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 January 5, 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 - 42,887,103 shares as of February 2, 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 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Other Information 12
Exhibits and Reports on Form 8-K 14
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
<CAPTION>
January 5, March 31,
1999 1998
---------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 61.5 $ 43.7
Accounts receivable, net of allowance
for doubtful accounts of $6.6 and
$6.2, respectively 174.7 156.5
Inventories 78.6 68.9
Deferred income taxes and other 61.1 57.2
-------- --------
Total current assets 375.9 326.3
Other assets 42.1 35.0
Goodwill, net 338.5 311.0
Plant and equipment, net 738.5 722.0
-------- --------
Total assets $1,495.0 $1,394.3
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 117.5 $ 132.1
Accrued salaries, wages and
benefits 58.5 56.5
Accrual for restructuring and
consolidation 9.2 6.1
Other current liabilities 74.3 39.3
-------- --------
Total current liabilities 259.5 234.0
Postretirement benefits 115.0 115.3
Long-term debt 295.2 266.7
Deferred income taxes 98.0 99.5
Other noncurrent liabilities 74.8 72.2
Commitments and contingencies -- --
Shareholders' equity
Common stock 0.4 0.2
Additional paid-in capital 612.7 608.1
Retained earnings 80.5 47.1
Unearned ESOP shares (13.2) (14.1)
Treasury stock (10.5) (7.0)
Unearned portion of restricted stock (2.8) (3.3)
Cumulative translation adjustment (14.6) (24.4)
--------- ---------
Shareholders' equity 652.5 606.6
--------- ---------
Total liabilities and shareholders'
equity $1,495.0 $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>
16-week period ended 40-week period ended
------------------------ ------------------------
January 5, December 30, January 5, December 30,
1999 1997 1999 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $609.2 $514.7 $1,484.6 $1,274.6
Cost of products sold 347.9 295.8 842.0 729.0
------ ------ -------- --------
Gross profit 261.3 218.9 642.6 545.6
Marketing, distribution and
administrative expenses 225.8 195.8 561.5 493.1
Provision for restructuring
and consolidation 2.6 -- 8.4 --
------ ------ -------- --------
Operating income 32.9 23.1 72.7 52.5
Other income and expenses:
Interest expense (6.3) (1.6) (15.1) (4.6)
Other income (expense),
net 1.1 1.3 5.1 1.9
------ ------ -------- --------
Income before income taxes 27.7 22.8 62.7 49.8
Provision for income taxes 10.7 8.7 24.8 19.5
------ ------ -------- --------
Income before cumulative
effect of change in
accounting principle 17.0 14.1 37.9 30.3
Cumulative effect of
change in accounting
principle, net of tax -- 1.8 -- 1.8
----- ------ -------- --------
Net income $17.0 $ 12.3 $ 37.9 $ 28.5
===== ====== ======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
<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
------------------------- -------------------------
January 5, December 30, January 5, December 30,
1999 1997 1999 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share: (a,b)
Basic
Earnings before cumulative
effect of change in
accounting principle $0.42 $0.34 $0.93 $0.74
Cumulative effect of
accounting change -- 0.04 -- 0.04
----- ----- ----- -----
Net Earnings $0.42 $0.30 $0.93 $0.70
===== ===== ===== =====
Weighted average shares
outstanding 40.7 40.6 40.7 40.6
==== ==== ==== ====
Diluted
Earnings before cumulative
effect of change in
accounting principle $0.40 $0.33 $0.89 $0.71
Cumulative effect of
accounting change -- 0.04 -- 0.04
----- ----- ----- -----
Net earnings $0.40 $0.29 $0.89 $0.67
===== ===== ===== =====
Weighted average shares
outstanding 42.9 42.6 42.8 42.3
==== ==== ==== ====
<FN>
(a) In the third quarter of fiscal 1998, the company took a $1.8 million net-of-tax, or
$0.04-per-share charge against earnings to comply with a newly 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. Most of the Earthgrains
system development costs affected by the accounting change are associated with
implementation of the company's new integrated SAP systems.
