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Hillshire Brands Co 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
HSH-10Q-03.29.2014

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 FORM 10-Q
 
   
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-3344
 
 
 
The Hillshire Brands Company
(Exact name of registrant as specified in its charter)
 
 
Maryland
 
36-2089049
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
400 South Jefferson Street, Chicago, Illinois
 
60607
(Address of principal executive offices)
 
(Zip Code)
(312) 614-6000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer", "large accelerated filer", "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
On March 29, 2014, the Registrant had 122,648,352 outstanding shares of common stock, par value $.01 per share.


1


The Hillshire Brands Company
INDEX
 



2




THE HILLSHIRE BRANDS COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
 
In millions
March 29, 2014
 
June 29, 2013
Assets
 
 
 
Cash and equivalents
$
219

 
$
400

Short-term investments
170

 

Trade accounts receivable, less allowances
205

 
219

Inventories
 
 
 
Finished goods
198

 
207

Work in process
16

 
15

Materials and supplies
86

 
91

 
300

 
313

Current deferred income taxes
98

 
71

Income tax receivable

 
18

Other current assets
106

 
85

Total current assets
1,098

 
1,106

Property, net of accumulated depreciation of $1,249 and $1,185, respectively
814

 
818

Trademarks and other identifiable intangibles, net
134

 
121

Goodwill
371

 
348

Deferred income taxes
64

 
20

Other noncurrent assets
50

 
21

 
$
2,531

 
$
2,434

Liabilities and Equity
 
 
 
Accounts payable
$
306

 
$
295

Accrued liabilities
323

 
357

Current maturities of long-term debt
102

 
19

Total current liabilities
731

 
671

Long-term debt
840

 
932

Pension obligation
107

 
119

Other liabilities
252

 
228

Contingencies and commitments (Note 10)

 

Equity
 
 
 
Hillshire Brands common stockholders’ equity
601

 
484

 
$
2,531

 
$
2,434

See accompanying Notes to Condensed Consolidated Financial Statements.



3





THE HILLSHIRE BRANDS COMPANY
Consolidated Statements of Income
(Unaudited)
 
 
Quarter Ended
 
Nine Months Ended
In millions, except per share data
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Continuing Operations
 
 
 
 
 
 
 
Net sales
$
955

 
$
924

 
$
3,021

 
$
2,958

Cost of sales
674

 
652

 
2,150

 
2,060

Selling, general and administrative expenses
200

 
205

 
609

 
642

Net charges for exit activities, asset and business dispositions
5

 
1

 
15

 
7

Impairment charges

 
1

 

 
1

Operating income
76

 
65

 
247

 
248

Interest expense
12

 
13

 
37

 
35

Interest income
(2
)
 
(2
)
 
(7
)
 
(5
)
Income from continuing operations before income taxes
66

 
54

 
217

 
218

Income tax expense
24

 
12

 
32

 
69

Income from continuing operations
42

 
42

 
185

 
149

Discontinued operations
 
 
 
 
 
 
 
Income from discontinued operations, net of tax expense (benefit) of nil, $(5), $1 and $(7)

 
4

 
1

 
13

Gain on sale of discontinued operations, net of tax expense of nil, $13, nil and $14

 
47

 

 
49

Net income from discontinued operations

 
51

 
1

 
62

Net income
42

 
93

 
186

 
211

Net income from continuing operations
42

 
42

 
185

 
149

Net income from discontinued operations

 
51

 
1

 
62

Net income
$
42

 
$
93

 
$
186

 
$
211

Earnings per share of common stock
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Income from continuing operations
$
0.35

 
$
0.34

 
$
1.50

 
$
1.22

Net income
$
0.35

 
$
0.76

 
$
1.51

 
$
1.72

Average shares outstanding
123

 
123

 
123

 
123

Diluted
 
 
 
 
 
 
 
Income from continuing operations
$
0.34

 
$
0.34

 
$
1.49

 
$
1.21

Net income
$
0.34

 
$
0.75

 
$
1.50

 
$
1.72

Average shares outstanding
124

 
124

 
124

 
123

Cash dividends declared per share of common stock
$
0.175

 
$
0.125

 
$
0.525

 
$
0.375

See accompanying Notes to Condensed Consolidated Financial Statements.

