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 June 23, 1998
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 - 21,465,280 shares as of July 15, 1998
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 4
Notes to Condensed Consolidated Financial Statements 5
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
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
<CAPTION>
June 23, March 31,
1998 1998
--------- ---------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 45.4 $ 43.7
Accounts receivable, net of allowance for
doubtful accounts of $6.5 and $6.2, respectively 161.0 156.5
Inventories 71.5 68.9
Deferred income taxes and other 57.0 57.2
-------- --------
Total current assets 334.9 326.3
Other assets 33.8 35.0
Goodwill, net 308.6 311.0
Plant and equipment, net 719.3 722.0
-------- --------
Total assets $1,396.6 $1,394.3
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 112.2 $ 132.1
Accrued salaries, wages and benefits 54.1 56.5
Accrual for restructuring and consolidation 4.4 6.1
Other current liabilities 45.3 39.3
--------- ---------
Total current liabilities 216.0 234.0
Postretirement benefits 115.4 115.3
Long-term debt 271.3 266.7
Deferred income taxes 100.8 99.5
Other noncurrent liabilities 75.2 72.2
Commitments and contingencies -- --
Shareholders' equity
Common stock 0.2 0.2
Additional paid-in capital 609.6 608.1
Retained earnings 56.9 47.1
Unearned ESOP shares (13.8) (14.1)
Treasury stock (10.5) (7.0)
Unearned portion of restricted stock (3.1) (3.3)
Cumulative translation adjustment (21.4) (24.4)
--------- ---------
Shareholders' equity 617.9 606.6
--------- ---------
Total liabilities and shareholders' equity $1,396.6 $1,394.3
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE> 2
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Earnings
(In millions except per share data)
(Unaudited)
<CAPTION>
For the 12-week
period ended
---------------------
June 23, June 17,
1998 1997
--------- ----------
<S> <C> <C>
Net sales $ 433.0 $ 377.4
Cost of products sold 244.1 214.7
------- -------
Gross profit 188.9 162.7
Marketing, distribution and administrative expenses 168.8 149.4
------- -------
Operating income 20.1 13.3
Other income and expenses:
Interest expense (4.3) (1.5)
Other (expense) income, net 2.4 (0.2)
------- -------
Income before income taxes 18.2 11.6
Provision for income taxes 7.3 4.7
------- -------
Net income $ 10.9 $ 6.9
======= =======
Earnings per share: (a)
Basic
Net earnings $ 0.54 $ 0.34
======= =======
Weighted average shares
outstanding 20.3 20.3
======= =======
Diluted
Net earnings $ 0.51 $ 0.33
======= =======
Weighted average shares
outstanding 21.3 20.9
======= =======
<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>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE> 3
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Cash Flows
(In millions except per share data)
(Unaudited)
<CAPTION>
For the 12-week
period ended
---------------------
June 23, June 17,
1998 1997
--------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 10.9 $ 6.9
Adjustments to reconcile earnings to net cash flow
provided by operations:
Depreciation and amortization 21.3 18.3
Deferred income taxes 1.3 (1.9)
(Gain) on disposal of fixed assets (3.5) (0.2)
Changes in noncash working capital (21.1) (18.2)
Other, net 4.7 (2.1)
------ ------
Net cash flow from operations 13.6 2.8
Cash flows from investing activities:
Capital expenditures (17.8) (7.5)
Other, net 5.9 2.5
------ ------
Net cash used by investing activities (11.9) (5.0)
Cash flows from financing activities:
Proceeds from (payments on) borrowings, net 4.6 5.7
Dividends to shareholders (1.1) (0.5)
------ ------
Purchases of treasury stock (3.5) --
Net cash provided by financing activities -- 5.2
------ ------
Net increase in cash and cash equivalents 1.7 3.0
Cash and cash equivalents, beginning of period 43.7 43.1
------ ------
Cash and cash equivalents, end of period $ 45.4 $ 46.1
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE> 4
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 31, 1998.
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:
June 23, March 31,
1998 1998
-------- ---------
Raw materials $ 55.7 $ 53.5
Finished goods 15.8 15.4
-------- ---------
$ 71.5 $ 68.9
======= ========
Note 3 - Earnings per share for the quarters ended June 23, 1998 and June 17,
1997 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. Prior-year
shares and per-share amounts have been restated to reflect the two-for-one stock
split effective July 28, 1997.
Note 4 - On May 26, 1998, the Earthgrains Board of Directors declared a two-
for-one stock split for shareholders of record as of July 10, 1998. The split
was effective July 20, 1998.
Note 5 - On June 12, 1998, Earthgrains announced that it had signed a letter of
intent with Interstate Bakeries Corporation to exchange assets of Earthgrains'
My Bread Baking Co. in New Bedford, Mass., for those of IBC's Holsum Bakery in
Grand Junction, Colo., plus a cash payment from IBC.
On June 29, 1998, the Company announced it had entered into an agreement to buy
two divisions of Southern Bakeries, Inc. - Palmetto Baking Co. of Orangeburg,
S.C., and Tatum Bakeries of Birmingham, Ala.
Both transactions are subject to regulatory review.
<PAGE> 5
Note 6 - Effective in the first quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 requires that noncash changes in shareholders
equity be combined with net income and reported as "comprehensive income." The
Company has elected to report comprehensive income in its Statement of
Shareholders' Equity. Adoption of SFAS 130 had no impact on the results of the
Company's operations. For the quarters ended June 23, 1998 and June 17, 1997,
comprehensive income was $13.9 million and $7.0 million, respectively.