</FN>
<FN>
(b) Prior-year shares and per-share amounts have been restated to reflect the two-for-one
stock split effective July 20, 1998.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
THE EARTHGRAINS COMPANY
Condensed Consolidated Statements of Cash Flows
(In millions except per share data)
(Unaudited)
<CAPTION>
For the 40-week
period ended
-------------------------------
January 5, December 30,
1999 1997
------------- ---------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 37.9 $ 28.5
Adjustments to reconcile earnings to net cash flow
provided by operations:
Depreciation and amortization 76.7 62.9
Deferred income taxes (3.7) 2.5
Provision for restructuring and consolidation ($8.4
million, less cash payments of $1.3 million) 7.1 --
(Gain) on disposal of fixed assets (4.6) (1.2)
Changes in noncash working capital, net of effect of
acquisitions (17.7) (9.3)
Other, net 2.8 3.3
-------- --------
Net cash flow from operations 98.5 86.7
-------- --------
Cash flows from investing activities:
Capital expenditures (57.2) (41.8)
Acquisitions, net of cash acquired (78.2) --
Proceeds from sale of property 35.6 1.1
-------- --------
Net cash used by investing activities (99.8) (40.7)
-------- --------
Cash flows from financing activities:
Proceeds from (payments on) borrowings, net 27.1 (36.8)
Dividends to shareholders (4.5) (2.6)
Purchases of treasury stock (3.5) (3.1)
-------- --------
Net cash provided by (used by) financing
activities 19.1 (42.5)
-------- --------
Net increase in cash and cash equivalents 17.8 3.5
Cash and cash equivalents, beginning of period 43.7 43.1
-------- --------
Cash and cash equivalents, end of period $ 61.5 $ 46.6
======== ========
<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 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>
January 5, March 31,
1999 1998
---------- ---------
<S> <S> <S>
Raw materials $ 60.0 $ 53.5
Finished goods 18.6 15.4
---------- ---------
$ 78.6 $ 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 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.
Effective October 5, 1998, Earthgrains completed the transaction with
Interstate Bakeries Corporation to exchange assets of Earthgrains' My
Bread Baking Co. in New Bedford, Massachusetts, for those of IBC's
Holsum Bakery in Grand Junction, Colorado, plus a cash payment from IBC.
In conjunction with this transaction, the Company recorded a
$2.6 million pre-tax charge during the current quarter related to the
previously announced plans to close its Pueblo, Colorado bakery.
Production will be transferred to its Denver bakery.
Additionally, during the second quarter of fiscal 1999, the Company
completed the following transactions:
6
<PAGE>
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.
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.
All 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
periods presented, 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 16- and 40-week periods ended January 5, 1999 and December 30,
1997, comprehensive income was $23.8 million and $47.7 million, and
$19.0 million and $25.2 million, respectively.
7
<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 16- and 40-week periods ended January 5,
1999 compared to the 16- and 40-week periods ended December 30, 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 16-week period ended January 5, 1999, increased to
$609.2 million from $514.7 million reported for the comparable prior-
year period, substantially from sales attributable to acquisitions, most
notably CooperSmith. Net sales for the 40-week period ended January 5,
1999 were $1,484.6 million, up from $1,274.6 million reported a year
ago. Favorable product mix shift and price improvements in the domestic
refrigerated dough business also continued to contribute to the increase
in sales both for its seasonally strong quarter and year to date.
International sales increased slightly from the prior year and
experienced a $4.9 million favorable foreign exchange rate impact year
to date.
Gross margins increased to 42.9% in the current 16-week period from
42.5% a year ago and to 43.3% from 42.8% year to date. The margin
improvements can be attributed to price and mix improvements, the
continued effect of lower raw material costs, and enhanced capacity
utilization from acquisitions.