4


THE HILLSHIRE BRANDS COMPANY
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Quarter Ended
 
Nine Months Ended
In millions
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Net income
$
42

 
$
93

 
$
186

 
$
211

Translation adjustments, net of tax

 
(21
)
 
(1
)
 
(20
)
Net unrealized gain (loss) on qualifying cash flow hedges, net of tax
4

 
(3
)
 
3

 
(7
)
Pension/Postretirement activity, net of tax
(1
)
 

 
(1
)
 

Comprehensive income
$
45

 
$
69

 
$
187

 
$
184

See accompanying Notes to Condensed Consolidated Financial Statements.



5


THE HILLSHIRE BRANDS COMPANY
Consolidated Statements of Equity
(Unaudited)
 
 
 
 
Hillshire Brands Common Stockholders’ Equity
In millions
Total
 
Common
Stock
 
Capital
Surplus
 
Retained
Earnings
 
Unearned
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
Balances at June 30, 2012
$
235

 
$
1

 
$
144

 
$
295

 
$
(61
)
 
$
(144
)
Net income
252

 

 

 
252

 

 

Translation adjustments, net of tax
(21
)
 

 

 

 

 
(21
)
Net unrealized loss on qualifying cash flow hedges, net of tax
(8
)
 

 

 

 

 
(8
)
Pension/Postretirement activity, net of tax
26

 

 

 

 

 
26

Dividends on common stock
(61
)
 

 

 
(61
)
 

 

Spin-off of international coffee and tea business
(3
)
 

 

 
(9
)
 

 
6

Stock issuances -
 
 
 
 
 
 
 
 
 
 
 
Restricted stock
3

 

 
3

 

 

 

Stock option and benefit plans
52

 

 
52

 

 

 

ESOP activity and other
9

 

 
1

 

 
8

 

Balances at June 29, 2013
484

 
1

 
200

 
477

 
(53
)
 
(141
)
Net income
186

 

 

 
186

 

 

Translation adjustments, net of tax
(1
)
 

 

 

 

 
(1
)
Net unrealized gain on qualifying cash flow hedges, net of tax
3

 

 

 

 

 
3

Pension/Postretirement activity, net of tax
(1
)
 

 

 

 

 
(1
)
Dividends on common stock
(65
)
 

 

 
(65
)
 

 

Spin-off of international coffee and tea business
5

 

 

 
5

 

 

Stock issuances -
 
 
 
 
 
 
 
 
 
 
 
Restricted stock
5

 

 
5

 

 

 

Stock option and benefit plans
13

 

 
13

 

 

 

Share repurchases and retirements
(30
)
 

 
(30
)
 

 

 

ESOP activity and other
2

 

 

 

 
2

 

Balances at March 29, 2014
$
601

 
$
1

 
$
188

 
$
603

 
$
(51
)
 
$
(140
)
See accompanying Notes to Condensed Consolidated Financial Statements.



6


THE HILLSHIRE BRANDS COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
In millions
March 29, 2014
 
March 30, 2013
OPERATING ACTIVITIES -
 
 
 
Net income
$
186

 
$
211

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation
97

 
110

Amortization
17

 
13

Impairment

 
1

Net gain on business dispositions

 
(69
)
(Decrease) increase in deferred income taxes
(76
)
 
31

Other
4

 
(14
)
Changes in current assets and liabilities, net of businesses acquired and sold:
 
 
 
Trade accounts receivable
14

 
32

Inventories
14

 
(42
)
Other current assets
(21
)
 
17

Accounts payable
4

 
(72
)
Accrued liabilities
(37
)
 
(76
)
Accrued taxes
30

 
40

Net cash from operating activities
232

 
182

INVESTING ACTIVITIES -
 
 
 
Purchases of property and equipment
(97
)
 
(103
)
Purchases of software and other intangibles
(10
)
 
(4
)
Acquisition of businesses
(35
)
 

Dispositions of businesses and investments

 
96

Cash from derivative transactions
2

 
3

Cash used to invest in short-term investments
(367
)
 

Cash received from maturing short-term investments
194

 

Sales of assets

 
1

Net cash used in investing activities
(313
)
 
(7
)
FINANCING ACTIVITIES -
 
 
 
Issuances of common stock
8

 
42

Purchases of common stock
(30
)
 

Repayments of other debt and derivatives
(20
)
 
(5
)
Payments of dividends
(58
)
 
(31
)
Net cash (used in) from financing activities
(100
)
 
6

(Decrease) / Increase in cash and equivalents
(181
)
 
181

Cash and equivalents at beginning of year
400

 
235

Cash and equivalents at end of period
$
219

 
$
416

Supplemental Cash Flow Data:
 
 
 
Cash paid for restructuring actions
$
55

 
$
69

Cash contributions to pension plans
6

 
5

Cash paid for income taxes
79

 
5

See accompanying Notes to Condensed Consolidated Financial Statements.

