SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended December 30, 1997
Commission file number 1-7554
THE EARTHGRAINS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-3201045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8400 Maryland Avenue, St. Louis, Missouri 63105
(Address of Principal Executive Offices) (Zip)
314-259-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$.01 Par Value Common Stock - 21,512,947 shares as of January 27, 1998
<PAGE>
THE EARTHGRAINS COMPANY
Index
Page No.
Part I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Earnings 3
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. OTHER INFORMATION
Other Information 9
Exhibits and Reports on Form 8-K 9
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
<CAPTION>
December 30, March 25,
1997 1997
------------ ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 46.6 $ 43.1
Accounts receivable, net of allowance for
doubtful accounts of $6.3 and $6.0, respectively 141.3 141.5
Inventories 65.6 66.4
Deferred income taxes and other 45.6 45.6
--------- --------
Total current assets 299.1 296.6
Other assets 28.2 28.8
Goodwill, net 140.6 140.0
Plant and equipment, net 672.9 706.7
--------- --------
Total assets $1,140.8 $1,172.1
========= ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 108.1 $ 121.4
Accrued salaries, wages and benefits 50.2 46.6
Accrual for restructuring and consolidation 4.5 15.4
Other current liabilities 31.1 32.6
--------- --------
Total current liabilities 193.9 216.0
Postretirement benefits 117.2 118.8
Long-term debt 66.2 103.0
Deferred income taxes 107.2 103.8
Other noncurrent liabilities 51.4 48.1
Commitments and contingencies -- --
Shareholders' equity
Common stock 0.2 0.1
Additional paid-in capital 605.9 604.4
Retained earnings 40.6 14.7
Treasury stock (3.1) --
Unearned ESOP shares (14.3) (15.1)
Unearned portion of restricted stock (3.6) (4.2)
Cumulative translation adjustment (20.8) (17.5)
---------- --------
Shareholders' equity 604.9 582.4
---------- --------
Total liabilities and shareholders' equity $1,140.8 $1,172.1
========== ==========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
2
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<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Earnings
(In millions except per share data)
(Unaudited)
<CAPTION>
16-week period ended 40-week period ended
-------------------------- -------------------------
December 30, December 31, December 30, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $514.7 $522.7 $1,274.6 $1,275.0
Cost of products sold 295.8 310.9 729.0 761.4
----- ----- ------- -------
Gross profit 218.9 211.8 545.6 513.6
Marketing, distribution and
administrative expenses 195.8 194.1 493.1 482.6
Provision for restructuring and
consolidation, net -- -- -- 1.0
----- ---- ----- -----
Operating income 23.1 17.7 52.5 30.0
Other income and expenses:
Interest expense (1.6) (1.9) (4.6) (4.7)
Other income, net 1.3 0.9 1.9 1.6
----- ---- ----- -----
Income before income taxes 22.8 16.7 49.8 26.9
Provision for income taxes 8.7 7.5 19.5 12.6
----- ---- ----- -----
Income before cumulative effect of
change in accounting principle 14.1 9.2 30.3 14.3
Cumulative effect of change in
accounting principle, net of tax 1.8 -- 1.8 --
----- ---- ----- -----
Net income $12.3 $9.2 $28.5 $14.3
===== ==== ===== =====
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
16-week period ended 40-week period ended
-------------------------- --------------------------
December 30, December 31, December 30, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings Per Share:(a)
Basic
Earnings before cumulative
effect of change in
accounting principle $0.69 $0.45 $1.49 $0.71
Cumulative effect of
accounting change 0.09 -- 0.09 --
----- ----- ----- -----
Net earnings $0.60 $0.45 $1.40 $0.71
===== ===== ===== =====
Weighted average shares
outstanding 20.3 20.3 20.3 20.3
==== ==== ==== ====
Diluted
Earnings before cumulative
effect of change in
accounting principle $0.66 $0.44 $1.42 $0.70
Cumulative effect of
accounting change 0.08 -- 0.08 --
----- ----- ----- -----
Net earnings $0.58 $0.44 $1.34 $0.70
===== ===== ===== =====
Weighted average shares
outstanding 21.3 20.8 21.2 20.5
==== ==== ==== ====
<FN>
(a) Prior year shares and per share amounts have been restated to reflect the two-for-one stock split effective July 28, 1997.
