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 20, 2000
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 -- 42,258,488 shares as of July 18, 2000
<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 20, March 28,
2000 2000
-------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13.4 $ 19.9
Accounts receivable, net of allowance for
doubtful accounts of $3.7 and $3.8,
respectively 265.2 261.3
Inventories 94.9 91.5
Deferred income taxes and other 113.9 108.6
-------- --------
Total current assets 487.4 481.3
Other assets, net 43.1 42.4
Goodwill, net 891.6 900.0
Plant and equipment, net 901.3 915.8
-------- --------
Total assets $2,323.4 $2,339.5
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt $ 456.4 $ 442.1
Accounts payable 159.8 177.9
Accrued salaries, wages and benefits 79.9 83.3
Accrual for restructuring and consolidation 14.2 17.0
Other current liabilities 95.9 107.7
-------- --------
Total current liabilities 806.2 828.0
Postretirement benefits 107.0 104.1
Long-term debt 563.2 562.3
Deferred income taxes 123.3 117.6
Other noncurrent liabilities 62.8 62.6
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 622.4 621.6
Retained earnings 134.6 125.8
Unearned ESOP shares (10.3) (11.0)
Treasury stock (37.1) (35.8)
Unearned portion of restricted stock (1.3) (1.6)
Accumulated other comprehensive income (57.8) (44.5)
--------- ---------
Shareholders' equity 650.9 654.9
--------- ---------
Total liabilities and shareholders' equity $2,323.4 $2,339.5
======== ========
<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>
12-week period ended
--------------------
June 20, June 22,
2000 1999
---- ----
<S> <C> <C>
Net sales $599.6 $449.6
Cost of products sold 319.8 247.5
------ ------
Gross profit 279.8 202.1
Marketing, distribution and administrative
expenses 244.8 177.4
Operating income 35.0 24.7
Other income and expenses:
Interest expense (15.8) (5.5)
Other income (expense), net -- 1.0
------ ------
Income before income taxes 19.2 20.2
Provision for income taxes 8.1 7.6
Minority interest expense (0.2) (0.1)
------ ------
Net income $ 10.9 $ 12.5
====== ======
Earnings per share:
Basic
Net earnings $ 0.27 $ 0.31
======= =======
Weighted average shares outstanding 40.4 40.6
==== ====
Diluted
Net earnings $ 0.27 $ 0.30
======= =======
Weighted average shares outstanding 41.1 42.1
==== ====
<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)
(Unaudited)
<CAPTION>
For the 12-week
period ended
-----------------------
June 20, June 22,
2000 1999
---------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 10.9 $ 12.5
Adjustments to reconcile earnings
to net cash flow provided by
operations:
Depreciation and amortization 34.3 24.7
Deferred income taxes 6.0 --
(Gain) on disposal of fixed assets (0.1) (0.1)
Changes in noncash working capital (39.7) (18.4)
Other, net (0.7) (12.9)
------- -------
Net cash flow from operations 10.7 5.8
------ ------
Cash flows from investing activities:
Capital expenditures (20.7) (14.2)
Acquisitions, net of cash acquired (8.8) --
Other, net 0.4 2.9
Net cash used by investing activities (29.1) (11.3)
------- -------
Cash flows from financing activities:
Proceeds from borrowings 15.2 15.6
Dividends to shareholders (2.1) (1.7)
Purchases of treasury stock (1.3) (5.6)
Other 0.1 0.9
------ ------
Net cash provided by financing
activities 11.9 9.2
------ ------
Net (decrease) increase in cash and
cash equivalents (6.5) 3.7
Cash and cash equivalents, beginning
of period 19.9 53.1
------ ------
Cash and cash equivalents, end of period $ 13.4 $ 56.8
====== ======
<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 28, 2000.
Note 2 - Inventories are carried at the lower of cost or market. Cost is
determined under the first-in, first-out method.
Total inventories consisted of the following:
June 20, March 28,
2000 2000
-------- ---------
Raw materials $ 68.5 $ 68.3
Finished goods 26.4 23.2
------- --------
$ 94.9 $ 91.5
======= ========
Note 3 - The Company has recorded various provisions for restructuring and
consolidation in conjunction with closing domestic bakeries and restructuring
operations in Spain in order to increase efficiencies and streamline operations.