On a percentage-of-sales basis, marketing, distribution and
administrative expenses decreased to 37.1% from 38.0% in the year-ago
quarter and to 37.8% from 38.7% on a year-to-date comparison. This
decrease can primarily be attributed to further benefit in the
consolidation of selling, distribution and administrative expenses
through integration of the CooperSmith business and lower advertising as
a percent of sales.
The $2.6 million pre-tax restructuring charge recorded in the current
quarter was in accordance with the previously announced plans to close
the Pueblo, Colorado bakery in conjunction with the asset exchange
completed with Interstate Bakeries Corporation. The $5.8 million charge
recorded in the previous 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. 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.
During the year-ago quarter, the Company recorded a $1.8 million, net-
of-tax, or $0.04-per-share charge against earnings to comply with a
newly required FASB accounting interpretation announced
November 20, 1997. Any unamortized costs that were previously
capitalized for business process reengineering activities were required
to be written off as a cumulative adjustment in the quarter containing
8
<PAGE>
November 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.
Net earnings for the 16-week period ended January 5, 1999 increased to
$17.0 million or $0.40 per diluted share, from $14.1 million, or $0.33
per share in the prior year's comparable period, excluding the
cumulative effect of the accounting change. Including the accounting
change, net earnings for the year-ago third quarter were $12.3 million,
or $0.29 per diluted share. Year-to-date earnings were $37.9 million or
$0.89 per diluted share compared to $30.3 million or $0.71 per share in
fiscal 1998 before the accounting change. Earnings for the 40-week
period ended December 30, 1997, were $0.67 per diluted share, including
the accounting change. 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
increased by $11.8 million from the year-ago period primarily as a
result of increased earnings. Net working capital, excluding cash and
cash equivalents, was $54.9 million at January 5, 1999 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.
$57.2 million has been invested in capital expenditures to date, with
spending for the fiscal year planned for a level of $80-85 million. No
additional share repurchases were made in the current quarter. 163,600
(post-split) 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 current year acquisitions partially offset by the
cash payment received from IBC in conjunction with the asset exchange 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 continues to provide the necessary funding for
ongoing cash requirements. Extension of this line and other financing
alternatives will be pursued as necessary for future acquisition or
business opportunities.
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.
9
<PAGE>
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 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 material 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.
Inventory, assessment, and remediation of internal information systems
began in 1997. Our plan is to have all critical systems remediated by
March 1999 and tested by mid-1999. The majority of property, plant and
equipment systems have been inventoried and assessed with remediation
scheduled to be completed by June 1999, and testing to be completed by
July 1999. The Company is in the process of communicating with Third
Party Suppliers and Trading Partners to coordinate Year 2000 conversion
and 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 upon 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.
10
<PAGE>
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.
11
<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.
12
<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 18, 1999 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 January 5, l999
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> APR-01-1998
<PERIOD-END> JAN-05-1999
<CASH> 61,500
<SECURITIES> 0
<RECEIVABLES> 181,300
<ALLOWANCES> 6,600
<INVENTORY> 78,600
<CURRENT-ASSETS> 375,900
<PP&E> 1,392,800
<DEPRECIATION> 654,300
<TOTAL-ASSETS> 1,495,000
<CURRENT-LIABILITIES> 259,500
<BONDS> 1,500
0
0
<COMMON> 400
<OTHER-SE> 652,100
<TOTAL-LIABILITY-AND-EQUITY> 1,495,000
<SALES> 1,484,600
<TOTAL-REVENUES> 1,484,600
<CGS> 842,000
<TOTAL-COSTS> 842,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 15,100
<INCOME-PRETAX> 62,700
<INCOME-TAX> 24,800
<INCOME-CONTINUING> 37,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,900
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.89
<FN>
<F1>Footnote to electronic filing only: as presented,
data is rounded to the nearest $100 except for per
share data.
</FN>
</TABLE>
