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 September 15, 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 - 42,984,032 shares as of October 13, 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 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 10
Exhibits and Reports on Form 8-K 10
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
<CAPTION>
September 15, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 48.9 $ 43.7
Accounts receivable, net of allowance for
doubtful accounts of $6.6 and $6.2, respectively 172.0 156.5
Inventories 75.9 68.9
Deferred income taxes and other 63.2 57.2
--------- ----------
Total current assets 360.0 326.3
Other assets 37.4 35.0
Goodwill, net 344.7 311.0
Plant and equipment, net 745.1 722.0
--------- ----------
Total assets $ 1,487.2 $ 1,394.3
--------- ----------
--------- ----------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 121.8 $ 132.1
Accrued salaries, wages and benefits 51.5 56.5
Accrual for restructuring and consolidation 9.6 6.1
Other current liabilities 48.8 39.3
--------- ----------
Total current liabilities 231.7 234.0
Postretirement benefits 114.8 115.3
Long-term debt 339.0 266.7
Deferred income taxes 97.1 99.5
Other noncurrent liabilities 76.4 72.2
Commitments and contingencies -- --
Shareholders' equity
Common stock 0.4 0.2
Additional paid-in capital 610.9 608.1
Retained earnings 65.2 47.1
Unearned ESOP shares (13.5) (14.1)
Treasury stock (10.5) (7.0)
Unearned portion of restricted stock (2.9) (3.3)
Cumulative translation adjustment (21.4) (24.4)
---------- -----------
Shareholders' equity 628.2 606.6
---------- -----------
Total liabilities and shareholders' equity $ 1,487.2 $ 1,394.3
---------- -----------
---------- -----------
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Earnings
(In millions except per share data)
(Unaudited)
<CAPTION>
For the 12-week For the 24-week period
period ended ended
---------------------------- ----------------------------
September 15, September 9, September 15, September 9,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $442.4 $382.5 $875.4 $759.9
Cost of products sold 250.0 218.5 494.1 433.2
----- ----- ----- -----
Gross profit 192.4 164.0 381.3 326.7
Marketing, distribution and administrative expenses 166.9 147.9 335.7 297.3
Provision for restructuring and consolidation 5.8 - 5.8 -
----- ----- ----- -----
Operating income 19.7 16.1 39.8 29.4
Other income and expenses:
Interest expense (4.5) (1.5) (8.8) (3.0)
Other income (expense), net 1.6 0.8 4.0 0.6
----- ----- ----- -----
Income before income taxes 16.8 15.4 35.0 27.0
Provision for income taxes 6.8 6.1 14.1 10.8
----- ----- ----- -----
Net income $10.0 $ 9.3 $20.9 $16.2
----- ----- ----- -----
----- ----- ----- -----
Earnings per share: (a)
Basic
Net earnings $0.25 $0.23 $0.51 $0.40
----- ----- ----- -----
----- ----- ----- -----
Weighted average shares outstanding 40.6 40.6 40.6 40.6
----- ----- ----- -----
----- ----- ----- -----
Diluted
Net earnings $0.23 $0.22 $0.49 $0.38
----- ----- ----- -----
----- ----- ----- -----
Weighted average shares outstanding 42.8 42.6 42.7 42.4
----- ----- ----- -----
----- ----- ----- -----
<FN>
(a) Prior-year shares and per-share amounts have been restated to reflect the two-for-one stock split effective July 20,
1998.
</FN>
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Cash Flows
(In millions except per share data)
(Unaudited)
<CAPTION>
For the 24-week
period ended
-----------------------------
September 15, September 9,
1998 1997
------------- ------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 20.9 $ 16.2
Adjustments to reconcile earnings to net cash flow
provided by operations:
Depreciation and amortization 43.4 37.3
Deferred income taxes (2.4) 1.5
Provision for restructuring and consolidation 5.8 --
(Gain) on disposal of fixed assets (4.2) (0.6)
Changes in noncash working capital, net of effect of
acquisitions (31.0) (8.2)
Other, net 5.8 (4.3)
------- -------
Net cash flow from operations 38.3 41.9
------- -------
Cash flows from investing activities:
Capital expenditures (33.7) (21.8)
Acquisitions, net of cash acquired (71.8) --
Other, net 7.9 (0.1)
------- -------
Net cash used by investing activities (97.6) (21.9)
------- -------
Cash flows from financing activities:
Proceeds from (payments on) borrowings, net 70.8 (14.9)
Dividends to shareholders (2.8) (1.6)
Purchases of treasury stock (3.5) --
------- -------
Net cash provided by (used by) financing activities 64.5 (16.5)
------- -------
Net increase in cash and cash equivalents 5.2 3.5
Cash and cash equivalents, beginning of period 43.7 43.1
------- -------
Cash and cash equivalents, end of period $ 48.9 $ 46.6
------- -------
------- -------
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
<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 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:
<TABLE>
<CAPTION> September 15, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Raw materials $ 58.0 $ 53.5
Finished goods 17.9 15.4
----------- ---------
$ 75.9 $ 68.9
----------- ---------
----------- ---------
</TABLE>
Note 3 - 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. A two-for-one stock split declared by the Earthgrains Board of
Directors was effective July 20, 1998. Prior-year shares and per-share amounts
have been restated to reflect the split.
