UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): August 28, 2014
 
Tyson Foods, Inc.
(Exact name of registrant as specified in charter)

Delaware
(State of incorporation or organization)

001-14704
(Commission File Number)

71-0225165
(IRS Employer Identification No.)
 
2200 Don Tyson Parkway, Springdale, AR 72762-6999
(479) 290-4000
(Address, including zip code, and telephone number, including area code, of
Registrant’s principal executive offices)
 
Not Applicable
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))








Item 2.01. Completion of Acquisition or Disposition of Assets.

As previously disclosed, on July 1, 2014, Tyson Foods, Inc., a Delaware corporation (“Tyson”), and HMB Holdings, Inc., a Maryland corporation and wholly owned subsidiary of Tyson (“Purchaser”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Hillshire Brands Company (“Hillshire Brands”), pursuant to which, among other things, Purchaser would merge with and into Hillshire Brands (the “Merger”), with Hillshire Brands surviving the Merger as a wholly owned subsidiary of Tyson.  In accordance with the terms of the Merger Agreement, on August 28, 2014, the Merger was completed.

Pursuant to the Merger Agreement, upon the terms and subject to the conditions thereof, Purchaser commenced a cash tender offer (the “Offer”) on July 16, 2014 to acquire all of the outstanding Hillshire Brands common stock, par value $0.01 per share (the “Shares”), at a price of $63.00 per Share, in cash, without interest (the “Offer Price”), subject to any withholding of taxes required by applicable law, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated July 16, 2014 (the “Offer to Purchase”), and in the related Letter of Transmittal, filed as Exhibit (a)(1)(i) and Exhibit (a)(1)(ii), respectively, to the Tender Offer Statement on Schedule TO dated July 16, 2014 (as amended or supplemented from time to time, the “Schedule TO”) filed by Purchaser and Tyson.
On August 28, 2014, Tyson and Hillshire Brands announced the completion of the Offer. The Offer expired at 12:00 midnight, New York City time, at the end of Wednesday, August 27, 2014. According to Computershare Trust Company, N.A., the depositary for the Offer, 86,987,201 Shares were validly tendered and not validly withdrawn (not including 3,662,904 Shares tendered pursuant to notices of guaranteed delivery), which represented approximately 70% of the outstanding Shares. Purchaser accepted for payment, and has paid for, all Shares that were validly tendered and not validly withdrawn in accordance with the terms of the Offer.
Pursuant to the option (the “Top-Up Option”) granted to Purchaser under the Merger Agreement to purchase directly from Hillshire Brands newly-issued Shares at the Offer Price, Hillshire Brands issued to Purchaser 250,754,549 Shares (the “Top-Up Shares”) for an aggregate purchase price of $15,797,536,587, which was paid by delivery of a promissory note. Under the Merger Agreement, because Tyson and Purchaser did not collectively own more than 90% of the Shares upon completion of the Offer, Purchaser was deemed to have exercised the Top-Up Option. The Top-Up Shares were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act.
Upon the purchase of the Top-Up Shares on August 28, 2014, Purchaser held a total of 337,741,750 Shares, representing more than 90% of the outstanding Shares.
The number of Shares tendered satisfied the condition to the Offer that there be validly tendered and not validly withdrawn prior to the expiration of the Offer a number of Shares (excluding Shares tendered by notice of guarantee delivery) which, together with the Shares already owned by Tyson and its subsidiaries, represent at least two-thirds the total number of Shares outstanding as of the expiration of the Offer.

Following the consummation of the Offer, the remaining conditions to the Merger set forth in the Merger Agreement were satisfied or waived, and on Thursday, August 28, 2014, Purchaser completed the acquisition of Hillshire Brands by consummating the Merger pursuant to the terms of the Merger Agreement and in accordance with the Maryland General Corporation Law. At the effective time of the Merger, any Shares not purchased pursuant to the Offer (other than Shares held by Hillshire Brands, Tyson, any of Tyson’s subsidiaries (including Purchaser) or any subsidiary of Hillshire Brands) were automatically converted into the right to receive, in cash and without interest, an amount equal to the Offer Price.
 








The aggregate cash consideration required to acquire all outstanding Shares pursuant to the Offer and the Merger is approximately $7.8 billion. Tyson obtained the funds necessary to fund the acquisition through (i) borrowings under the Term Loan Agreement dated as of July 15, 2014 among Tyson, Morgan Stanley Senior Funding, Inc., as administrative agent, and the other lenders party thereto, on the terms and conditions previously disclosed in the Schedule TO, (ii) proceeds from concurrent offerings of Class A common stock and 4.75% tangible equity units on the terms and conditions previously disclosed in the Prospectus Supplement on Form 424B5 filed by Tyson on July 31, 2014, (iii) proceeds from concurrent offerings of four series of senior notes due 2019, 2024, 2034 and 2044 on the terms and conditions previously disclosed in the Prospectus Supplement on Form 424B5 filed by Tyson on August 6, 2014 and (iv) cash on hand.
 
The foregoing is a general description of the Offer, the Merger and the Merger Agreement; it does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed by Tyson on July 2, 2014, and which is incorporated herein by reference.

Pro forma information

Tyson is filing this Current Report on Form 8-K to provide certain financial information with respect to Tyson’s acquisition of Hillshire Brands. As previously disclosed in its Schedule TO amendment No. 10 on August 28, 2014, Tyson and Purchaser completed the acquisition of Hillshire Brands by consummating the Merger pursuant to the terms of the Merger Agreement and in accordance with Maryland General Corporation Law.

Included in this filing as Exhibit 99.1 are the audited consolidated financial statements of Hillshire Brands for the periods described in Item 9.01(a) below, the notes related thereto and the Reports of the Independent Registered Public Accounting Firms.
 
Also included in this filing as Exhibits 99.2 is Management’s Discussion and Analysis of Financial Condition and Results of Operations for Hillshire Brands for the periods described in 9.01(a) below and included as Exhibit 99.3 is the pro forma financial information described in Item 9.01(b) below, respectively.


Item 9.01. Financial Statements and Exhibits

(a)
Financial Statements

•
Audited consolidated financial statements of The Hillshire Brands Company comprised of consolidated balance sheets as of June 28, 2014 and June 29, 2013 and the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of equity and consolidated statements of cash flows for the three years ended June 28, 2014, the notes related thereto and the Reports of the Independent Registered Public Accounting Firms, attached as Exhibit 99.1 hereto.

(b)
Pro Forma Financial Information

The following unaudited pro forma condensed consolidated financial information of Tyson Foods, Inc., giving effect to the acquisition of The Hillshire Brands Company, is included in Exhibit 99.3 hereto:

•
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 28, 2014;
•
Unaudited Pro Forma Condensed Consolidated Statements of Income for the year ended September 28, 2013;
•
Unaudited Pro Forma Condensed Consolidated Statements of Income for the nine months ended June 28, 2014; and
•
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information.









(d)     Exhibits

Exhibit No.
Description

23.1
Consent of Deloitte & Touche LLP

23.2
Consent of PricewaterhouseCoopers LLP

99.1
Audited consolidated financial statements of The Hillshire Brands Company as of June 28, 2014 and June 29, 2013 and for each of the three years in the period ended June 28, 2014, the notes related thereto and the Reports of the Independent Registered Public Accounting Firms

99.2
Management’s Discussion and Analysis of Financial Condition and Results of Operations of The Hillshire Brands Company for the three years ended June 28, 2014

99.3
Unaudited Pro Forma Condensed Consolidated Financial Information of Tyson Foods, Inc.









SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TYSON FOODS, INC.
Date: September 4, 2014

By:
 
/s/ Curt T. Calaway
Name:
 
Curt T. Calaway
Title:
 
Senior Vice President, Controller and Chief Accounting Officer








23.1HSHDELOITTECONSENT8-K


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-197661) and Forms S-8 (Nos. 333-186797, 333-115378, 333-115379, 333-11580) of Tyson Foods, Inc. of our report dated August 21, 2014, relating to the consolidated financial statements of The Hillshire Brands Company, appearing in this Current Report on Form 8-K of Tyson Foods, Inc. dated September 4, 2014.




/s/ Deloitte & Touche LLP
Chicago, Illinois
September 4, 2014



23.2HSHPWCConsentfor8-Kpro (1)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-197661) and on Forms S-8 (Nos. 333-186797, 333-115378, 333-115379 and 333-11580) of Tyson Foods, Inc. of our report dated August 23, 2013 relating to the financial statements of The Hillshire Brands Company, which appears in this Current Report on Form 8-K of Tyson Foods, Inc. dated September 4, 2014.




/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
September 4, 2014

99.1 hsh 2014 10k financials
EX 99.1

Audited consolidated financial statements of The Hillshire Brands Company as of June 28, 2014 and June 29, 2013 and for each of the three years in the period ended June 28, 2014













REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
The Hillshire Brands Company
Chicago, Illinois

We have audited the accompanying consolidated balance sheet of The Hillshire Brands Company and subsidiaries (the "Company") as of June 28, 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year ended June 28, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Hillshire Brands Company and subsidiaries at June 28, 2014, and the results of their operations and their cash flows for the year ended June 28, 2014, in conformity with accounting principles generally accepted in the United States of America.


/s/ Deloitte & Touche LLP
Chicago, Illinois
August 21, 2014


EX 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
of The Hillshire Brands Company

In our opinion, the consolidated balance sheet as of June 29, 2013 and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the two years in the period ended June 29, 2013 present fairly, in all material respects, the financial position of The Hillshire Brands Company and its subsidiaries at June 29, 2013, and the results of their operations and their cash flows for each of the two years in the period ended June 29, 2013, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
August 23, 2013

2
EX 99.1

CONSOLIDATED STATEMENTS OF INCOME
 
 
 
Years Ended
In millions except per share data
 
June 28, 2014
 
June 29, 2013
 
June 30, 2012
Continuing Operations
 
 
 
 
 
 
Net sales
 
$
4,085

 
$
3,920

 
$
3,958

Cost of sales
 
2,920

 
2,758

 
2,857

Selling, general and administrative expenses
 
845

 
855

 
930

Net charges for exit activities, asset and business dispositions
 
14

 
9

 
81

Impairment charges
 
—

 
1

 
14

Operating income
 
306

 
297

 
76

Interest expense
 
48

 
48

 
77

Interest income
 
(9
)
 
(7
)
 
(5
)
Debt extinguishment costs
 
—

 
—

 
39

Income (loss) from continuing operations before income taxes
 
267

 
256

 
(35
)
Income tax expense (benefit)
 
55

 
72

 
(15
)
Income (loss) from continuing operations
 
212

 
184

 
(20
)
Discontinued Operations
 
 
 
 
 
 
Income from discontinued operations net of tax expense (benefit) of $1, $(8), and $(603)
 
1

 
15

 
463

Gain on sale of discontinued operations, net of tax expense of nil, $15, and $367
 
—

 
53

 
405

Net income from discontinued operations
 
1

 
68

 
868

Net income
 
213

 
252

 
848

Less: Income from noncontrolling interests, net of tax
 
 
 
 
 
 
Discontinued operations
 
—

 
—

 
3

Net income attributable to Hillshire Brands
 
$
213

 
$
252

 
$
845

Amounts attributable to Hillshire Brands
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
212

 
$
184

 
$
(20
)
Net income from discontinued operations
 
1

 
68

 
865

Net income attributable to Hillshire Brands
 
$
213

 
$
252

 
$
845

Earnings per share of common stock
 
 
 
 
 
 
Basic
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
1.72

 
$
1.50

 
$
(0.16
)
Net income
 
$
1.73

 
$
2.05

 
$
7.13

Diluted
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
1.71

 
$
1.49

 
$
(0.16
)
Net income
 
$
1.72

 
$
2.04

 
$
7.13

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

3

EX 99.1

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
Years Ended
In millions
 
June 28, 2014
 
June 29, 2013
 
June 30, 2012
Net income
 
$
213

 
$
252

 
$
848

Translation adjustments, net of tax of nil, $(6), $(17) respectively
 
(1
)
 
(21
)
 
(23
)
Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of nil, $4, nil respectively
 
1

 
(8
)
 
2

Pension/Postretirement activity, net of tax of $5, $(14), $26 respectively
 
(8
)
 
26

 
(21
)
Comprehensive income
 
205

 
249

 
806

Comprehensive income attributable to non-controlling interests
 
—

 
—

 
3

Comprehensive income attributable to Hillshire Brands
 
$
205

 
$
249

 
$
803

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

4

EX 99.1

CONSOLIDATED BALANCE SHEETS

In millions
 
June 28, 2014
 
June 29, 2013
Assets
 
 
 
 
Cash and equivalents
 
$
236

 
$
400

Short-term investments
 
87

 
—

Trade accounts receivable, less allowances of $2 in 2014 and $2 in 2013
 
232

 
219

Inventories
 
 
 
 
Finished goods
 
226

 
207

Work in process
 
19

 
15

Materials and supplies
 
85

 
91

 
 
330

 
313

Current deferred income taxes
 
128

 
71

Income tax receivable
 
13

 
18

Other current assets
 
57

 
85

Total current assets
 
1,083

 
1,106

Property
 
 
 
 
Land
 
25

 
25

Buildings and improvements
 
771

 
790

Machinery and equipment
 
1,164

 
1,095

Construction in progress
 
118

 
93

 
 
2,078

 
2,003

Accumulated depreciation
 
1,239

 
1,185

Property, net
 
839

 
818

Trademarks and other identifiable intangibles, net
 
240

 
121

Goodwill
 
452

 
348

Deferred income taxes
 
47

 
20

Other noncurrent assets
 
47

 
21

 
 
$
2,708

 
$
2,434

Liabilities and Equity
 
 
 
 
Accounts payable
 
$
365

 
$
295

Accrued liabilities
 
 
 
 
Payroll and employee benefits
 
135

 
110

Advertising and promotion
 
119

 
124

Other accrued liabilities
 
85

 
123

Current maturities of long-term debt
 
105

 
19

Total current liabilities
 
809

 
671

Long-term debt
 
839

 
932

Pension obligation
 
116

 
119

Other liabilities
 
307

 
228

Contingencies and commitments (Note 14)
 
 
 
 
Equity
 
 
 
 
Hillshire Brands common stockholders' equity:
 
 
 
 
Common stock: (authorized $1,200,000,000 shares; $0.01 par value) Issued and outstanding - 123,755,082 shares in 2014 and 123,247,815 shares in 2013
 
1

 
1

Capital surplus
 
228

 
200

Retained earnings
 
607

 
477

Unearned stock of ESOP
 
(50
)
 
(53
)
Accumulated other comprehensive (loss)
 
(149
)
 
(141
)
Total equity
 
637

 
484

 
 
$
2,708

 
$
2,434

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

5

EX 99.1

CONSOLIDATED STATEMENTS OF EQUITY

 
 
 
 
Hillshire Brands Common Stockholders' Equity
 
 
In millions
 
Total
 
Common
Stock
 
Capital
Surplus
 
Retained
Earnings
 
Unearned
Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interest
BALANCES AT JULY 2, 2011
 
1,893

 
6

 
39

 
2,161

 
(77
)
 
(265
)
 
29

Net income
 
848

 
—

 
—

 
845

 
—

 
—

 
3

Translation adjustments, net of tax of $(17)
 
(23
)
 
—

 
—

 
—

 
—

 
(23
)
 
—

Net unrealized gain on qualifying cash flow hedges, net of tax of nil
 
2

 
—

 
—

 
—

 
—

 
2

 
—

Pension/Postretirement activity, net of tax of $26
 
(21
)
 
—

 
—

 
—

 
—

 
(21
)
 
—

Dividends on common stock
 
(138
)
 
—

 
—

 
(138
)
 
—

 
—

 
—

Dividends paid on noncontrolling interest/Other
 
(2
)
 
—

 
—

 
—

 
—

 
—

 
(2
)
Disposition of noncontrolling interest
 
(29
)
 
—

 
—

 
—

 
—

 
—

 
(29
)
Repurchase of noncontrolling interest
 
(10
)
 
—

 
(9
)
 
—

 
—

 
—

 
(1
)
Spin-off of International Coffee and Tea business
 
(2,408
)
 
—

 
(5
)
 
(2,566
)
 
—

 
163

 
—

Stock issuances -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted stock
 
14

 
—

 
21

 
(7
)
 
—

 
—

 
—

Stock option and benefit plans
 
94

 
—

 
94

 
—

 
—

 
—

 
—

Reverse stock split
 
—

 
(5
)
 
5

 
—

 
—

 
—

 
—

ESOP tax benefit, redemptions and other
 
15

 
—

 
(1
)
 
—

 
16

 
—

 
—

BALANCES AT JUNE 30, 2012
 
235

 
1

 
144

 
295

 
(61
)
 
(144
)
 
—

Net income
 
252

 
—

 
—

 
252

 
—

 
—

 
—

Translation adjustments, net of tax of $(6)
 
(21
)
 
—

 
—

 
—

 
—

 
(21
)
 
—

Net unrealized loss on qualifying cash flow hedges, net of tax of $4
 
(8
)
 
—

 
—

 
—

 
—

 
(8
)
 
—

Pension/Postretirement activity, net of tax of $(14)
 
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 tax benefit, redemptions and other
 
9

 
—

 
1

 
—

 
8

 
—

 
—

BALANCES AT JUNE 29, 2013
 
484

 
1

 
200

 
477

 
(53
)
 
(141
)
 
—

Net income
 
213

 
—

 
—

 
213

 
—

 
—

 
—

Translation adjustments, net of tax of nil
 
(1
)
 
—

 
—

 
—

 
—

 
(1
)
 
—

Net unrealized gain on qualifying cash flow hedges, net of tax of nil
 
1

 
—

 
—

 
—

 
—

 
1

 
—

Pension/Postretirement activity, net of tax of $5
 
(8
)
 
—

 
—

 
—

 
—

 
(8
)
 
—

Dividends on common stock
 
(87
)
 
—

 
—

 
(87
)
 
—

 
—

 
—

Spin-off of International Coffee and Tea
 
5

 
—

 
—

 
5

 
—

 
—

 
—

Stock issuances -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted stock
 
1

 
—

 
1

 
—

 
—

 
—

 
—

Stock option and benefit plans
 
57

 
—

 
57

 
—

 
—

 
—

 
—

Share repurchases and retirements
 
(30
)
 
—

 
(30
)
 
—

 
—

 
—

 
—

ESOP tax benefit, redemptions and other
 
2

 
—

 
—

 
(1
)
 
3

 
—

 
—

BALANCES AT JUNE 28, 2014
 
$
637

 
$
1

 
$
228

 
$
607

 
$
(50
)
 
$
(149
)
 
$
—

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

6

EX 99.1

CONSOLIDATED STATEMENTS OF CASH FLOWS 

In millions
 
June 28, 2014
 
June 29, 2013
 
June 30, 2012
Operating Activities
 
 
 
 
 
 
Net income
 
$
213

 
$
252

 
$
848

Adjustments to reconcile net income to net cash from operating activities
 
 
 
 
 
 
Depreciation
 
131

 
148

 
266

Amortization
 
24

 
18

 
46

Impairment charges
 
—

 
1

 
428

Net gain on business dispositions
 
—

 
(75
)
 
(772
)
Increase (decrease) in deferred income taxes
 
(55
)
 
44

 
(400
)
Pension contributions, net of income/expense
 
(10
)
 
(14
)
 
(226
)
Refundable tax on Senseo payments
 
—

 
—

 
(43
)
Debt extinguishment costs
 
—

 
—

 
39

Other
 
(44
)
 
(11
)
 
(70
)
Change in current assets and liabilities, net of businesses acquired and sold
 
 
 
 
 
 
Trade accounts receivable
 
(9
)
 
19

 
66

Inventories
 
(13
)
 
(38
)
 
34

Other current assets
 
(24
)
 
30

 
(30
)
Accounts payable
 
44

 
(52
)
 
29

Accrued liabilities
 
(16
)
 
(89
)
 
94

Income taxes
 
10

 
20

 
(60
)
Net cash from operating activities
 
251

 
253

 
249

Investing Activities
 
 
 
 
 
 
Purchases of property and equipment
 
(140
)
 
(135
)
 
(314
)
Purchases of software and other intangibles
 
(13
)
 
(5
)
 
(188
)
Acquisitions of businesses
 
(200
)
 
—

 
(30
)
Dispositions of businesses and investments
 
—

 
96

 
2,033

Insurance proceeds
 
50

 
—

 
—

Proceeds from note receivable
 
55

 
—

 
—

Cash balance of International Coffee and Tea business at spin-off
 
—

 
—

 
(2,061
)
Cash received from derivative transactions
 
3

 
—

 
31

Cash used to invest in short-term investments
 
(354
)
 
—

 
—

Cash received from maturing short-term investments
 
263

 
—

 
—

Sales of assets
 
1

 
3

 
8

Net cash used in investing activities
 
(335
)
 
(41
)
 
(521
)
Financing Activities
 
 
 
 
 
 
Issuances of common stock
 
37

 
47

 
84

Purchases of common stock
 
(30
)
 
—

 
—

Borrowings of other debt
 
—

 
—

 
851

Repayments of other debt and derivatives
 
(20
)
 
(46
)
 
(1,811
)
Net change in financing with less than 90-day maturities
 
—

 
—

 
(204
)
Stock compensation income tax benefits
 
13

 
—

 
15

Purchase of non-controlling interest
 
—

 
—

 
(10
)
Payments of dividends
 
(80
)
 
(46
)
 
(271
)
Net cash used in financing activities
 
(80
)
 
(45
)
 
(1,346
)
Effect of changes in foreign exchange rates on cash
 
—

 
(2
)
 
(213
)
Increase (decrease) in cash and equivalents
 
(164
)
 
165

 
(1,831
)
Add: Cash balance of discontinued operations at beginning of year
 
—

 
—

 
1,992

Less: Cash balance of discontinued operations at end of year
 
—

 
—

 
—

Cash and equivalents at beginning of year
 
400

 
235

 
74

Cash and equivalents at end of year
 
$
236

 
$
400

 
$
235

Supplemental Cash Flow Data
 
 
 
 
 
 
Cash paid for restructuring charges
 
$
70

 
$
102

 
$
512

Cash contributions to pension plans
 
$
9

 
$
8

 
$
213

Cash paid for income taxes
 
$
101

 
$
15

 
$
209

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

7

EX 99.1

Note 1 - Nature of Operations and Basis of Presentation

Nature of Operations

The Hillshire Brands Company (corporation, company or Hillshire Brands) is a U.S.-based company that primarily focuses on manufacturing and marketing branded convenient foods. 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.

The relative importance of each of the company's business segments over the past three years, as measured by sales and operating segment income, is presented in Note 19 - Business Segment Information, of these financial statements.

Basis of Presentation

The Consolidated Financial Statements include the accounts of the company and all subsidiaries where we have a controlling financial interest. The consolidated financial statements include the accounts of a variable interest entity (VIE) for which the company is deemed the primary beneficiary. The results of companies acquired or disposed of during the year are included in the consolidated financial statements from the effective date of acquisition, or up to the date of disposal. Intercompany balances and transactions have been eliminated in consolidation.

The fiscal year ends on the Saturday closest to June 30. Fiscal 2014, 2013 and 2012 were 52-week years. Unless otherwise stated, references to years relate to fiscal years.

Certain 2013 and 2012 amounts have been reclassified to conform to the 2014 presentation.

Discontinued Operations

The results of the Australian Bakery, International Coffee and Tea, North American Foodservice Beverage, European Bakery, North American Fresh Bakery, North American Refrigerated Dough, and International Household and Body Care businesses were reported as discontinued operations in the company's 2013 Annual Report on Form 10-K. The results of operations of these businesses through the date of disposition are presented as discontinued operations in the Consolidated Statements of Income for all periods presented. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines of the Consolidated Balance Sheets.

Note 2 - Summary of Significant Accounting Policies

The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the U.S. (GAAP).

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses and certain financial statement disclosures. Significant estimates in these Consolidated Financial Statements include allowances for doubtful accounts receivable, net realizable value of inventories, sales incentives, useful lives of property and identifiable intangible assets, the evaluation of the recoverability of property, identifiable intangible assets and goodwill, self-insurance reserves, income tax and valuation reserves, the valuation of assets and liabilities acquired in business combinations, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans, and the volatility, expected lives and forfeiture rates for stock compensation instruments granted to employees. Actual results could differ from these estimates.

Reacquired Shares

The company is incorporated in the State of Maryland and under the laws of that state shares of its own stock that are acquired by the company constitute authorized but unissued shares. The cost of the acquisition by the company of shares of its own stock in excess of the aggregate par value of the shares first reduces capital surplus, to the extent available, with any residual cost applied against retained earnings.

8

EX 99.1

Sales Recognition and Incentives

The company recognizes sales when they are realized or realizable and earned. The company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price charged is fixed or determinable, and collectability is reasonably assured. For the company, this generally means that we recognize sales when title to and risk of loss of our products pass to our resellers or other customers. In particular, title usually transfers upon receipt of our product at our customers' locations, or upon shipment, as determined by the specific sales terms of the transactions.

Sales are recognized as the net amount to be received after deducting estimated amounts for sales incentives, trade allowances and product returns. The company estimates trade allowances and product returns based on historical results taking into consideration the customer, transaction and specifics of each arrangement. The company provides a variety of sales incentives to resellers and consumers of its products, and the policies regarding the recognition and display of these incentives within the Consolidated Statements of Income are as follows:

Discounts, Coupons and Rebates The cost of these incentives is recognized at the later of the date at which the related sale is recognized or the date at which the incentive is offered. The cost of these incentives is estimated using a number of factors, including historical utilization and redemption rates. Substantially all cash incentives of this type are included in the determination of net sales. Incentives offered in the form of free product are included in the determination of cost of sales.

