segment excludes from the applicable operating segment income measure the impact of significant items recognized by that portion of the business during the fiscal period presented and excludes the results of businesses that have been exited or divested for all periods presented but does not exclude the impact of businesses acquired after the start of the fiscal period presented. Results for businesses acquired are included from the date of acquisition onward.

“Adjusted Income from Continuing Operations” excludes from income from continuing operations the impact of significant items related to continuing operations recognized in the fiscal period presented. It does not exclude the impact of businesses that have been exited or divested and does not exclude the impact of businesses acquired after the start of the fiscal period presented. Results for businesses acquired are included from the date of acquisition onward.

Source: The Hillshire Brands Company

The Hillshire Brands Company
Media: Jon Harris, 1.312.614.8661
Analysts: Melissa Napier, 1.312.614.8739