Note 4 - On August 3, 1998, the Company acquired the assets of Chevalier-
Servant, S.A., a French producer of refrigerated and frozen dough. Chevalier-
Servant will operate as a division combined with the Company's French-based
refrigerated dough producer, Europate, S.A., to compete across Europe in the
canned, rolled and frozen dough product categories.
Effective August 18, 1998, the Company completed the transaction to
acquire the assets of two divisions of Southern Bakeries, Inc. - Palmetto Baking
Co. of Orangeburg, S.C., and Tatum Bakeries of Birmingham, Ala. Palmetto
produces Sunbeam and Country Hearth brand bread, buns and rolls in South
Carolina and Eastern Georgia. Tatum produces specialty rolls for sale to other
wholesale bakers.
During this quarter, the Company also entered into a multiyear
agreement to supply store-brand fresh bread and bakery products to Kroger Food
Stores in Texas and Louisiana.
5
<PAGE>
All three transactions were funded through the existing credit facility
and will be accounted for using the purchase method. Accordingly, the results
of operations, which did not have a material effect during the current quarter,
are reflected in the consolidated statement of earnings from the date of
acquisition.
Note 5 - 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 12- and 24-week periods ended September 15, 1998
and September 9, 1997, comprehensive income was $10.0 million and $23.9 million,
and ($0.8) million and $6.2 million, respectively.
Note 6 - Subsequent Events
Effective October 5, 1998, Earthgrains completed the transaction 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. In conjunction with this
transaction, the Company announced plans to close its Pueblo, Colorado, bakery
within six months and transfer production to its Denver bakery.
Additionally, on September 21, 1998, the Company entered into a multiyear
agreement to supply store-brand fresh bread, buns and rolls to Lucky Stores,
Inc., in northern California. Earthgrains will service this contract through
its existing bakeries in Oakland and Sacramento.
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 12- and 24-week periods ended September 15, 1998 compared to the 12- and
24-week periods ended September 9, 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 September 15, 1998, increased to $442.4
million from $382.5 million reported for the comparable prior-year period,
substantially from sales attributable to acquisitions, most notably
CooperSmith. Net sales for the 24-week period ended September 15, 1998 were
$875.4 million, up from $759.9 million reported a year ago. Increased volume
and favorable product mix shift in the domestic refrigerated dough business
also continued to contribute to the increase in sales for the quarter and
year to date. International sales decreased from the prior year primarily
due to a $5.7 million unfavorable foreign exchange rate impact year to date.
Gross margins increased to 43.5% in the current 12-week period from 42.9% a year
ago and to 43.6% from 43.0% year to date. The margin improvements can be
attributed to improvement in operating efficiencies through enhanced capacity
utilization and the continued effect of lower manufacturing costs and favorable
product mix shift.
On a percentage-of-sales basis, marketing, distribution and administrative
expenses decreased to 37.7% from 38.7% in the year-ago quarter and to 38.3% from
39.1% on a year-to-date comparison. This decrease can primarily be attributed
to consolidation of selling, distribution and administrative expenses through
integration of the CooperSmith business and lower advertising expenditures for
couponing activity.
The $5.8 million pre-tax restructuring charge recorded in the current quarter
was for costs to close the Macon, Georgia and Montgomery, Alabama bakeries, and
for severance costs related to the creation of a Financial Shared Services
Center in St. Louis. An additional charge will be reflected in the third
quarter as a result of the recently announced plans to close the Pueblo,
Colorado bakery. The company will continue to review its operations both
domestically and internationally to further improve efficiencies and in
conjunction with integrating acquisitions.
The increase in other income is related substantially to the first quarter gain
on the sale of property.
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 $10.0 million or $0.23 per diluted
share, compared to $9.3 million, or $0.22 per diluted share in the prior year's
comparable period. Year-to-date earnings were $20.9 million or $0.49 per
diluted share compared to $16.2 million or $0.38 per diluted share in fiscal
1998. The
7
<PAGE>
improvement in earnings is reflective of continued benefits and efficiencies
achieved from the factors discussed above partially offset by the restructuring
charge taken in the current quarter.
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 decreased by
$3.6 million from the year-ago period primarily as a result of increased working
capital. Net working capital, excluding cash and cash equivalents, was $79.4
million at September 15, 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.
$33.7 million has been invested in capital expenditures to date, with spending
for the fiscal year planned for a level of $80-90 million. No additional share
repurchases were made in the current quarter. 81,800 shares have been
repurchased for the treasury to date during fiscal 1999 at a cost of $3.5
million. The increase in long-term debt is a result of the acquisitions made in
the current quarter. 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.
