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 14, 1999
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 - 42,513,596 shares as of October 12, 1999
<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 11
Exhibits and Reports on Form 8-K 11
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
<CAPTION>
Sept. 14, March 30,
1999 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 30.6 $ 53.1
Accounts receivable, net of allowance
for doubtful accounts of $5.7 and
$5.6, respectively 223.9 184.5
Inventories 78.6 77.7
Deferred income taxes and other 68.9 69.4
-------- --------
Total current assets 402.0 384.7
Other assets, net 43.3 46.0
Goodwill, net 428.3 399.8
Plant and equipment, net 757.2 761.1
-------- --------
Total assets $1,630.8 $1,591.6
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 127.3 $ 125.5
Accrued salaries, wages and benefits 56.4 56.9
Accrual for restructuring and consolidation 25.7 32.4
Other current liabilities 79.6 67.8
-------- --------
Total current liabilities 289.0 282.6
Postretirement benefits 111.4 114.0
Long-term debt 381.7 369.3
Deferred income taxes 101.8 102.7
Other noncurrent liabiliies 84.7 73.6
Commitments and contingecies -- --
Minority interest-mandatorily redeemable
preferred stock of subsidiary 10.0 10.0
Shareholders' equity
Common stock 0.4 0.4
Additional paid-in capital 619.8 616.6
Retained earnings 103.6 79.1
Unearned ESOP shares (12.2) (13.0)
Treasury stock (31.3) (20.4)
Unearned portion of restricted stock (2.1) (2.5)
Accumulated other comprehensive income (26.0) (20.8)
--------- ---------
Shareholders' equity 652.2 639.4
-------- ---------
Total liabilities and shareholders'
equity $1,630.8 $1,591.6
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Earnings
(In millions except per share data)
(Unaudited)
<CAPTION>
12-week period ended 24-week period ended
---------------------------- ----------------------------
September 14, September 15, September 14, September 15,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $469.4 $442.4 $919.0 $875.4
Cost of products sold 260.6 250.0 508.3 494.1
------ ------ ------ ------
Gross profit 208.8 192.4 410.7 381.3
Marketing, distribution
and administrative
expenses 178.5 166.9 355.6 335.7
Provision for
restructuring and
consolidation - 5.8 - 5.8
------ ------ ------ ------
Operating income 30.3 19.7 55.1 39.8
Other income and
expenses:
Interest expense (5.5) (4.5) (11.0) (8.8)
Other income
(expense), net 0.8 1.6 1.7 4.0
------ ------ ------ ------
Income before income
taxes 25.6 16.8 45.8 35.0
Provision for income
taxes 9.7 6.8 17.3 14.1
Minority interest
expense, net of tax (0.2) - (0.3) -
Net income $15.7 $10.0 $28.2 $20.9
===== ===== ===== =====
Earnings per share:
Basic
Net earnings $0.39 $0.25 $0.70 $0.51
===== ===== ===== =====
Weighted average
shares outstanding 40.6 40.6 40.5 40.6
==== ==== ==== ====
Diluted
Net earnings $0.37 $0.23 $0.67 $0.49
===== ===== ===== =====
Weighted average
shares outstanding 42.1 42.8 42.1 42.7
==== ==== ==== ====
See accompanying Notes to Condensed Consolidated Financial Statements.
