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 22, 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 - 42,708,196 shares as of July 20, 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 8
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>
June 22, March 30,
1999 1999
-------- ---------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 56.8 $ 53.1
Accounts receivable, net of allowance
for doubtful accounts of $5.6 and
$5.6, respectively 199.1 184.5
Inventories 76.2 77.7
Deferred income taxes and other 66.9 69.4
-------- --------
Total current assets 399.0 384.7
Other assets, net 46.9 46.0
Goodwill, net 397.4 399.8
Plant and equipment, net 749.0 761.1
-------- --------
Total assets $1,592.3 $1,591.6
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 120.9 $ 125.5
Accrued salaries, wages and benefits 57.0 56.9
Accrual for restructuring and consolidation 29.8 32.4
Other current liabilities 66.6 67.8
-------- --------
Total current liabilities 274.3 282.6
Postretirement benefits 113.1 114.0
Long-term debt 385.2 369.3
Deferred income taxes 102.0 102.7
Other noncurrent liabilities 66.1 73.6
Commitments and contingencies -- --
Minority interest-mandatorily redeemable
preferred stock of subsidiary 10.0 10.0
Shareholders' equity
Common stock 0.4 0.4
Additional paid-in capital 618.6 616.6
Retained earnings 89.9 79.1
Unearned ESOP shares (12.5) (13.0)
Treasury stock (26.0) (20.4)
Unearned portion of restricted stock (2.3) (2.5)
Accumulated other comprehensive income (26.5) (20.8)
-------- --------
Shareholders' equity 641.6 639.4
-------- --------
Total liabilities and
shareholders equity $1,592.3 $1,591.6
======== ========
<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
period ended
------------------------------
June 22, 1999 June 23, 1998
------------- -------------
<S> <C> <C>
Net sales $449.6 $433.0
Cost of products sold 247.7 244.1
------ ------
Gross profit 201.9 188.9
Marketing, distribution and
administrative expenses 177.1 168.8
------ ------
Operating income 24.8 20.1
Other income and expenses:
Interest expense (5.5) (4.3)
Other income (expense), net 0.9 2.4
------ ------
Income before income taxes 20.2 18.2
Provision for income taxes 7.6 7.3
Minority interest expense, net of tax (0.1) --
------ ------
Net income $ 12.5 $ 10.9
====== ======
Earnings Per Share: (a)
Basic
Net earnings $ 0.31 $ 0.27
======= =======
Weighted average shares outstanding 40.6 40.5
====== ======
Diluted
Net earnings $ 0.30 $ 0.26
======= =======
Weighted average shares outstanding 42.1 42.5
====== ======
<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 12-week
period ended
----------------------
June 22, June 23,
1999 1998
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 12.5 $ 10.9
Adjustments to reconcile earnings
to net cash flow provided by
operations:
Depreciation and amortization 24.7 21.3
Deferred income taxes -- 1.3
(Gain) on disposal of fixed assets (0.1) (3.5)
Changes in noncash working capital (18.4) (21.1)
Other, net (12.9) 4.7
------ ------
Net cash flow from operations 5.8 13.6
Cash flows from investing activities:
Capital expenditures (14.2) (17.8)
Other, net 2.9 5.9
------ ------
Net cash used by investing
activities (11.3) (11.9)
Cash flows from financing activities:
Proceeds from (payments on) borrowings,
net 15.6 4.6
Dividends to shareholders (1.7) (1.1)
Purchases of treasury stock (5.6) (3.5)
Other 0.9 --
------ ------
Net cash provided by financing
activities 9.2 --
------ ------
Net increase in cash and cash equivalents 3.7 1.7
Cash and cash equivalents, beginning of
period 53.1 43.7
------ ------
Cash and cash equivalents, end of period $ 56.8 $ 45.4
====== ======
<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 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:
<TABLE>
<CAPTION>
June 22, March 30,
1999 1999
-------- ---------
<S> <C> <C>
Raw materials $ 59.9 $ 59.8
Finished goods 16.3 17.9
------ ------
$ 76.2 $ 77.7
====== ======
</TABLE>
Note 3 - Earnings per share for the quarters ended June 22, 1999 and
June 23, 1998, 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
20, 1998.
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 quarters ended June 22,
1999 and June 23, 1998, comprehensive income was $6.8 million and $13.9
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 for the first quarter of fiscal 2000 and
1999 (in millions):
<TABLE>
<CAPTION>
For the 12-week period ended
Income Statement Information: June 22, 1999 June 23, 1998
------------- -------------
<S> <C> <C>
Net Sales
Bakery Products $ 395.9 $ 374.4
Refrigerated Dough Products 53.7 58.6
--------- ---------
Total $ 449.6 $ 433.0
--------- ---------
Operating Income
Bakery Products $ 22.4 $ 18.0
Refrigerated Dough Products 5.1 4.8
Corporate (a) (2.7) (2.7)
--------- ---------
Total $ 24.8 $ 20.1
--------- ---------
Depreciation & Amortization
Bakery Products $ 19.0 $ 15.8
Refrigerated Dough Products 3.0 2.8
Corporate (a) 2.7 2.7
--------- ---------
Total $ 24.7 $ 21.3
--------- ---------
Balance Sheet Information:
Capital Expenditures
Bakery Products $ 10.9 $ 16.0
Refrigerated Dough Products 3.3 1.8
--------- ---------
Total $ 14.2 $ 17.8
--------- ---------
<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>
</TABLE>
Subsequent Event
- ----------------
Note 6 - On June 30, 1999, Earthgrains announced it had acquired 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.
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-week period ended June 22, 1999 compared
to the 12-week period ended June 23, 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 June 22, 1999, increased to
$449.6 million from $433.0 million reported for the comparable prior-
year period, substantially from sales attributable to the 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 impacted by a $0.6 million unfavorable
foreign exchange rate impact from the prior year.
Gross margins increased significantly in the current period to 44.9%
from 43.6% in the year-ago period. The margin improvements can be
attributed to further improvement in operating efficiencies, improved
price and mix, acquisition benefits, and lower costs.
Marketing, distribution and administrative expenses increased slightly
to 39.4% from 39.0% in the year-ago quarter on a percentage-of-sales
basis. The increase can primarily be attributed to the increased supply
agreement and goodwill amortization relative to acquisitions.
The decrease in other income is related to a $1.7 million pre-tax gain
on the sale of property reflected in the year ago period.
The lower effective income tax rate in the current quarter 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 $12.5 million or $0.30 per
diluted share, compared to $10.9 million, or $0.26 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
- -------------------------------
Cash flow from operations continues to be a primary source of liquidity.
Net working capital, excluding cash and cash equivalents, was $67.9
million at June 22, 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.
During the current quarter, $14.2 million was invested in capital
expenditures, with spending for the fiscal year planned for a level of
$90-95 million. Additionally, 255,200 shares were repurchased during
the current quarter for the treasury at a cost of $5.6 million.
7
<PAGE>
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-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
- ---------------------------------------------
8
<PAGE>
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 scheduled for completion 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 September 1999 with testing scheduled for
completion in October 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 scheduled for completion in August 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 completion
targeted for August 1999 and October 1999 for U.S. and European
Operations, respectively. Such plans will be reviewed and updated
throughout 1999. 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 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
- ---------------------
9
<PAGE>
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. At the
Annual Meeting of Shareholders of the Company held July 16, 1999, the
following matters were voted upon:
1. Election of Barry H. Beracha, Peter F. Benoist and Maxine
K. Clark to serve as Directors of the Company for a term of three years
expiring in 2002.
For Withheld
Barry H. Beracha 37,021,789 104,966
Peter F. Benoist 37,021,335 105,420
Maxine K. Clark 37,009,811 116,944
2. Reapproval of the Company's Exceptional Performance Plan.
For 35,968,030
Against 1,042,670
Abstain 116,053
Non-Votes 2
3. Shareholder proposal recommending that the Company
declassify its Board of Directors.
For 20,617,714
Against 9,972,189
Abstain 1,496,055
Non-Votes 5,040,797
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: August 5, 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 twelve weeks ended June 22, 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> 3-MOS
<FISCAL-YEAR-END> MAR-30-1999
<PERIOD-START> MAR-31-1999
<PERIOD-END> JUN-22-1999
<CASH> 56,800
<SECURITIES> 0
<RECEIVABLES> 204,700
<ALLOWANCES> 5,600
<INVENTORY> 76,200
<CURRENT-ASSETS> 399,000
<PP&E> 1,420,800
<DEPRECIATION> 671,800
<TOTAL-ASSETS> 1,592,300
<CURRENT-LIABILITIES> 274,300
<BONDS> 151,500
0
0
<COMMON> 400
<OTHER-SE> 641,200
<TOTAL-LIABILITY-AND-EQUITY> 1,592,300
<SALES> 449,600
<TOTAL-REVENUES> 449,600
<CGS> 247,700
<TOTAL-COSTS> 247,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 5,500
<INCOME-PRETAX> 20,200
<INCOME-TAX> 7,600
<INCOME-CONTINUING> 12,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,500
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.30
<FN>
<F1>Footnote to electronic filing only: as presented,
data is rounded to the nearest $100 except for per
share data.
</FN>
</TABLE>