YEAR 2000
Many computer systems process dates in application software and data files based
upon two digits for the year of a transaction rather than a full four digits.
As a result, these systems may not be able to properly process dates in the year
2000. Consequently, businesses and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations, including among other things, a temporary inability to
process transactions or send and receive electronic data with third parties or
engage in other business activities.
In 1994, in order to improve access to business information through integrated
systems across the company, and accordingly gain efficiencies and cost
improvements, Earthgrains embarked on a company-wide systems integration project
using SAP software. Additionally, in the past two years, the Company has
purchased a new mainframe computer to increase capacity in support of its
acquisition growth strategy and has replaced all handheld computers, upgrading
to the latest technology to enhance route distribution efficiency. These new
components, which comprise the majority of the Company's core business computer
systems, are Year 2000 compliant.
The Company is also in the process of executing a plan to address the Year 2000
issue with the objective to have all of its significant business systems and
software applications that are date-sensitive, including those related to
facilities and manufacturing activities, operating effectively before January 1,
2000. A project team is in place and is directing or supervising the Company's
activity regarding this issue, monitoring progress of the effort and reporting
such findings regularly to management and the Board of Directors.
The project is structured into three major categories - - - Internal Information
Systems, Property, Plant and Equipment and Operating Systems, and Third Party
Suppliers and Trading Partners. The phases of the project common to each of the
categories are: (1) establishing an inventory of Year 2000 effected items;
8
<PAGE>
(2) assessing the risk of these identified items; (3) assessing the compliance
of items considered to have a potential for material impact; (4) remediating
material items determined not to be in compliance; (5) testing such material
items; and (6) formulating contingency and business continuation plans for any
areas as deemed necessary.
Inventory, assessment, and remediation of internal information systems began in
1997. Our goal is to have all critical systems remediated by December 1998 and
tested by mid-1999. The majority of property, plant and equipment systems have
been inventoried and assessed and virtually all remediation is scheduled to be
completed by May 1999, with testing to be completed by June 1999. The Company
is in the process of communicating with Third Party Suppliers and Trading
Partners to coordinate Year 2000 conversion and to obtain assurances that their
systems are Year 2000 compliant. The majority of the costs of these efforts are
attributable to the purchase of new systems and hardware as a part of the
company-wide business systems improvement program previously mentioned and are
being capitalized. This improvement program is proceeding as planned in support
of the Company's on-going business strategy. Incremental project costs
associated with Year 2000 compliance will be expensed or capitalized where
appropriate as incurred and are expected to total approximately $5 million,
based on current estimates. Such costs are not anticipated to be material to
the Company's financial position or results of operations.
Contingency plans are being developed, as considered necessary, for each of the
three project categories with completion targeted for July 1999. Such plans
will be reviewed and updated throughout 1999.
Although the Company believes that the cost of Year 2000 modification efforts
for internal-use software and systems are not material, due to the inherent
uncertainties surrounding Year 2000 compliance issues, there can be no
assurances that Year 2000 failures or implications, including litigation, will
not have a material adverse effect on the Company's business, operating results
or financial position, particularly in the event any significant third parties
cannot in a timely manner provide the Company with products, services or systems
that meet Year 2000 requirements. The Year 2000 project is designed to reduce
risks surrounding Year 2000 issues and, coupled with the ongoing business
systems improvement effort, the possibility of significant interruptions of
routine business operations should be reduced.
The conclusions and estimates in this Year 2000 information include forward-
looking statements and are based upon management's current best estimates of
future events. Risks to achieving this plan include the availability of
resources, the ability to discover and correct the potential Year 2000 sensitive
problems and the ability of suppliers and trading partners to bring their
systems into Year 2000 compliance.
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.
9
<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.
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.
10
<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)
October 29, 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 twenty four weeks ended September 15,
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> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-15-1998
<CASH> 48,900
<SECURITIES> 0
<RECEIVABLES> 178,600
<ALLOWANCES> 6,600
<INVENTORY> 75,900
<CURRENT-ASSETS> 360,000
<PP&E> 1,388,200
<DEPRECIATION> 643,100
<TOTAL-ASSETS> 1,487,200
<CURRENT-LIABILITIES> 231,700
<BONDS> 1,500
0
0
<COMMON> 400
<OTHER-SE> 627,800
<TOTAL-LIABILITY-AND-EQUITY> 1,487,200
<SALES> 875,400
<TOTAL-REVENUES> 875,400
<CGS> 494,100
<TOTAL-COSTS> 494,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 8,800
<INCOME-PRETAX> 35,000
<INCOME-TAX> 14,100
<INCOME-CONTINUING> 20,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,900
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.49
<FN>
<F1>Footnote to electronic filing only: as presented,
data is rounded to the nearest $100 except for per
share data.
</FN>
</TABLE>