</FN>
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Cashflows
(In millions)
(Unaudited)
<CAPTION>
For the 40-week
period ended
--------------------------------
December 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 28.5 $ 14.3
Adjustments to reconcile earnings to net
cash flow provided by operations:
Depreciation and amortization 62.9 62.1
Deferred income taxes 2.5 6.5
Provision for restructuring and
consolidation -- 1.0
Gain on disposal of fixed assets (1.2) 0.4
Changes in noncash working capital (9.3) (7.8)
Other, net 3.3 10.2
------- -------
Net cash flow from operations 86.7 86.7
------- -------
Cash flows from investing activities:
Capital expenditures (41.8) (56.1)
Acquisition -- (38.5)
Other, net 1.1 4.8
------- -------
Net cash used by investing activities (40.7) (89.8)
------- -------
Cash flows from financing activities:
(Payments on) proceeds from borrowings, net (36.8) 23.0
Dividends to shareholders (2.6) (1.1)
Purchases of treasury stock (3.1) --
------- -------
Net cash (used) provided by financing
activities (42.5) 21.9
------- -------
Net increase in cash and cash equivalents 3.5 18.8
Cash and cash equivalents, beginning of period 43.1 38.9
------- -------
Cash and cash equivalents, end of period $ 46.6 $ 57.7
======= =======
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
- -----------------------------------------------------------
Note 1 - In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the financial
statements pursuant to the applicable SEC rules and guidelines pertaining to
interim financial information. Operating results for any quarter are not
necessarily indicative of the results for any other quarter or for the full
year. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Annual Report to Shareholders for the year ended March 25, 1997.
Note 2 - Inventories are carried at the lower of cost or market. Cost is
determined under the first-in, first-out method.
Total inventories consisted of the following:
<TABLE>
<CAPTION>
December 30, March 25,
1997 1997
------------ ---------
<S> <C> <C>
Raw materials $ 50.7 $ 51.6
Finished goods 14.9 14.8
------------ ---------
$ 65.6 $ 66.4
============ =========
</TABLE>
Note 3 - In the current quarter, earnings per share for the current and prior-
year periods has been calculated and presented to comply with the new accounting
pronouncement SFAS No. 128, "Earning per Share". Earnings per share are based
on the weighted average number of shares of Earthgrains common stock outstanding
for the periods presented. The difference in the weighted average shares
outstanding used in the basic and dilutive earnings per share calculations
represents the assumed conversion of stock options. The two-for-one stock split
declared by the Earthgrains Board of Directors was effective July 28, 1997.
Prior year shares and per share amounts have been restated to reflect the split.
Note 4 - In the third quarter of fiscal 1998, the company recorded a $1.8
million, net-of-tax, or $0.09-per-share (basic) charge against earnings to
comply with a new required accounting interpretation announced Nov. 20, 1997.
The Emerging Issues Task Force (EITF), a subcommittee of the Financial
Accounting Standards Board (FASB), reached a consensus requiring that costs of
business process reengineering be expensed as those costs are incurred. Any
such unamortized costs that were previously capitalized must be written off as a
cumulative adjustment in the quarter containing Nov. 20, 1997.
Note 5 - Effective January 17, 1998, the Company completed the transaction to
acquire the stock of CooperSmith, Inc. of Atlanta, GA. CooperSmith operates
eight bakeries producing bread, buns and rolls in the South, Southeast and
Northeast United States. The acquisition will be accounted for using the
purchase method and, accordingly, the results of operations will begin being
reflected in the consolidated statement of earnings from the date of acquisition
in the fourth quarter.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
- ------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of The Earthgrains Company
for the sixteen and forty week periods ended December 30, 1997 compared to the
sixteen and forty week periods ended December 31, 1996. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto for the fiscal year ended March 25, 1997 included in the Company's
Annual Report to Shareholders.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the sixteen week period ended December 30, 1997, were $514.7
million compared to $522.7 million reported for the prior year period,
reflecting a $17.3 million unfavorable impact from foreign exchange rates. Net
sales for the forty week period ended December 30, 1997 were $1,274.6 million
compared to $1,275.0 million a year ago. Excluding the impact of foreign
exchange rates, sales increased 1.8% for the sixteen week period and 3.0% on a
year-to-date basis. Improved brand and product mix and increased pricing in
domestic operations along with sales related to last year's acquisition of
Heiner's contributed to the increase in sales.
Gross margins increased to 42.5% in the current sixteen week period from 40.5% a
year ago and to 42.8% from 40.3% year-to-date. The margin improvements can be
attributed to the continued effect of achieved price increases, a favorable
product mix shift, lower ingredient and manufacturing costs, and improved
operating efficiencies.
A significant portion of the increase in marketing, distribution and
administrative expenses can be attributed to the continued increase in
advertising as a part of the Company's strategy to build brand awareness in its
premium core brands. This increase is partially offset by improved selling and
distribution efficiencies.
The $1.0 million pre-tax restructuring charge recorded in the prior year related
to the closure of the bakery production facility in Augusta, Georgia.
Production and distribution was transferred to the existing Atlanta bakery.
The variance in the effective income tax rate reflects the relative impact of
the nondeductible fixed goodwill amortization on the respective earnings levels.