Note 7 - In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS133). The Standard requires all
derivative financial instruments to be reflected on an entity's balance sheet at
fair value, with periodic changes in fair value recognized in either earnings or
equity, depending on the nature of the exposure being hedged.
The adoption of SFAS 133 requires that the Company record a cumulative-effect
type adjustment to recognize the fair value of its derivative portfolio on the
balance sheet. This adjustment is to be recorded as a cumulative-effect type
adjustment to either earnings or other comprehensive income depending on the
hedged item. For fair value hedges, SFAS 133 also requires that the carrying
amount of the derivatives' underlying exposure be adjusted to fair value with
the impact recorded to earnings. As the Company uses only derivative
instruments that are highly correlated to the underlying exposure, the Company
anticipates that the initial adoption of SFAS 133 will not have a material
impact on its financial position or results of operations.
SFAS 133 is required to be adopted by the Company not later than April 2000.
Early adoption of the Standard is permitted. The Company has not yet made a
determination as to when SFAS 133 will be adopted.
<PAGE> 6
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 12-week period ended June 23, 1998 compared to the 12-week period ended
June 17, 1997. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
March 31, 1998 included in the Company's Annual Report to Shareholders.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the 12-week period ended June 23, 1998, increased to $433.0
million from $377.4 million reported for the comparable prior-year period,
substantially from sales attributable to the CooperSmith acquisition. Increased
volume and favorable product mix shift in the refrigerated dough business also
contributed to the increase in sales for the quarter. International sales
decreased from the prior year due to a $4.0 million unfavorable foreign exchange
rate impact and slightly lower sales in Spain.
Gross margins increased in the current period to 43.6% from 43.1% in the year-
ago period. The margin improvements can be attributed to further improvement in
operating efficiencies and the continued effect of lower manufacturing costs and
favorable product mix shift.
Marketing, distribution and administrative expenses decreased to 39.0% from
39.6% in the year-ago quarter on a percentage-of-sales basis. This decrease can
primarily be attributed to consolidation of selling, distribution and
administrative expenses through integration of the CooperSmith business and
lower advertising expenditures than in the prior-year period.
The increase in other income is related to a gain on the sale of property
reflected in the current period from a previously discontinued business.
The effective income tax rate is consistent with that of the prior year and
reflects the impact of nondeductible goodwill amortization relative to the
respective earnings level.
Net earnings for the 12-week period were $10.9 million or $0.51 per diluted
share, compared to $6.9 million, or $0.33 per diluted share in the prior year's
comparable period. The significant improvement in earnings is reflective of
continued benefits and efficiencies achieved from the factors 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 current period increased by
$10.8 million from the year-ago period primarily as a result of the increased
earnings. Net working capital, excluding cash and cash equivalents, was $73.5
million at June 23, 1998 compared to $48.6 million at March 31, 1998. The
increase can be primarily attributed to the timing of disbursements at each
period end and seasonality of the business.
<PAGE> 7
During the current quarter, $17.8 million was invested in capital expenditures,
with spending for the fiscal year planned for a level of $80-90 million.
Additionally, 81,800 shares were repurchased for the treasury at a cost of $3.5
million. The Company's primary routine cash requirements will consist of
funding capital expenditures, interest payments pursuant to the credit facility
and dividends to shareholders.
Cash provided by operations and borrowings available under the $450 million
credit facility should continue to provide the necessary funding for ongoing
cash requirements.
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.
<PAGE> 8
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. At the Annual
Meeting of Shareholders of the company held July 17, 1998, the following matters
were voted upon:
1. Election of J. Joe Adorjan and Jerry E. Ritter to serve as
Directors of the company for a term of three years expiring in 2001.
For Withheld Non-Votes
J. Joe Adorjan 18,204,879 118,605 0
---------- ------- --------
Jerry E. Ritter 18,198,579 124,905 0
---------- ------- --------
2. Approval of an amendment to the Certificate of Incorporation to
increase the number of authorized shares of common stock from 50,000,000 to
150,000,000.
For 12,938,425
----------
Against 5,350,803
----------
Abstain 34,256
----------
Non-Votes 0
----------
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.
<PAGE> 9
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: August 6, 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 twelve weeks ended June 23, l998
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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-23-1998
<CASH> 45,400
<SECURITIES> 0
<RECEIVABLES> 167,500
<ALLOWANCES> 6,500
<INVENTORY> 71,500
<CURRENT-ASSETS> 334,900
<PP&E> 1,348,800
<DEPRECIATION> 629,500
<TOTAL-ASSETS> 1,396,600
<CURRENT-LIABILITIES> 216,000
<BONDS> 1,500
0
0
<COMMON> 200
<OTHER-SE> 617,700
<TOTAL-LIABILITY-AND-EQUITY> 1,396,600
<SALES> 433,000
<TOTAL-REVENUES> 433,000
<CGS> 244,100
<TOTAL-COSTS> 244,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 4,300
<INCOME-PRETAX> 18,200
<INCOME-TAX> 7,300
<INCOME-CONTINUING> 10,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,900
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.51
<FN>
<F1>Footnote to electronic filing only: as presented,
data is rounded to the nearest $100 except for per
share data.
</FN>
</TABLE>