Slotting Fees Certain retailers require the payment of slotting fees in order to obtain space for the company's products on the retailer's store shelves. These amounts are included in the determination of net sales when a liability to the retailer is created.

Volume-Based Incentives These incentives typically involve rebates or refunds of a specified amount of cash only if the reseller reaches a specified level of sales. Under incentive programs of this nature, the company estimates the incentive and allocates a portion of the incentive to reduce each underlying sales transaction with the customer.

Cooperative Advertising Under these arrangements, the company agrees to reimburse the reseller for a portion of the costs incurred by the reseller to advertise and promote certain of the company's products. The company recognizes the cost of cooperative advertising programs in the period in which the advertising and promotional activity first takes place. The costs of these incentives are generally included in the determination of net sales.

Fixtures and Racks Store fixtures and racks are given to retailers to display certain of the company's products. The costs of these fixtures and racks are recognized as expense in the period in which they are delivered to the retailer.

Advertising Expense

Advertising costs, which include the development and production of advertising materials and the communication of this material through various forms of media, are expensed in the period the advertising first takes place. Advertising expense is recognized in Selling, general and administrative expenses in the Consolidated Statements of Income. Total media advertising expense for continuing operations was $104 million in 2014, $113 million in 2013 and $86 million in 2012.

Cash and Equivalents

All highly liquid investments purchased with a maturity of three months or less at the time of purchase are considered to be cash equivalents.

Accounts Receivable Valuation

Accounts receivable are stated at their net realizable value. The allowance for doubtful accounts reflects the company's best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information.

Shipping and Handling Costs

Shipping and handling costs are $250 million in 2014, $249 million in 2013 and $258 million in 2012. These costs are recognized in Selling, general and administrative expenses in the Consolidated Statements of Income.

9

EX 99.1

Inventory Valuation

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases are reflected as a reduction in the cost of the related inventory item, and are therefore, reflected in cost of sales when the related inventory item is sold.

Recognition and Reporting of Planned Business Dispositions

When a decision to dispose of a business component is made, it is necessary to determine how the results will be presented within the financial statements and whether the net assets of that business are recoverable. The following summarizes the significant accounting policies and judgments associated with a decision to dispose of a business.

Discontinued Operations A discontinued operation is a business component that meets several criteria. First, it must be possible to clearly distinguish the operations and cash flows of the component from other portions of the business. Second, the operations need to have been sold, spun-off or classified as held for sale. Finally, after the disposal, the cash flows of the component must be eliminated from continuing operations and the company may not have any significant continuing involvement in the business. Significant judgments are involved in determining whether a business component meets the criteria for discontinued operation reporting and the period in which these criteria are met. The results for a business to be spun-off do not meet the criteria for discontinued operations reporting until the completion of the spin-off.

If a business component is reported as a discontinued operation, the results of operations through the date of sale are presented on a separate line of the income statement. Interest on corporate level debt is not allocated to discontinued operations. Any gain or loss recognized upon the disposition of a discontinued operation is also reported on a separate line of the income statement. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines of the balance sheet.

Gains and losses related to the sale of business components that do not meet the discontinued operation criteria are reported in continuing operations and separately disclosed, if significant.

Businesses Held for Sale In order for a business to be classified as held for sale, several criteria must be achieved. These criteria include, among others, an active program to market the business and locate a buyer, as well as the probable disposition of the business within one year. Upon being classified as held for sale, the recoverability of the carrying value of a business must be assessed. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, intangible assets not subject to amortization and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell and no additional depreciation expense is recognized related to property. The carrying value of a held for sale business includes the portion of the cumulative translation adjustment related to the operation. Once a business is classified as held for sale, all of its historical balance sheet information is included in assets and liabilities held for sale in the balance sheet.
 
Businesses Held for Use If a decision to dispose of a business is made and the held for sale criteria are not met, the business is considered held for use and its assets are evaluated for recoverability in the following order: assets other than goodwill; property and intangibles subject to amortization; and finally, goodwill. In evaluating the recoverability of property and intangible assets subject to amortization, in a held for use business, the carrying value of the business is first compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the operation. If the carrying value exceeds the undiscounted expected cash flows, then an impairment is recognized to the extent the carrying value of the business exceeds its fair value.

There are inherent judgments and estimates used in determining future cash flows and it is possible that additional impairment charges may occur in future periods. In addition, the sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to the closing date.

10

EX 99.1

Property

Property is stated at historical cost and depreciation is computed using the straight-line method over the lives of the assets. Machinery and equipment are depreciated over periods ranging from 3 to 25 years and buildings and building improvements over periods of up to 40 years. Additions and improvements that substantially extend the useful life of a particular asset and interest costs incurred during the construction period of major properties are capitalized. Leasehold improvements are capitalized and amortized over the shorter of the remaining lease term or remaining economic useful life. As of June 28, 2014, the company had $27 million in capital expenditures within accounts payable. Repairs and maintenance costs are charged to expense. Upon the sale or disposition of property, the cost and related accumulated depreciation are removed from the accounts. Interest expense is capitalized for capital projects over $1 million that are in process for more than three months. Capitalized interest was $3 million in 2014, $2 million in 2013 and $5 million in 2012.

Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in the business climate, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life or spun-off. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If the carrying amount exceeds the estimated future undiscounted cash flows then an asset is not recoverable. The impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value.

Assets that are to be disposed of by sale are recognized in the financial statements at the lower of carrying amount or fair value, less cost to sell, and are not depreciated after being classified as held for sale. In order for an asset to be classified as held for sale, the asset must be actively marketed, be available for immediate sale and meet certain other specified criteria.

Trademarks and Other Identifiable Intangible Assets

The primary identifiable intangible assets of the company are trademarks and customer relationships acquired in business combinations and computer software. The company capitalizes direct costs of materials and services used in the development and purchase of internal-use software. Identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of a finite-lived identifiable intangible asset is based upon a number of factors, including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows.

Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used in evaluating the recoverability of property, plant and equipment. Identifiable intangible assets not subject to amortization are assessed for impairment at least annually and as triggering events may occur. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. In making this assessment, management relies on a number of factors to discount estimated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent assumptions and judgments required in the analysis of intangible asset impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

Goodwill

Goodwill is the difference between the purchase price and the fair value of the assets acquired and liabilities assumed in a business combination. When a business combination is completed, the assets acquired and liabilities assumed are assigned to the reporting unit or units of the company given responsibility for managing, controlling and generating returns on these assets and liabilities. Reporting units are business components at or one level below the operating segment level for which discrete financial information is available and reviewed by segment management. In many instances, all of the acquired assets and liabilities are assigned to a single reporting unit and in these cases all of the goodwill is assigned to the same reporting unit. In those situations in which the acquired assets and liabilities are allocated to more than one reporting unit, the goodwill to be assigned to each reporting unit is determined in a manner similar to how the amount of goodwill recognized in the business combination is determined.

11

EX 99.1

Goodwill is not amortized; however, it is assessed for impairment at least annually and as triggering events may occur. The company performs its annual review for impairment in the fourth quarter of each fiscal year. The company uses accounting standards regarding goodwill impairment reviews that permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. Some of the factors considered in the qualitative assessment process were the overall financial performance of the business including current and expected cash flows, revenues and earnings; changes in macroeconomic or industry conditions; changes in cost factors such as raw materials and labor; and changes in management, strategy or customers. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value is less than the carrying amount, then the two-step process of impairment testing is unnecessary.

However, if the qualitative assessment discussed above indicates that there may be a possible impairment then the first step of the goodwill impairment test is required to be performed. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process is necessary and involves a comparison of the implied fair value and the carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

In evaluating the recoverability of goodwill, it is necessary to estimate the fair values of the reporting units. In making this assessment, management relies on a number of factors to discount anticipated future cash flows, including operating results, business plans and present value techniques. The fair value of reporting units is estimated based on a discounted cash flow model. The discounted cash flow model uses management's business plans and projections as the basis for expected future cash flows for the first three years and a residual growth rate thereafter. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for our reporting units. A separate discount rate derived from published sources was utilized for each reporting unit. Rates used to discount cash flows are dependent upon interest rates, market-based risk premium and the cost of capital at a point in time. Because some of the inherent assumptions and estimates used in determining the fair value of these reporting units are outside the control of management, including interest rates, market-based risk premium, the cost of capital, and tax rates, changes in these underlying assumptions and our credit rating can also adversely impact the business units' fair values. The amount of any impairment is dependent on these factors, which cannot be predicted with certainty.

Exit and Disposal Activities

Exit and disposal activities primarily consist of various actions to sever employees, exit certain contractual obligations and dispose of certain assets. Charges are recognized for these actions in the period in which the liability is incurred. Adjustments to previously recorded charges resulting from a change in estimated liability are recognized in the period in which the change is identified. Our methodology used to record these charges is described below.

Severance Severance actions initiated by the company are generally covered under previously communicated benefit arrangements, which provides for termination benefits in the event that an employee is involuntarily terminated. Liabilities are recorded under these arrangements when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. This generally occurs when management with the appropriate level of authority approves an action to terminate employees who have been identified and targeted for termination within one year.

Noncancelable Lease and Contractual Obligations Liabilities are incurred for noncancelable lease and other contractual obligations when the company terminates the contract in accordance with contract terms or when the company ceases using the right conveyed by the contract or exits the leased space. The charge for these items is determined based on the fair value of remaining lease rentals reduced by the fair value of estimated sublease rentals that could reasonably be obtained for the property, estimated using an expected present value technique.

Other For other costs associated with exit and disposal activities, a charge is recognized at its fair value in the period in which the liability is incurred, estimated using an expected present value technique, generally when the services are rendered.
 
Stock-Based Compensation

The company recognizes the cost of employee services received in exchange for awards of equity instruments over the vesting period based upon the grant date fair value of those awards.

12

EX 99.1

Income Taxes

The company's tax rate from period to period is affected by many factors. The most significant of these factors includes changes in tax legislation, the tax characteristics of the company's income, the timing and recognition of goodwill impairments and acquisitions and dispositions. In addition, the company's tax returns are routinely audited and finalization of issues raised in these audits sometimes affects the tax provision. It is reasonably possible that tax legislation in the jurisdictions in which the company does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the company's tax assets and obligations will need to be measured and recognized in the financial statements.

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates for the years in which the differences are expected to reverse. The company continually assesses the recoverability of these deferred tax amounts and, where appropriate, provides a reserve for amounts that appear to be more likely than not unrecoverable. Federal income taxes are provided on that portion of the income of foreign subsidiaries that are expected to be remitted to the U.S. and be taxable. There is not a significant amount of income generated outside of the U.S.

The management of the company periodically estimates the probable tax obligations of the company using historical experience in tax jurisdictions and informed judgments in accordance with GAAP. For a tax benefit to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the taxing authority. The company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these situations, the ultimate payment may be materially different from the estimated recorded amounts. Any adjustment to a tax reserve impacts the company's tax expense in the period in which the adjustment is made.

Defined Benefit, Postretirement and Life-Insurance Plans

The company recognizes the funded status of defined pension and postretirement plans in the Consolidated Balance Sheet. The funded status is measured as the difference between the fair market value of the plan assets and the benefit obligation. The company measures its plan assets and liabilities as of its fiscal year end. For a defined benefit pension plan, the benefit obligation is the projected benefit obligation; for any other defined benefit postretirement plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. Any overfunded status is recognized as an asset and any underfunded status is recognized as a liability. Any transitional asset/(liability), prior service cost (credit) or actuarial (gain)/loss that has not yet been recognized as a component of net periodic cost is recognized in the accumulated other comprehensive income section of the Consolidated Statements of Equity, net of tax. Accumulated other comprehensive income will be adjusted as these amounts are subsequently recognized as a component of net periodic benefit costs in future periods.

13

EX 99.1

Financial Instruments

The company uses financial instruments, including options and futures to manage its exposures to movements in commodity prices. The use of these 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 purposes and is not a party to leveraged derivatives.

The company uses either hedge accounting or mark-to-market accounting for its derivative instruments. Under hedge accounting, the company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivatives that are designated as hedges of specific assets, liabilities, firm commitments or forecasted transactions. The company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the company discontinues hedge accounting and any deferred gains or losses are recorded in the Consolidated Statements of Income. Derivatives are recorded in the Consolidated Balance Sheets at fair value in other assets and other liabilities In accordance with generally accepted accounting principles, we offset certain derivative asset and liability balances, as well as certain amounts representing rights to reclaim cash collateral and obligations to return cash collateral, where master netting agreements provide for legal right of setoff. For more information about accounting for derivatives see Note 15 - Financial Instruments.

Self-Insurance Reserves

The company purchases third-party insurance for workers' compensation, automobile and product and general liability claims that exceed a certain level. The company is responsible for the payment of claims under these insured limits. The undiscounted obligation associated with these claims is accrued based on estimates obtained from consulting actuaries. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. Accrued reserves, excluding any amounts covered by insurance, were $27 million as of June 28, 2014 and $32 million as of June 29, 2013.

Business Acquisitions

With respect to business acquisitions, the company is required to recognize and measure the identifiable assets acquired, liabilities assumed, contractual contingencies, contingent consideration and any noncontrolling interest in an acquired business at fair value on the acquisition date. In addition, the accounting guidance also requires expensing acquisition costs when incurred, recognizing restructuring costs in periods subsequent to the acquisition date and recording any adjustments to deferred tax asset valuation allowances and acquired uncertain tax positions after the measurement period in income tax expense.

Foreign Currency Translation

Foreign currency denominated assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income within common stockholders' equity. The company translates the results of operations of its foreign subsidiaries at the average exchange rates during the respective periods. Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in Selling, general and administrative expense in the Consolidated Statements of Income.

14

EX 99.1

Note 3 - Intangible Assets and Goodwill

Intangible Assets

The primary components of the intangible assets reported in continuing operations and the related amortization expense are as follows: 
In millions
 
Gross Value
 
Accumulated Amortization
 
Net Book Value
2014
 
 
 
 
 
 
Intangible assets subject to amortization
 
 
 
 
 
 
Trademarks and brand names
 
$
87

 
$
5

 
$
82

Customer relationships
 
131

 
49

 
82

Computer software
 
143

 
123

 
20

Other contractual agreements
 
13

 
1

 
12

 
 
$
374

 
$
178

 
196

Trademarks and brand names not subject to amortization
 
 
 
 
 
44

Net book value of intangible assets
 
 
 
 
 
$
240

2013
 
 
 
 
 
 
Intangible assets subject to amortization
 
 
 
 
 
 
Trademarks and brand names
 
31

 
4

 
27

Customer relationships
 
72

 
46

 
26

Computer software
 
133

 
112

 
21

Other contractual agreements
 
3

 
—

 
3

 
 
$
239

 
$
162

 
77

Trademarks and brand names not subject to amortization
 
 
 
 
 
44

Net book value of intangible assets
 
 
 
 
 
$
121


The company made two acquisitions during 2014 to further broaden its product offerings and to facilitate extension into additional categories. On September 6, 2013, the Retail segment acquired 100% of the common stock of Formosa Meat Company, Inc. (“Golden Island”) for $35 million. On May 15, 2014, the Retail segment acquired 100% of the capital stock of Healthy Frozen Food, Inc. (“Van's”) for approximately $165 million, net of cash acquired. As a result of the acquisitions, the company recognized a total of $104 million of goodwill and $125 million of brand names, customer relationships, and other intangibles.

The year-over-year change in the value of trademarks and brand names and customer relationships is primarily due to the acquisitions of Golden Island and Van's and the impact of amortization during the year. The amortization expense reported in continuing operations for intangible assets subject to amortization was $19 million in 2014, $17 million in 2013 and $21 million in 2012. The estimated amortization expense for the next five years, assuming no change in the estimated useful lives of identifiable intangible assets or changes in foreign exchange rates, is as follows: $22 million in 2015, $14 million in 2016, $14 million in 2017, $14 million in 2018 and $11 million in 2019. At June 28, 2014, the weighted average remaining useful life for trademarks is 19 years; customer relationships is 17 years; computer software is 2 years; and other contractual agreements is 9 years.

15

EX 99.1

Goodwill

The goodwill reported in continuing operations associated with each business segment and the changes in those amounts during 2014 and 2013 are as follows:
In millions
 
Retail
 
Foodservice/Other
 
Total
Net Book Value at June 30, 2012
 
 
 
 
 
 
Gross goodwill
 
$
139

 
$
591

 
$
730

Accumulated impairment losses
 
—

 
(382
)
 
(382
)
Net goodwill
 
139

 
209

 
348

Net Book Value at June 29, 2013
 
 
 
 
 
 
Gross goodwill
 
139

 
591

 
730

Accumulated impairment losses
 
—

 
(382
)
 
(382
)
Net goodwill
 
139

 
209

 
348

Acquisitions
 
104

 
—

 
104

Net Book Value at June 28, 2014
 
 
 
 
 
 
Gross goodwill
 
243

 
591

 
834

Accumulated impairment losses
 
—

 
(382
)
 
(382
)
Net goodwill
 
$
243

 
$
209

 
$
452


Note 4 - Impairment Charges

The company recognized impairment charges in 2013 and 2012 and the significant impairments are reported as Impairment charges in the Consolidated Statements of Income. The impact of these charges is summarized in the following table: 
 
 
 
In millions
Pretax Impairment Charge
2013
 
Retail
$
1

2012
 
General corporate expenses
$
14


No impairment charges were recognized in 2014.

The company currently tests goodwill and intangible assets not subject to amortization for impairment in the fourth quarter of its fiscal year and whenever a significant event occurs or circumstances change that would more likely than not reduce the fair value of these intangible assets. Other long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. The following is a discussion of each impairment charge:

2013

Retail Property The company recognized a $1 million impairment charge related to machinery and equipment within the Retail segment, which was determined to no longer have any future use by the company.

2012

Capitalized Computer Software The company recognized a $14 million impairment charge related to the write-down of capitalized computer software, which was determined to no longer have any future use by the company. These charges were recognized as part of general corporate expenses.

16

EX 99.1

Note 5 - Discontinued Operations

The results of the fresh bakery, refrigerated dough and foodservice beverage operations in North America and the international coffee and tea, household and body care, European bakery and Australian bakery businesses are classified as discontinued operations and are presented as discontinued operations in the Consolidated Statements of Income for all periods presented. The assets and liabilities for these businesses met the accounting criteria to be classified as held for sale and have been aggregated and reported on a separate line of the Consolidated Balance Sheet prior to disposition.

North American Operations

North American Fresh Bakery On October 21, 2011, the company announced an agreement with Grupo Bimbo that allowed the parties to complete the previously announced sale of its North American Fresh Bakery business for a purchase price of $709 million. The sale also included a small portion of business that was part of the North American Foodservice/Other segment which is not reflected as discontinued operations as it did not meet the definition of a component pursuant to the accounting rules. The transaction closed on November 4, 2011 and Hillshire Brands received $717 million, which included working capital and other purchase price adjustments. The company entered into a customary transition services agreement with the purchaser of this business to provide for the orderly separation of the business and transition of various administrative functions and processes which ended in the fourth quarter of 2013.

The buyer of the North American Fresh Bakery business assumed all the pension and postretirement medical liabilities associated with these businesses, including any multi-employer pension liabilities. An actuarial analysis under ERISA guidelines was performed to determine the final plan assets that should be transferred to support the pension liabilities assumed by the buyer. The transfer of the benefit plan liabilities to the buyer resulted in the recognition of a $36 million settlement loss related to the defined benefit pension plans and a $71 million settlement gain and a $44 million curtailment gain related to the postretirement benefit plans. These amounts have been included in the gain on disposition of this business.

North American Foodservice Beverage On October 24, 2011, the company announced that it had entered into an agreement to sell the majority of its North American Foodservice Beverage operations to the J.M. Smucker Company (Smuckers) for $350 million. The transaction closed on December 31, 2011, resulting in the recognition of a pretax gain of $222 million in the second quarter of 2012. The company received $376 million of proceeds, which included a working capital adjustment. The company entered into a customary transition services agreement with Smuckers to provide for the orderly separation of the business and the transition of various administrative functions and processes which ended in the fourth quarter of 2012. The company also entered into a 10 year partnership to collaborate on liquid coffee innovation that will pay the company approximately $50 million plus growth-related royalties over the 10 year period. While this arrangement provided a continuation of cash flows subsequent to the divestiture, it did not represent significant continuing cash flows or significant continuing involvement that would have precluded classification of the North American Foodservice Beverage component as a discontinued operation. This partnership agreement was subsequently transferred to the international coffee and tea business as part of the spin-off. The company performed an updated impairment analysis for the remaining assets for sale in the North American Foodservice Beverage component and recognized a pretax impairment charge of $6 million in 2012 which has been recognized in the operating results for discontinued operations. The company has also recognized exit-related costs for this business which is included in the operating results for discontinued operations.

North American Foodservice Refrigerated Dough On August 9, 2011, the company announced it had entered into an agreement to sell its North American Foodservice Refrigerated Dough business to Ralcorp for $545 million. The company received $552 million of proceeds, which included working capital adjustments. The company entered into a customary transitional services agreement with the purchaser of this business to provide for the orderly separation of the business and the orderly transition of various functions and processes which ended in the fourth quarter of 2012.

International Operations

Australian Bakery 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. 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, which was recorded as results of discontinued operations in the Consolidated Statements of Income.

17

EX 99.1

International Coffee and Tea On June 28, 2012, the company's International Coffee and Tea business was spun off into a new public company called D.E MASTER BLENDERS 1753 N.V. (DEMB). The separation was effected as follows: a distribution of all of the common stock of a U.S. subsidiary that held all of the company's International Coffee and Tea business (CoffeeCo) was made to an exchange agent on behalf of the company's shareholders of record. Immediately after the distribution of CoffeeCo common stock, CoffeeCo paid a $3.00 per share dividend, which totaled $1.8 billion. After the payment of the dividend, CoffeeCo merged with a subsidiary of DEMB. As a result of the spin-off, the historical results of the International Coffee and Tea business have been reported as a discontinued operation in the company's consolidated financial statements. The company entered into a master separation agreement that provided for the orderly separation of the business and transition of various administrative functions and processes and a separate tax sharing agreement whereby DEMB agreed to indemnify the company for certain tax liabilities that could result from the spin-off and certain related transactions. The company does not have any significant continuing involvement in the business and does not expect any material direct cash inflows or outflows with this business.

European Bakery During the first quarter of 2012, management decided to divest the Spanish bakery and French refrigerated dough businesses, collectively referred to as European Bakery, requiring that these businesses be tested for impairment under the available for sale model. Based on an estimate of the anticipated proceeds for these businesses, the company recognized a pretax impairment charge of $379 million for the European Bakery businesses in 2012. A tax benefit of $38 million was recognized on these impairment charges. On October 10, 2011, the company announced that it had signed an agreement to sell the Spanish bakery business to Grupo Bimbo for €115 million and closed the transaction in the second quarter of 2012. In the third quarter of 2012, the company also completed the disposition of its French refrigerated dough business for €115 million. An $11 million pretax gain was recognized in 2012 on the sale of both the Spanish bakery and French refrigerated dough businesses.

Air Care Products Business In July 2010, the company sold a majority of its air care products business. However, certain operations were retained in Spain until production related to non-air care businesses ceased at the facility. The sale of the Spanish facility closed in the third quarter of 2012 and the company received $44 million of proceeds and recognized a pretax loss on the sale of this facility of $10 million.

Shoe Care Business In May 2011, the company completed the sale of the majority of its shoe care businesses. However, certain other shoe care businesses were sold on a delayed basis. In 2012, the company closed on the sale of its shoe care business in Malaysia, China and Indonesia and received $56 million of proceeds, which included working capital adjustments.

Non-Indian Insecticides Business The company began selling portions of its Non-Indian Insecticides business in December 2010. The company recognized a pretax gain of $255 million on such dispositions in 2012.

18

EX 99.1

Results of Discontinued Operations

The amounts in the tables below reflect the operating results of the businesses reported as discontinued operations up through the date of disposition, exclusive of any gains or losses related to the disposal of these discontinued operations.
In millions
 
Net Sales
 
Pretax Income (Loss)
 
Income (Loss)
2014
 
 
 
 
 
 
Australian Bakery
 
—

 
2

 
1

Total
 
$
—

 
$
2

 
$
1

2013
 
 
 
 
 
 
North American Fresh Bakery
 
$
—

 
$
1

 
$
1

North American Foodservice Beverage
 
—

 
3

 
2

International Coffee and Tea
 
—

 
—

 
6

European Bakery
 
—

 
—

 
(3
)
International Household and Body Care
 
—

 
—

 
1

Australian Bakery
 
80

 
3

 
8

Total
 
$
80

 
$
7

 
$
15

2012
 
 
 
 
 
 
North American Fresh Bakery
 
$
724

 
$
29

 
$
163

North American Refrigerated Dough
 
74

 
13

 
9

North American Foodservice Beverage
 
330

 
(15
)
 
(9
)
International Coffee and Tea
 
3,728

 
224

 
662

European Bakery
 
262

 
(384
)
 
(358
)
International Household and Body Care
 
111

 
(5
)
 
(2
)
Australian Bakery
 
136

 
(2
)
 
(2
)
Total
 
$
5,365

 
$
(140
)
 
$
463

In 2012, as a consequence of the spin-off, the company released approximately $623 million of deferred tax liabilities on its balance sheet related to the repatriation of foreign earnings with a corresponding reduction in the tax expense of the discontinued International Coffee and Tea business.

Gain (Loss) on the Sale of Discontinued Operations

The gain (loss) on the sale of discontinued operations recognized in 2013 and 2012 are summarized in the following tables. There was no gain (loss) on the sale of discontinued operations recognized during 2014.