</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 14, September 15,
1999 1998
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income $28.2 $20.9
Adjustments to reconcile earnings to net cash flow
provided by operations:
Depreciation and amortization 50.6 43.4
Deferred income taxes (0.4) (2.4)
Provision for restructuring and consolidation -- 5.8
(Gain) on disposal of fixed assets (0.3) (4.2)
Changes in noncash working capital, net of effect
of acquisitions (30.4) (31.0)
Other, net (15.5) 5.8
----- -----
Net cash flow from operations 32.2 38.3
----- -----
Cash flows from investing activities:
Capital expenditures (34.3) (33.7)
Acquisitions, net of cash acquired (18.4) (71.8)
Other, net 4.5 7.9
----- -----
Net cash used by investing activities (48.2) (97.6)
----- -----
Cash flows from financing activities:
Proceeds from borrowings 11.0 70.4
Payments on long-term debt (4.2) (0.4)
Dividends to shareholders (3.7) (2.8)
Purchases of treasury stock (10.9) (3.5)
Other 1.3 --
----- -----
Net cash (used by) provided by financing activities (6.5) 64.5
----- -----
Net (decrease) increase in cash and cash equivalents (22.5) 5.2
Cash and cash equivalents, beginning of period 53.1 43.7
----- -----
Cash and cash equivalents, end of period $30.6 $48.9
===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
</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 30, 1999.
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:
Sept. 14, March 30,
1999 1999
--------- ---------
Raw materials $ 61.4 $ 59.8
Finished goods 17.2 17.9
------ ------
$ 78.6 $ 77.7
====== ======
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.
Note 4 - 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. Other comprehensive income for the Company relates only
to foreign currency translation adjustments. Adoption of SFAS 130 had no impact
on the results of the Company's operations. For the 12- and 24-week periods
ended September 14, 1999 and September 15, 1998, comprehensive income was $16.2
million and $23.0 million, and $10.0 million and $23.9 million, respectively.
5
<PAGE>
Note 5 - In the fourth quarter of 1999, the Company adopted FAS 131,
"Disclosures about Segments of an Enterprise and Related Information." The
business segments of the Company are Bakery Products, which consists of the U.S.
Bakery Products division and the European Bakery Products division, and
Refrigerated Dough Products, which contains the U.S. Refrigerated Dough Products
division and the European Refrigerated Dough Products division. There have been
no changes to the basis of segmentation or to the basis of measurement as
presented in the 1999 Annual Report to Shareholders. Summarized below is the
Company's business segment information through the second quarter of fiscal 2000
and 1999 (in millions):
<TABLE>
<CAPTION>
12-week period ended 24-week period ended
-------------------- --------------------
Sept. 14, Sept. 15, Sept. 14, Sept. 15,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income Statement Information:
Net Sales
Bakery Products $408.2 $381.1 $804.1 $755.5
Refrigerated Dough
Products 61.2 61.3 114.9 119.9
------ ------ ------ ------
Total $469.4 $442.4 $919.0 $875.4
------ ------ ------ ------
Operating Income
Bakery Products $ 25.8 $ 17.1(b) $ 48.2 $ 35.1(b)
Refrigerated Dough
Products 7.1 5.2 12.2 10.0
Corporate (a) (2.6) (2.6) (5.3) (5.3)
------ ------ ------ ------
Total $ 30.3 $ 19.7 $ 55.1 $ 39.8
------ ------ ------ ------
Depreciation & Amortization
Bakery Products $ 19.8 $ 16.6 $ 38.8 $ 32.4
Refrigerated Dough
Products 3.5 2.9 6.5 5.7
Corporate (a) 2.6 2.6 5.3 5.3
------ ------ ------ ------
Total $ 25.9 $ 22.1 $ 50.6 $ 43.4
------ ------ ------ ------
Balance Sheet Information:
Capital Expenditures
Bakery Products $ 15.1 $ 12.8 $ 26.0 $ 28.8
Refrigerated Dough
Products 5.0 3.1 8.3 4.9
------ ------ ------ ------
Total $ 20.1 $ 15.9 $ 34.3 $ 33.7
------ ------ ------ ------
<FN>
(a) Amounts represent purchase accounting valuation in conjunction with the acquisition of the Company by Anheuser-Busch in 1982 and
the related depreciation and amortization thereon.
</FN>
<FN>
(b) Includes the $5.8 million pretax provision for restructuring and consolidation.