7


THE HILLSHIRE BRANDS COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation

The Hillshire Brands Company is a U.S.-based company that primarily focuses on producing and marketing branded food products. The company's principal product lines are branded packaged meat products and frozen bakery products. Sales are made in both the retail channel, to supermarkets, warehouse clubs and national chains, and the foodservice channel. References to “we”, “our”, “us”, “Hillshire Brands” and “the company” refer to The Hillshire Brands Company and its consolidated subsidiaries as a whole, unless the context otherwise requires. The company’s reportable segments are Retail and Foodservice/Other.
The consolidated financial statements for the third quarter and nine months ended March 29, 2014 and March 30, 2013 have not been audited by an independent registered public accounting firm, but in the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair presentation of our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The results of operations for the third quarter and nine months ended March 29, 2014 are not necessarily indicative of the operating results to be expected for the full fiscal year.
The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Although management believes the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from these estimates. These unaudited interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended June 29, 2013 and other financial information filed with the SEC.
The company’s fiscal year ends on the Saturday closest to June 30. Fiscal 2014 ends on June 28, 2014. The third quarter of fiscal 2014 ended on March 29, 2014, and the third quarter of fiscal 2013 ended on March 30, 2013. Each of the quarters was a thirteen-week period. Fiscal 2014 and fiscal 2013 are both 52-week years. Unless otherwise stated, references to years relate to fiscal years.
The condensed consolidated balance sheet as of June 29, 2013 has been derived from the company’s audited financial statements included in our Annual Report on Form 10-K for the year ended June 29, 2013. The Australian bakery business, North American Fresh Bakery and North American Foodservice Beverage are presented as discontinued operations in the company’s consolidated income statements. See Note 5 – “Discontinued Operations” for additional information regarding this discontinued operation. Unless stated otherwise, any reference to income statement items in these financial statements refers to results from continuing operations.
2. Net Income Per Share

Net income per share - basic is computed by dividing income by the weighted average number of common shares outstanding for the period. Net income per share - diluted reflects the potential dilution that could occur if options and fixed awards to be issued under stock-based compensation arrangements were converted into common stock. For the quarter and nine months ended March 29, 2014, options to purchase 0.2 million shares of the company’s common stock had exercise prices that were greater than the average market price of those shares during the respective reporting periods. For the quarter and nine months ended March 30, 2013, options to purchase 3.3 million shares of the company’s common stock had exercise prices that were greater than the average market price of those shares during the respective reporting periods.

The average shares outstanding increased in the first nine months of 2014 as compared to the first nine months of 2013 as a result of stock issuances related to the exercise of stock options and the vesting of restricted stock units (RSUs). During the first nine months of 2014, the company repurchased 0.9 million shares at a cost of $30 million under an existing share repurchase program which authorized the company to repurchase $1.2 billion of common stock.

As of March 29, 2014, the remaining amount authorized for repurchase is approximately $1.2 billion of common stock under one of its existing share repurchase programs, plus 2.7 million shares of common stock that remain authorized for repurchase under the company's other share repurchase program.

8


The following is a reconciliation of net income to net income per share – basic and diluted – for the third quarter and first nine months of 2014 and 2013 (per share amounts are rounded and may not add to total):
Computation of Net Income per Common Share
(In millions, except per share data)
 
 
Quarter Ended
 
Nine Months Ended
 
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
 
 
 
 
 
 
 
 
Income from continuing operations
$
42

 
$
42

 
$
185

 
$
149

Income from discontinued operations, net of tax

 
51

 
1

 
62

Net income
$
42

 
$
93

 
$
186

 
$
211

Average shares outstanding – Basic
123

 
123

 
123

 
123

Dilutive effect of stock option and award plans
1

 
1

 
1

 

Diluted shares outstanding
124

 
124

 
124

 
123

Earnings per common share – Basic
 
 
 
 
 
 
 