19

EX 99.1

In millions
 
Pretax Gain (Loss) on Sale
 
Tax (Expense)/Benefit
 
After Tax Gain (Loss)
2013
 
 
 
 
 
 
North American Fresh Bakery
 
$
10

 
$
(4
)
 
$
6

North American Foodservice Beverage
 
2

 
2

 
4

North American Refrigerated Dough
 
—

 
(1
)
 
(1
)
Non-European Insecticides
 
—

 
2

 
2

Australian Bakery
 
56

 
(14
)
 
42

Total
 
$
68

 
$
(15
)
 
$
53

2012
 
 
 
 
 
 
North American Fresh Bakery
 
$
94

 
$
(33
)
 
$
61

North American Foodservice Beverage
 
222

 
(76
)
 
146

North American Refrigerated Dough
 
198

 
(156
)
 
42

European Bakery
 
11

 
(45
)
 
(34
)
Non-European Insecticides
 
249

 
(59
)
 
190

Air Care Products
 
(10
)
 
(1
)
 
(11
)
Other Household and Body Care
 
8

 
3

 
11

Total
 
$
772

 
$
(367
)
 
$
405

The gain on sale of discontinued operations 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.

In 2012, the $156 million tax expense recognized on the sale of the North American Refrigerated Dough business was impacted by the $254 million of goodwill that had no tax basis and the $45 million of tax expense recognized on the sale of the European Bakery businesses was impacted by $140 million of cumulative translation adjustments that had no tax basis.

Discontinued Operations Cash Flows

The company's discontinued operations impacted the cash flows of the company as follows:
In millions
 
2014
 
2013
 
2012
Discontinued operations impact on
 
 
 
 
 
 
Cash from operating activities
 
$
1

 
$
10

 
$
122

Cash from (used in) investing activities
 
—

 
86

 
(368
)
Cash used in financing activities
 
(1
)
 
(95
)
 
(1,530
)
Effect of changes in foreign exchange rates on cash
 
—

 
(1
)
 
(216
)
Net cash impact of discontinued operations
 
$
—

 
$
—

 
$
(1,992
)
Cash balance of discontinued operations
 
 
 
 
 
 
At start of period
 
$
—

 
$
—

 
$
1,992

At end of period
 
—

 
—

 
—

Increase (decrease) in cash of discontinued operations
 
$
—

 
$
—

 
$
(1,992
)

The cash used in financing activities in 2014, 2013 and 2012 primarily represents the net transfers of cash with the corporate office. The net assets of the discontinued operations includes only the cash noted above as most of the cash of those businesses, with the exception of the International Coffee and Tea business, has been retained as a corporate asset.

There were no assets held for sale or disposition as of June 28, 2014 and June 29, 2013. 

Note 6 - Exit, Disposal and 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

On April 4, 2014, the company announced that it will discontinue all production at its Florence, Alabama facility by December 30, 2014. As a result of the facility closure, the company expects to incur cash charges of approximately $12.6 million. These costs include cash severance charges of approximately $9.6 million, all of which have been recognized within Net charges for exit activities, asset and business dispositions in the Consolidated Statements of Income as of June 28, 2014. Other cash closure costs of approximately $3.0 million are expected to be incurred prior to the end of 2016. 

2. Costs Recognized in Selling, General and Administrative Expenses

These amounts primarily relate to:
•
Expenses associated with the installation of information systems related to ongoing 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

20

EX 99.1

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 pursuant to the accounting rules for exit and disposal activities. However, management believes that the disclosure of these charges provides the reader with greater transparency to the total cost of the initiatives.

The following is a summary of the expenses associated with all exit, disposal and ongoing restructuring actions, as well as where the costs are reflected in the Consolidated Statements of Income:
 
In millions
 
2014
 
2013
 
2012
Exit and business dispositions
 
$
14

 
$
9

 
$
81

Selling, general and administrative expenses
 
44

 
39

 
115

Decrease in income from continuing operations before income taxes
 
$
58

 
$
48

 
$
196


The impact of these actions on the company's business segments and unallocated corporate expenses is summarized as follows:
 
In millions
 
2014
 
2013
 
2012
Retail
 
$
9

 
$
(1
)
 
$
14

Foodservice/Other
 
2

 
(2
)
 
4

Expense (income) in operating segments
 
11

 
(3
)
 
18

General corporate expenses
 
47

 
51

 
178

Total
 
$
58

 
$
48

 
$
196


The following table summarizes the activity during 2014 related to exit, disposal and restructuring related actions and the status of the related accruals as of June 28, 2014. The accrued amounts remaining represent the estimated cash expenditures necessary to satisfy remaining obligations. The majority of the cash payments to satisfy the accrued costs 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 (income) recognized during 2014
 
13

 
44

 
1

 
58

Cash payments
 
(9
)
 
(42
)
 
(19
)
 
(70
)
Noncash charges
 
—

 
(1
)
 
—

 
(1
)
Accrued costs as of June 28, 2014
 
$
14

 
$
6

 
$
5

 
$
25


Note 7 - Common Stock

On June 28, 2012, the company effected a 1-for-5 reverse stock split of Hillshire Brands common stock. As a result, every five shares of Sara Lee Corporation common stock were converted into one share of Hillshire Brands common stock. Any reference to the number of shares outstanding or any per share amounts has been adjusted to reflect the impact of this reverse stock split.

Changes in outstanding shares of common stock for the past three years were: 
Shares in thousands
 
2014
 
2013
 
2012
Beginning balances
 
123,248

 
120,644

 
117,420

Stock issuances
 
 
 
 
 
 
Stock option and benefit plans
 
1,379

 
2,436

 
1,104

Restricted stock plans
 
37

 
155

 
2,119

Reacquired shares
 
(933
)
 
—

 
—

Other
 
24

 
13

 
1

Ending balances
 
123,755

 
123,248

 
120,644


21

EX 99.1

Common stock dividends and dividend-per-share amounts declared on outstanding shares of common stock were: 
In millions except per share data
 
2014
 
2013
 
2012
Common stock dividends declared
 
$
86

 
$
61

 
$
137

Dividends per share amount declared
 
$
0.70

 
$
0.50

 
$
1.15


During 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 June 28, 2014, the remaining amount authorized for repurchase is $1.2 billion of common stock under an existing share repurchase program, plus 2.7 million shares of common stock that remain authorized for repurchase under the company's prior share repurchase program.

22

EX 99.1

Note 8 - Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are:
In millions
 
Translation Adjustments
 
 
 
Net Unrealized Gain (Loss) on Qualifying Cash Flow Hedges
 
 
 
Pension/ Postretirement Activity
 
 
 
Total
Balance at July 2, 2011
 
219

 
 
 
6

 
 
 
(490
)
 
 
 
(265
)
Other comprehensive income (loss) before reclassifications
 
—

 
 
 
5

 
 
 
(111
)
 
 
 
(106
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior-service cost
 
—

 
 
 
—

 
 
 
11

 
(b)
 
11

Net actuarial gain
 
—

 
 
 
—

 
 
 
(15
)
 
(b)
 
(15
)
Pension plan curtailments/settlements
 
—

 
 
 
—

 
 
 
38

 
(b)
 
38

Gain realized from derivatives
 
—

 
 
 
(1
)
 
(a)
 
—

 
 
 
(1
)
Business dispositions
 
127

 
(f)
 
—

 
 
 
—

 
 
 
127

Other comprehensive income (loss) activity
 
(133
)
 
 
 
(2
)
 
 
 
30

 
(b)
 
(105
)
Tax expense (benefit)
 
(17
)
 
(c)
 
—

 
(c)
 
26

 
(c)
 
9

Net current-period other comprehensive income (loss)
 
(23
)
 
 
 
2

 
 
 
(21
)
 
 
 
(42
)
Spin-off of International Coffee and Tea business
 
(180
)
 
(e)
 
—

 
 
 
343

 
 
 
163

Balance at June 30, 2012
 
16

 
 
 
8

 
 
 
(168
)
 
 
 
(144
)
Other comprehensive income before reclassifications
 
—

 
 
 
6

 
 
 
41

 
 
 
47

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

 
 
 
—

 
 
 
(8
)
 
(b)
 
(8
)
Net actuarial loss
 
—

 
 
 
—

 
 
 
5

 
(b)
 
5

Pension plan curtailments/settlements
 
—

 
 
 
—

 
 
 
2

 
(b)
 
2

Gain realized from derivatives
 
—

 
 
 
(18
)
 
(a)
 
—

 
 
 
(18
)
Business dispositions
 
(15
)
 
(d)
 
—

 
 
 
—

 
 
 
(15
)
Tax expense (benefit)
 
(6
)
 
(c)
 
4

 
(c)
 
(14
)
 
(c)
 
(16
)
Net current-period other comprehensive income (loss)
 
(21
)
 
 
 
(8
)
 
 
 
26

 
 
 
(3
)
Spin-off of International Coffee and Tea business
 
6

 
(e)
 
—

 
 
 
—

 
 
 
6

Balance at June 29, 2013
 
1

 
 
 
—

 
 
 
(142
)
 
 
 
(141
)
Other comprehensive loss before reclassifications
 
(1
)
 
 
 
(1
)
 
 
 
(12
)
 
 
 
(14
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior-service benefit
 
—

 
 
 
—

 
 
 
(7
)
 
(b)
 
(7
)
Net actuarial loss
 
—

 
 
 
—

 
 
 
6

 
(b)
 
6

Loss realized from derivatives
 
—

 
 
 
2

 
(a)
 
—

 
 
 
2

Tax expense
 
—

 
 
 
—

 
(c)
 
5

 
(c)
 
5

Net current-period other comprehensive income (loss)
 
(1
)
 
 
 
1

 
 
 
(8
)
 
 
 
(8
)
Balance at June 28, 2014
 
—

 
 
 
1

 
 
 
(150
)
 
 
 
(149
)

(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 16 - Defined Benefit Pension Plans and Note 17 - Postretirement Health-care and Life-Insurance 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
(f) Included in Gain on sale of discontinued operations in the Consolidated Statements of Income

23

EX 99.1

Note 9 - Stock-Based Compensation

The company has various stock option and stock award plans. At June 28, 2014, 17.6 million shares were available for future grant in the form of options, stock unit awards, restricted shares or stock appreciation rights. The company will satisfy the requirement for common stock for share-based payments by issuing shares out of authorized but unissued common stock.

Stock Options

The exercise price of each stock option equals the market price of the company's stock on the date of grant. Options can generally be exercised over a maximum term of 10 years. Options generally cliff vest and expense is recognized on a straight-line basis during the vesting period.

In fiscal 2014, no stock options were granted under the company's Long-term Incentive Plan compensation structure. For stock option awards outstanding, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions: 
 
 
2013
 
2012
Weighted average expected lives
 
6.0

 
7.0

Weighted average risk-free interest rates
 
0.95
%
 
1.37
%
Range of risk-free interest rates
 
0.94 - 1.03%

 
1.28 - 1.38%

Weighted average expected volatility
 
29.7
%
 
28.1
%
Range of expected volatility
 
29.7 - 30.0%

 
28.1 - 28.3%

Dividend yield
 
2.0
%
 
2.5
%

The company uses historical volatility for a period of time that is comparable to the expected life of the option to determine volatility assumptions.

A summary of the changes in stock options outstanding under the company's option plans during 2014 is presented below: 
Shares in thousands
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Options outstanding at June 29, 2013
 
5,855

 
$
25.59

 
6.3

 
$
44

Granted
 
—

 
—

 
—

 
—

Exercised
 
(1,381
)
 
26.76

 
—

 
—

Canceled/expired
 
(250
)
 
26.41

 
—

 
—

Options outstanding at June 28, 2014
 
4,224

 
$
25.17

 
5.7

 
$
156

Options exercisable at June 28, 2014
 
1,863

 
$
23.60

 
2.6

 
$
72


The company received cash from the exercise of stock options during 2014 of $37 million. As of June 28, 2014, the company had $3.7 million of total unrecognized compensation expense related to stock option plans that will be recognized over the weighted average period of 0.5 years. 
In millions except per share data
 
2014
 
2013
 
2012
Number of options exercisable at end of fiscal year
 
1,863

 
3,065

 
5,704

Weighted average exercise price of options exercisable at end of fiscal year
 
$
23.60

 
$
24.92

 
$
22.65

Weighted average grant date fair value of options granted during the fiscal year
 
$
—

 
$
6.08

 
$
6.35

Total intrinsic value of options exercised during the fiscal year
 
$
32.6

 
$
22.9

 
$
23.5

Fair value of options that vested during the fiscal year
 
$
1.0

 
$
0.3

 
$
16.9


24

EX 99.1

Stock Unit Awards

Restricted stock units (RSUs) are granted to certain employees to incent performance and retention over periods ranging from 1 to 3 years. Upon the achievement of defined parameters, the RSUs are generally converted into shares of the company's common stock on a one-for-one basis and issued to the employees. A portion of all RSUs vest solely upon continued future service to the company. A portion of RSUs vest based upon continued future employment and the achievement of certain defined performance measures. The cost of these awards is determined using the fair value of the shares on the date of grant, and compensation is recognized over the period during which the employees provide the requisite service to the company.

The fair value of performance-based awards pegged to market-based targets is estimated on the date of grant using a Monte Carlo simulation model containing the following assumptions:
 
2014
Range of risk-free interest rates
0.48 - 0.72%

Range of expected volatility
22.0 - 23.0%

Range of initial TSR
(3.8) - 6.6%

Dividend yield
—
%

The following is a summary of the changes in the stock unit awards outstanding under the company's benefit plans during 2014: 
Shares in thousands
 
Shares
 
Weighted Average Grant Date Fair Value
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Nonvested share units at June 29, 2013
 
845

 
$
25.26

 
1.6

 
$
28

Granted
 
909

 
32.45

 
—

 
—

Vested
 
(42
)
 
24.77

 
—

 
—

Forfeited
 
(168
)
 
28.95

 
—

 
—

Nonvested share units at June 28, 2014
 
1,544

 
$
29.10

 
1.4

 
$
96

Exercisable share units at June 28, 2014
 
51

 
$
21.93

 
5.4

 
$
3

 
As of June 28, 2014, the company had $21 million of total unrecognized compensation expense related to stock unit plans that will be recognized over the weighted average period of 2.0 years.
 
In millions except per share data
 
2014
 
2013
 
2012
Stock Unit Awards
 
 
 
 
 
 
Fair value of share-based units that vested during the fiscal year
 
$
1

 
$
4

 
$
88

Weighted average grant date fair value of share based units granted during the fiscal year
 
$
32.45

 
$
25.02

 
$
29.09

All Stock-Based Compensation
 
 
 
 
 
 
Total compensation expense
 
$
22

 
$
13

 
$
35

Tax benefit on compensation expense
 
$
9

 
$
5

 
$
11


Note 10 - Employee Stock Ownership Plans (ESOP)

The company maintains an ESOP that holds common stock of the company that is used to fund a portion of the company's matching program for its 401(k) savings plan for domestic non-union employees. The purchase of the original stock by the ESOP was funded both with debt guaranteed by the company and loans from the company. The debt guaranteed by the company was fully paid in 2004 and only loans from the company to the ESOP remain. Each year, the company makes contributions that, with the dividends on the common stock held by the ESOP, are used to pay loan interest and principal. Shares are allocated to participants based upon the ratio of the current year's debt service to the sum of the total principal and interest payments over the remaining life of the loan. The number of unallocated shares in the ESOP was 2 million at June 28, 2014 and 3 million at June 29, 2013. Expense recognition for the ESOP is accounted for under the grandfathered provisions contained within US GAAP.

The expense for the 401(k) savings plan recognized by the ESOP amounted to $0.2 million in 2014, $5 million in 2013 and $14 million in 2012. Payments to the ESOP were $4 million in 2014, $10 million in 2013 and $6 million in 2012.

25

EX 99.1

Note 11 - Earnings Per Share

Net income per share - basic is computed by dividing income (loss) attributable to Hillshire Brands 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, if such exercises would be considered dilutive.

Options to purchase 2.2 million shares of common stock at June 29, 2013 and 0.8 million shares of common stock at June 30, 2012 were not included in the computation of diluted earnings per share because these options were either anti-dilutive or the exercise price was greater than the average market price of the company's outstanding common stock. No such options were excluded from the computation in 2014. In 2012, the dilutive effect of stock options and award plans were excluded from the earnings per share calculation because they would be antidilutive given the loss in the period.

The following is a reconciliation of net income to net income per share - basic and diluted - for the years ended June 28, 2014, June 29, 2013 and June 30, 2012:
 
In millions except earnings per share
 
2014
 
2013
 
2012
Income (loss) from continuing operations attributable to Hillshire Brands
 
$
212

 
$
184

 
$
(20
)
Income from discontinued operations attributable to Hillshire Brands
 
1

 
68

 
865

Net income attributable to Hillshire Brands
 
$
213

 
$
252

 
$
845

Average shares outstanding - basic
 
123

 
123

 
119

Dilutive effect of stock compensation
 
1

 
—

 
—

Diluted shares outstanding
 
124

 
123

 
119

Income (loss) per common share - Basic
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
1.72

 
$
1.50

 
$
(0.16
)
Income from discontinued operations
 
0.01

 
0.55

 
7.29

Net income
 
$
1.73

 
$
2.05

 
$
7.13

Income (loss) per common share - Diluted
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
1.71

 
$
1.49

 
$
(0.16
)
Income from discontinued operations
 
0.01

 
0.55

 
7.29

Net income
 
$
1.72

 
$
2.04

 
$
7.13


26

EX 99.1

Note 12 - Debt Instruments

The composition of the company's uncollateralized long-term debt, which includes capital lease obligations, is summarized in the following table:
In millions
 
Maturity Date
 
2014
 
2013
Senior debt
 
 
 
 
 
 
10% zero coupon notes ($19 million face value)
 
2014
 
$
—

 
$
18

10% - 14.25% zero coupon notes ($105 million face value)
 
2015
 
105

 
93

2.75% notes
 
2016
 
400

 
400

4.1% notes
 
2021
 
278

 
278

6.125% notes
 
2033
 
152

 
152

Total senior debt
 
 
 
935

 
941

Obligations under capital lease
 
 
 
—

 
—

Other debt
 
 
 
10

 
11

Total debt
 
 
 
945

 
952

Unamortized discounts
 
 
 
(1
)
 
(1
)
Total long-term debt
 
 
 
944

 
951

Less current portion
 
 
 
(105
)
 
(19
)
 
 
 
 
$
839

 
$
932

Payments required on long-term debt during the years ending 2015 through 2019 are $105 million, $400 million, nil, nil and $1 million, respectively. The company made cash interest payments of $32 million, $35 million and $73 million in 2014, 2013 and 2012, respectively.

The company has a $750 million revolving credit facility that matures in June 2017. The credit facility has an annual fee of 0.15% of the facility size as of June 28, 2014. Pricing under this facility is based on the company's current credit rating. As of June 28, 2014, the company did not have any borrowings outstanding under the credit facility, but it did have approximately $3 million of letters of credit under this facility outstanding. In addition, in the first quarter of 2014, the company entered into a $65 million uncommitted bilateral letter of credit facility agreement. Under the terms of the agreement, there is no annual fee for the facility and the company is subject to an annual interest rate of 0.85% on issuances.   As of June 28, 2014, the company had letters of credit totaling $42 million outstanding under this facility. The company's credit facility and debt agreements contain 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 28, 2014, the company's interest coverage ratio was 9.1 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 28, 2014, the leverage ratio was 2.1 to 1.0.

There were no short-term borrowings during 2014 or 2013.

Note 13 - Leases

The company leases certain facilities, equipment and vehicles under agreements that are classified as either operating or capital leases. The building leases have original terms that range from 10 to 15 years, while the equipment and vehicle leases have terms of generally less than seven years.
 
In millions
 
June 28, 2014
 
June 29, 2013
Gross book value of capital lease assets included in property
 
$
3

 
$
3

Net book value of capital lease assets included in property
 
—

 
—


27

EX 99.1

Future minimum payments, by year and in the aggregate, under capital leases are less than $1 million at June 28, 2014. Future minimum payments, by year end in the aggregate, under noncancelable operating leases having an original term greater than one year at June 28, 2014 were as follows: 
 
 
 
In millions
Operating Leases

2015
$
21

2016
15

2017
13

2018
12

2019
11

Thereafter
88

Total minimum lease payments
$
160

 
In millions
 
2014
 
2013
 
2012
Depreciation of capital lease assets
 
$
—

 
$
2

 
$
1

Rental expense under operating leases
 
23

 
23

 
22


Note 14 - Contingencies and Commitments

Contingent Liabilities

The company is a party to various pending legal proceedings, claims and environmental actions by government agencies. The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to the particular matter.

Aris This is a consolidation of cases filed by individual complainants with the Republic of the Philippines, Department of Labor and Employment and the National Labor Relations Commission (NLRC) from 1998 through July 1999. The complaint alleges unfair labor practices due to the termination of manufacturing operations in the Philippines by Aris Philippines, Inc. (Aris), a former subsidiary of the company. The complaint names the company as a party defendant. In 2006, the arbitrator ruled against the company and awarded the plaintiffs approximately $80 million in damages and fees. This ruling was appealed by the company and subsequently set aside by the NLRC in December 2006. Both the complainants and the company have filed motions for reconsideration. The company continues to believe that the plaintiffs' claims are without merit; however, it is reasonably possible that this case will be ruled against the company and have a material adverse impact on the company's results of operations and cash flows. The company has initiated settlement discussions for this case and has established an accrual for the estimated settlement amount.

Multi-Employer Pension Plans The company participates in one multi-employer pension plan that provides retirement benefits to certain employees covered by collective bargaining agreements (the MEPP). Participating employers in the MEPP are jointly responsible for any plan underfunding. The Pension Protection Act of 2006 (PPA) imposes minimum funding requirements on pension plans. Multi-employer pension plans that fail to meet certain funding standards (as defined by the PPA) are categorized as being either in critical or endangered status. The MEPP was certified by its actuary to be in critical status for the 2012 plan year; consequently, the trustees of the MEPP adopted a rehabilitation plan designed to improve the plan's funding within a prescribed period of time. The rehabilitation plan included increases in employer contributions and reductions in benefits. 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 subsequent years) is imposed on contributions to the MEPP under the current collective bargaining agreement. Such surcharge remains in effect until the effective date of an adopted collective bargaining agreement which includes modifications consistent with the rehabilitation plan. Any surcharge assessed on an employer will also be included in the calculation of the compounded contribution rate increases required under the rehabilitation plan. In addition, the failure of the MEPP to meet funding improvement targets provided in its rehabilitation plan could result in the imposition of an excise tax on contributing employers.

28

EX 99.1

Under the current law regarding multi-employer pension plans, a withdrawal or partial withdrawal from any multi-employer pension plan that was underfunded would render a withdrawing employer liable for its proportionate share of that underfunding. Such withdrawing employer is required to pay, in annual installment payments, a statutorily determined amount to satisfy the withdrawal liability. The annual installment payments for a complete withdrawal are capped at twenty years, except in the case of a mass withdrawal. In a mass withdrawal, the twenty-year payment cap does not apply. 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, the impact to the company's 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 the MEPPs related to continuing operations totaled approximately $1 million in 2014, $1 million in 2013 and $2 million in 2012.

Plant Shutdown During March 2014, a fire occurred at the company's turkey processing facility in Iowa. The fire caused significant damage to both the plant and equipment and resulted in a shutdown in production. The company currently estimates the facility will resume production within 9-12 months from the date of the fire. The company is presently maintaining pre-fire production volumes through the use of alternate processors while the facility is under repair and anticipates it will continue to do so until production resumes. The company maintains insurance to cover such incidents with limits it believes are sufficient to reimburse the company for its expected provable losses, subject to a $1.0 million deductible. During the year ended June 28, 2014, the company incurred $35 million in incremental costs related to the plant shutdown of which $31 million and $4 million are reported in Cost of sales and Selling, general, and administrative expenses, respectively, in the Consolidated Statements of Income. During the year ended June 28, 2014, the company received $50 million of insurance proceeds to cover the cost of reconstructing the damaged portion of the facility and replacing equipment that was destroyed in the fire. A gain of approximately $45 million was recorded on the involuntary conversion of those assets and is reported in Cost of sales in the Consolidated Statements of Income. Insurance proceeds attributable to the property and equipment destroyed in the fire are reported in investing activities in the Consolidated Statements of Cash Flows.

Guarantees

The company 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 company under which the company agrees to indemnify a third party against losses arising from a breach of representations and covenants related to matters such 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 company is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow the company to challenge the other party's claims. In addition, the company's obligations under these agreements may be limited in terms of time and/or amount, and in some cases the company may have recourse against third parties for certain payments made by the company. 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 company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company's business, financial condition or results of operations. The company believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the company's business, financial condition or results of operations.

The material guarantees for which the maximum potential amount of future payments can be determined, are as follows:

Contingent Lease Obligations The company is contingently liable for leases on property operated by others. At June 28, 2014, the maximum potential amount of future payments the company could be required to make if all of the current operators default on the rental arrangements is $9 million. The minimum annual rentals under these leases are $8 million in 2015 and $1 million in 2016. The largest components of these amounts relate to a number of retail store leases assumed by Coach, Inc. Coach, Inc. has issued a guarantee to the company and agreed to indemnify and reimburse the company from and against any payments or performance that may be required with respect to any obligation or liability imposed under the retail store leases. The company has not recognized a liability for the contingent obligation on the Coach, Inc. leases it assumed.

Contingent Debt Obligations and Other The company has guaranteed the payment of certain third-party debt. The maximum potential amount of future payments that the company could be required to make, in the event that these third parties default on their debt obligations, is $15 million. At the present time, the company does not believe it is probable that any of these third parties will default on the amount subject to guarantee.