</FN>
</TABLE>
Note 6 - Effective June 30, 1999, Earthgrains completed the acquisition of
Patrick Raulet, S.A., a leading producer of refrigerated dough products in Dole,
France. This acquisition complements the Company's existing European
Refrigerated Dough Products business, making it the largest refrigerated dough
supplier in France. This acquisition was funded through the cash flows of the
local existing operations and has been accounted for using the purchase method.
Accordingly, the results of operations, which did not have a material impact
during the current quarter, are reflected in the consolidated statement of
earnings from the date of acquisition.
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 14, 1999 compared to the 12- and
24-week periods ended September 15, 1998. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto for the
fiscal year ended March 30, 1999 included in the Company's Annual Report to
Shareholders.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the 12-week period ended September 14, 1999, increased to $469.4
million from $442.4 million reported for the comparable prior-year period. For
the respective 24-week periods, net sales increased to $919.0 million from the
year-ago $875.4 million. Sales growth can be attributed to the continued impact
of fiscal 1999 acquisitions and new supply agreements in the Bakery Products
segment, including Southern Bakeries and Reposteria Martinez. This increase in
Bakery Products revenue was partially offset by the elimination of domestic
lower-return business, the divestiture of the My Bread Baking Co. in the
northeast, and a decline in Refrigerated Dough Product revenues, primarily as a
result of reduced U.S. sales of refrigerated cookie dough and an early Easter
holiday in 1999. International sales during the current quarter were effected
by a $4.4 million unfavorable foreign exchange rate compared to the prior year,
$4.9 million year to date.
Gross margins increased significantly in the current period to 44.5% from 43.5%
a year ago and to 44.7% from 43.6% year to date. The margin improvements can be
attributed to continued acquisition-related benefits and further improvement in
operating efficiencies and lower costs across both business segments - bakery
and refrigerated dough products.
On a percentage-of-sales basis, marketing, distribution and administrative
expenses increased slightly to 38.0% from 37.7% in the year-ago quarter and to
38.7% from 38.3% on a year-to-date comparison. The increase can primarily be
attributed to the increased supply agreement and goodwill amortization relative
to acquisitions.
The $5.8 million pre-tax restructuring charge recorded in the year-ago 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 upcoming
third quarter as a result of the recently announced plans to close the Johnson
City, Tennessee bakery.
The year-to-date decrease in other income is primarily related to a $1.7 million
pre-tax gain on the sale of property reflected in the year-ago first quarter.
The lower effective income tax rate in the current year reflects benefits of a
state tax planning strategy and a European bakery tax structure established in
the fourth quarter of fiscal 1999.
Net earnings for the 12-week period were $15.7 million or $0.37 per diluted
share, compared to $10.0 million, or $0.23 per diluted share in the prior year's
comparable period. Year-to-date earnings were $28.2 million or $0.67 per
diluted share compared to $20.9 million or $0.49 per diluted share in fiscal
1998.
7
<PAGE>
The significant improvement in earnings is reflective of continued benefits and
efficiencies achieved from the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flow from operations continues to be a primary source of liquidity. Net
working capital, excluding cash and cash equivalents, was $82.4 million at
September 14, 1999 compared to $49.0 million at March 30, 1999. The increase
can be primarily attributed to the seasonality of the business and the temporary
increase in accounts receivable in conjunction with the transition of processing
to the Shared Services Center.
$34.3 million has been invested in capital expenditures to date, with spending
for the fiscal year planned for a level of $90-95 million. Additionally,
207,700 shares were repurchased during the current quarter for the treasury at a
cost of $5.3 million; 462,900 shares have been purchased year to date at a cost
of $10.9 million.
On April 20, 1999, Earthgrains issued $150 million in 10-year, 6.5% fixed-rate
senior debentures under a $250 million shelf registration statement filed with
the Securities and Exchange Commission. Proceeds from the offering were used to
repay borrowings under the Company's $450 million syndicated, revolving-credit
facility, to fund capital expenditures and for general corporate purposes.