Income from continuing operations
$
0.35

 
$
0.34

 
$
1.50

 
$
1.22

Income from discontinued operations

 
0.42

 
0.01

 
0.51

Net income
$
0.35

 
$
0.76

 
$
1.51

 
$
1.72

Earnings per common share – Diluted
 
 
 
 
 
 
 
Income from continuing operations
$
0.34

 
$
0.34

 
$
1.49

 
$
1.21

Income from discontinued operations

 
0.41

 
0.01

 
0.51

Net income
$
0.34

 
$
0.75

 
$
1.50

 
$
1.72




9


3. Accumulated Other Comprehensive Income

The changes in accumulated other comprehensive income (AOCI) by component for the nine months ended March 29, 2014 and March 30, 2013 are as follows:
 
Net Unrealized Gain (Loss) on Qualifying Cash Flow Hedges
 
Pension/ Postretirement Activity
 
Translation Adjustments
 
Total
Beginning Balance as of June 29, 2013
$

 
$
(142
)
 
$
1

 
$
(141
)
 
Other comprehensive income (loss) before reclassifications
1

 

 
(1
)
 

 
Amounts reclassified from accumulated other comprehensive income:
 
 
 
 
 
 
 
 
   Prior-service benefit

 
(5
)
 (b)

 
(5
)
 
   Net actuarial loss

 
3

 (b)

 
3

 
   Loss realized from derivatives
3

 (a)

 

 
3

 
Tax expense (benefit)
(1
)
(c)
1

(c)

 

Net current-period other comprehensive income (loss)
3

 
(1
)
 
(1
)
 
1

Ending Balance as of March 29, 2014
$
3

 
$
(143
)
 
$

 
$
(140
)
 
 
 
 
 
 
 
 
 
Beginning Balance as of June 30, 2012
$
8

 
$
(168
)
 
$
16

 
$
(144
)
 
Other comprehensive income (loss) before reclassifications
7

 

 
(5
)
 
2

 
Amounts reclassified from accumulated other comprehensive income:
 
 
 
 
 
 
 
 
   Prior-service benefit

 
(6
)
 (b)

 
(6
)
 
   Net actuarial loss

 
4

 (b)

 
4

 
   Gain realized from derivatives
(17
)
 (a)

 

 
(17
)
 
   Translation adjustment

 

 
(15
)
(d)
(15
)
 
Tax expense
3

(c)
2

 (c)

 
5

Net current-period other comprehensive loss
(7
)
 

 
(20
)
 
(27
)
Spin-off of international coffee and tea business

 

 
6

(e)
$
6

Ending Balance as of March 30, 2013
$
1

 
$
(168
)
 
$
2

 
$
(165
)

(a) Included as Cost of sales in the Consolidated Statements of Income
(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 8 - "Pension and Other Postretirement Benefit Plans" for additional details)
(c) Included as Income tax expense (benefit) in the Consolidated Statements of Income
(d) Included in Gain on sale of discontinued operations in the Consolidated Statements of Income related to the sale of the Australian Bakery business
(e) Recorded as part of spin-off of international coffee and tea business within retained earnings
4. Segment Information
The following is a general description of the company’s two business segments:
Retail – sells a variety of packaged meat and frozen bakery products to retail customers in North America. It also includes gourmet artisanal sausage, salami and jerky products.
Foodservice/Other – sells a variety of meats and bakery products to foodservice customers in North America such as broad-line foodservice distributors, restaurants, hospitals and other large institutions and includes commodity meat products.


10


The following is a summary of net sales and operating income by business segment:
 
 
Net Sales
 
Quarter Ended
 
Nine Months Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Retail
$
713

 
$
692

 
$
2,226

 
$
2,188

Foodservice/Other
242

 
232

 
795

 
770

Net sales
$
955

 
$
924

 
$
3,021

 
$
2,958

 
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
 
Quarter Ended
 
Nine Months Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Retail
$
92

 
$
76

 
$
267

 
$
272

Foodservice/Other
10

 
9

 
66

 
62

Total operating segment income
102

 
85

 
333

 
334

General corporate expenses
(4
)
 
(12
)
 
(23
)
 
(32
)
Net mark-to-market derivative gains
1

 

 
6

 
1

Amortization of intangibles
(2
)
 
(1
)
 
(4
)
 
(3
)
Significant items
(21
)
 
(7
)
 
(65
)
 
(52
)
Total operating income
76

 
65

 
247

 
248

Net interest expense
(10
)
 
(11
)
 
(30
)
 
(30
)
Income from continuing operations before income taxes
$
66

 
$
54

 
$
217

 
$
218


Significant items primarily consist of restructuring charges and accelerated depreciation.

