Reported operating income from continuing operations for the first half of fiscal 2011 was $376 million, compared to $581 million in the year-ago period, a decrease of $205 million, or 35 percent. The decline was primarily the result of no longer receiving contingent sale proceeds from the sale of its tobacco business ($133 million in the year-ago period), as well as higher commodity costs net of pricing (-$96 million), increased investment in MAP and unfavorable exchange rates, partially offset by savings from corporate and continuous improvement net of inflation, a commodity mark-to-market benefit and mix improvement net of volume declines. Adjusted operating income from continuing operations was $ 428 million, compared to $483 million in the first half of fiscal 2010, a decrease of $55 million, or 11 percent.
Sara Lee reported a gain on the sale of household and body care discontinued operations of $0.84 in the second quarter and $0.97 in the first half. As a result of entering into an agreement to sell the North American fresh bakery operations, Sara Lee is required to record a deferred tax asset and related tax benefit associated with the excess tax over book basis. This tax benefit is $0.35 in the second quarter. Upon the close of the sale of the North American fresh bakery business, this benefit will reverse.
Net cash from operating activities was $233 million for the first half of fiscal 2011, compared to $472 million in the prior-year period. The $239 million decline is mainly due to a $112 million increase in inventory balances primarily due to higher commodity input costs, a $55 million decline in adjusted operating income from continuing operations and a $29 million decline in operating cash flow from discontinued operations.
MAP spending increased 2 percent in the second quarter of fiscal 2011. In the first half MAP increased 10 percent, driven by greater investment behind the core growth brands, Jimmy Dean and Hillshire Farm, in North American retail and the launch of innovative new products, such as L'Or EspressO, in international beverage.
In the second quarter, commodity costs (excluding commodity mark-to-market) increased by approximately $127 million, partially offset by approximately $73 million in higher prices, resulting in a net unfavorable commodity cost impact of approximately $54 million. In the first half of fiscal 2011, commodity costs increased by approximately $219 million, partially offset by approximately $123 million in price increases, resulting in a net unfavorable commodity cost impact of $96 million. Included in the above commodity cost increases were currency mark-to-market losses, related to the purchase of commodities in the international beverage segment, of $2 million in the quarter and $33 million year-to-date.
- Net interest expense was $21 million in the quarter, compared to $29 million in the year-ago period. In the second quarter the company incurred $25 million of debt extinguishment costs related to the early redemption of debt. This is the final extinguishment charge bringing the full year total to $55 million. The lower interest rate on the new bonds will reduce annual interest expense by approximately $20 million.
General corporate expenses declined $18 million to $45 million in the second quarter compared to $63 million in the year-ago period, due to a reduction in information technology costs and lower employee benefit costs.
Mark-to-market adjustments from unrealized commodity derivatives amounted to a loss of $2 million in the quarter compared to a gain of $2 million in the second quarter last year. The effective tax rate for continuing operations in the second quarter, on an as reported basis, was 32.7 percent, compared to (24.4) percent in the year-ago quarter. Sara Lee expects the tax rate for continuing operations, excluding significant items, to be between 34 percent and 35 percent for fiscal 2011. For further detail on the tax rate, see pages 18 and 19 of this release.
·Project Accelerate is a company-wide cost savings and productivity initiative focused on outsourcing actions,\ supply chain efficiencies and organizational simplification. The company has revised Project Accelerate benefits and costs to exclude the North American fresh bakery business. Ongoing cumulative benefits realized from the beginning of fiscal 2009 to date are $194 million, of which approximately $50 million are incremental in the first half of fiscal 2011. At the end of fiscal 2011, Sara Lee expects cumulative ongoing benefits of $220 to $240 million. By the end of fiscal 2012, the company expects annualized benefits in continuing operations of $300 to $350 million. The company expects Project Accelerate costs in fiscal 2011 to be approximately $30 to $40 million and minimal charges in fiscal 2012. In total, project charges will amount to approximately $280 million from 2009 to 2012.