Reserves have also been established in conjunction with certain acquisitions for
restructuring related to the acquiree's operations. In accordance with the
generally accepted accounting principles, the acquisition-related reserves were
recorded as an increase to goodwill and no provision was recorded. These
provisions and reserves reflect costs of writing off certain fixed assets,
employee severance benefits, and other related closing costs.
No such provisions or additional reserves were recorded during the current
quarter. The reserve balance at June 20, 2000 is comprised primarily of
severance yet to be paid. A reconciliation of activity with respect to the
Company's restructuring and consolidation since fiscal year 2000 is as follows:
Ending balance, March 28, 2000 $17.0
Cash payments associated with severance 2.8
-----
Ending balance, June 20, 2000 $14.2
=====
Note 4 - Effective March 18, 2000, the Company acquired the stock of Metz Baking
Company for $625 million. Metz, which operates 21 bread and specialty bakeries,
added major markets and brands in the upper Midwest. The acquisition was
initially financed through new and existing committed credit facilities and
commercial paper.
4
<PAGE>
Effective June 30, 1999, Earthgrains acquired the stock 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.
Both acquisitions were purchased for cash and have been accounted for using
the purchase method. Accordingly, the results of operations are reflected in
the Consolidated Statement of Earnings from the date of acquisition. The
purchase price has been preliminarily allocated to the assets acquired and the
liabilities assumed based upon their estimated fair market value, and the excess
costs over net tangible assets are being amortized over 40 years. See comments
in the Management's Discussion and Analysis section of this filing regarding
impacts of these transactions during the current quarter.
Note 5 - Long-term debt is comprised of the following:
June 20, 2000 March 28, 2000
------------- --------------
Commercial Paper $ 860.8 $ 259.1
Notes Payable, 6.5%,
due 2009 150.0 150.0
Revolving Credit Facility,
due 2000 -- 25.0
Revolving Credit Facility,
due 2001 -- 568.0
Other 8.8 2.3
-------- --------
1,019.6 1,004.4
Less current portion 456.4 442.1
-------- --------
$ 563.2 $ 562.3
======== ========
Borrowings under the new $600 million revolving credit facility to
initially finance the acquisition of Metz Baking Company (March 2000) were
refinanced during the current quarter through borrowings under the Company's
commercial paper programs. Borrowings outstanding under the commercial paper
programs are supported by the existing lines of credit. The commercial paper
borrowings were at a weighted average interest rate of 6.9% during the current
quarter compared to a weighted average rate of 6.2% for fiscal 2000.
Approximately $200 million was available for future borrowings under the
existing $1.1 billion in committed lines of credit at June 20, 2000.
Note 6 - 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 7 - Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (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. For the 12-week periods ended June
20, 2000 and June 22, 1999, comprehensive income was a negative $2.4 million and
$6.8 million, respectively.
6
<PAGE>
Note 8 - 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 2000 Annual Report to Shareholders. Summarized
below is the Company's business segment information through the first quarter of
fiscal 2001 and 2000 (in millions):
<TABLE>
<CAPTION>
12-week period ended
--------------------
June 20, June 22,
2000 1999
-------- --------
<S> <C> <C>
Income Statement Information:
Net Sales
Bakery Products $541.2 $395.9
Refrigerated Dough Products 58.4 53.7
------ ------
Total $599.6 $449.6
Operating Income
Bakery Products $ 32.8 $ 22.3
Refrigerated Dough Products 4.9 5.1
Corporate (a) (2.7) (2.7)
------- -------
Total $ 35.0 $ 24.7
------ ------
Depreciation & Amortization
Bakery Products $ 27.7 $ 19.0
Refrigerated Dough Products 3.8 3.0
Corporate (a) 2.7 2.7
------ ------
Total $ 34.2 $ 24.7
------ ------
Balance Sheet Information:
Capital Expenditures
Bakery Products $ 17.8 $ 10.9
Refrigerated Dough Products 2.9 3.3
------ ------
Total $ 20.7 $ 14.2
------ ------
<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 9 - On July 25, 2000, Earthgrains issued $300 million in three-year, 8-3/8%
fixed-rate Notes due 2003 and $250 million in five-year, 8-1/2% fixed-rate Notes
due 2005 from the $750 million shelf registration statement filed with the
Securities and Exchange Commission, which became effective in April 2000.
Proceeds from this issuance were used to repay a portion of the outstanding
commercial paper borrowings. The $400 million in interest rate swaps, entered
into in May 2000, were terminated in conjunction with this issuance. The $7.8
million loss on these swap agreements will be recognized as an adjustment to
interest expense on the underlying debt instruments.