5. Discontinued Operations

During the second quarter of 2014, the company received a tax refund of approximately AUD 2.0 million ($1.9 million USD) related to Australian bakery discontinued operations. The disposition of the Australian bakery business was completed prior to the end of fiscal 2013. The results of the Australian bakery business are classified as discontinued operations and are presented as discontinued operations in the consolidated statements of income for all periods presented.
On December 19, 2012, the company signed an agreement to sell its Australian bakery business to McCain Foods Limited. The results of this business were previously reported as the Australian Bakery business segment. Also included in the transaction were the license rights to certain intellectual property used by the Australian bakery business in the Asia-Pacific region. In February 2013, the company completed the sale of its Australian bakery business. Using foreign currency exchange rates on the date of the transaction, the company received cash proceeds of $85 million and reported an after tax gain on disposition of $42 million.
The results of the fresh bakery and foodservice beverage operations in North America and the international coffee and tea business, which were disposed of prior to the end of fiscal 2012, are classified as discontinued operations and are presented as discontinued operations in the consolidated statements of income for all periods presented. In the third quarter and first nine months of 2013, the company recognized $5 million of net tax benefit adjustments related to prior year tax provision estimates associated with certain businesses that had been disposed of in the prior year.


11


The following is a summary of the operating results of the company’s discontinued operations for the third quarter and first nine months of 2014 and 2013: 
 
Third Quarter 2014
 
First Nine Months of 2014
(In millions)
Net
Sales
 
Pretax
Income
 
Net
Income
 
Net
Sales
 
Pretax
Income
 
Net
Income
Australian Bakery
$

 
$

 
$

 
$

 
$
2

 
$
1


 
Third Quarter 2013
 
First Nine Months of 2013
(In millions)
Net
Sales
 
Pretax
Loss
 
Net
Income (Loss)
 
Net
Sales
 
Pretax
Income
 
Net
Income (Loss)
Australian Bakery
$
10

 
$
(1
)
 
$
(1
)
 
$
81

 
$
4

 
$
7

North American Foodservice Beverage

 

 

 

 
2

 
1

International Coffee and Tea

 

 
6

 

 

 
6

Other

 

 
(1
)
 

 

 
(1
)
Total
$
10

 
$
(1
)
 
$
4

 
$
81

 
$
6

 
$
13


The following is a summary of the gain on sale of the company’s discontinued operations for the third quarter and first nine months of 2013: 
 
Third Quarter 2013
 
First Nine Months of 2013
(In millions)
Pretax Gain
on Sale
 
Tax
(Expense) Benefit
 
After Tax
Gain
 
Pretax Gain
on Sale
 
Tax
(Expense) Benefit
 
After Tax
Gain
North American Fresh Bakery
$
4

 
$
(2
)
 
$
2

 
$
5

 
$
(2
)
 
$
3

North American Foodservice Beverage

 
3

 
3

 
2

 
2

 
4

Australian Bakery
56

 
(14
)
 
42

 
56

 
(14
)
 
42

Total
$
60

 
$
(13
)
 
$
47

 
$
63

 
$
(14
)
 
$
49


The gain on sale of discontinued operations reported in fiscal 2013 represents the impact of a final purchase price adjustment related to the North American fresh bakery disposition and gain related to the disposition of two manufacturing facilities related to the North American foodservice beverage operations, the gain on sale of the Australian bakery business as well as tax adjustments of prior year provision estimates related to business dispositions.
The cash flows related to the discontinued operations for the first nine months of 2014 and 2013 are summarized in the table below:
 
 
Nine months ended
Nine months ended
(In millions) – Increase / (Decrease)
March 29, 2014
March 30, 2013
Cash flow from operating activities
$
1

$
10

Cash flow from investing activities

85

Cash flow used in financing activities
(1
)
(95
)
Change in net cash of discontinued operations


Cash and equivalents at beginning of year


Cash and equivalents at end of period
$

$

The cash used in financing activities primarily represents the net transfers of cash with the corporate office. The net assets of the discontinued operations assumed that the cash of those businesses has been retained as a corporate asset.