In July 1999, Earthgrains established a $400 million commercial paper program to
provide short-term financing for its working capital and operating
requirements. The revolving-credit facility, which expires in September 2002,
will serve as a liquidity backup for commercial paper.
The Company's primary routine cash requirements will consist of funding capital
expenditures, interest payments pursuant to the credit facilities and dividends
to shareholders. Cash provided by operations and borrowings available under the
existing credit facilities and the new shelf registration and commercial paper
program 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.
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 purchase of new systems and hardware as a
part of the company-wide business systems improvement program are being
capitalized. This improvement program is proceeding as planned in support of the
Company's ongoing business strategy.
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-
8
<PAGE>
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 Systems; and Third Party Suppliers and
Trading Partners. The six phases of the project common to each of the categories
are: (1) establishing an inventory of Year 2000 effected items; (2) assessing
the risk of these identified items; (3) assessing the compliance of items
considered to have a potential for material impact; (4) remediating items
determined not to be in compliance; (5) testing such items; and (6) formulating
contingency and business continuation plans for any areas as deemed necessary.
U.S. Bakery and Refrigerated Dough Operations
- ---------------------------------------------
Inventory, assessment, and remediation of internal information systems began in
1997. All critical business systems were remediated by March 1999 and testing
was completed in May 1999. Property, plant and equipment systems assessment and
remediation were completed in June 1999 with testing completed in August 1999.
European Bakery Operations
- --------------------------
Critical business systems inventory, assessment, and remediation were completed
in June 1999 with testing scheduled for completion in October 1999. Property,
plant and equipment systems assessment and remediation will be completed in
October 1999 with testing scheduled for completion in November 1999. European
Bakery Operations Year 2000 status includes efforts associated with the March
1999 acquisition of Reposteria Martinez.
European Refrigerated Dough Operations
- --------------------------------------
Critical business systems have been inventoried and assessed with remediation
completed in September 1999 and testing scheduled for completion in October
1999. Property, plant and equipment systems assessment and remediation were
completed in June 1999 with testing scheduled for completion in October 1999.
European Refrigerated Dough Operations Year 2000 status includes efforts
associated with the June 1999 acquisition of Patrick Raulet.
The Company is in the process of communicating with all (U.S. and European)
Third Party Suppliers and Trading Partners to coordinate Year 2000 conversion
and obtain assurances that their systems are Year 2000 compliant. Contingency
plans are being developed, as considered necessary, for each of the three
project categories with an October 1999 target completion. 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 upon current estimates. Such costs are not anticipated to be material to
the Company's financial position or results of operations.
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
9
<PAGE>
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.
10
<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.
11
<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: October 27, 1999 By: Mark H. Krieger
/S/ MARK K. 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 14,
1999 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-30-1999
<PERIOD-START> MAR-31-1999
<PERIOD-END> SEP-14-1999
<CASH> 30,600
<SECURITIES> 0
<RECEIVABLES> 229,600
<ALLOWANCES> 5,700
<INVENTORY> 78,600
<CURRENT-ASSETS> 402,000
<PP&E> 1,444,400
<DEPRECIATION> 687,200
<TOTAL-ASSETS> 1,630,800
<CURRENT-LIABILITIES> 289,000
<BONDS> 151,500
0
0
<COMMON> 400
<OTHER-SE> 651,800
<TOTAL-LIABILITY-AND-EQUITY> 1,630,800
<SALES> 919,000
<TOTAL-REVENUES> 919,000
<CGS> 508,300
<TOTAL-COSTS> 508,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 600
<INTEREST-EXPENSE> 11,000
<INCOME-PRETAX> 45,800
<INCOME-TAX> 17,300
<INCOME-CONTINUING> 28,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,200
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.67
<FN>
<F1>Footnote to electronic filing only: as presented,
data is rounded to the nearest $100 except for per
share data.
</FN>
</TABLE>