29

EX 99.1


Note 15 - 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 June 28, 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 June 28, 2014 are summarized as follows:
 
 
June 28, 2014
In millions
 
Amortized Cost
 
Unrealized Gain / (Loss)
 
Fair Market Value
Available-for-sale(1)
 
 
 
 
 
 
Commercial Paper
 
15

 
—

 
15

Corporate Note
 
72

 
—

 
72

Total
 
87

 
—

 
87

(1) Categorized as Level 1: Observable input such as quoted prices in active markets for identical assets or liabilities

Background Information

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 of these financial statements.
 
Types of Derivative Instruments

Cross Currency Swaps Prior to the spin-off of its International Coffee and Tea business in June 2012, the company issued certain foreign-denominated debt instruments and utilized cross currency swaps to reduce the variability of functional currency cash flows related to foreign currency debt. Cross currency swap agreements that are effective at hedging the variability of foreign-denominated cash flows are designated and accounted for as cash flow hedges. In the fourth quarter of 2012, the company entered into an offsetting cross currency swap to neutralize €229 million due under the company’s one remaining cross currency swap that matured in June 2013. The net cash paid on both derivative instruments was approximately $40 million.

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 does not use significant levels of commodity financial instruments to hedge commodity prices and primarily relies upon 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.

30

EX 99.1

The notional values of the various derivative instruments used by the company are summarized in the following table: 
In millions
 
June 28, 2014
 
June 29, 2013
 
Hedge Coverage (Number of Months)
Commodity contracts
 
 
 
 
 
 
Commodity future contracts1
 
 
 
 
 
 
Grains and oilseeds
 
$
47

 
$
34

 
11

Energy
 
30

 
29

 
23

Other commodities
 
7

 
20

 
8

1 The notional values of commodity futures contracts are determined by the initial cost of the contract.

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 shall 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 (i.e., 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 were no derivative instruments with credit-risk-related contingent features that are in a liability position as of June 28, 2014 and June 29, 2013, for which the company posted no collateral.

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 nonperformance 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.

Trade accounts receivable due from customers that the company identified as having low or no credit ratings were $85 million at June 28, 2014 and $60 million at June 29, 2013.

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, derivative instruments and notes payable 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 discounted cash flows based on the company’s current incremental borrowing rates for similar types of borrowing arrangements. 
  
 
June 28, 2014
 
June 29, 2013
In millions
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Carrying Amount
Long-term debt, including current portion
 
$
971

 
$
944

 
$
981

 
$
951


31

EX 99.1

Information related to our cash flow hedges and other derivatives not designated as hedging instruments for the periods ended June 28, 2014, June 29, 2013, and June 30, 2012 follows: 
 
 
Interest Rate
Contracts
 
Foreign Exchange Contracts
 
Commodity
Contracts
 
Total
In millions
 
June 28, 2014
 
June 29, 2013
 
June 30, 2012
 
June 28, 2014
 
June 29, 2013
 
June 30, 2012
 
June 28, 2014
 
June 29, 2013
 
June 30, 2012
 
June 28, 2014
 
June 29, 2013
 
June 30, 2012
Cash Flow Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income (OCI)1
 
$
—

 
$
—

 
$
(8
)
 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
6

 
$
13

 
$
(1
)
 
$
6

 
$
5

Amount of gain (loss) reclassified from AOCI into earnings1, 2
 
—

 
—

 
(3
)
 
—

 
—

 
2

 
(2
)
 
18

 
2

 
(2
)
 
18

 
1

Amount of ineffectiveness recognized in earnings3, 4
 
—

 
—

 
—

 
—

 
—

 
(2
)
 
1

 
(1
)
 
2

 
1

 
(1
)
 
—

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

 
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
10

 
—

 
(2
)
 
10

Net Investment Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in OCI1
 
—

 
—

 
—

 
—

 
—

 
604

 
—

 
—

 
—

 
—

 
—

 
604

Amount of gain (loss) recognized from OCI into earnings6
 
—

 
—

 
—

 
—

 
—

 
(446
)
 
—

 
—

 
—

 
—

 
—

 
(446
)
Amount of gain (loss) recognized from OCI into spin-off dividend7
 
—

 
—

 
—

 
—

 
—

 
324

 
—

 
—

 
—

 
—

 
—

 
324

Fair Value Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of derivative gain (loss) recognized in earnings5
 
—

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

Amount of hedged item gain (loss) recognized in earnings5
 
—

 
—

 
4

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in Cost of sales
 
—

 
—

 
—

 
—

 
—

 
—

 
4

 
(2
)
 
(2
)
 
4

 
(2
)
 
(2
)
Amount of gain recognized in SG&A
 
—

 
—

 
—

 
—

 
—

 
(15
)
 
2

 
2

 
—

 
2

 
2

 
(15
)

1 Effective Portion.
2 Gain (loss) reclassified from AOCI into earnings is reported in Interest expense or Debt extinguishment costs, for interest rate swaps, in Selling, general, and administrative (SG&A) expenses for foreign exchange contracts and in Cost of sales for commodity contracts.
3 Gain (loss) recognized in earnings is related to the ineffective portion and amounts excluded from the assessment of hedge effectiveness.
4 Gain (loss) recognized in earnings is reported in Interest expense for foreign exchange contract and SG&A expenses for commodity contracts.
5 The amount of gain (loss) recognized in earnings on the derivative contracts and the related hedged item is reported in Interest expense or Debt extinguishment costs, for the interest rate contracts and SG&A for the foreign exchange contracts.
6 The gain (loss) recognized from OCI into earnings is reported in Gain on sale of discontinued operations.
7 The gain (loss) recognized from OCI into the spin-off dividend is reported in Retained earnings as a result of the spin-off.

Note 16 - Defined Benefit Pension Plans

The company sponsors two U.S. and one Canadian pension plans to provide retirement benefits to certain employees. The benefits provided under these plans are based primarily on years of service and compensation levels.

Measurement Dates and Assumptions

A fiscal year end measurement date is utilized to value plan assets and obligations for all of the company's defined benefit pension plans.

32

EX 99.1

The weighted average actuarial assumptions used in measuring the net periodic benefit cost and plan obligations of continuing operations were as follows: 
 
 
2014
 
2013
 
2012
Net periodic benefit cost
 
 
 
 
 
 
Discount rate
 
4.8
%
 
4.2
%
 
5.5
%
Long-term rate of return on plan assets
 
6.5
%
 
6.2
%
 
6.5
%
Plan obligations
 
 
 
 
 
 
Discount rate
 
4.3
%
 
4.8
%
 
4.2
%

The discount rate is determined by utilizing a yield curve based on high-quality fixed-income investments that have a AA bond rating to discount the expected future benefit payments to plan participants. Compensation increase assumptions are based upon historical experience and anticipated future management actions. Compensation changes for participants in the U.S. plans no longer have an impact on the benefit cost or plan obligations as the participants in the U.S. salaried plan will no longer accrue additional benefits. In determining the long-term rate of return on plan assets, the company assumes that the historical long-term compound growth rates of equity and fixed-income securities and other plan investments will predict the future returns of similar investments in the plan portfolio. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions.

Net Periodic Benefit Cost and Funded Status

The components of the net periodic benefit cost for continuing operations were as follows:
In millions
 
2014
 
2013
 
2012
Components of defined benefit net periodic (benefit) cost
 
 
 
 
 
 
Service cost
 
$
9

 
$
11

 
$
9

Interest cost
 
74

 
70

 
73

Expected return on assets
 
(91
)
 
(92
)
 
(86
)
Amortization of :
 
 
 
 
 
 
Prior service cost
 
1

 
1

 
1

Net actuarial loss
 
4

 
4

 
3

Settlement loss
 
1

 
6

 
1

Net periodic (benefit) cost
 
$
(2
)
 
$
—

 
$
1


In 2014, the company recognized $1 million of settlement losses associated with plan settlements resulting from the payment of lump-sum benefits to plan participants.

In 2013, the company recognized $1 million of settlement losses associated with settlement of two of the company's defined benefit pension plans in Canada. The losses resulted from recognition of the unamortized actuarial losses associated with these two plans. The company also recognized a $4 million loss related to the payout of the surplus assets associated with these plans, which were in an overfunded position. The remaining $1 million of settlement losses were associated with plan settlements resulting from the payment of lump-sum benefits to plan participants.

In 2012, the company recognized $1 million of settlement losses associated with plan settlements resulting from the payment of lump-sum benefits to plan participants. In 2012, the disposition of the North American fresh bakery business resulted in the recognition of a $36 million net settlement loss as a result of the assumption of the related plan liabilities by the buyer. The settlement loss was recognized as part of the gain on disposition of this business.

The net periodic benefit cost of the defined benefit pension plans in 2014 decreased by $2 million from 2013, driven by a decrease in settlement losses and service cost, partially offset by higher interest expense and a decrease in asset returns.

The net periodic benefit cost of the defined benefit pension plans in 2013 was virtually unchanged from 2012 as an increase in settlement losses and amortization expense was offset by an increase in asset returns and lower interest expense.

The amount of prior service cost and net actuarial loss that is expected to be amortized from accumulated other comprehensive income and reported as a component of net periodic benefit cost in continuing operations during 2015 is $1 million and $4 million, respectively.

33

EX 99.1

The funded status of defined benefit pension plans at the respective year-ends was as follows: 
In millions
 
2014
 
2013
Projected benefit obligation
 
 
 
 
Beginning of year
 
$
1,562

 
$
1,680

Service cost
 
9

 
11

Interest cost
 
74

 
70

Plan amendments/other
 
—

 
1

Benefits paid
 
(76
)
 
(81
)
Actuarial loss (gain)
 
116

 
(123
)
Settlements
 
—

 
4

End of year
 
$
1,685

 
$
1,562

Fair value of plan assets
 
 
 
 
Beginning of year
 
$
1,439

 
$
1,515

Actual return on plan assets
 
194

 
(3
)
Employer contributions
 
8

 
8

Benefits paid
 
(76
)
 
(81
)
End of year
 
1,565

 
1,439

Funded status
 
$
(120
)
 
$
(123
)
Amounts recognized on the consolidated balance sheets
 
 
 
 
Other noncurrent assets
 
$
—

 
$
1

Accrued liabilities
 
(4
)
 
(5
)
Pension obligation
 
(116
)
 
(119
)
Net liability recognized
 
$
(120
)
 
$
(123
)
Amounts recognized in accumulated other comprehensive income
 
 
 
 
Unamortized prior service cost
 
$
6

 
$
7

Unamortized actuarial loss, net
 
237

 
228

Total
 
$
243

 
$
235


The underfunded status of the plans decreased from $123 million in 2013 to $120 million in 2014, due to a $126 million increase in plan assets, partially offset by a $123 million increase in plan obligations resulting from $116 million of actuarial losses driven by a decrease in the discount rate. The increase in plan assets was the result of improved investment performance during the year.

The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The accumulated benefit obligations of the company's pension plans as of the measurement dates in 2014 and 2013 were $1.685 billion and $1.562 billion, respectively.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were: 
In millions
 
2014
 
2013
Projected benefit obligation
 
$
1,677

 
$
1,555

Accumulated benefit obligation
 
1,677

 
1,555

Fair value of plan assets
 
1,557

 
1,431


34

EX 99.1

Plan Assets, Expected Benefit Payments and Funding

The fair value of pension plan assets as of June 28, 2014 was determined as follows: 
 
 
 
 
Fair Value Measurement at Reporting Date, Using:
 
 
Total Fair Value
 
Quoted Prices in Active Market for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
In millions
 
2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
Equity securities
 
 
 
 
 
 
 
 
U.S. securities - pooled funds
 
$
84

 
$
84

 
$
—

 
$
—

Non-U.S. securities - pooled funds
 
100

 
100

 
—

 
—

Total equity securities
 
184

 
184

 
—

 
—

Fixed income securities
 
 
 
 
 
 
 
 
Government bonds
 
134

 
134

 
—

 
—

Corporate bonds
 
643

 
—

 
643

 
—

U.S. pooled funds
 
134

 
—

 
134

 
—

Non-U.S. pooled funds
 
5

 
—

 
5

 
—

Bond fund
 
413

 
—

 
413

 
—

Total fixed income securities
 
1,329

 
134

 
1,195

 
—

Real estate
 
32

 
—

 
32

 
—

Cash and equivalents
 
5

 
5

 
—

 
—

Other
 
15

 
—

 
15

 
—

Total fair value of assets
 
$
1,565

 
$
323

 
$
1,242

 
$
—

The fair value of pension plan assets as of June 29, 2013 was determined as follows: 
 
 
 
 
Fair Value Measurement at Reporting Date, Using:
 
 
 
 
Quoted Prices in Active Market for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
In millions
 
2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
Equity securities
 
 
 
 
 
 
 
 
U.S. securities - pooled funds
 
$
85

 
$
85

 
$
—

 
$
—

Non-U.S. securities - pooled funds
 
102

 
102

 
—

 
—

Total equity securities
 
187

 
187

 
—

 
—

Fixed income securities
 
 
 
 
 
 
 
 
Government bonds
 
256

 
256

 
—

 
—

Corporate bonds
 
503

 
—

 
503

 
—

U.S. pooled funds
 
122

 
—

 
122

 
—

Non-U.S. pooled funds
 
5

 
—

 
5

 
—

Bond fund
 
324

 
—

 
324

 
—

Total fixed income securities
 
1,210

 
256

 
954

 
—

Real estate
 
23

 
—

 
23

 
—

Cash and equivalents
 
6

 
6

 
—

 
—

Other
 
13

 
—

 
13

 
—

Total fair value of assets
 
$
1,439

 
$
449

 
$
990

 
$
—

 
In 2014, management reevaluated the classification of its securities and revised the 2013 fair value hierarchy table above to correct errors in the presentation of certain investments. The classification of the following has been corrected from Level 1 to Level 2: Corporate bonds ($503 million), U.S. pooled funds ($122 million), Non-U.S. pooled funds ($5 million), Bond fund ($324 million), Real estate ($23 million), and Other ($13 million). The Corporate bonds and the Bond fund may include treasury securities. These corrections did not impact the total fair value of assets.

35

EX 99.1

Level 1 assets were valued using quoted market prices of the identical underlying security in an active market. The fair value of the Level 2 assets is primarily based on market-observable inputs to quoted market prices, benchmark yields and broker/dealer quotes. The company did not have any Level 3 assets, which would include assets for which values are determined by non-observable inputs. See Note 15 - Financial Instruments for additional information as to the fair value hierarchy.

The percentage allocation of pension plan assets based on a fair value basis as of the respective year-end measurement dates is as follows: 
 
 
2014
 
2013
Asset category
 
 
 
 
Equity securities
 
12
%
 
13
%
Debt securities
 
85

 
84

Real estate
 
2

 
2

Cash and other
 
1

 
1

Total
 
100
%
 
100
%

The overall investment objective is to manage the plan assets so that they are sufficient to meet the plan's future obligations while maintaining adequate liquidity to meet current benefit payments and operating expenses. The actual amount for which these obligations will be settled depends on future events and actuarial assumptions. These assumptions include the life expectancy of the plan participants. The resulting estimated future obligations are discounted using an interest rate curve that represents a return that would be required from high quality corporate bonds. The company has adopted a liability driven investment (LDI) strategy which consists of investing in a portfolio of assets whose performance is driven by the performance of the associated pension liability. This means that plan assets managed under an LDI strategy may underperform general market returns, but should provide for lower volatility of funded status as its return is designed to match the pension liability movement. Over time, as pension obligations become better funded, the company will further de-risk its investments and increase the allocation to fixed income.

As noted in the above table, on an aggregate fair value basis, the plan is currently at 85% fixed income securities and 12% equity securities. Fixed income securities can include, but are not limited to, direct bond investments, pooled or indirect bond investments and cash. Other investments can include, but are not limited to, international and domestic equities, real estate, commodities and private equity. Derivative instruments may also be used in concert with either fixed income or equity investments to achieve desired exposure or to hedge certain risks. Derivative instruments can include, but are not limited to, futures, options, swaps or swaptions. The assets are managed by professional investment firms and performance is evaluated against specific benchmarks. The responsibility for the investment strategies typically lies with an investment committee, which is composed of representatives appointed by the company.

Pension assets at the 2014 and 2013 measurement dates do not include any direct investment in the company's debt or equity securities. Substantially all pension benefit payments are made from assets of the pension plans. It is anticipated that the future benefit payments will be as follows: $74 million in 2015, $78 million in 2016, $81 million in 2017, $84 million in 2018, $86 million in 2019 and $473 million from 2020 to 2024. The company expects to contribute approximately $5 million to its pension plans in 2015.

Defined Contribution Plans

The company sponsors defined contribution plans, which cover certain salaried and hourly employees. The company's cost is determined by the amount of contributions it makes to these plans. The amounts charged to expense for contributions made to these defined contribution plans related to continuing operations totaled $16 million in 2014, $25 million in 2013 and $21 million in 2012.

Multi-Employer Plans

The company participates in a multi-employer plan that provides defined benefits to certain employees covered by collective bargaining agreements. Such plans are usually administered by a board of trustees composed of the management of the participating companies and labor representatives.

36

EX 99.1

The company previously contributed to several multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that covered various union-represented employees but currently only contributes to one of these plans. The risks of participating in these multiemployer plans are different from single-employer plans. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligation of the plan may be borne by the remaining participating employers. If the company stops participating in a plan, the company may be required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. None of the contributions to the pension funds for continuing operations was in excess of 5% of the total plan contributions for plan years 2014, 2013 and 2012. There are no contractually required minimum contributions to the plans as of June 28, 2014.

The net pension cost of these plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. The contributions for plans related to continuing operations were $1 million in 2014, $1 million in 2013 and $2 million in 2012. Assets contributed to such plans are not segregated or otherwise restricted to provide benefits only to the employees of the company. The future cost of these plans is dependent on a number of factors including the funded status of the plans and the ability of the other participating companies to meet ongoing funding obligations.

The company's participation in these multiemployer plans for fiscal 2014 is outlined below. The EIN/Pension Plan Number column provides the Employer Identification Number (EIN) and the three digit plan number, if applicable. Unless otherwise noted, the most recent PPA zone status available in 2014 and 2013 is for the plan's year beginning January 1, 2014 and 2013, respectively. The zone status is based on information that the company has received from the plan and is certified by plans' actuaries. Among other factors, plans in the red zone are generally less than 65 percent funded. The FIP/RP Status Pending/Implemented column indicates plans for which a financial improvement plan (FIP) or rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date(s) of the collective-bargaining agreements to which the plans are subject. There have been no significant changes that affect the comparability of contributions from year to year.

In addition to regular contributions, the company could be obligated to pay additional contributions (known as complete or partial withdrawal liabilities) if a MEPP has unfunded vested benefits.
 
 
 
 
PPA Zone  Status
 
FIP/RP Status
 
Contributions  (in millions)
 
2014 Surcharge Imposed
 
Expiration Date of Collective Bargaining  Agreement
  
 
EIN/Pension Plan Number
 
2014
 
2013
 
Pending/ Implemented
 
2014
 
2013
 
2012
 
Pension Fund Plan Name
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bakery and Confectionary Union & Industry International Pension Fund
 
52-6118572/001
 
Red
 
Red
 
Nov 2012
 
$
1

 
$
1

 
$
2

 
10
%
 
Oct 2014

Note 17 - Postretirement Health-Care and Life-Insurance Plans

The company provides health-care and life-insurance benefits to certain retired employees and their covered dependents and beneficiaries. Generally, employees who have attained age 55 and have rendered 10 or more years of service are eligible for these postretirement benefits. Certain retirees are required to contribute to plans in order to maintain coverage.

Measurement Date and Assumptions

A fiscal year end measurement date is utilized to value plan assets and obligations for the company's postretirement health-care and life-insurance plans pursuant to the accounting rules.

The weighted average actuarial assumptions used in measuring the net periodic benefit cost (income) and plan obligations for the three years ending June 28, 2014 were:
 
 
2014
 
2013
 
2012
Net periodic benefit cost (income)
 
 
 
 
 
 
Discount rate
 
4.4
%
 
3.9
%
 
5.3
%
Plan obligations
 
 
 
 
 
 
Discount rate
 
3.9

 
4.4

 
3.8

Health-care cost trend assumed for the next year
 
7.0

 
7.5

 
7.5

Rate to which the cost trend is assumed to decline
 
5.0

 
5.0

 
5.0

Year that rate reaches the ultimate trend rate
 
2018

 
2018

 
2017


37

EX 99.1

The discount rate is determined by utilizing a yield curve based on high-quality fixed-income investments that have a AA bond rating to discount the expected future benefit payments to plan participants. Assumed health-care trend rates are based on historical experience and management's expectations of future cost increases. A one-percentage-point change in assumed health-care cost trend rates would have the following effects: 
In millions
 
One Percentage Point Increase

 
One Percentage Point Decrease

Effect on total service and interest components
 
$
1

 
$
(1
)
Effect on postretirement benefit obligation
 
8

 
(7
)

Net Periodic Benefit Cost and Funded Status

The components of the net periodic benefit income associated with continuing operations were as follows: 
In millions
 
2014
 
2013
 
2012
Components of defined benefit net periodic cost (income)
 
 
 
 
 
 
Service cost
 
$
2

 
$
2

 
$
2

Interest cost
 
4

 
4

 
3

Net amortization and deferral
 
(7
)
 
(9
)
 
(8
)
Curtailment gain
 
$
(1
)
 
$
—

 
$
—

Net periodic benefit income
 
$
(2
)
 
$
(3
)
 
$
(3
)

The amount of the prior service credits and net actuarial loss that is expected to be amortized from accumulated other comprehensive income and reported as a component of net periodic benefit cost during 2015 is $5 million of income and $1 million of expense, respectively.

The funded status of postretirement health-care and life-insurance plans related to continuing operations at the respective year-ends were:
In millions
 
2014
 
2013
Accumulated postretirement benefit obligation
 
 
 
 
Beginning of year
 
$
90

 
$
101

Service cost
 
2

 
3

Interest cost
 
4

 
4

Net benefits paid
 
(6
)
 
(5
)
Plan participant contributions
 
1

 
1

Curtailment gain
 
(1
)
 
—

Actuarial gain
 
(1
)
 
(14
)
End of year
 
89

 
90

Fair value of plan assets
 
—

 
1

Funded status
 
$
(89
)
 
$
(89
)
Amounts recognized on the consolidated balance sheets
 
 
 
 
Accrued liabilities
 
$
(6
)
 
$
(6
)
Other liabilities
 
(83
)
 
(83
)
Total liability recognized
 
$
(89
)
 
$
(89
)
Amounts recognized in accumulated other comprehensive loss
 
 
 
 
Unamortized prior service credit
 
$
(12
)
 
$
(20
)
Unamortized net actuarial loss
 
8

 
10

Total
 
$
(4
)
 
$
(10
)

38

EX 99.1

Expected Benefit Payments and Funding

Substantially all postretirement health-care and life-insurance benefit payments are made by the company. Using expected future service, it is anticipated that the future benefit payments that will be funded by the company will be as follows: $6 million per year in 2015 through 2017, $7 million per year in 2018 and 2019, and $35 million from 2020 to 2024.

The Medicare Part D subsidy received by the company was less than $1 million in 2014 and $1 million in 2013 and 2012.

Note 18 - Income Taxes

The provisions for income taxes on continuing operations computed by applying the U.S. statutory rate to income from continuing operations before taxes as reconciled to the actual provisions were: 
 
 
2014
 
2013
 
2012
Income (loss) from continuing operations before income taxes
 
 
 
 
 
 
United States
 
99.6
%
 
99.7
%
 
(97.9
)%
Foreign
 
0.4
%
 
0.3
%
 
(2.1
)%
Total
 
100.0
%
 
100.0
%
 
(100.0
)%
Tax expense (benefit) at U.S. statutory rate
 
35.0
%
 
35.0
%
 
(35.0
)%
State income taxes
 
3.1
%
 
2.1
%
 
0.4
 %
Finalization of tax reviews and audits and changes in estimate on tax contingencies
 
(0.1
)
 
(2.1
)
 
(2.3
)
Domestic production deduction
 
(2.5
)
 
(1.6
)
 
—

Employee benefit deductions
 
(1.1
)
 
(1.5
)
 
(8.5
)
Non-taxable indemnification agreements
 
—

 
(1.7
)
 
(22.0
)
Non-deductible professional fees
 
2.0

 
0.2

 
28.9

Tax provision adjustments
 
0.7

 
(1.6
)
 
(6.5
)
Valuation allowance
 
(16.4
)
 
—

 
—

Other, net
 
(0.2
)
 
(0.7
)
 
0.8

Taxes at effective worldwide tax rates
 
20.5
%
 
28.1
%
 
(44.2
)%

The tax expense related to continuing operations decreased $17 million in 2014 due primarily to a $44 million tax benefit for the release of a valuation allowance on state deferred tax assets, primarily related to net operating loss and credit carryovers that became more-likely-than not realizable during the year. This benefit was partially offset by year-over-year net decreases in tax benefits for the items noted in the table above. The decrease in tax benefits relate primarily to a decrease in the release of certain contingent tax obligations after statutes in multiple jurisdictions lapsed and certain tax regulatory examinations and reviews were resolved, a decrease in non-taxable indemnification income, and an increase in the amount of non-deductible professional fees.

The tax expense related to continuing operations increased $87 million in 2013 due primarily to an increase in pretax income from continuing operations of $291 million offset by $15 million of year-over-year increases in tax benefits for the items noted in the table above. The increase in tax benefits relate primarily to the release of certain contingent tax obligations after statutes in multiple jurisdictions lapsed and certain tax regulatory examinations and reviews were resolved, an increase in deductions associated with domestic production activities, and a decrease in the amount of non-deductible professional fees offset by a decrease in non-taxable indemnification income.

The tax expense related to continuing operations decreased $42 million in 2012 due to primarily to a decline in pretax income from continuing operations of $120 million.

The company intends to continue to reinvest all of its earnings outside of the U.S. and, therefore, has not recognized U.S. tax expense on these earnings. U.S. federal income tax and withholding tax on these foreign unremitted earnings would be immaterial.