12




6. Exit, Disposal and Other Restructuring Activities
The company has incurred exit, disposition and restructuring charges for initiatives designed to improve its operational performance and reduce cost. The nature of the costs incurred under these plans determine where they are classified in the financial statements. Our restructuring activities are recorded in one of two areas:
1. Exit Activities, Asset and Business Disposition Actions
These amounts primarily relate to:
Employee termination costs
Lease and contractual obligation exit costs
Gains or losses on the disposition of assets or asset groupings that do not qualify as discontinued operations
2. Costs recognized in Selling, general and administrative expenses
These amounts primarily relate to:
Expenses associated with the installation of information systems related to restructuring activities
Consulting costs related to restructuring activities
Costs associated with the renegotiation of contracts for services with outside third-party vendors as part of the spin-off of the international coffee and tea operations
These costs are recognized in Selling, general and administrative expenses in the Consolidated Statements of Income as they do not qualify for treatment as an exit activity or asset and business disposition under the accounting rules for exit and disposal activities. However, management believes the disclosure of these charges provides the reader greater transparency to the total cost of the initiatives.

The following is a summary of the expense associated with ongoing actions, which also highlights where the costs are reflected in the Consolidated Statements of Income:
 
 
Quarter Ended
 
Nine Months Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Selling, general and administrative expenses
11

 
8

 
$
36

 
$
23

Net charges for exit activities, asset and business dispositions
5

 
1

 
15

 
7

Decrease in income from continuing operations before income taxes
16

 
9

 
51

 
30

The impact of these actions on the company’s business segments and general corporate expenses is summarized as follows:
 
 
Quarter Ended
 
Nine Months Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Retail
$
4

 
$

 
$
11

 
$
(3
)
Foodservice/Other

 
(1
)
 
2

 
(3
)
Expense (income) in operating segments
4

 
(1
)
 
13

 
(6
)
General corporate expenses
12

 
10

 
38

 
36

Total
$
16

 
$
9

 
$
51

 
$
30


13


The following table summarizes the activity for the first nine months of 2014 related to exit, disposal and restructuring related actions and the status of the related accruals as of March 29, 2014. The 2014 exit, disposal and restructuring related actions include recognized third party consulting costs related to cost saving and efficiency processes, IT initiatives and recognized severance charges associated with planned employee terminations. The accrued amounts remaining represent the estimated cash expenditures necessary to satisfy remaining obligations and the majority are expected to be paid in the next 12 months.
 
(In millions)
Employee termination and other benefits
 
IT and other costs
 
Non-cancellable leases/ Contractual obligations
 
Total
Accrued costs as of June 29, 2013
$
10

 
$
5

 
$
23

 
$
38

Exit, disposal and other costs recognized during 2014
15

 
35

 
1

 
51

Cash payments
(8
)
 
(32
)
 
(15
)
 
(55
)
Noncash charges

 
(1
)
 

 
(1
)
Accrued costs as of March 29, 2014
$
17

 
$
7

 
$
9

 
$
33


7. Financial Instruments
Investment Securities
Beginning in the first quarter of fiscal year 2014, the company purchased securities for investment purposes. Under the current investment policy, the company may invest in debt securities deemed to be investment grade at the time of purchase. The company determines the appropriate categorization of debt securities at the time of purchase and reevaluates such designation at each balance sheet date. The company typically categorizes all debt securities as available-for-sale, as the company has the intent to convert these investments into cash if needed. Classification of available-for-sale marketable securities as current or non-current is based on whether the conversion to cash is expected to be necessary for operations in the upcoming year, which is consistent with the security’s maturity date, if applicable. As of March 29, 2014, all investment securities have maturity dates within the next twelve months.