During the current quarter, the company recorded a $1.8 million, net-of-tax, or
$0.09-per-share (basic) charge against earnings to comply with a new required
FASB accounting interpretation announced Nov. 20, 1997. Any unamortized costs
that were previously capitalized for business process reengineering activities
must be written off as a cumulative adjustment in the quarter containing Nov.
20, 1997. Most of the business process reengineering costs affected by the
accounting change for the company are associated with implementation of the
Company's new integrated SAP systems.
7
<PAGE>
Net earnings for the sixteen week period ended December 30, 1997, excluding the
cumulative effect of the accounting change, increased to $14.1 million or $0.69
per basic share, from $9.2 million, or $0.45 per basic share in the prior year's
comparable period. Including the accounting change, net earnings for the third
quarter were $12.3 million, or $0.60 per basic share. The company is also
reporting diluted earnings per share to comply with a new FASB pronouncement
effective this quarter. Diluted earnings, before the accounting change, were
$0.66 per share; while including the accounting change, diluted earnings were
$0.58 per share. Diluted earnings were $0.44 per share in the year-ago
quarter. Year-to-date earnings, before the accounting change, were $30.3
million or $1.49 per basic share compared to $14.3 million or $0.71 per basic
share in fiscal 1997. On a diluted basis, earnings for the 40-week period
ended Dec. 30, 1997, were $1.42 per share before the effect of the accounting
change and $1.34 per share, including the accounting change. Diluted
earnings were $0.70 per share in the year-ago period. The significant
improvement in earnings is reflective of strong operating results from the
business along with continued benefits and efficiencies achieved as discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary source of liquidity continues to be cash flow from
operations. Cash flows from operations for the year-to-date period continue to
be driven from the increased earnings level. Approximately 77,000 shares were
repurchased for the treasury in the current quarter. Net working capital,
excluding cash and cash equivalents, was $58.6 million at December 30, 1997
compared to $37.5 million at March 25, 1997. The increase can be primarily
attributed to the timing of disbursements at each period end, reduction of the
accrual for restructuring and seasonality of the business.
The Company's primary routine cash requirements will consist of funding capital
expenditures, interest payments pursuant to the credit facility and dividends to
shareholders. While only $41.8 million has been invested in capital
expenditures to date, spending for the fiscal year is planned for a level of
$70-$75 million.
Cash provided by operations and borrowings available under the renegotiated
credit facility of $450 million should continue to provide the funding for
ongoing cash requirements and funding of the CooperSmith acquisition.
ENVIRONMENTAL MATTERS
- ---------------------
The Company is subject to Federal, state and local environmental protection laws
and regulations and is operating within such laws or is taking action aimed at
assuring compliance with such laws and regulations. Earthgrains has been
identified as a potentially responsible party ("PRP") at certain locations by
the EPA and may be required to share in the cost of cleanup with respect to two
sites. While it is difficult to quantify with certainty the financial impact of
actions related to environmental matters, based on the information currently
available it is management's opinion that the ultimate liability arising from
such matters, taking into consideration established reserves, should not have a
material effect on the Company's results of operations or financial position.
8
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings. The Company has no legal proceedings which have
become a reportable event in the current period.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security-Holders. No matters were
submitted to a vote of security-holders during the current period.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 27 - Financial Data Schedule.
(b) Reports on Form 8-K - None.
9
<PAGE>
SIGNATURES
----------
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 thereunto duly authorized.
THE EARTHGRAINS COMPANY
(Registrant)
Date: February 9, 1998 By: Mark H. Krieger
/s/ MARK H. KRIEGER
------------------------
Mark H. Krieger
Vice President and Chief
Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Company's
consolidated financial statements for the forty weeks ended December 30, l997
included in this report on Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000 <F1>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> SEP-10-1997
<PERIOD-END> DEC-30-1997
<CASH> 46,600
<SECURITIES> 0
<RECEIVABLES> 147,600
<ALLOWANCES> 6,300
<INVENTORY> 65,600
<CURRENT-ASSETS> 299,100
<PP&E> 1,283,800
<DEPRECIATION> 610,900
<TOTAL-ASSETS> 1,140,800
<CURRENT-LIABILITIES> 193,900
<BONDS> 1,500
0
0
<COMMON> 200
<OTHER-SE> 604,700
<TOTAL-LIABILITY-AND-EQUITY> 1,140,800
<SALES> 1,274,600
<TOTAL-REVENUES> 1,274,600
<CGS> 729,000
<TOTAL-COSTS> 729,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 800
<INTEREST-EXPENSE> 4,600
<INCOME-PRETAX> 49,800
<INCOME-TAX> 19,500
<INCOME-CONTINUING> 30,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,800
<NET-INCOME> 28,500
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.34
<FN>
<F1>Footnote to electronic filing only: as presented,
data is rounded to the nearest $100 except for per
share data.
</FN>
</TABLE>