39

EX 99.1

Current and deferred tax provisions (benefits) were: 
 
 
2014
 
2013
 
2012
In millions
 
Current
 
Deferred
 
Current
 
Deferred
 
Current
 
Deferred
U.S.
 
$
104

 
$
8

 
$
27

 
$
38

 
$
(17
)
 
$
2

Foreign
 
—

 
—

 
—

 
—

 
—

 
—

State
 
6

 
(63
)
 
3

 
4

 
3

 
(3
)
 
 
$
110

 
$
(55
)
 
$
30

 
$
42

 
$
(14
)
 
$
(1
)

Cash payments for income taxes from continuing operations were $100 million in 2014, $12 million in 2013 and $26 million in 2012.

Hillshire Brands and eligible subsidiaries file a consolidated U.S. federal income tax return. The company uses the asset-and-liability method to provide income taxes on all transactions recorded in the consolidated financial statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax liability or asset for each temporary difference is determined based upon the tax rates that the company expects to be in effect when the underlying items of income and expense are realized. The company's expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the company expects to realize.

The deferred tax liabilities (assets) at the respective year-ends were as follows: 
In millions
 
2014
 
2013
Deferred tax (assets)
 
 
 
 
Pension liability
 
$
(58
)
 
$
(52
)
Employee benefits
 
(86
)
 
(90
)
Nondeductible reserves
 
(50
)
 
(54
)
Net operating loss and credit carryforwards
 
(79
)
 
(51
)
Other
 
(46
)
 
(28
)
Gross deferred tax (assets)
 
(319
)
 
(275
)
Less valuation allowances
 
14

 
58

Net deferred tax (assets)
 
(305
)
 
(217
)
Deferred tax liabilities
 
 
 
 
Property, plant and equipment
 
100

 
93

Intangibles
 
82

 
33

Deferred tax liabilities
 
182

 
126

Total net deferred tax liabilities
 
$
(123
)
 
$
(91
)
 
There are tax effected federal net operating losses of $9 million that begin to expire in 2028 through 2033. There are tax effected state net operating losses and credit carryforwards of $70 million that begin to expire in 2015 through 2033.

Valuation allowances have been established on net operating losses and other deferred tax assets in certain U.S. state jurisdictions as a result of the company's determination that there is less than a 50% likelihood that these assets will be realized.

The company records tax reserves for uncertain tax positions taken, or expected to be taken, on a tax return. For those tax benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon audit settlement.

Due to the inherent complexities arising from the nature of the company's businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between Hillshire Brands and the many tax jurisdictions in which the company files tax returns may not be finalized for several years. Thus, the company's final tax-related assets and liabilities may ultimately be different from those currently reported.

40

EX 99.1

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were $59 million as of June 28, 2014. This amount differs from the balance of unrecognized tax benefits as of June 28, 2014 primarily due to uncertain tax positions that created deferred tax assets in jurisdictions which have not been realized due to a lack of profitability in the respective jurisdictions. At this time, the company estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by up to $27 million in the next 12 months from a variety of uncertain tax positions as a result of the completion of various worldwide tax audits currently in process and the expiration of the statute of limitations in several jurisdictions.

The company recognizes interest and penalties related to unrecognized tax benefits in tax expense. During the years ended June 28, 2014, June 29, 2013 and June 30, 2012, the company recognized an expense of $1 million, a benefit of $1 million and a expense of $3 million, respectively, of interest and penalties in continuing operations tax expense. The tax benefits in 2013 and 2012 were the result of the finalization of tax reviews and audits and changes in estimates of tax contingencies. As of June 28, 2014, June 29, 2013 and June 30, 2012, the company had accrued interest and penalties of approximately $7 million, $8 million and $10 million, respectively. 

The company's tax returns are routinely audited by federal, state and foreign tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service (IRS) has completed examinations of the company's U.S. income tax returns through July 3, 2010. With few exceptions, the company is no longer subject to state and local income tax examinations by tax authorities for years before June 30, 2007.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended June 28, 2014, June 29, 2013 and June 30, 2012: 
In millions
 
June 28,
2014
 
June 29,
2013
 
June 30,
2012
Unrecognized tax benefits
 
 
 
 
 
 
Beginning of year balance
 
$
67

 
$
74

 
$
83

Increases based on current period tax positions
 
—

 
—

 
5

Increases based on prior period tax positions
 
2

 
—

 
24

Decreases based on prior period tax positions
 
—

 
—

 
(4
)
Decreases related to settlements with tax authorities
 
(6
)
 
—

 
(33
)
Decreases related to a lapse of applicable statute of limitation
 
(3
)
 
(7
)
 
(1
)
End of year balance
 
$
60

 
$
67

 
$
74


Note 19 - Business Segment Information

The company is a leading producer and marketer of high quality, branded food products in North America. The company manages the business in two operating segments which are based on customer type, as each segment requires different distribution and marketing strategies.

The following are the company's two business segments and the types of products and services from which each reportable segment derives its revenues.
•
Retail sells a variety of packaged meat, frozen breakfast 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.

The company's management uses operating segment income in order to evaluate segment performance and allocate resources, which is defined as operating income before general corporate expenses; mark-to-market derivative gains/(losses); and amortization of trademarks and customer relationship intangibles. Significant items represent various income and/or expense items related to restructuring actions and other gains and losses that are not considered to be part of the core business results. The company believes that these results are more indicative of the company's core operating results and improve the comparability of the underlying results from period to period. Interest and other debt expense, as well as income tax expense, are centrally managed, and accordingly, such items are not presented by segment since they are not included in the measure of segment profitability reviewed by management. The accounting policies of the segments are the same as those described in Note 2 - Summary of Significant Accounting Policies.

41

EX 99.1

In millions
 
2014
 
2013
 
2012
Sales
 
 
 
 
 
 
Retail
 
$
2,992

 
$
2,894

 
$
2,884

Foodservice/Other
 
1,093

 
1,026

 
1,025

 
 
4,085

 
3,920

 
3,909

Impact of businesses exited/disposed
 
—

 
—

 
55

Intersegment
 
—

 
—

 
(6
)
Total
 
$
4,085

 
$
3,920

 
$
3,958

In millions
 
2014
 
2013
 
2012
Income (loss) from Continuing Operations before Income Taxes
 
 
Retail
 
$
339

 
$
329

 
$
313

Foodservice/Other
 
87

 
75

 
79

Total operating segment income
 
426

 
404

 
392

General corporate expenses
 
(38
)
 
(36
)
 
(64
)
Mark-to-market derivative gain/(loss)
 
4

 
(1
)
 
(1
)
Amortization of intangibles
 
(5
)
 
(4
)
 
(4
)
Significant items
 
(81
)
 
(72
)
 
(255
)
Impact of businesses exited/disposed
 
—

 
6

 
8

Total operating income
 
306

 
297

 
76

Net interest expense
 
(39
)
 
(41
)
 
(72
)
Debt extinguishment costs
 
—

 
—

 
(39
)
Income (loss) from continuing operations before income taxes
 
$
267

 
$
256

 
$
(35
)
Net sales for a business segment may include sales between segments. Such sales are at transfer prices that are equivalent to market value.

Revenues from Wal-Mart Stores Inc. represent approximately $1.1 billion of the company's consolidated revenues for continuing operations in 2014, and 1.0 billion in 2013 and 2012, all within the Retail segment.
In millions
 
2014
 
2013
 
2012
Assets
 
 
 
 
 
 
Retail
 
$
1,560

 
$
1,273

 
$
1,279

Foodservice/Other
 
564

 
542

 
530

 
 
2,124

 
1,815

 
1,809

Australian Bakery
 
—

 
—

 
58

Net assets held for sale/disposition
 
—

 
—

 
5

Other1
 
584

 
619

 
578

Total assets
 
$
2,708

 
$
2,434

 
$
2,450

Depreciation
 
 
 
 
 
 
Retail
 
$
101

 
$
90

 
$
101

Foodservice/Other
 
27

 
28

 
30

 
 
128

 
118

 
131

Discontinued operations
 
—

 
2

 
104

Other
 
3

 
28

 
31

Total depreciation
 
$
131

 
$
148

 
$
266

Additions to Long-Lived Assets
 
 
 
 
 
 
Retail
 
$
368

 
$
95

 
$
128

Foodservice/Other
 
32

 
28

 
38

 
 
400

 
123

 
166

Other
 
—

 
16

 
7

Total additions to long-lived assets
 
$
400

 
$
139

 
$
173

1 Principally cash and equivalents, certain corporate fixed assets, deferred tax assets and certain other non-current assets.

42

EX 99.1

Net sales by product type within each business segment are as follows: 
In millions
 
2014
 
2013
 
2012
Sales
 
 
 
 
 
 
Retail
 
 
 
 
 
 
Meat
 
$
2,167

 
$
2,103

 
$
2,117

Convenient Foods
 
730

 
685

 
647

Bakery
 
94

 
104

 
118

Commodities/Other
 
1

 
2

 
2

Total Retail
 
2,992

 
2,894

 
2,884

Foodservice/Other
 
 
 
 
 
 
Meat
 
557

 
507

 
520

Convenient Foods
 
93

 
88

 
86

Bakery
 
343

 
343

 
344

Commodities/Other
 
100

 
88

 
75

Total Foodservice/Other
 
1,093

 
1,026

 
1,025

Total business segment sales
 
4,085

 
3,920

 
3,909

Impact of businesses exited/disposed
 
—

 
—

 
55

Intersegment elimination
 
—

 
—

 
(6
)
Total net sales
 
$
4,085

 
$
3,920

 
$
3,958

Meat category includes lunchmeat, hot dogs, breakfast sausage, smoked sausage and other meat products. Convenient Foods category includes breakfast sandwiches, breakfast convenience, corn dogs and other ready to eat meal items. Bakery category includes cakes, pies, cheesecakes and other bakery products. Commodities/Other category includes commodity turkey and pork.

Hillshire Brands' operations are principally in the United States. With respect to operations outside of the United States, no single foreign country or geographic region was significant. Foreign net sales were $17 million, $17 million and $18 million in 2014, 2013, and 2012, respectively, all of which was in Canada. The long-lived assets located outside of the United States are not significant.

43

EX 99.1

Note 20 - Quarterly Financial data (Unaudited)

The company's quarterly results for 2014 and 2013 are as follows:
 
 
Quarter
In millions
 
First
 
Second
 
Third
 
Fourth
2014
 
 
 
 
 
 
 
 
Continuing operations
 
 
 
 
 
 
 
 
Net sales
 
$
984

 
$
1,082

 
$
955

 
$
1,064

Gross profit
 
265

 
325

 
281

 
294

Income
 
29

 
114

 
42

 
27

Income per common share
 
 
 
 
 
 
 
 
Basic
 
0.24

 
0.92

 
0.35

 
0.22

Diluted
 
0.23

 
0.91

 
0.34

 
0.22

Net income
 
29

 
115

 
42

 
27

Net income per common share
 
 
 
 
 
 
 
 
Basic
 
0.24

 
0.93

 
0.35

 
0.22

Diluted
 
0.23

 
0.92

 
0.34

 
0.22

Cash dividends declared
 
0.175

 
0.175

 
0.175

 
0.175

Market price
 
 
 
 
 
 
 
 
High
 
36.01

 
34.12

 
38.01

 
62.22

Low
 
30.63

 
30.35

 
32.71

 
34.22

Close
 
30.86

 
33.34

 
36.99

 
62.00

 
 
Quarter
In millions
 
First
 
Second
 
Third
 
Fourth
2013
 
 
 
 
 
 
 
 
Continuing operations
 
 
 
 
 
 
 
 
Net sales
 
$
974

 
$
1,060

 
$
924

 
$
962

Gross profit
 
294

 
332

 
272

 
264

Income
 
49

 
58

 
42

 
35

Income per common share
 
 
 
 
 
 
 
 
Basic
 
0.40

 
0.47

 
0.34

 
0.29

Diluted
 
0.40

 
0.47

 
0.34

 
0.28

Net income
 
53

 
65

 
93

 
41

Net income per common share
 
 
 
 
 
 
 
 
Basic
 
0.43

 
0.53

 
0.76

 
0.33

Diluted
 
0.43

 
0.53

 
0.75

 
0.33

Cash dividends declared
 
0.125

 
0.125

 
0.125

 
0.125

Market price
 
 
 
 
 
 
 
 
High
 
30.43

 
28.74

 
35.19

 
37.28

Low
 
24.31

 
24.96

 
27.30

 
31.75

Close
 
26.78

 
27.49

 
35.15

 
33.08


The quarterly financial data shown above includes the impact of significant items. Significant items may include, but are not limited to: charges for exit activities; various restructuring programs; spin-off related costs; impairment charges; pension partial withdrawal liability charges; benefit plan curtailment gains and losses; plant shutdown costs and the related insurance recoveries; merger and acquisition costs; tax charges on deemed repatriated earnings; tax costs and benefits resulting from the disposition of a business; impact of tax law changes; 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. Further details of these items are included in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K.

44

EX 99.1

Note 21 - Subsequent Events

On July 1, 2014, Hillshire entered into a definitive agreement and plan of merger with Tyson Foods, Inc., ("Tyson"), pursuant to which, among other things, Tyson has commenced a tender offer to acquire all of the issued and outstanding shares of Hillshire's common stock in cash at a purchase price of $63.00 per share. The transaction is expected to close on or before September 27, 2014.

On June 30, 2014, the company repaid $57 million of fully matured zero coupon notes. On July 2, 2014, the company repaid the remaining $48 million of fully matured zero coupon notes.

45

99.2 hsh 2014 10K MD&A
EX 99.2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE HILLSHIRE BRANDS COMPANY
FOR THE THREE YEARS ENDED JUNE 28, 2014
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides a summary of the company's results of operations, financial condition and liquidity, and significant accounting policies and critical estimates. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto contained elsewhere in this Annual Report. The company's fiscal year ends on the Saturday closest to June 30. Fiscal years 2014, 2013 and 2012 were 52-week years. Unless otherwise stated, references to years relate to fiscal years.
The following is an outline of the analysis included herein:
•
Business Overview
•
Summary of Results/Outlook
•
Review of Consolidated Results
•
Operating Results by Business Segment
•
Financial Condition
•
Liquidity
•
Non-GAAP Financial Measures
•
Critical Accounting Estimates
•
Issued But Not Yet Effective Accounting Standards
•
Forward-Looking Information

Business Overview

Our Business

Hillshire Brands is a manufacturer and marketer of high-quality, brand name food products. Sales are principally in the United States, where it is one of the leaders in branded food solutions for the retail and foodservice markets. In the retail channel, the company sells a variety of packaged meat products that include hot dogs, corn dogs, breakfast sausages, breakfast convenience items, including breakfast sandwiches and bowls, dinner sausages, gourmet artisanal sausage, salami, jerky, premium deli and luncheon meats and cooked hams, as well as a variety of frozen baked products and specialty items including pies, cakes, and cheesecakes. These products are sold primarily to supermarkets, warehouse clubs and national chains. The company also sells a variety of meat and bakery products to foodservice customers.

The company's portfolio of brands includes Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery, Chef Pierre pies and Van's, as well as artisanal brands Aidells, Gallo Salame and Golden Island Jerky.

Strategy

The company is focused on delivering long-term value creation through strengthening the core of its business through brand building and innovation; leveraging its heritage brand equities to extend into new adjacent categories; and fueling growth by driving operating efficiencies.

Pending Transaction with Tyson

On July 1, 2014, Hillshire Brands, Tyson and Tyson merger sub entered into a Merger Agreement under which Tyson would acquire Hillshire Brands. Pursuant to the Merger Agreement, Tyson merger sub has commenced a tender offer for all of the outstanding shares of Hillshire Brands common stock for $63 per share in cash. Tyson merger sub’s obligation to consummate the tender offer and accept for payment and pay for shares of Hillshire Brands common stock tendered is subject to certain conditions, including (i) that the number of shares tendered represents at least two-thirds of the total number of outstanding shares of Hillshire Brands common stock as of the expiration of the tender offer and (ii) that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, will have expired or been terminated at the expiration of the tender offer.
Upon the consummation of the tender offer, subject to the terms and conditions of the Merger Agreement, Tyson merger sub will merge with and into Hillshire Brands, with Hillshire Brands surviving as a wholly owned subsidiary of Tyson. As a result of the merger, any outstanding shares of Hillshire common stock not owned, directly or indirectly, by Tyson, Tyson merger sub or Hillshire Brands will be converted into the right to receive the offer price in the tender offer of $63 per share, and Hillshire Brands common stock will be delisted from the New York Stock Exchange. For additional information regarding the pending acquisition, see Part I, Item 1, “Business - Pending Transaction with Tyson”.

1
EX 99.2

Summary of Results/Outlook

The business highlights for 2014 include the following:

•
Net sales for the year were $4.1 billion, an increase of $165 million, or 4.2% versus the prior year. The increase in sales was driven by favorable mix and pricing actions taken to offset input cost inflation, which were partially offset by a decline in volume, as measured in pounds.
•
Reported operating income for the year was $306 million, an increase of $9 million, which was mainly driven by pricing actions to offset input cost inflation and decreased sales, general and administrative ("SG&A") costs. Adjusted operating income was $387 million, an increase of $24 million, or 6.5% over the prior year, which was driven by decreased SG&A spending partially offset by higher input costs.
•
Net income from continuing operations attributable to Hillshire Brands in 2014 was $212 million, or $1.71 per share on a diluted basis, versus $184 million, or $1.49 per share on a diluted basis in 2013. The increase was primarily driven by higher operating income and lower tax expense in 2014. On an as adjusted basis, net income from continuing operations attributable to Hillshire Brands in 2014 was $224 million or $1.80 per share on a diluted basis, versus $212 million, or $1.72 per share of income in 2013.
•
Cash from operating activities was $251 million in 2014, a decrease of $2 million. The most significant driver of the change was the decrease in deferred income taxes, partially offset by improved working capital management, specifically in inventory and favorable accounts payable and accrued liabilities changes.

Fiscal Year 2015 Outlook

The company expects Fiscal 2015 results to be impacted by a number of factors including higher raw material costs, continued investments in brand building and innovation and competitive dynamics. These factors will be partially offset by expected savings from the company's productivity planning.

Review of Consolidated Results

The following tables summarize net sales and operating income for 2014 versus 2013, and 2013 versus 2012 and certain items that affected the comparability of these amounts:

2014 Versus 2013  
In millions
 
2014
 
2013
 
Dollar 
Change 
 
Percent    
Change    
Net sales
 
$
4,085

 
$
3,920

 
$
165

 
4.2
%
Operating income
 
$
306

 
$
297

 
$
9

 
3.0
%
Less: Impact of Significant items on operating income
 
(81
)
 
(72
)
 
(9
)
 
 
Dispositions
 
—

 
6

 
(6
)
 
 
Adjusted operating income
 
$
387

 
$
363

 
$
24

 
6.5
%

2013 Versus 2012  
In millions
 
2013
 
2012
 
Dollar 
Change 
 
Percent 
Change 
Net sales
 
$
3,920

 
$
3,958

 
$
(38
)
 
(1.0
)%
Operating income
 
$
297

 
$
76

 
$
221

 
NM

Less: Impact of Significant items on operating income
 
(72
)
 
(255
)
 
183

 
 
Dispositions
 
6

 
8

 
(2
)
 
 
Adjusted operating income
 
$
363

 
$
323

 
$
40

 
12.5
 %

Non-GAAP Measures

Management measures and reports Hillshire Brands' financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). In this report, 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. See the "Non-GAAP Financial Measures" section of this Item for additional information regarding these financial measures.


2
EX 99.2

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. 

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 eight performance measures under Hillshire Brands' annual incentive plan are adjusted net sales and adjusted operating income, which are the reported amounts as adjusted for significant items and select other charges and gains. Many of the significant items will recur in future periods; however, the amount and frequency of each significant item varies from period to period.

Net Sales

Net sales in 2014 were $4.1 billion, an increase of $165 million, or 4.2% over the comparable 2013 period. Acquisitions during fiscal year 2014 increased net sales by $20 million. The remaining increase in net sales was driven by favorable mix and pricing actions taken to offset input cost inflation, which were partially offset by a decline in volume and lower commodity meat sales.

Net sales in 2013 were $3.9 billion, a decrease of $38 million, or 1.0% over the comparable 2012 period. Net sales were impacted by dispositions after the beginning of 2012, which reduced net sales by $55 million. Adjusted net sales increased $17 million, or 0.4% due to a 1.4% increase in volumes, which were only partially offset by an unfavorable shift in sales mix and pricing actions in response to lower commodity costs. Sales were negatively impacted by a material one-time reduction in inventory levels held by a large retail customer in the fourth quarter of 2013 and issues with the lunchmeat packaging transition.

Operating Income

Operating income increased by $9 million in 2014 over the comparable 2013 period. The year-over-year net impact of the change in significant items and business dispositions identified in the preceding table of consolidated results increased operating income by $15 million. As a result, adjusted operating income increased $24 million, or 6.5%, driven primarily by higher sales and lower SG&A expense partially offset by increased input costs.

Operating income decreased by $221 million in 2013 over the comparable 2012 period. The year-over-year net impact of the change in significant items and the business dispositions identified in the preceding table of consolidated results decreased operating income by $181 million. As a result, adjusted operating income increased $40 million, or 12.5% due to a significant decline in general corporate expense, excluding significant items, lower commodity costs net of pricing actions and higher volumes, partially offset by increased investments in media, advertising and promotion ("MAP") spending.

Gross Margin

The gross margin, which represents net sales less cost of sales, increased by $3 million in 2014 over the comparable 2013 period. The increase was driven by pricing actions and favorable sales mix, partially offset by lower volumes and increased input costs.

The gross margin percentage decreased from 29.6% in 2013 to 28.5% in 2014. The decrease was primarily driven by increased input costs, partially offset by pricing actions and favorable sales mix.

The gross margin increased by $61 million in 2013 over the comparable 2012 period. The increase was driven by the impact of lower commodity costs and the benefits of cost saving initiatives. These were only partially offset by a negative shift in sales mix, higher bakery manufacturing costs and the generally weak economic conditions in the foodservice category.

The gross margin percentage increased from 27.8% in 2012 to 29.6% in 2013 due to gross margin percentage increases in the Retail segment. The gross margin percentage was positively impacted by lower commodity costs partially offset by higher bakery manufacturing costs.

3
EX 99.2

Selling, General and Administrative Expenses
In millions
 
2014
 
2013
 
2012
SG&A expenses in the business segment results
 
 
 
 
 
 
Media advertising and promotion
 
$
151

 
$
174

 
$
136

Other
 
585

 
597

 
594

Total business segments
 
736

 
771

 
730

Amortization of identifiable intangibles
 
5

 
4

 
4

General corporate expenses
 
106

 
81

 
195

Mark-to-market derivative (gains)/losses
 
(2
)
 
(1
)
 
1

Total SG&A
 
$
845

 
$
855

 
$
930


Total SG&A expenses reported in 2014 by the business segments decreased by $35 million, or 4.6%, versus the comparable 2013 period primarily due to lower MAP spending.

Unallocated general corporate expenses increased by $25 million in 2014 over the comparable prior year period primarily due to increased spending on efficiency programs and deal costs.

Total SG&A expenses reported in 2013 by the business segments increased by $41 million, or 5.6%, versus the comparable 2012 period primarily due to higher MAP spending.

Unallocated general corporate expenses decreased by $114 million in 2013 over the comparable prior year period due to a $86 million decrease in charges related to restructuring actions, costs incurred in conjunction with the spin-off and other significant items as well as the favorable impact of headcount reductions, lower benefit plan expenses and a reduction in information technology costs.

As previously noted, reported SG&A reflects amounts recognized for restructuring actions, spin-off related costs and other significant amounts. These amounts include the following: 
In millions
 
2014
 
2013
 
2012
Restructuring/spin-off costs
 
$
45

 
$
57

 
$
137

Gain on HBI tax settlement
 
—

 
—

 
(15
)
Litigation accrual
 
—

 
—

 
11

Pension curtailments/settlements
 
(1
)
 
5

 
1

Foreign tax indemnification charge
 
—

 
(10
)
 
(3
)
Workers' compensation deposit adjustment
 
—

 
(7
)
 
—

Deal costs
 
21

 
—

 
—

Other
 
3

 
—

 
1

Total
 
$
68

 
$
45

 
$
132


Additional information regarding the restructuring and spin-off related costs can be found in Note 6 - Exit, Disposal and Restructuring Activities.
 
Exit Activities, Asset and Business Dispositions

Exit activities, asset and business dispositions are as follows:
In millions
 
2014
 
2013
 
2012
Charges for exit activities
 
 
 
 
 
 
Severance
 
$
13

 
$
3

 
$
27

Exit of leases and other contractual obligations
 
1

 
12

 
54

Business disposition gains
 
—

 
(6
)
 
—

Total
 
$
14

 
$
9

 
$
81


The net charges in 2014 are $5 million higher than the comparable 2013 period as a result of higher severance costs, partially offset by lower lease and contractual obligation exit costs.

4
EX 99.2

The net charges in 2013 are $72 million lower than the comparable 2012 period as a result of lower severance and lease and contractual obligation exit costs. The 2012 charges were incurred in conjunction with the spin-off.

Impairment Charges

The company did not incur impairment charges in 2014. In 2013, the company recognized a $1 million impairment charge, which related to the writedown of machinery and equipment associated with the Retail segment that was determined to no longer have any future use by the company. In 2012, the company recognized a $14 million impairment charge, which related to the writedown of computer software which was no longer in use. The charge was recognized as part of general corporate expenses.

Additional details regarding these impairment charges are discussed in Note 4 - Impairment Charges.