Securities categorized as available-for-sale are stated at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). The amortized cost, unrealized gains and losses, and fair market values of the company's investment securities available for sale at March 29, 2014 are summarized as follows:
 
March 29, 2014
(In millions)
Amortized Cost
 
Unrealized Gain/(Loss)
 
Fair Market Value
Available-for-sale:(1)
 
 
 
 
 
Commercial Paper
$
128

 
$

 
$
128

Corporate Note
126

 

 
126

Total
$
254

 
$

 
$
254

(1)
Categorized as Level 1: Observable input such as quoted prices in active markets for identical assets or liabilities
Derivative Instruments
The company uses derivative financial instruments, including futures, options and swap contracts to manage its exposures to commodity prices and interest rate risks. The use of these derivative financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the company. The company does not use derivatives for trading or speculative purposes and is not a party to leveraged derivatives. More information concerning accounting for financial instruments can be found in Note 2 - "Summary of Significant Accounting Policies" in the company’s 2013 Annual Report.
Types of Derivative Instruments
Interest Rate Swaps
The company previously had utilized interest rate swap derivatives to manage interest rate risk in order to maintain a targeted amount of both fixed-rate and floating-rate long-term debt. Interest rate swap agreements that are effective at hedging the fair value of fixed-rate debt agreements are designated and accounted for as fair value hedges. The company has a fixed interest

14


rate on virtually all of its long-term debt, and as of March 29, 2014 and June 29, 2013, the company is not a party to any interest rate swap agreements.
Commodity Futures and Options Contracts
The company uses commodity futures and options to hedge a portion of its commodity price risk. The principal commodities hedged by the company include pork, beef, natural gas, diesel fuel, corn, wheat and other ingredients. The company uses both commodity financial instruments and fixed rate supplier contracts to determine commodity pricing. In circumstances where commodity-derivative instruments are used, there is a high correlation between the commodity costs and the derivative instruments. For those instruments where the commodity instrument and underlying hedged item correlate between 80%-125%, the company accounts for those contracts as cash flow hedges. The company only enters into futures and options contracts that are traded on established, well-recognized exchanges that offer high liquidity, transparent pricing, daily cash settlement and collateralization through margin requirements.

The notional values of the various derivative instruments used by the company are summarized in the following table:
 
Notional Values
(In millions)
March 29, 2014
 
June 29, 2013
 
Hedge Coverage (Number of months)
Commodity Contracts:
 
 
 
 
 
Commodity Future Contracts:(1)
 
 
 
 
 
Grains/Oilseed
$
47

 
$
34

 
14
Energy
$
27

 
$
29

 
20
Other commodities
$
9

 
$
20

 
7
Commodity Options Contracts:(2)
 
 
 
 
 
Grains/Oilseed
$
4

 
$

 
2
 
(1) The notional values of commodity futures contracts are determined by the initial cost of the contract.
(2) The notional values of commodity option contracts are determined by the ratio of the change in option value to the change in the underlying hedged item.
Cash Flow Presentation

The cash receipts and payments from a derivative instrument are classified according to the nature of the instrument, when realized, generally in investing activities unless otherwise disclosed. However, cash flows from a derivative instrument that are accounted for as a fair value hedge or cash flow hedge are classified in the same category as the cash flows from the items being hedged provided the derivative does not include a financing element at inception. If a derivative instrument includes a financing element at inception, all cash inflows and outflows of the derivative instrument are considered cash flows from financing activities. If, for any reason, hedge accounting is discontinued, any remaining cash flows after that date will be classified consistent with mark-to-market instruments.
Contingent Features/Concentration of Credit Risk
All of the company’s derivative instruments are governed by International Swaps and Derivatives Association (ISDA) master agreements, requiring the company to maintain an investment grade credit rating from both Moody’s and Standard & Poor’s credit rating agencies. If the company’s credit rating were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate collateralization on the derivative instruments in net liability positions. There are no derivative instruments with credit-risk-related contingent features that are in a liability position as of March 29, 2014 and June 29, 2013.
A large number of major international financial institutions are counterparties to the company’s financial instruments. The company enters into financial instrument agreements only with counterparties meeting very stringent credit standards (a credit rating of A-/A3 or better), limiting the amount of agreements or contracts it enters into with any one party and, where legally available, executing master netting agreements. The company regularly monitors these positions. While the company may be exposed to credit losses in the event of non-performance by individual counterparties of the entire group of counterparties, the company has not recognized any losses with these counterparties in the past and does not anticipate material losses in the future.


15


Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value must be categorized into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement.
The carrying amounts of cash and equivalents, trade accounts receivables, accounts payable, and derivative instruments approximate fair values due to their short-term nature and are considered Level 1 based on the valuation inputs. Available-for-sale marketable securities values are derived solely from Level 1 inputs. The fair value of the company’s long-term debt (considered Level 2 based on the valuation inputs used), including the current portion, is estimated using available market data. 
 