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 12-week period ended June 20, 2000 compared to the 12-week period ended
June 22, 1999. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
March 28, 2000 included in the Company's Annual Report to Shareholders.
RESULTS OF OPERATIONS
---------------------
Net sales for the 12-week period ended June 20, 2000, increased 33.4% to $599.6
million from $449.6 million reported for the comparable prior-year period,
despite an $11.6 million unfavorable impact from foreign exchange rates.
Excluding the impact of foreign exchange rates, sales increased 35.9% for the
current quarter. Sales growth can be attributed to the impact of acquisitions,
primarily from the Metz Baking acquisition, price and mix improvements, and core
volume growth.
Gross margins increased in the current period to 46.7% from 45.0% a year ago.
The margin improvements can be attributed to improved manufacturing
efficiencies, lower ingredient costs, and benefits from the European
acquisitions.
On a percentage-of-sales basis, marketing, distribution and administrative
expenses increased to 40.8% from 39.5% in the year-ago quarter. The increase
can primarily be attributed to the furthering of mix shift between the Company's
segments to a greater percentage of business in the bakery operations, which
reflects higher selling and delivery costs, coupled with increases in fuel
costs, and additional goodwill amortization relative to acquisitions.
The increase in interest expense is directly related to the increased long-term
debt level resulting from acquisitions and approximately $1.6 million due to
higher interest rates.
The higher effective income tax rate in the current quarter is a direct result
of the increase in nondeductible goodwill amortization, which increased from
$2.1 million to $5.0 million in the current quarter, related primarily to the
Metz acquisition.
Net earnings for the 12-week period were $10.9 million or $0.27 per diluted
share, compared to $12.5 million, or $0.30 per diluted share in the prior year's
comparable period. As expected, the year-over-year comparison was affected by
the acquisition-related impacts discussed above.
Operating Segment 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. This discussion
reflects significant impacts in business results by operating segment, as
reported consistently with how management assesses operating segment
performance. See Note 8 for comparative presentation of business segment data.
8
<PAGE>
Bakery Products
---------------
The Bakery Products segment reflected significantly higher net sales during the
current quarter over the comparable year-ago quarter, despite a significant
unfavorable foreign exchange impact. Net sales for the segment increased 36.7%
to $541.2 million. Excluding the exchange rate impact, sales increased 39.0%.
The Metz acquisition contributed $136.9 million in net sales during the current
quarter. Price, continued product mix shift to premium and superpremium product
lines, and core volume growth also contributed to the sales increase.
Strong operating results were also generated by the Bakery Products segment.
Operating income increased 47.1% over the prior year to $32.8 million.
Excluding the foreign exchange impact, operating income increased by 49.3% to
$33.3 million. Increased revenues, manufacturing and selling efficiencies, and
lower ingredient costs were primary drivers of the improvement. Benefits of
integrating the Reposteria Martinez acquisition in Spain (March 1999) also
contributed to efficiency improvements for the segment. Final integration is
nearing completion and further benefits are expected to be realized.
Refrigerated Dough
------------------
Net sales for the Refrigerated Dough segment increased 8.8% during the current
quarter to $58.4 million, compared to the year-ago quarter. Excluding the
impact of foreign exchange, net sales increased 13.6% to $61.0 million. The
Patrick Raulet acquisition (June 1999) contributed to sales during the quarter
but was partially offset by unfavorable pricing and flat volumes experienced in
the domestic operations.
Operating income for the quarter was $4.9 million compared with $5.1 million in
the prior year. The Patrick Raulet acquisition contributed positively to
operating results but was offset by the category pricing and volume impacts
domestically. The domestic operations will continue to focus efforts on
enhancing product mix to higher margin products while lowering costs.
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 a negative $332.2
million at June 20, 2000 compared to a negative $366.6 million at March 28,
2000. The negative working capital is directly attributed to the current
maturities of long-term debt related to the Metz acquisition. The increase from
fiscal year end 2000 reflects the seasonality of the business.
$20.7 million has been invested in capital expenditures during the quarter, with
spending for the fiscal year planned for a level of $115-120 million.
Additionally, 85,000 shares were repurchased during the current quarter for the
treasury at a cost of $1.3 million.
The Company initially financed the Metz acquisition (March 2000) with the new
$600 million revolving credit facility due 2001. During the current quarter,
borrowings under this new revolving credit facility were refinanced through
borrowings under the Company's commercial paper programs. The commercial paper
borrowings were at a weighted average interest rate of 6.9% during the current
quarter compared to a weighted average rate of 6.2% for fiscal 2000. These
commercial paper programs are supported by the existing lines of credit. As of
June 20, 2000, approximately $200 million was available under these lines for
future borrowings.
On July 25, 2000, Earthgrains issued $300 million in three-year, 8-3/8% fixed-
rate Notes due 2003 and $250 million in five-year, 8-1/2% fixed-rate Notes due
2005 under the Company's $750 million shelf registration
9
<PAGE>
statement filed with the Securities and Exchange Commission in April 2000.
Proceeds from the offering were used to refinance outstanding commercial paper
borrowings. $550 million of the $1.1 billion total committed lines of credit
were terminated at the time of the issuance. The $400 million in interest rate
swaps, entered into in May 2000, were also terminated in conjunction with this
issuance. The $7.8 million loss on these swap agreements will be recognized as
an adjustment to interest expense on the underlying debt instruments.
The Company's available cash will be used to fund capital expenditures, interest
payments pursuant to the outstanding debt and the initiative to begin repaying a
portion of the debt in fiscal 2001, and dividends to shareholders. Cash
provided by operations and borrowings available under the existing credit
facilities and commercial paper program and the remaining shelf registration
should continue to provide the necessary funding for ongoing cash requirements.
ENVIRONMENTAL MATTERS
---------------------
The Company is subject to Federal, state and local environmental protection laws
and regulations and is operating within such laws or is taking action aimed at
assuring compliance with such laws and regulations. Earthgrains has been
identified as a potentially responsible party ("PRP") at certain locations by
the EPA and may be required to share in the cost of cleanup with respect to one
material site. 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 14, 2000, the following matters
were voted upon:
1. Election of E. Byron Glore, Jr., Jaime Iglesias, and William E.
Stevens to serve as Directors of the Company for a term of three
years expiring in 2003.
For Withheld
--- --------
E. Byron Glore, Jr. 36,902,462 1,363,887
Jaime Iglesias 36,909,878 1,356,471
William E. Stevens 36,911,707 1,354,642
2. Approval of an amendment to the 1996 Stock Incentive Plan.
For 33,167,744
Against 4,791,534
Abstain 307,071
Non-Votes N/A
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 10.1 - Amendment No. 4 to The Earthgrains Company
Employee Stock Ownership/401(k) Plan, dated
as of June 30, 1998.
- 10.2 - Amendment No. 5 to The Earthgrains Company
Employee Stock Ownership/401(k) Plan, dated
as of June 30, 1999.
- 10.3 - Amendment No. 6 to The Earthgrains Company
Employee Stock Ownership/401(k) Plan, dated
as of June 30, 2000.
- 10.4 - Amendment No. 7 to The Earthgrains Company
Employee Stock Ownership/401(k) Plan, dated
as of June 30, 2000.
- 10.5 - The Earthgrains Company 1996 Stock Incentive
Plan (As Amended April 11, 1996, March 21,
1997, May 30, 1997, April 29, 1999, and
July 14, 2000; Restated to reflect two 2-
for-1 Stock Splits on July 28, 1997, and
July 20, 1998.)
- 27 - Financial Data Schedule.
11
<PAGE>
(b) Reports on Form 8-K
- On May 31, 2000, the Company voluntarily filed with the
Securities and Exchange Commission a current report on
Form 8-K in order to make public its consolidated balance
sheets as of March 28, 2000 and March 30, 1999 and the
consolidated statements of earnings, cash flows, and
shareholders' equity for each of the fiscal years in the
three-year period, ended March 28, 2000, and the related
footnotes and independent accountant's report thereon,
all of which were also incorporated into the Company's
Annual Report on Form 10-K.
- On June 1, 2000, the Company filed with the Securities
and Exchange Commission a current report on Form 8-K in
order to file the financial statements of Metz and the
accountant's report thereon required by Item 7(a) and
the pro forma financial information required by Item
7(b) in conjunction with the acquisition of Metz Baking
Company.
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: August 3, 2000 By: Mark H. Krieger
/S/ MARK H. KRIEGER
------------------------
Mark H. Krieger
Vice President and Chief
Financial Officer
<PAGE>