Net Interest Expense

Net interest expense of $39 million in 2014 was $2 million lower than the comparable prior year period. This was due to a $2 million increase in interest income from short-term investments. Net interest expense of $41 million in 2013 was $31 million lower than the comparable 2012 period. This was due to a decline in interest expense as a result of the repayment of approximately $2 billion of debt during 2012 primarily using proceeds from the completed business dispositions, as well as the transfer of $650 million of debt to DEMB as part of the spin-off.

Debt Extinguishment Costs

In 2012, the company completed a cash tender offer for $348 million of its 6.125% Notes due November 2032 and $122 million of its 4.10% Notes due 2020 and it redeemed all of its 3.875% Notes due 2013, with an aggregate principal amount of $500 million, and recognized $39 million of charges associated with the early extinguishment of this debt.

Income Tax Expense

The effective tax rate on continuing operations in 2014, 2013 and 2012 was impacted by a number of significant items that are shown in the reconciliation of the company's effective tax rate to the U.S. statutory rate in Note 18 - Income Taxes. Additional information regarding income taxes can be found in "Critical Accounting Estimates" within Management's Discussion and Analysis. 
In millions
 
2014
 
2013
 
2012
Continuing operations
 
 
 
 
 
 
Income (loss) before income taxes
 
$
267

 
$
256

 
$
(35
)
Income tax expense (benefit)
 
55

 
72

 
(15
)
Effective tax rates
 
20.5
%
 
28.1
%
 
(44.2
)%

2014 versus 2013 In 2014, the company recognized a tax expense for continuing operations of $55 million, or an effective tax rate of 20.5%, compared to tax expense of $72 million, or an effective tax rate of 28.1%, in 2013. The tax rate in 2014 was primarily impacted by a $44 million tax benefit for the release of a valuation allowance on state deferred tax assets, primarily related to net operating loss and credit carryovers that became more-likely-than not realizable during the year. See the tax rate reconciliation table in Note 18 - Income Taxes for additional information.

2013 versus 2012 In 2013, the company recognized tax expense on continuing operations of $72 million, or an effective tax rate of 28.1%, compared to a tax benefit of $15 million, or an effective tax rate of 44.2%, in 2012. The tax rate in 2013 was impacted by contingent tax obligations, deductions associated with domestic production activities, non-taxable indemnification agreements, employee benefit deductions and tax provision adjustments. See the tax rate reconciliation table in Note 18 - Income Taxes for additional information.

Income (Loss) from Continuing Operations and Diluted Earnings Per Share (EPS) from Continuing Operations

Income from continuing operations in 2014 was $212 million, an increase of $28 million over the comparable prior year period. The improvement was primarily due to decreased SG&A and income tax expense (benefit), partially offset by increased net charges for exit activities, asset and business dispositions.

Income from continuing operations in 2013 was $184 million, an increase of $204 million over the comparable prior year period. The improvement was due to a $165 million decrease in net after tax charges incurred in conjunction with the spin-off, restructuring actions and other significant items.

5
EX 99.2

Diluted EPS from continuing operations was $1.71 in 2014, $1.49 in 2013 and a loss of $0.16 in 2012. Adjusted diluted EPS was $1.80 in 2014, $1.72 in 2013 and $1.45 in 2012. The diluted EPS from continuing operations in the current year is unfavorably impacted by higher average shares outstanding primarily as a result of the exercise of stock options and increase in average share price.

Discontinued Operations

The results of the company's North American Fresh Bakery, Refrigerated Dough and Foodservice Beverage businesses and the International Coffee and Tea, Household and Body Care and European and Australian Bakery businesses, which have been classified as discontinued operations, are summarized below. See Note 1 - Nature of Operations and Basis of Presentation for additional information.
In millions
 
2014
 
2013
 
2012
Net sales
 
$
—

 
$
80

 
$
5,365

Income (loss) from discontinued operations before income taxes
 
$
2

 
$
7

 
$
(140
)
Income tax (expense) benefit on income from discontinued operations
 
(1
)
 
8

 
603

Gain on disposition of discontinued operations before income taxes
 
—

 
68

 
772

Income tax expense on disposition of discontinued operations
 
—

 
(15
)
 
(367
)
Net income from discontinued operations
 
$
1

 
$
68

 
$
868


Net Sales and Income (Loss) from Discontinued Operations before Income Taxes There were no net sales for discontinued operations in 2014. Net sales for discontinued operations were $80 million in 2013, compared to $5.4 billion in 2012. The year-over-year change was due to the completion of the disposition of most of the businesses that were part of the discontinued operations prior to the end of 2012. The net sales in 2013 all relate to the Australian Bakery operations, which were disposed of in February 2013. Income from discontinued operations was $1 million in 2014, a decline of $67 million over the comparable 2013 period as a result of the completion of the disposition of most of the businesses that were part of discontinued operations. The operating results reported in 2013 relate to the Australian Bakery operations, as well as adjustments of prior year tax provision estimates related to the business dispositions completed in 2012. Income from discontinued operations in 2013 was $68 million, a decrease of $800 million compared to 2012. The decrease was again driven by the completion of the disposition of most of the businesses that were part of discontinued operations. The year-over-year change was also impacted by the nonrecurrence of significant impairment charges and tax benefits that were recognized in 2012, as discussed in more detail below.
 
Gain on Sale of Discontinued Operations There were no gains on the sale of discontinued operations in 2014. In 2013, the company completed the disposition of the Australian Bakery business and recognized a pretax gain of $56 million ($42 million after tax), as well as gains related to a final purchase price adjustment associated with the North American Fresh Bakery operation, a gain on the sale of manufacturing facilities related to the sale of the North American Foodservice Beverage operations and adjustments to the prior year tax provision estimates associated with previous business dispositions. In 2012, the company completed the disposition of the Fresh Bakery, Foodservice Beverage and Refrigerated Dough businesses in North America as well as the European Bakery businesses in Spain and France. It also completed the disposition of the remainder of the businesses that comprised the Household and Body Care business, primarily the Non-European Insecticides business and portions of the Air Care and Shoe Care businesses. It recognized a pretax gain of $772 million ($405 million after tax) on the disposition of these businesses in 2012. The tax provision on the disposition of the Refrigerated Dough business was negatively impacted by a book/tax basis difference related to $254 million of goodwill that is not deductible for tax purposes. Further details regarding these transactions are included in Note 5 - Discontinued Operations.

Consolidated Net Income and Diluted Earnings Per Share (EPS)

The consolidated net income and related diluted earnings per share includes the results of both continuing and discontinued operations - see the Consolidated Statements of Income in this report for additional information. Net income was $213 million in 2014, a decrease of $39 million over the comparable prior year period. The decrease was primarily driven by increased input costs, partially offset by lower SG&A and Income tax expense (benefit).

Net income was $252 million in 2013, a decrease of $596 million over the comparable prior year period. The decrease in net income was primarily due to a $800 million decline in the results associated with discontinued operations, partially offset by a $204 million increase in results associated with continuing operations noted previously.

The net income attributable to Hillshire Brands was $213 million in 2014, $252 million in 2013 and $845 million in 2012.


6
EX 99.2

Diluted EPS were $1.72 in 2014, $2.04 in 2013 and $7.13 in 2012. The decrease in EPS is primarily the result of the change in net income from discontinued businesses. Further, the diluted EPS from continuing operations in the current year is unfavorably impacted by higher average shares outstanding primarily as a result of the exercise of stock options and increase in average share price.

Operating Results by Business Segment

The company's structure is currently organized around two business segments, which are described below:

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 meat and bakery products to foodservice customers in North America such as broad-line foodservice distributors, restaurants, hospitals and other large institutions. This segment also includes sales results for the commodity pork and turkey businesses as well as the former Senseo coffee business in the United States that was exited in March 2012.

The following is a summary of results by business segment: 
In millions
 
2014
 
2013
 
2012
Sales
 
 
 
 
 
 
Retail
 
$
2,992

 
$
2,894

 
$
2,884

Foodservice/Other
 
1,093

 
1,026

 
1,025

 
 
4,085

 
3,920

 
3,909

Impact of businesses exited/disposed
 
—

 
—

 
55

Intersegment
 
—

 
—

 
(6
)
Total
 
$
4,085

 
$
3,920

 
$
3,958

 
The following tables summarize the components of the percentage change in net sales as compared to the prior year: 
2014 versus 2013
 
Volumes
 
+
 
Price/Mix
 
+
 
Acquisitions
 
+
 
Disposition
 
=
 
Net Sales
Change
Retail
 
(1.1
)%
 
 
 
3.8
 %
 
 
 
0.7
%
 
 
 
—
 %
 
 
 
3.4
 %
Foodservice/Other
 
(3.6
)%
 
 
 
10.2
 %
 
 
 
—
%
 
 
 
—
 %
 
 
 
6.6
 %
Total business segments
 
(2.0
)%
 
 
 
5.7
 %
 
 
 
0.5
%
 
 
 
—
 %
 
 
 
4.2
 %
2013 versus 2012
 
Volumes
 
+
 
Price/Mix
 
+
 
Acquisitions
 
 
 
Disposition
 
=
 
Net Sales
Change
Retail
 
(0.1
)%
 
 
 
0.4
 %
 
 
 
—
%
 
 
 
—
 %
 
 
 
0.3
 %
Foodservice/Other
 
4.5
 %
 
 
 
(4.4
)%
 
 
 
—
%
 
 
 
—
 %
 
 
 
0.1
 %
Total business segments
 
1.4
 %
 
 
 
(1.0
)%
 
 
 
—
%
 
 
 
(1.4
)%
 
 
 
(1.0
)%

Operating segment income, which excludes the impact of significant items and business dispositions, and income from continuing operations before income taxes for 2014, 2013 and 2012 are as follows:
In millions
 
2014
 
2013
 
2012
Income from continuing operations before income taxes
 
 
 
 
 
 
Retail
 
$
339

 
$
329

 
$
313

Foodservice/Other
 
87

 
75

 
79

Total operating segment income
 
426

 
404

 
392

General corporate expenses
 
(38
)
 
(36
)
 
(64
)
Mark-to-market derivative gains/(losses)
 
4

 
(1
)
 
(1
)
Amortization of intangibles
 
(5
)
 
(4
)
 
(4
)
Significant items
 
(81
)
 
(72
)
 
(255
)
Impact of businesses exited/disposed
 
—

 
6

 
8

Total operating income
 
306

 
297

 
76

Interest expense, net
 
(39
)
 
(41
)
 
(72
)
Debt extinguishment costs
 
—

 
—

 
(39
)
Income (loss) from continuing operations before income taxes
 
$
267

 
$
256

 
$
(35
)

7
EX 99.2

A discussion of each business segment's sales and operating segment income is presented on the following pages. The change in volumes for each business segment excludes the impact of acquisitions and dispositions.

General corporate expenses, which are not allocated to the individual business segments, were $38 million in 2014, an increase of $2 million over the prior year primarily due to increased benefit plan, stock based compensation and medical expenses which were partially offset by the positive impact of foreign exchange rates. General corporate expenses were $36 million in 2013, a decrease of $28 million over the prior year primarily due to a reduction in stock based compensation expenses, the impact of headcount reductions and a reduction in information technology costs.

The company uses derivative financial instruments to manage its exposure to commodity prices. A commodity derivative not declared a hedge in accordance with the accounting rules is accounted for under mark-to-market accounting with changes in fair value recorded in the Consolidated Statements of Income. The company excludes these unrealized mark-to-market gains and losses from the operating segment results until such time that the exposure being hedged affects the earnings of the business segment. At that time, the cumulative gain or loss previously reported as mark-to-market derivative gains/(losses) for the derivative instrument will be reclassified into the business segment's results.

The unrealized mark-to-market gain/loss incurred on commodity derivative contracts was a gain of $4 million in 2014 as compared to a loss of $1 million in 2013 and a loss of $1 million in 2012. The unrealized mark-to-market gains and losses are primarily related to commodity derivative contracts.

The amortization of intangibles in the table relates to acquired trademarks and customer relationships. It does not include software amortization, a portion of which is recognized in the earnings of the segments and a portion of which is recognized as part of general corporate expenses.

Retail 
In millions
 
2014
 
2013
 
Dollar
Change
 
Percent
Change
 
2013
 
2012
 
Dollar
Change
 
Percent
Change
Net sales
 
$
2,992

 
$
2,894

 
$
98

 
3.4
%
 
$
2,894

 
$
2,884

 
$
10

 
0.3
%
Operating segment income
 
$
339

 
$
329

 
$
10

 
2.9
%
 
$
329

 
$
313

 
$
16

 
5.5
%
 
2014 versus 2013 Net sales increased by $98 million, or 3.4%, as pricing and a favorable shift in sales mix were partially offset by declines in volume. Volumes declined 1.1% as volume increases for Jimmy Dean breakfast sandwiches and Aidells specialty sausages were offset by volume declines for Ball Park hot dogs, deli meats and frozen sweet goods.

Operating segment income increased $10 million, or 2.9%. The increase was due to the impact of pricing, favorable mix, and cost actions partially offset by higher input costs and declines in volumes.

2013 versus 2012 Net sales increased by $10 million, or 0.3%, due to a favorable shift in sales mix partially offset by price decreases in an environment of lower commodity costs and slightly lower volumes. Volumes declined 0.1%, as volume increases for Jimmy Dean breakfast sandwiches and sausages and Aidells specialty sausages were offset by a one-time material change in the fourth quarter inventory levels held by a large retail customer, softness in Hillshire Farm lunchmeat and declining volumes for Ball Park hot dogs, sweet goods, and Sara Lee deli meats.

Operating segment income increased $16 million, or 5.5%. The increase was due to lower commodities costs net of pricing actions and a favorable shift in sales mix, which was partially offset by increased manufacturing and SG&A expenses. MAP investment increases were driven by higher spending behind certain core brands and new products, notably with respect to Jimmy Dean and Ball Park.

Foodservice/Other
In millions
 
2014
 
2013
 
Dollar
Change
 
Percent
Change
 
2013
 
2012
 
Dollar
Change
 
Percent
Change
Net sales
 
$
1,093

 
$
1,026

 
$
67

 
6.6
%
 
$
1,026

 
$
1,025

 
$
1

 
0.1
 %
Operating segment income
 
$
87

 
$
75

 
$
12

 
16.3
%
 
$
75

 
$
79

 
$
(4
)
 
(5.0
)%
 
2014 versus 2013 Net sales increased by $67 million, or 6.6%, due to pricing and favorable sales mix which were partially offset by a decrease in volume. Overall volumes decreased 3.6% primarily driven by decreased commodity meat sales as a result of improved internal utilization.

8
EX 99.2

Operating segment income increased by $12 million, or 16.3%. The increase was primarily driven by pricing, favorable mix and expense management which was partially offset by increased input costs and lower volume.

2013 versus 2012 Net sales increased by $1 million, or 0.1%. The favorable impact of higher volumes was mostly offset by an unfavorable shift in sales mix and negative pricing actions in response to lower commodity costs. Volumes increased 4.5% as higher volumes for processed meat and commodity meat products were only partially offset by lower bakery volumes due to the continued weak economic conditions.

Operating segment income decreased by $4 million, or 5.0%. The decrease was primarily driven by an unfavorable shift in sales mix and investments in bakery plant improvements partially offset by increased volumes and lower commodity costs. Increased investments in MAP were offset by lower SG&A costs.

Financial Condition

The company's cash flow statements include amounts related to discontinued operations through the date of disposal. The discontinued operations had an impact on the cash flows from operating, investing and financing activities in each fiscal year.

Cash from Operating Activities

The net cash from operating activities generated by continuing and discontinued operations is summarized in the following table: 
 
 
2014
 
2013
 
2012
Net cash from operating activities
 
 
 
 
 
 
Continuing operations
 
$
250

 
$
243

 
$
127

Discontinued operations
 
1

 
10

 
122

Total
 
$
251

 
$
253

 
$
249


2014 versus 2013 Cash from operating activities was $251 million in 2014, a decrease of $2 million. The most significant driver of the change was a $102 million increase in working capital management, specifically in inventory and favorable accounts payable and accrued liabilities changes, partially offset by a $99 million decrease in deferred income taxes. Discontinued operations related to the Australian bakery operations generated $1 million of cash in 2014 and $10 million of cash in 2013.

2013 versus 2012 The increase in cash from operating activities of $4 million in 2013 was due to a $410 million decrease in cash paid for restructuring actions, a $205 million decrease in pension contributions, and a $194 million decrease in cash taxes paid, as well as improved operating results on an adjusted basis. These increases in cash generated from operations were offset by the completion of business dispositions in the prior fiscal year as well as an increase in cash used to fund operating activities.

Cash used in Investing Activities

The net cash used in investing activities generated by continuing and discontinued operations is summarized in the following table: 
 
 
2014
 
2013
 
2012
Net cash used in investing activities
 
 
 
 
 
 
Continuing operations
 
$
(335
)
 
$
(127
)
 
$
(153
)
Discontinued operations
 
—

 
86

 
(368
)
Total
 
$
(335
)
 
$
(41
)
 
$
(521
)

2014 versus 2013 In 2014, $335 million of cash was used in investing activities compared to $41 million in 2013. The year-over-year increase is primarily due to a net $91 million increase in the cash used to invest in short-term commercial paper and corporate note investments and $200 million in acquisitions of businesses.
 
The company made two acquisitions during 2014 to further broaden its product offerings and to facilitate extension into additional categories. On September 6, 2013, the Retail segment acquired 100% of the common stock of Formosa Meat Company, Inc. (“Golden Island”) for $35 million. On May 15, 2014, the Retail segment acquired 100% of the capital stock of Healthy Frozen Food, Inc. (“Van's”) for approximately $165 million, net of cash acquired.

9
EX 99.2

2013 versus 2012 In 2013, $41 million of cash was used in investing activities compared with $521 million in 2012. The decrease in cash used was primarily due to a $179 million decrease in cash paid for property and equipment, a $183 million decline in cash paid for software and other intangibles and a $124 million increase in net cash proceeds received related to business dispositions.

The company spent $135 million in 2013 for the purchase of property and equipment as compared to $314 million in 2012, which included $158 million related to discontinued operations. The year-over-year decline related to continuing operations was due primarily to the higher expenditures in 2012 related to expanded meat production capacity.

The cash paid for the purchase of software and other intangibles declined by $183 million as the prior year included a $153 million payment to acquire the remaining ownership interest in the Senseo coffee trademark, which was subsequently transferred to DEMB as part of the spin-off.

The company received $96 million on the disposition of businesses in 2013, of which approximately $85 million (82 million AUD) was received upon the disposition of its Australian bakery business. In 2012, business dispositions resulted in a net use of cash of $28 million as the $2.033 billion of cash received from various business dispositions was offset by $2.061 billion of cash transferred as part of the spin-off. The $30 million of expenditures for business acquisitions in 2012 related to beverage companies that were subsequently transferred to DEMB as part of the spin-off.

Cash used in Financing Activities

The net cash used in financing activities is split between continuing and discontinued operations as follows: 
 
 
2014
 
2013
 
2012
Net cash used in financing activities
 
 
 
 
 
 
Continuing operations
 
$
(79
)
 
$
50

 
$
184

Discontinued operations
 
(1
)
 
(95
)
 
(1,530
)
Total
 
$
(80
)
 
$
(45
)
 
$
(1,346
)

The cash used in the financing activities of the discontinued operations primarily represents the net transfers of cash with the corporate office as most of the cash of these businesses has been retained as a corporate asset, with the exception of the cash related to the International Coffee and Tea business, which was transferred as part of the spin-off.

2014 versus 2013 The cash used in financing activities in 2014 increased by $35 million when compared to the prior year primarily due to a $34 million year over year increase in dividend payments as well as $30 million for the repurchases of common stock. This activity is partially offset by a $26 million decrease in repayment of debt and derivatives. The majority of the $20 million repayment of debt in 2014 represents 10% Zero Coupon Note payments, the face value of which was $19 million.
 
In 2014, the company recognized a $13 million windfall tax benefit related to stock compensation that occurs when compensation cost from non-qualified share-based compensation recognized for tax purposes exceeds compensation cost from equity-based compensation recognized in the financial statements. This tax benefit increased net cash provided by financing activities.

The company paid $80 million of dividends during 2014 as compared to $46 million in 2013.

2013 versus 2012 The cash used in financing activities in 2013 decreased by $1.301 billion over the prior year driven primarily by $1.164 billion in net debt repayments in 2012 and a year-over-year decrease in dividends paid of $225 million, partially offset by a decrease in cash received related to common stock issuances. In 2013, the company paid approximately $40 million upon the settlement of two cross currency swaps maturing in June 2013 that were associated with certain foreign denominated debt instruments. In 2012, the company repaid $348 million of its 6.125% Notes due November 2032 and $122 million of its 4.10% Notes due 2020 as part of a tender offer. It also redeemed all of its 3.875% Notes due 2013, which had an aggregate principal amount of $500 million. The company also repaid $841 million of long-term debt and derivatives, which included the payment of $156 million related to derivatives associated with this debt, and $204 million of debt with maturities less than 90 days. The company utilized cash on hand and new borrowings to repay this debt. The company issued $851 million of new borrowings in 2012, which included a note purchase agreement with a group of institutional investors related to the private placement of $650 million aggregate principal amount of indebtedness. On June 28, 2012, the company transferred its obligation under the private placement debt as part of the spin-off.

Additionally, in 2012 the company recognized a $15 million windfall tax benefit related to stock compensation that occurs when compensation cost from non-qualified share-based compensation recognized for tax purposes exceeds compensation cost from equity-based compensation recognized in the financial statements. This tax benefit increased net cash provided by financing activities.

10
EX 99.2

Dividends paid during 2013 were $46 million as compared to $271 million in 2012. The dividends paid in 2013 represent the first three quarterly dividends of Hillshire Brands.

Cash from stock issuances totaled $47 million in 2013 compared to $84 million in 2012, driven primarily by stock award activity.

Liquidity

Cash and Equivalents, Short-Term Investments and Cash Flow

At the end of 2014, the company's cash and equivalents balance was $236 million, which was primarily held in bank demand deposit accounts.

Dividends

The quarterly dividend amounts paid in 2014 were $0.175 per share, or $0.70 on an annualized basis. The Merger Agreement with Tyson restricts our ability to pay dividends other than regular quarterly cash dividends in the ordinary course of business consistent with past practice not exceeding $0.175 per share. The amount of any future dividends will be determined by the company's Board of Directors, subject to the terms of the Merger Agreement, and is not guaranteed.

Business Dispositions in 2013

In February 2013, the company closed on the sale of its Australian bakery business to McCain Foods for 82 million AUD (approximately $85 million U.S. dollars). Also included in the transaction were the license rights to certain intellectual property used by the Australian bakery business in the Asia-Pacific region.

Business Dispositions in 2012

In September 2011, the company closed on the sale of its North American refrigerated dough business to Ralcorp for $545 million. In November 2011, the company closed on the sale of its North American fresh bakery business to Grupo Bimbo for $709 million, which included the assumption of $34 million of debt. In December 2011, the company closed on the sale of its North American food service beverage operations to J. M. Smucker for $350 million. In August 2011, the company also made the decision to divest its Spanish bakery business to Grupo Bimbo for €115 million and closed on this sale in the second quarter of 2012. The company also divested its French refrigerated dough business for €115 million and closed on this deal in the third quarter of 2012. The company closed on the divestiture of certain of the international household and body care businesses during 2012 and received proceeds of approximately $117 million.

Spin-off/Special Dividend

In 2012, immediately after the spin-off, DEMB paid a $3.00 per share special dividend, which totaled $1.8 billion, to the company's shareholders who received shares of the spun-off business.

Share Repurchases

As of June 28, 2014, approximately $1.2 billion were authorized for share repurchase by the board of directors, in addition to a 2.7 million share authorization remaining under a prior share repurchase program, after adjusting for the 1-for-5 reverse stock split in June 2012. In August 2013, the company announced that it was targeting repurchases of approximately $200 million of shares of its common stock over the next two fiscal years under its pre-existing stock repurchase authorizations. The timing of the share buybacks would depend, in part, on our share price, the state of the financial markets and other factors. During 2014, the company repurchased 0.9 million shares at a cost of $30 million. The company does not currently expect to repurchase additional shares under its repurchase programs.

11
EX 99.2

Debt

The total debt outstanding at June 28, 2014 is $944 million, a decrease of $7 million over the prior year as result of the repayments of zero coupon note debt. The company's long-term debt was virtually 100% fixed-rate debt as of June 28, 2014 and June 29, 2013.

The debt is due to be repaid as follows: $105 million in 2015, $400 million in 2016, nil in 2017, nil in 2018, $1 million in 2019 and $438 million thereafter. The debt obligations are expected to be satisfied with cash on hand, cash from operating activities or with additional borrowings.

From time to time, the company opportunistically may repurchase or retire its outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the company's liquidity requirements, contractual restrictions and other factors. The amounts involved could be material.
 
Pension Plans

As shown in Note 16 - Defined Benefit Pension Plans, the funded status of the company's defined benefit pension plans is defined as the amount the projected benefit obligation exceeds the plan assets. The funded status of the plans for total continuing operations is an underfunded position of $120 million at the end of fiscal 2014 as compared to an underfunded position of $123 million at the end of fiscal 2013.

The company expects to contribute approximately $5 million of cash to its pension plans in 2015 as compared to approximately $9 million in 2014 and $8 million in 2013. The contribution amounts are for pension plans of continuing operations and pension plans where the company has agreed to retain the pension liability after certain business dispositions were completed. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements. As a result, the actual funding in 2015 may be materially different from the estimate.

The company participates in one multi-employer pension plan (MEPP) that provided retirement benefits to certain employees covered by collective bargaining agreements. Participating employers in a MEPP are jointly responsible for any plan underfunding. MEPP contributions are established by the applicable collective bargaining agreements; however, the MEPPs may impose increased contribution rates and surcharges based on the funded status of the plan and the provisions of the Pension Protection Act of 2006 (PPA). The PPA imposes minimum funding requirements on the plans. Plans that fail to meet certain funding standards as defined by the PPA are categorized as being either in a critical or endangered status. The company has received notice that the plan to which it contributes 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 the company liable for its proportionate share of that underfunding. 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 that a withdrawal or partial withdrawal was to occur with respect to the MEPP to which the company makes contributions, the impact to the 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 2014, $1 million in 2013 and $2 million in 2012. For continuing operations, the company incurred withdrawal liabilities of nil in 2014 and 2013 and $3 million in 2012.

12
EX 99.2

Cost Savings Initiatives

The company has a number of initiatives that are expected to deliver significant savings by 2016. The cost savings are expected to result from improved revenue management, supply chain and support processes. The company expects to achieve the savings targets previously disclosed. In 2014, there were approximately $43 million of cash charges related to these cost saving initiatives.

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. Subsequent to 2012, there is not a significant amount of income generated outside of the U.S. and thus U.S. federal income tax and withholding tax on these foreign unremitted earnings would be immaterial. In 2012, the discontinued 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 recognized $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 liabilities 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 28, 2014 and pricing under this facility is based on the company's current credit rating. At June 28, 2014, the company did not have any borrowings outstanding under this facility but it did have approximately $3 million of letters of credit outstanding under this credit facility. In addition, in the first quarter of 2014, the company entered into a $65 million uncommitted bilateral letter of credit facility agreement. Under the terms of the agreement, there is no annual fee for the facility and the company is subject to an annual interest rate of 0.85% on issuances.   As of June 28, 2014, the company had letters of credit totaling $42 million outstanding under this 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 28, 2014, the company's interest coverage ratio was 9.1 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 28, 2014, the leverage ratio was 2.1 to 1.0.

The company's credit ratings by Standard & Poor's, Moody's Investors Service and Fitch Ratings, as of June 28, 2014 were as follows: 
 
 
 
 
 
 
 
  
 
Senior
Unsecured
Obligations
 
Short-term
Borrowings
 
Outlook
Standard & Poor's
 
BBB
 
A-2
 
Negative
Moody's
 
Baa2
 
P-2
 
Negative
Fitch
 
BB
 
B
 
Evolving

During the fourth quarter of 2014, the company’s long-term and short-term credit ratings were downgraded by Fitch from BBB to BB and from F-2 to B, respectively. The downgrades were due to the company’s announced definitive agreement to acquire Pinnacle and the intended issuance of debt to finance the acquisition. Based on the subsequent termination of the Pinnacle Merger Agreement in the first quarter of 2015, Fitch upgraded the company’s ratings to BBB and F-2.

13
EX 99.2

Changes in the company's credit ratings result in changes in the company's borrowing costs. The company's current short-term credit rating allows it to participate in a commercial paper market that has a number of potential investors and a historically high degree of liquidity. A downgrade of the company's short-term credit rating would place the company in a commercial paper market that would contain significantly less market liquidity than it operates in with a rating of A-2, P-2 and F-2. This would reduce the amount of commercial paper the company could issue and raise its commercial paper borrowing cost. The facility does not mature or terminate upon a credit rating downgrade. See Note 15 - Financial Instruments for more information. To the extent that the company's operating requirements were to exceed its ability to issue commercial paper following a downgrade of its short-term credit rating, the company has the ability to use available credit facilities to satisfy operating requirements, if necessary.

Off-Balance Sheet Arrangements

The off-balance sheet arrangements that are reasonably likely to have a current or future effect on the company's financial condition are lease transactions for facilities, warehouses, office space, vehicles and machinery and equipment.

Leases

The company has numerous operating leases for manufacturing facilities, warehouses, office space, vehicles and machinery and equipment. Operating lease obligations are scheduled to be paid as follows: $21 million in 2015, $15 million in 2016, $13 million in 2017, $12 million in 2018, $11 million in 2019 and $88 million thereafter. The company is also contingently liable for certain long-term leases on property operated by others. These leased properties relate to certain businesses that have been sold. The company continues to be liable for the remaining terms of the leases on these properties in the event that the owners of the businesses are unable to satisfy the lease liability. The minimum annual rentals under these leases are as follows: $8 million in 2015 and $1 million in 2016.

14
EX 99.2

Future Contractual Obligations and Commitments

The company has no material unconditional purchase obligations as defined by the accounting principles associated with the Disclosure of Long-Term Purchase Obligations. The following table aggregates information on the company's contractual obligations and commitments.
 
 
 
 
Payments Due by Fiscal Year
In millions
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
Long-term debt
 
$
944

 
$
105

 
$
400

 
$
—

 
$
—

 
$
1

 
$
438

Interest on debt obligations1
 
262

 
32

 
24

 
21

 
21

 
21

 
143

Operating lease obligations
 
160

 
21

 
15

 
13

 
12

 
11

 
88

Purchase obligations2
 
1,478

 
649

 
344

 
222

 
168

 
14

 
81

Other long-term liabilities3
 
39

 
—

 
16

 
9

 
4

 
6

 
4

Subtotal
 
2,883

 
807

 
799

 
265

 
205

 
53

 
754

Contingent lease obligations4
 
9

 
8

 
1

 
—

 
—

 
—

 
—

Total5
 
$
2,892

 
$
815

 
$
800

 
$
265

 
$
205

 
$
53

 
$
754

1

 
Interest obligations on fixed rate debt instruments are calculated for future periods using stated interest rates as per the debt terms. See Note 12 - Debt Instruments for further details on the company'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 professional services where, as of the end of 2014, the company 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 company 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 company are not included in the table since at the end of 2014 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 2014. Ultimately, the company's decisions and cash expenditures to purchase these various items will be based upon the company's sales of products, which are driven by consumer demand. The company'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. The company has employee benefit obligations consisting of pensions and other postretirement benefits, including medical; pension and postretirement obligations, including any contingent amounts that may be due related to multi-employer pension plans, have been excluded from the table. A discussion of the company's pension and postretirement plans, including funding matters, is included in Notes 16 - Defined Benefit Pension Plans and 17 - Postretirement Healthcare and Life Insurance Plans. The company'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 - Income Taxes regarding income taxes for further details.
4

 
Contingent lease obligations represent leases on property operated by others that only become an obligation of the company 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 June 28, 2014, the company 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 tax impact. See Note 18 - Income Taxes regarding income taxes for further details.

15
EX 99.2

Guarantees

The company 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 company under which the company 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 company is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow the company to challenge the other party's claims. In addition, the company's obligations under these agreements may be limited in terms of time and/or amount, and in some cases the company may have recourse against third parties for certain payments made by the company. 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 company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company's business, financial condition or results of operations. The company believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the company's business, financial condition or results of operations.

The material guarantees for which the maximum potential amount of future payments can be determined, include the company's contingent liability on leases on property operated by others that is described above, and the company's guarantees of certain third-party debt. These debt guarantees require the company 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 company could be required to make in the event that these third parties default on their debt obligations is approximately $24 million. At the present time, the company does not believe it is probable that any of these third parties will default on the amount subject to guarantee.

Non-GAAP Financial Measures

The following is an explanation of the non-GAAP financial measures presented in this Annual Report on Form 10-K. Adjusted net sales excludes from net sales the impact of businesses that have been exited or divested for all periods presented. Adjusted operating income excludes from operating income the impact of significant items recognized during the fiscal period and businesses exited or divested for all periods presented. It also adjusts for the impact of an additional week in those fiscal years that include a 53rd week. 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. Adjusted EPS excludes from diluted EPS for continuing operations the impact of significant items and the 53rd week.

Significant Items Affecting Comparability

The reported results for 2014, 2013 and 2012 reflect amounts recognized for restructuring actions and other significant amounts that impact comparability.

Significant items are income or charges (and related tax impact) that management believes have had 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; various restructuring programs; spin-off related costs; impairment charges; pension partial withdrawal liability charges; benefit plan curtailment gains and losses; plant shutdown costs and related insurance recoveries; deal costs; tax charges on deemed repatriated earnings; tax costs and benefits resulting from the disposition of a business; impact of tax law changes; 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.

The impact of the above items on net income and diluted earnings per share is summarized on the following page.

16
EX 99.2

Impact of Significant Items on Income from Continuing Operations, Net Income and Diluted Earnings Per Share
 
 
Year ended June 28, 2014
 
Year ended June 29, 2013
 
Year ended June 30, 2012
In millions except per share data
 
Pretax
Impact
 
Net Income2
 
Diluted EPS Impact1
 
Pretax
Impact
 
Net Income2
 
Diluted EPS Impact1
 
Pretax
Impact
 
Net Income2
 
Diluted EPS Impact1
Significant items affecting comparability of income from continuing operations and net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total restructuring actions excluding accelerated depreciation
 
$
(58
)
 
$
(36
)
 
$
(0.29
)
 
$
(48
)
 
$
(31
)
 
$
(0.25
)
 
$
(196
)
 
$
(139
)
 
$
(1.16
)
Accelerated depreciation
 
(15
)
 
(9
)
 
(0.07
)
 
(29
)
 
(18
)
 
(0.15
)
 
(46
)
 
(29
)
 
(0.25
)
Other significant items*
 
(8
)
 
33

 
0.27

 
11

 
21

 
0.17

 
(52
)
 
(25
)
 
(0.21
)
Impact of significant items on income (loss) from continuing operations
 
(81
)
 
(12
)
 
(0.09
)
 
(66
)
 
(28
)
 
(0.23
)
 
(294
)
 
(193
)
 
(1.61
)
Impact of significant items on income from discontinued operations**
 
2

 
1

 
0.01

 
66

 
57

 
0.46

 
23

 
467

 
3.90

Impact of using diluted vs. basic shares
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
0.07

Impact of significant items on net income (loss)
 
$
(79
)
 
$
(11
)
 
$
(0.08
)
 
$
—

 
$
29

 
$
0.23

 
$
(271
)
 
$
274

 
$
2.36

Impact on income (loss) from continuing operations before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
$
1

 
 
 
 
 
$
(11
)
 
 
 
 
 
$
(28
)
 
 
 
 
Selling, general and administrative expenses
 
(68
)
 
 
 
 
 
(45
)
 
 
 
 
 
(132
)
 
 
 
 
Exit and business dispositions
 
(14
)
 
 
 
 
 
(9
)
 
 
 
 
 
(81
)
 
 
 
 
Impairment charges
 
—

 
 
 
 
 
(1
)
 
 
 
 
 
(14
)
 
 
 
 
Impact on operating income
 
(81
)
 
 
 
 
 
(66
)
 
 
 
 
 
(255
)
 
 
 
 
Debt extinguishment costs
 
—

 
 
 
 
 
—

 
 
 
 
 
(39
)
 
 
 
 
Total
 
$
(81
)
 
 
 
 
 
$
(66
)
 
 
 
 
 
$
(294
)
 
 
 
 
Diluted earnings per share - continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As reported
 
 
 
 
 
$
1.71

 
 
 
 
 
$
1.49

 
 
 
 
 
$
(0.16
)
Less: Impact of significant items
 
 
 
 
 
(0.09
)
 
 
 
 
 
(0.23
)
 
 
 
 
 
(1.61
)
Adjusted earnings per share
 
 
 
 
 
$
1.80

 
 
 
 
 
$
1.72

 
 
 
 
 
$
1.45

 
 
 
1

 
The earnings per share (EPS) impact of individual amounts in the table above are rounded to the nearest $0.01 and may not add to the total.
2

 
Taxes computed at applicable statutory rates.
*

 
Includes impact from tax settlements; tax valuation allowance adjustments; debt extinguishment costs; deal costs; impairment charges; plant shutdown costs and related insurance recoveries; and benefit plan curtailment/settlement.
**

 
Includes impact from gain on disposition of Non-European Insecticides, North American Foodservice Beverage, North American Refrigerated Dough, Fresh Bakery, and Australian Bakery businesses, impairment charges, and impact of tax-related matters on dispositions.
 
Critical Accounting Estimates

The company's summary of significant accounting policies is discussed in Note 2 - Summary of Significant Accounting Policies. The application of certain of these policies requires significant judgments or a complex estimation process that can affect the results of operations and financial position of the company, as well as the related footnote disclosures. The company bases its estimates on historical experience and other assumptions that it believes are most likely to occur. If actual amounts are ultimately different from previous estimates, the revisions are included in the company's results of operations for the period in which the actual amounts become known, and, if material, are disclosed in the financial statements. The disclosures below also note situations in which it is reasonably likely that future financial results could be impacted by changes in these estimates and assumptions. The term reasonably possible refers to an occurrence that is more than remote but less than probable in the judgment of management.

17
EX 99.2

Sales Recognition and Incentives

Sales are recognized when title and risk of loss pass to the customer. Reserves for uncollectible accounts are based upon historical collection statistics, current customer information, and overall economic conditions. These estimates are reviewed each quarter and adjusted based upon actual experience. The reserves for uncollectible trade receivables are disclosed and trade receivables due from customers that the company considers highly leveraged are presented in Note 15 - Financial Instruments. The company has a significant number of individual accounts receivable and a number of factors outside of the company's control that impact the collectibility of a receivable. It is reasonably likely that actual collection experience will vary from the assumptions and estimates made at the end of each accounting period.

The Notes to the Consolidated Financial Statements specify a variety of sales incentives that the company offers to resellers and consumers of its products. Measuring the cost of these incentives requires, in many cases, estimating future customer utilization and redemption rates. Historical data for similar transactions are used in estimating the most likely cost of current incentive programs. These estimates are reviewed each quarter and adjusted based upon actual experience and other available information. The company has a significant number of trade incentive programs and a number of factors outside of the company's control that impact the ultimate cost of these programs. It is reasonably likely that actual experience will vary from the assumptions and estimates made at the end of each accounting period.

Inventory Valuation

Inventory is carried on the balance sheet at the lower of cost or market. Obsolete, damaged and excess inventories are carried at net realizable value. Historical recovery rates, current market conditions, future marketing, sales plans and spoilage rates are key factors used by the company in assessing the most likely net realizable value of obsolete, damaged and excess inventory. These factors are evaluated at a point in time and there are inherent uncertainties related to determining the recoverability of inventory. It is reasonably likely that market factors and other conditions underlying the valuation of inventory may change in the future.

Impairment of Property

Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in the business climate, the impact of significant customer losses, current period operating or cash flow losses, forecasted continuing losses, or a current expectation that an asset group will be disposed of before the end of its useful life or spun-off. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously recognized impairment loss is not allowed.

There are inherent uncertainties associated with these judgments and estimates and it is reasonably likely that impairment charges can change from period to period. Note 4 - Impairment Charges discloses the impairment charges recognized by the company and the factors which caused these charges.

Trademarks and Other Identifiable Intangible Assets

The primary identifiable intangible assets of the company are trademarks and customer relationships acquired in business combinations and computer software. Identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the company is based upon a number of factors, including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows. As of June 28, 2014, the net book value of trademarks and other identifiable intangible assets was $240 million, of which $196 million is being amortized. The anticipated amortization over the next five years is $75 million.

Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate elements of property. Identifiable intangible assets not subject to amortization are assessed for impairment at least annually, in the fourth quarter, and as triggering events may arise. The impairment test for intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. The fair value of the intangible asset is measured using the royalty savings method. In making this assessment, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time.


18
EX 99.2

There are inherent assumptions and estimates used in developing future cash flows requiring management's judgment in applying these assumptions and estimates to the analysis of intangible asset impairment including projecting revenues, interest rates, the cost of capital, royalty rates and tax rates. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments.

Goodwill

Goodwill is not amortized but is subject to periodic assessments of impairment and is discussed further in Note 3 - Intangible Assets and Goodwill. Goodwill is assessed for impairment at least annually, in the fourth quarter, and as triggering events may arise. The recoverability of goodwill is first evaluated using qualitative factors to determine if recoverability needs to be further assessed using the two-step process. Some of the factors considered were the overall financial performance of the business including current and expected cash flows, revenues and earnings; changes in macroeconomic or industry conditions; changes in cost factors such as raw materials and labor; and changes in management, strategy or customers. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value is less than the carrying amount, then the two-step process of impairment testing is unnecessary. However, if the qualitative assessment discussed above indicates that there may be a possible impairment then the first step of the goodwill impairment test is required to be performed.

The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Reporting units are business components at least one level below the operating segment level for which discrete financial information is available and reviewed by segment management. In evaluating the recoverability of goodwill, it is necessary to estimate the fair value of the reporting units. In making this assessment, management relies on a number of factors to determine anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. The fair value of reporting units is estimated based on a discounted cash flow model. The discounted cash flow model uses management's business plans and projections as the basis for expected future cash flows for the first three years and a residual growth rate thereafter. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for our reporting units. A separate discount rate derived from published sources was utilized for each reporting unit.

There are inherent assumptions and estimates used in developing future cash flows requiring management's judgment in applying these assumptions and estimates to the analysis of goodwill impairment including projecting revenues and profits, interest rates, the cost of capital, tax rates, the company's stock price, and the allocation of shared or corporate items. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates can change in future periods. These changes can result in future impairments.

Self-Insurance Reserves

The company purchases third-party insurance for workers' compensation, automobile and product and general liability claims that exceed a certain level. The company is responsible for the payment of claims under these insured limits, and consulting actuaries are utilized to estimate the obligation associated with incurred losses. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. Consulting actuaries make a significant number of estimates and assumptions in determining the cost to settle these claims and many of the factors used are outside the control of the company. Accordingly, it is reasonably likely that these assumptions and estimates may change and these changes may impact future financial results.

Income Taxes

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse.

19
EX 99.2

The company's effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the company operates. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the company transacts business. We establish reserves for income taxes when, despite the belief that our tax positions are fully supportable, we believe that our position may be challenged and possibly disallowed by various tax authorities. The company's recorded estimates of liability related to income tax positions are based on management's judgments made in consultation with outside tax and legal counsel, where appropriate, and are based upon the expected outcome of proceedings with tax authorities in consideration of applicable tax statutes and related interpretations and precedents. The reserves include penalties and interest on these reserves at the appropriate statutory interest rates and these charges are also included in the company's effective tax rate. The ultimate liability incurred by the company may differ from its estimates based on a number of factors, including the application of relevant legal precedent, the company's success in supporting its filing positions with tax authorities, and changes to, or further interpretations of, law.

The company's tax returns are routinely audited by federal and state tax authorities. Reserves for uncertain tax positions represent a provision for the company's best estimate of taxes expected to be paid based upon all available evidence recognizing that over time, as more information is known, these reserves may require adjustment. Reserves are adjusted when (a) new information indicates a different estimated reserve is appropriate; (b) the company finalizes an examination with a tax authority, eliminating uncertainty regarding tax positions taken; or (c) a tax authority does not examine a tax year within a given statute of limitations, also eliminating the uncertainty with regard to tax positions for a specific tax period. The actual amounts settled with respect to these examinations are the result of discussions and settlement negotiations involving the interpretation of complex income tax laws in the context of our fact patterns. Any adjustment to a tax reserve impacts the company's tax expense in the period in which the adjustment is made.

The company's tax rate from period to period can be affected by many factors. The most significant of these factors are changes in tax legislation, the tax characteristics of the company's income, the timing and recognition of goodwill impairments, acquisitions and dispositions, adjustments to the company's reserves related to uncertain tax positions, and changes in valuation allowances. It is reasonably possible that the following items can have a material impact on income tax expense, net income and liquidity in future periods:

•
Tax legislation in the jurisdictions in which the company does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the company's tax assets and obligations will need to be measured and recognized in the financial statements.

•
The company has ongoing U.S. and state tax audits for various tax periods. The U.S. federal tax years from 2011 onward remain subject to audit. With few exceptions, the company is no longer subject to state and local income tax examinations by tax authorities for years before 2007. The tax reserves for uncertain tax positions recorded in the financial statements reflect the expected finalization of examinations. The company regularly reviews its tax positions based on the individual facts, circumstances, and technical merits of each tax position. If the company determines it is more likely than not that it is entitled to the economic benefits associated with a tax position, it then considers the amounts and probabilities of the outcomes that could be realized upon ultimate settlement with a taxing authority, taking into consideration all available facts, circumstances, and information. The company believes that it has sufficient cash resources to fund the settlement of these audits.

As a result of audit resolutions, expirations of statutes of limitations, and changes in estimate on tax contingencies in 2014, 2013 and 2012, the company recognized nil, a benefit of $5 million, and a benefit of $1 million, respectively. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. The company estimates reserves for uncertain tax positions, but is not able to control or predict the extent to which tax authorities will examine specific periods, the outcome of examinations, or the time period in which examinations will be conducted and finalized. Favorable or unfavorable past audit experience in any particular tax jurisdiction is not indicative of the outcome of future examinations by those tax authorities. Based on the nature of uncertain tax positions and the examination process, management is not able to predict the potential outcome with respect to tax periods that have not yet been examined or the impact of any potential reserve adjustments on the company's tax rate or net earnings trends. As of the end of 2014, the company believes that it is reasonably possible that the liability for unrecognized tax benefits will decrease by up to $27 million over the next 12 months.

20
EX 99.2

•
Facts and circumstances may change that cause the company to revise the conclusions on its ability to realize certain net operating losses and other deferred tax attributes. The company regularly reviews whether it will realize its deferred tax assets. Its review consists of determining whether sufficient taxable income of the appropriate character exists within the carryback and carryforward period available under respective tax statutes. The company considers all available evidence of recoverability when evaluating its deferred tax assets; however, the company's most sensitive and critical factor in determining recoverability of deferred tax assets is the existence of historical and projected profitability in a particular jurisdiction. As a result, changes in actual and projected results of the company's various legal entities can create variability, as well as changes in the level of the company's gross deferred tax assets, which could result in increases or decreases in the company's deferred tax asset valuation allowance.

The company cannot predict with reasonable certainty or likelihood future results considering the complexity and sensitivity of the assumptions above.

Note 18 - Income Taxes sets out the factors which caused the company's effective tax rate to vary from the statutory rate and certain of these factors result from finalization of tax audits and review and changes in estimates and assumptions regarding tax obligations and benefits.

Stock Based Compensation

The company issued, in fiscal 2014, restricted stock units ("RSUs") and, in fiscal 2013, stock options and RSUs to employees in exchange for employee services. See Note 9 - Stock-Based Compensation regarding stock-based compensation for further information on these awards. The cost of RSUs and stock option awards is equal to the fair value of the award at the date of grant, and compensation expense is recognized for those awards earned over the service period. A certain number of the RSUs vest based upon the employee achieving certain defined service and performance measures, either internally or externally measured. During the service period, management estimates the number of awards that will meet the defined performance measures. At the time of grant, if the measures are based upon external criteria, the Monte Carlo model is used to determine the fair value of these awards at the date of grant. Management estimates the volatility of the company's stock and the initial total shareholder return to determine the fair value of the award. If the measures are based upon internal criteria, the cost of the RSUs is equal to the fair value at the date of grant. With regard to stock options, at the date of grant, the company determines the fair value of the award using the Black-Scholes option pricing formula. Management estimates the period of time the employee will hold the option prior to exercise and the expected volatility of the company's stock, each of which impacts the fair value of the stock options. The company believes that changes in the estimates and assumptions associated with prior non-performance-based grants and stock option grants are not reasonably likely to have a material impact on future operating results. However, changes in estimates and assumptions related to previously issued performance-based RSUs may have a material impact on future equity.

Defined Benefit Pension Plans

See Note 16 - Defined Benefit Pension Plans, for information regarding plan obligations, plan assets and the measurements of these amounts, as well as the net periodic benefit cost and the reasons for changes in this cost. 

Pension costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. The assumptions used in developing the required estimates include the following key factors: discount rates, expected return on plan assets, retirement rates and mortality.

In determining the discount rate, the company utilizes a yield curve based on high-quality fixed-income investments that have a AA bond rating to discount the expected future benefit payments to plan participants. In determining the long-term rate of return on plan assets, the company assumes that the historical long-term compound growth rate of equity and fixed-income securities will predict the future returns of similar investments in the plan portfolio. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality. Results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic benefit cost in future periods.

Net periodic benefit costs for the company's defined benefit pension plans related to continuing operations were $(2) million in 2014, nil in 2013, and $1 million in 2012, and the projected benefit obligation was $1.685 billion at the end of 2014 and $1.562 billion at the end of 2013. The year-over-year change versus 2014 is primarily due to the recognition of $6 million of non-recurring settlement losses in 2013 which related to a Canadian plan, partially offset by increased interest cost and lower return on plan assets. The company currently expects its net periodic benefit cost for 2015 to be approximately $13 million of income.

21
EX 99.2

The following information illustrates the sensitivity of the net periodic benefit cost and projected benefit obligation to a change in the discount rate and return on plan assets. Amounts relating to foreign plans are translated at the spot rate at the close of 2014. The sensitivities reflect the impact of changing one assumption at a time and are specific to base conditions at the end of 2014. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and that the effects of changes in assumptions are not necessarily linear.
 
 
 
 
 
 
Increase/(Decrease) in
Assumption
 
Change
 
2014 Net Periodic Benefit Cost
 
2013 Projected Benefit Obligation
Discount rate
 
1
%
 
increase
 
$
—

 
$
(209
)
 
 
1
%
 
decrease
 
6

 
238

Asset return
 
1
%
 
increase
 
(15
)
 
—

 
 
1
%
 
decrease
 
15

 
—


The company's defined benefit pension plans had a net unamortized actuarial loss of $237 million in 2014 and $228 million in 2013. The unamortized actuarial loss is reported in the Accumulated other comprehensive (loss) line of the Consolidated Balance Sheet. The increase in the unamortized net actuarial loss in 2014 was primarily due to a net actuarial loss in 2014 resulting from an increase in plan liabilities due to the decrease in the weighted average discount rate partially offset by the increase in actual asset performances.

As indicated above, changes in the bond yields, expected future returns on assets, and other assumptions can have a material impact upon the funded status and the net periodic benefit cost of defined benefit pension plans. It is reasonably likely that changes in these external factors will result in changes to the assumptions used by the company to measure plan obligations and net periodic benefit cost in future periods.

Issued but not yet Effective Accounting Standards

Following is a discussion of recently issued accounting standards that the company will be required to adopt in a future period.

Presentation of Unrecognized Tax Benefits - In July 2013, the FASB issued an accounting standard to clarify the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists to address issues with diversity in practice. The standard states that, with limited exceptions, the unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset. While the standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, the company has historically presented such information in accordance with the newly issued guidance. As such, there will be no impact to the financial statements as a result of the issuance of this amendment.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity - In April 2014, the FASB issued an accounting standard update that changes the requirements for reporting discontinued operations. The standard states that only those disposals of components that represent a strategic shift that has or will have a major effect on an entity's operations and financial results can be reported as discontinued operations in the financial statements. The amendment requires that the assets and liabilities of a disposal group that includes a discontinued operation to be stated separately in the statement of financial position and also requires additional disclosures. The amendment is prospectively effective for the company beginning in the first quarter of fiscal 2016. This amendment is not expected to have a significant impact on our consolidated results of operations, financial position or cash flows.

Revenue from Contracts with Customers - In May 2014, the FASB issued an accounting standard update that replaces substantially all current revenue recognition accounting guidance and requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The amendment is effective for the company beginning in the first quarter of fiscal 2017 and early application is not permitted. The company is currently assessing the impact of the future adoption of this standard on our financial statements.

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period - In June 2014, the FASB issued an accounting standard update that clarifies the existing accounting guidance for entities that issue share-based payment awards that require a specific performance target be achieved for employees to become eligible to vest in the awards, which may occur subsequent to a required service period. Current accounting guidance does not explicitly address how to account for these types of awards. The new standard provides explicit guidance and clarifies that these types of performance targets should be treated as performance conditions. This amendment is effective for the company beginning in the first quarter of fiscal 2017. This amendment is not expected to have a significant impact on our consolidated results of operations, financial position or cash flows.

22
EX 99.2

Forward-Looking Information

This Annual Report on Form 10-K contains forward-looking statements regarding Hillshire Brands' business prospects and future financial results and metrics preceded by terms such as "will," "anticipates," "intends," "expects," "likely" or "believes." 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 this Annual Report on Form 10-K, as well as factors relating to:

•
The risk that the acquisition of Hillshire Brands and any related tender offer and merger may not be consummated, or may not be consummated in a timely manner, or the time necessary to obtain required regulatory clearance;

•
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;

•
Hillshire Brands' spin-off of its International Coffee and Tea business in June 2012, including potential tax liabilities and other indemnification obligations; 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 business.

In addition, Hillshire Brands' results may also be affected by general factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, taxes and laws and regulations in markets where the company competes. Hillshire Brands undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.




23
99.3 Pro Forma TSN HSH
EX 99.3

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On July 1, 2014, Tyson Foods, Inc., a Delaware corporation ("Tyson"), and HMB Holdings, Inc. ("HMB Holdings"), a Maryland corporation and wholly-owned subsidiary of Tyson, entered into a definitive agreement and plan of merger (the “Merger Agreement”) with The Hillshire Brands Company (“Hillshire”), a Maryland corporation. Under the Merger Agreement, Tyson and HMB Holdings agreed to acquire Hillshire and its subsidiaries for a price of $63.00 per share in cash. The all-cash transaction is valued at approximately $8.9 billion, including the assumption of Hillshire's net debt and breakage fees. The Merger Agreement contains representations, warranties and covenants of the parties customary for transactions of this type. The transaction closed on August 28, 2014.
The following unaudited pro forma condensed consolidated financial information is based on the historical consolidated financial information of Tyson and Hillshire and has been prepared to reflect the Hillshire acquisition and related financing transactions.
The unaudited pro forma condensed consolidated financial information is provided for informational purposes only. The unaudited pro forma condensed consolidated statements of income are not necessarily indicative of operating results that would have been achieved had the acquisition been completed as of September 30, 2012 (first day of the most recently completed fiscal year) and does not intend to project the future financial results of Tyson after the Hillshire acquisition. The unaudited pro forma condensed consolidated balance sheet does not purport to reflect what Tyson’s financial condition would have been had the transactions closed on June 28, 2014 (latest interim balance sheet date) or for any future or historical period. The unaudited pro forma condensed consolidated statements of income and balance sheet are based on certain assumptions, described in the accompanying notes, which management believes are reasonable and do not reflect the cost of any integration activities or the benefits from the Hillshire acquisition and synergies that may be derived from any integration activities.
Tyson’s fiscal year ends in September, while Hillshire’s fiscal year ends in June. The unaudited condensed consolidated balance sheet combines the unaudited condensed consolidated balance sheet of Tyson as of June 28, 2014, and the audited consolidated balance sheet of Hillshire as of June 28, 2014. The full-year unaudited pro forma condensed consolidated statement of income for the year ended September 28, 2013, combines the audited consolidated statement of income for Tyson for the fiscal year ended September 28, 2013 and the audited consolidated statement of income of Hillshire for the fiscal year ended June 29, 2013. The unaudited pro forma condensed consolidated statement of income for the nine months ended June 28, 2014 combines the unaudited condensed consolidated statement of income of Tyson for the nine months ended June 28, 2014 and Hillshire’s unaudited condensed consolidated statement of income for the nine months ended June 28, 2014. The unaudited condensed consolidated statement of income of Hillshire for the nine months ended June 28, 2014 was determined by subtracting Hillshire’s unaudited condensed consolidated statement of income for the three months ended September 28, 2013 (its first quarter of fiscal 2014) from the audited consolidated statement of income for the year ended June 28, 2014. Sales of $984 million and net income of $29 million related to Hillshire's first fiscal quarter ended September 28, 2013, are not included in the pro forma information.
The unaudited pro forma condensed consolidated financial information should be read in conjunction with the following information:
•
notes to the unaudited pro forma condensed consolidated financial information;
•
Tyson’s Current Report on Form 8-K filed on July 2, 2014, including exhibits thereto, which describes the Hillshire acquisition;
•
audited consolidated financial statements of Tyson as of and for the year ended September 28, 2013, which are included in Tyson’s Current Report on Form 8-K filed with the SEC on July 28, 2014;
•
audited consolidated financial statements of Hillshire as of June 28, 2014 and June 29, 2013 and for each of the three years in the period ended June 28, 2014; and
•
unaudited condensed consolidated financial statements of Tyson as of and for the nine months ended June 28, 2014, which are included in Tyson’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2014, as filed with the SEC on August 7, 2014.



1
EX 99.3


Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 28, 2014
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tyson
 
Hillshire
 
Pro Forma
 
 
 
Historical
 
Historical
 
Adjustments
 
Pro Forma
Assets
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
587

 
$
236

 
$
(510
)
(1) 
$
313

Accounts receivable, net
1,624

 
232

 
—

 
1,856

Inventories
3,061

 
330

 
45

(2) 
3,436

Other current assets
241

 
285

 
15

(3) 
541

Total Current Assets
5,513

 
1,083

 
(450
)
 
6,146

Net Property, Plant and Equipment
3,941

 
839

 
444

(4) 
5,224

Goodwill
1,925

 
452

 
4,190

(5) 
6,567

Intangible Assets
151

 
240

 
4,951

(6) 
5,342

Other Assets
525

 
94

 
(1
)
(7) 
618

Total Assets
$
12,055

 
$
2,708

 
$
9,134

 
$
23,897

 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Current debt
$
41

 
$
105

 
$
240

(8) 
$
386

Accounts payable
1,496

 
365

 
—

 
1,861

Other current liabilities
1,075

 
339

 
(91
)
(9) 
1,323

Total Current Liabilities
2,612

 
809

 
149

 
3,570

Long-Term Debt
1,784

 
839

 
5,536

(8) 
8,159

Deferred Income Taxes
404

 
—

 
2,009

(10) 
2,413

Other Liabilities
545

 
423

 
—

 
968

Commitments and Contingencies
 
 
 
 
 
 
 
Shareholders' Equity
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Class A
32

 
1

 
1

(11) 
34

Class B
7

 
—

 
—

 
7

Capital in excess of par value
2,122

 
228

 
1,898

(11) 
4,248

Retained earnings
5,640

 
607

 
(658
)
(11) 
5,589

Accumulated other comprehensive loss
(96
)
 
(149
)
 
149

(11) 
(96
)
Unearned stock of ESOP
—

 
(50
)
 
50

(11) 
—

Treasury stock, at cost
(1,011
)
 
—

 
—

 
(1,011
)
Total Registrant Shareholders' Equity
6,694

 
637

 
1,440

 
8,771

Noncontrolling Interests
16

 
—

 
—

 
16

Total Shareholders' Equity
6,710

 
637

 
1,440

 
8,787

Total Liabilities and Shareholders' Equity
$
12,055

 
$
2,708

 
$
9,134

 
$
23,897


2
EX 99.3


Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Twelve Months Ended
 
 
 
 
 
 
 
(in millions, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tyson
 
Hillshire
 
 
 
 
 
Historical
 
Historical
 
Pro Forma
 
 
 
September 28, 2013
 
June 29, 2013
 
Adjustments
 
Pro Forma
 
 
 
 
 
 
 
 
Sales
$
34,374

 
$
3,920

 
$
(63
)
(12) 
$
38,231

Cost of Sales
32,016

 
2,758

 
166

(13) 
34,940

Gross Profit
2,358

 
1,162

 
(229
)
 
3,291

Selling, General and Administrative
983

 
865

 
(200
)
(14) 
1,648

Operating Income
1,375

 
297

 
(29
)
 
1,643

Other (Income) Expense
 
 
 
 
 
 
 
   Interest Income
(7
)
 
(7
)
 
—

 
(14
)
   Interest Expense
145

 
48

 
171

(15) 
364

   Other, net
(20
)
 
—

 
—

 
(20
)
Total Other (Income) Expense
118

 
41

 
171

 
330

Income from Continuing Operations before Income Taxes
1,257

 
256

 
(200
)
 
1,313

Income Tax Expense
409

 
72

 
(76
)
(10) 
405

Income from Continuing Operations
848

 
184

 
(124
)
 
908

Less: Net Income (Loss) Attributable to Noncontrolling Interests
—

 
—

 
—

 
—

Net Income from Continuing Operations
Attributable to Registrant
$
848

 
$
184

 
$
(124
)
 
$
908

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
   Class A Basic
282

 
 
 
56

(17) 
338

   Class B Basic
70

 
 
 
 
 
70

   Diluted
367

 
 
 
63

(17) 
430

 
 
 
 
 
 
 
 
Net Income per Share from Continuing Operations
 
 
 
 
 
 
 
   Class A Basic
$
2.46

 
 
 
 
 
$
2.26

   Class B Basic
$
2.22

 
 
 
 
 
$
2.08

   Diluted
$
2.31

 
 
 
 
 
$
2.11



3
EX 99.3

Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Nine Months Ended
 
 
 
 
 
 
 
(in millions, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tyson
 
Hillshire
 
 
 
 
 
Historical
 
Historical
 
Pro Forma
 
 
 
June 28, 2014
 
June 28, 2014
 
Adjustments
 
Pro Forma
 
 
 
 
 
 
 
 
Sales
$
27,475

 
$
3,101

 
$
(60
)
(12) 
$
30,516

Cost of Sales
25,502

 
2,201

 
117

(13) 
27,820

Gross Profit
1,973

 
900

 
(177
)
 
2,696

Selling, General and Administrative
849

 
649

 
(163
)
(14) 
1,335

Operating Income
1,124

 
251

 
(14
)
 
1,361

Other (Income) Expense
 
 
 
 
 
 
 
   Interest Income
(6
)
 
(7
)
 
—

 
(13
)
   Interest Expense
78

 
35

 
124

(15) 
237

   Other, net
18

 
—

 
(22
)
(16) 
(4
)
Total Other (Income) Expense
90

 
28

 
102

 
220

Income from Continuing Operations before Income Taxes
1,034

 
223

 
(116
)
 
1,141

Income Tax Expense
314

 
40

 
(44
)
(10) 
310

Income from Continuing Operations
720

 
183

 
(72
)
 
831

Less: Net Income (Loss) Attributable to Noncontrolling Interests
(7
)
 
—

 
—

 
(7
)
Net Income from Continuing Operations
Attributable to Registrant
$
727

 
$
183

 
$
(72
)
 
$
838

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
   Class A Basic
275

 
 
 
56

(17) 
331

   Class B Basic
70

 
 
 
 
 
70

   Diluted
355

 
 
 
63

(17) 
418

 
 
 
 
 
 
 
 
Net Income per Share from Continuing Operations
 
 
 
 
 
 
 
   Class A Basic
$
2.15

 
 
 
 
 
$
2.12

   Class B Basic
$
1.94

 
 
 
 
 
$
1.95

   Diluted
$
2.05

 
 
 
 
 
$
2.00



4
EX 99.3

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(dollars in millions, except per share data)
BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma condensed consolidated financial information presented is based on the historical audited and unaudited consolidated financial information of Tyson and the audited and unaudited consolidated financial information of Hillshire. The unaudited pro forma condensed consolidated balance sheet as of June 28, 2014 assumes the Hillshire acquisition was completed on that date. The unaudited pro forma condensed consolidated statements of income for the year ended September 28, 2013 and the nine months ended June 28, 2014, assume the Hillshire acquisition was completed on September 30, 2012.
Pro forma adjustments reflected in the unaudited pro forma condensed consolidated balance sheet are based on items that are directly attributable to the Hillshire acquisition and related financing that are factually supportable. Pro forma adjustments reflected in the unaudited pro forma condensed consolidated statements of income are based on items directly attributable to the acquisition and related financing and are factually supportable and expected to have a continuing impact on Tyson.
The acquisition will be accounted for as a business combination. Accordingly, the assets acquired and liabilities assumed are recorded based on their estimated fair values. The unaudited pro forma condensed consolidated statements of income do not reflect the cost of any integration activities or benefits from the acquisitions and synergies that may be derived from any integration activities, both of which may have a material effect on Tyson’s consolidated statements of income in periods following the completion of the Hillshire acquisition.
Certain amounts in Hillshire’s historical financial information have been reclassified to conform to Tyson’s presentation.
HILLSHIRE ACQUISITION TRANSACTION SUMMARY
Tyson paid a cash purchase price equal to $63.00 per share, or $8,081, at closing to consummate the Hillshire acquisition. In addition, Tyson paid $163 in cash for breakage costs incurred by Hillshire related to a previously proposed acquisition, and assumed Hillshire’s net debt which totaled $621 as of June 28, 2014. Pro forma adjustments related to the financing for the Hillshire acquisition have been made in the unaudited pro forma condensed consolidated balance sheet as of June 28, 2014 as if the Hillshire acquisition had closed on that date and in the unaudited pro forma condensed consolidated statements of income for the year ended September 28, 2013 and the nine months ended June 28, 2014 as if the financings had been completed on September 30, 2012.
Financing
The Hillshire Acquisition financing consisted of:
a)
$1,202 aggregate principal amount of 3-year floating rate term loans with an amortizing base equal to 2.50% per quarter and with an interest rate of 1.53%;
b)
$546 aggregate principal amount of 5-year floating rate term loans with an amortizing base equal to 2.50% per quarter and with an interest rate of 1.65%;
c)
$552 aggregate principal amount of 5-year floating rate term loans, with an interest rate of 1.65%;
d)
$3,250 aggregate principal amount of senior notes, or $3,243 net proceeds after the original issue discounts of $7 million, consisting of $1,000 due August 2019 (2.65% interest rate), $1,250 due August 2024 (3.95% interest rate), $500 million due 2034 (4.88% interest rate), and $500 due August 2044 (5.15% interest rate);
e)
the sale of 23.8 million shares of common stock at a price of $37.80 per share resulting in proceeds of $900 before deducting discounts and commissions, and estimated offering expenses; and
f)
the sale of $1,500 of 4.75% tangible equity units, comprised of $1,295 of prepaid stock purchase contracts and $205 of senior amortizing notes. The prepaid stock purchase contracts have a “reference price” equal to $37.80 per share, such that the maximum number of shares issuable on the July 15, 2017 settlement date (which would be subject to postponement in certain limited circumstances) would be approximately 39.7 million. The senior amortizing notes have a stated interest rate of 1.5%.
At this time, Tyson has not completed detailed valuation analyses to determine the fair values of Hillshire’s assets and liabilities. Accordingly, the unaudited pro forma condensed consolidated financial information includes a preliminary fair value determination based on assumptions and estimates that, while considered reasonable under the circumstances, are subject to changes, which may be material. In addition, Tyson has not yet performed the due diligence necessary to identify all of the adjustments required to conform Hillshire’s accounting policies to Tyson’s or to identify other items that could significantly impact the fair value determination or the assumptions and adjustments made in the preparation of this unaudited pro forma condensed consolidated financial information. Upon completion of detailed valuation analyses, there may be additional

5
EX 99.3

increases or decreases to the recorded book values of the acquired assets and liabilities, including but not limited to inventories, brands, trademarks, customer relationships and other intangible assets, property, plant and equipment, and debt that could give rise to future amounts of depreciation and amortization expense and changes in related deferred taxes that are not reflected in the information contained in this unaudited pro forma condensed consolidated information. Accordingly, once the necessary valuation analyses have been performed and the final fair value determination has been completed, actual results may differ materially from the information presented in this unaudited pro forma condensed consolidated financial information. Additionally, the unaudited pro forma condensed consolidated statements of income do not reflect the cost of any integration activities or benefits from the Hillshire acquisition and synergies that may be derived from any integration activities, both of which may have a material effect on Tyson’s consolidated results of operations in periods following the completion of the Hillshire acquisition.
Below is a summary of the preliminary reconciliation of purchase consideration to the book value of net assets acquired and certain valuation adjustments related to the Hillshire acquisition:
Total consideration (includes closing consideration, $163 breakage costs incurred by Hillshire related to a previously proposed acquisition and $32 change in control related costs)
 
$
8,276

 
 
 
Historical net book value of Hillshire
 
$
637

Preliminary valuation adjustment to inventories
 
45

Preliminary valuation adjustment for property, plant and equipment
 
444

Preliminary valuation adjustment to identifiable intangible assets
 
4,951

Preliminary valuation adjustment to debt
 
(27
)
Deferred and current tax impact of preliminary valuation adjustments
 
(1,961
)
Write-off of deferred financing fees of Hillshire's existing debt
 
(3
)
Residual adjustment to goodwill created by the business combination
 
4,190

Total acquisition cost
 
$
8,276


The following table is an estimate of the total sources and uses of cash as a result of the Hillshire acquisition and related financing transactions.
Sources of cash
 
 
Cash on hand
 
$
559

Term loans - 3 year (amortizing)
 
1,202

Term loans - 5 year (amortizing)
 
546

Term loans - 5 year
 
552

Senior notes - 5, 10, 20, and 30 year (net of original issue discount)
 
3,243

Common Equity
 
900

Tangible Equity Units (a)
 
1,500

Total sources of cash
 
$
8,502

 
 
 
Uses of cash
 
 
Fund Hillshire acquisition
 
$
8,081

Breakage cost
 
163

Change in control cost
 
32

Other estimated transaction fees and expenses
 
226

Total uses of cash
 
$
8,502

a)
The tangible equity units consists of $1,295 of prepaid stock purchase contracts accounted for as equity and $205 of senior amortizing notes accounted for as debt.



6
EX 99.3

HILLSHIRE ACQUISITION PRO FORMA ADJUSTMENTS
1)
After consideration of the expected financing transactions and related fees, Tyson estimates it will use $559 of cash on hand to consummate the Hillshire Acquisition. Of this, $49 was already spent as of June 28, 2014.
2)
Reflects the adjustment of Hillshire’s inventory to its preliminary estimated fair value.
3)
Reflects the estimated net tax benefit effect totaling $133 for certain transaction related fees and costs and a reduction of $85 for a reclass of current deferred tax liability to current deferred tax asset as described in note (9). Additionally, includes an adjustment of $13 for net tax benefits associated with transaction fees and costs recognized as of June 28, 2014. Furthermore, includes an adjustment of $20 for deferred bridge costs paid but not yet expensed as of June 28, 2014.
4)
Reflects the adjustment of Hillshire’s property, plant and equipment to its preliminary estimated fair value.
5)
Represents the incremental goodwill resulting from purchase accounting after estimating the fair value of the identifiable assets acquired and liabilities assumed. See “Hillshire Acquisition Transaction Summary” above.
6)
For purposes of the preliminary fair value determination discussed in “Hillshire Acquisition Transaction Summary” above, Tyson estimated the fair value of Hillshire’s identifiable intangible assets at $5,191 including approximately $4,652 of brand and trademark related intangibles and approximately $539 of customer relationship intangibles representing an increase to the historical net book value of Hillshire’s intangible assets of $4,951. For purposes of determining incremental pro forma amortization expense to be recorded in the unaudited pro forma condensed consolidated statements of income, $4,363 of the brand names were assumed to have an indefinite life, $289 of the brand names were assumed to have a 20-year life to be amortized on a straight-line basis, and the customer relationship intangible assets were assumed to have a weighted average life of approximately 16 years to be amortized on a declining basis based on economic benefit derived over that period.
7)
Represents the net impact of reversing $3 of deferred financing fees recorded on Hillshire's historical balance sheet for debt instruments and recording $49 of estimated issuance costs to be incurred on the debt to be issued to finance the transaction.  Additionally, $47 of Hillshire's non-current deferred tax asset was reclassified to non-current deferred tax liability.
8)
Current debt adjustment represents amounts expected to be due in the first year on the amortizing term loans and senior amortizing note component of the tangible equity units. Long-term debt reflects a $28 adjustment of Hillshire’s long-term debt to its preliminary estimated fair value and the incremental new debt Tyson incurred to finance the Hillshire acquisition less the current portion. The balance of new Tyson debt consists of the following components: term loans of $2,300 ($175 shown as current debt), senior notes of $3,243 and senior amortizing notes component of tangible equity units of $205 ($65 shown as current debt).
9)
Reflects a reclassification of Tyson's net current deferred tax liability at June 28, 2014 to net against Hillshire's net current deferred tax asset as described in note (3). Additionally, includes $6 of accrued transaction related expenses as of June 28, 2014
10)
Income tax expense and deferred income tax impacts in the pro forma condensed consolidated balance sheet and condensed consolidated statements of income as a result of purchase accounting have been estimated at Tyson’s incremental statutory tax rate of 38%. Additionally, Deferred Income Taxes includes a reduction of $47 for a reclass of current deferred tax liability as described in note (7).
11)
Reflects adjustments to remove Hillshire’s historical equity accounts to record the acquisition (the total of which is equal to its net book value). Additionally, includes adjustments to reduce retained earnings to reflect the after tax effect of certain acquisition related expenses as described in notes contained herein, to reduce capital in excess of par value for fees related to equity issuance, and to increase common stock and capital in excess of par value for the net proceeds from the issuance of common stock and the prepaid stock purchase contract component of the tangible equity units. Furthermore, includes an adjustment of $21, net of taxes, for transaction fees and costs recognized as of June 28, 2014.
12)
Sales and Cost of Sales were adjusted to eliminate sales of $63 for the year ended September 28, 2013 and $60 for the nine months ended June 28, 2014 between Tyson and Hillshire.
13)
Reflects the elimination of Cost of Sales for intercompany sales as described in note (12) and an adjustment to reclass shipping and handling costs to Cost of Sales from Selling, General and Administrative expense of $249 for the year ended September 28, 2013 and $188 for the nine months ended June 28, 2014. The reclass of shipping and handling costs is to conform Hillshire's policy election to record shipping and handling costs

7
EX 99.3

in Selling, General and Administrative expense to Tyson's policy to record such costs in Cost of Sales. Additionally, reflects a decrease in depreciation expense of $20 for the year ended September 28, 2013 and $11 for the nine months ended June 28, 2014 driven by an extension of the historical useful lives of Hillshire's property, plant and equipment, partially offset by the impact of fair value adjustments to their respective book values.
14)
Reflects adjustments to reclass shipping and handling costs from Selling, General and Administrative expense to Cost of Sales as described in note (13) and amortization of intangible assets as described in note (6) of $51 for the year ended September 28, 2013 and $38 for the nine months ended June 28, 2014. Additionally, reflects a decrease of $2 for the year ended September 28, 2013 and $2 for the nine months ended June 28, 2014 for the changes in depreciation expense described in note (13) that are charged to Selling, General and Administrative expense. Additionally, includes adjustment of $11 to reverse transaction expenses recognized as of June 28, 2014.
15)
As described in notes herein, Tyson incurred new debt to partially finance the Hillshire acquisition. The pro forma adjustments for the year ended September 28, 2013 and the nine months ended June 28, 2014, reflect incremental interest expense, including amortization of deferred financing fees using the effective interest method, for new debt incurred by Tyson.
16)
Reflects adjustment to reverse $22 of acquisition related bridge costs expensed as of June 28, 2014.
17)
As described in the notes herein, Tyson issued shares of common stock and tangible equity units to partially finance the Hillshire acquisition. The issuance of common stock results in a 23.8 million share increase to pro forma basic and diluted shares for both the year ended September 28, 2013, and the nine months ended June 28, 2014. The issuance of tangible equity units results in a 31.7 million share increase to pro forma basic shares outstanding (based on the minimum stock purchase contract settlement rate) and a 39.7 million share increase to pro forma diluted shares outstanding (based on the maximum stock purchase contract settlement rate), for both the year ended September 28, 2013, and the nine months ended June 28, 2014.

8