 
March 29, 2014
 
June 29, 2013
(In millions)
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
Long-term debt, including current portion
$
971

 
$
942

 
$
981

 
$
951


Information related to our cash flow hedges and other derivatives not designated as hedging instruments for the quarters and nine months ended March 29, 2014 and March 30, 2013 is as follows:
 
 
Foreign Exchange
Contracts
 
Commodity
Contracts
Total
 
Quarter Ended
 
Quarter Ended
Quarter Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
March 29, 2014
 
March 30, 2013
Cash Flow Derivatives:
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income (OCI) (a)
$

 
$

 
$
3

 
$
(1
)
$
3

 
$
(1
)
Amount of gain (loss) reclassified from AOCI into earnings (a) (b)

 

 
(1
)
 
6

(1
)
 
6

Amount of ineffectiveness recognized in earnings (c) (d)

 

 
1

 
(1
)
1

 
(1
)
Amount of gain expected to be reclassified into earnings during the next twelve months

 

 
2

 

2

 

Net Investment Derivatives:
 
 
 
 
 
 
 
 
 
 
Amount of loss recognized from OCI into earnings (e)

 
(28
)
 

 


 
(28
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
Amount of gain recognized in Cost of sales

 

 
3

 

3

 

Amount of loss recognized in SG&A

 

 
(1
)
 

(1
)
 


(a) Effective portion
(b) Gain reclassified from AOCI into earnings is reported in SG&A expenses for foreign exchange contracts and in Cost of sales for commodity contracts
(c) Gain (loss) recognized in earnings is related to the ineffective portion and amounts excluded from the assessment of hedge effectiveness
(d) Gain (loss) recognized in earnings is reported in SG&A expenses for commodity contracts
(e) The loss recognized from OCI into earnings is reported in gain on sale of discontinued operations


16


 
Foreign Exchange
Contracts
 
Commodity
Contracts
 
Total
 
Nine Months Ended
 
Nine Months Ended
 
Nine Months Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Cash Flow Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Amount of gain recognized in other comprehensive income (OCI) (a)

 

 
1

 
7

 
1

 
7

Amount of gain (loss) reclassified from AOCI into earnings (a) (b)

 

 
(3
)
 
17

 
(3
)
 
17

Amount of ineffectiveness recognized in earnings (c) (d)

 

 
2

 
(1
)
 
2

 
(1
)
Amount of gain expected to be reclassified into earnings during the next twelve months

 

 
2

 

 
2

 

Net Investment Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Amount of loss recognized from OCI into earnings (e)

 
(28
)
 

 

 

 
(28
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Amount of gain recognized in Cost of sales

 

 
4

 
3

 
4

 
3

Amount of gain (loss) recognized in SG&A

 
(1
)
 
1

 

 
1

 
(1
)

(a) Effective portion
(b) Gain (loss) reclassified from AOCI into earnings is reported in SG&A expenses for foreign exchange contracts and in Cost of sales for commodity contracts
(c) Gain (loss) recognized in earnings is related to the ineffective portion and amounts excluded from the assessment of hedge effectiveness
(d) Gain (loss) recognized in earnings is reported in SG&A expenses for commodity contracts
(e) The loss recognized from OCI into earnings is reported in gain on sale of discontinued operations

8. Pension and Other Postretirement Benefit Plans
The components of the net periodic benefit cost (benefit) for the pension and postretirement benefit plans for the quarter and nine months ended March 29, 2014 and March 30, 2013 are as follows:
 
 
Pension Plans
 
Quarter Ended
 
Nine Months Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Service cost
3

 
$
3

 
7

 
$
8

Interest cost
19

 
17

 
56

 
52

Expected return on plan assets
(24
)
 
(23
)
 
(68
)
 
(69
)
Amortization of:
 
 
 
 
 
 
 
     Net actuarial loss
1

 
1

 
3

 
4

Prior service cost
1

 
1

 
1

 
1

Settlement loss

 

 

 
1

Net periodic benefit
$

 
$
(1
)
 
$
(1
)
 
$
(3
)
 

17


 
Postretirement Benefit Plans
 
Quarter Ended
 
Nine Months Ended
(In millions)
March 29, 2014
 
March 30, 2013
 
March 29, 2014
 
March 30, 2013
Service cost
$
1

 
$
1

 
$
2

 
$
2

Interest cost
1

 
1

 
3

 
3

Expected return on plan assets

 

 

 

Amortization of: