<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-18859
----------
INTERNATIONAL HOME FOODS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377322
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1633 LITTLETON ROAD, PARSIPPANY, N.J. 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 359-9920
----------
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 [ ]
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at March 31, 1999 was 73,378,608.
1
<PAGE> 2
INTERNATIONAL HOME FOODS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
<S> <C>
Condensed Consolidated Statements of Income 3
Three Months Ended March 31, 1999 and 1998
Condensed Consolidated Balance Sheets 4
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows 5
Three Months Ended March 31, 1999 and 1998
Condensed Consolidated Statements of 6
Comprehensive Income
Three Months Ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 18
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibit 12. Computation of Consolidated Ratio of 31
Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule 32
</TABLE>
2
<PAGE> 3
INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Net sales $ 514,186 $ 388,451
Cost of sales 280,362 201,762
------------ ------------
Gross profit 233,824 186,689
Marketing expenses 109,739 81,014
Selling, general, and administrative expenses 60,959 51,441
------------ ------------
Income from operations 63,126 54,234
Interest expense 25,751 22,922
Other (income) expense, net (175) (600)
Gain on sale of business (15,779) --
------------ ------------
Income before provision for income taxes 53,329 31,912
Provision for income taxes 20,798 12,605
------------ ------------
Net income $ 32,531 $ 19,307
============ ============
Basic earnings per share:
Net income $ 0.44 $ 0.25
------------ ------------
Shares used in computing basic earnings per share 73,303,266 77,226,185
------------ ------------
Diluted earnings per share:
Net income $ 0.43 $ 0.24
------------ ------------
Shares used in computing diluted earnings per share 75,802,674 81,078,048
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,231 $ 17,201
Accounts receivable, net of allowances 174,719 141,422
Inventories 226,362 235,730
Prepaid expenses and other current assets 21,114 17,522
Deferred income taxes 21,074 19,616
----------- -----------
Total current assets 466,500 431,491
Property, plant and equipment, net 263,552 262,771
Intangible assets, net 400,476 396,617
Deferred income taxes 318,273 330,651
Other assets 22,492 24,667
----------- -----------
Total assets $ 1,471,293 $ 1,446,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to banks $ 14,477 $ 17,470
Current portion of long-term debt 67,804 51,694
Revolving credit facility 36,094 62,526
Accounts payable 57,500 44,854
Accrued compensation and benefits 28,478 22,780
Accrued advertising and promotion 52,746 39,102
Accrued interest 26,280 16,311
Other accrued liabilities 36,772 33,378
----------- -----------
Total current liabilities 320,151 288,115
Long-term debt 1,060,921 1,102,830
Postretirement benefits obligation 25,242 24,487
Other noncurrent liabilities 855 861
----------- -----------
Total liabilities 1,407,169 1,416,293
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock - par value $.01 per share; authorized,
100,000,000 shares; no shares issued or outstanding $ -- $ --
Common stock - par value $.01 per share; authorized,
300,000,000 shares; issued 77,778,608 and
77,584,348 shares 778 776
Additional paid-in capital 57,567 56,051
Treasury stock, at cost 4,400,000 shares (57,200) (57,200)
Retained earnings 67,028 34,497
Accumulated other comprehensive income (loss) (4,049) (4,220)
----------- -----------
Total stockholders' equity 64,124 29,904
----------- -----------
Total liabilities and stockholders' equity $ 1,471,293 $ 1,446,197
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
(unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 32,531 $ 19,307
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,621 9,198
Deferred income taxes 10,921 7,688
Stock option compensation 26 393
Gain on sale of business (15,779) --
Changes in assets and liabilities, net of acquisitions and divestiture:
Increase in accounts receivable (18,331) (5,338)
Decrease in inventories 26,088 3,992
Increase in other current assets (3,424) (6,648)
Increase in accounts payable 6,471 9,396
Increase in accrued liabilities 28,773 8,151
Increase in non-current assets (179) 3,856
Increase in non-current liabilities 738 --
-------- --------
Net cash provided by operating activities 78,456 49,995
-------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment, net (10,865) (5,984)
Purchase of businesses, net of cash acquired (37,733) (34,463)
Proceeds from sale of business 30,000 --
-------- --------
Net cash used in investing activities (18,598) (40,447)
-------- --------
FINANCING ACTIVITIES:
Increase (Decrease) in due to banks (2,993) 1,062
Repayment of long-term debt (25,802) (13,700)
Borrowings from revolving credit facility 13,124 35,000
Repayment of borrowings from revolving credit facility (40,210) (25,000)
Proceeds from exercise of stock options 1,232 1,967
-------- --------
Net cash used in financing activities (54,649) (671)
-------- --------
Effect of exchange rate changes on cash 821 (907)
-------- --------
Increase in cash and cash equivalents 6,030 7,970
Cash and cash equivalents at beginning of period 17,201 11,872
-------- --------
Cash and cash equivalents at end of period $ 23,231 $ 19,842
======== ========
Cash paid during the period for:
Interest 14,604 11,466
Income taxes 1,814 3,395
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------- --------
(unaudited)
<S> <C> <C>
Net income $32,531 $ 19,307
Other comprehensive income (loss), net of tax:
Foreign currency translation 171 (593)
------- --------
Total other comprehensive income (loss) 171 (593)
------- --------
Comprehensive income $32,702 $ 18,714
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. ACCOUNTING POLICIES
Interim Financial Statements
In the opinion of International Home Foods, Inc. ("the Company"), the
accompanying condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's financial position as of March 31, 1999 and
the results of operations and cash flows for the three months ended March
31, 1999 and 1998. In 1999 the Company converted its quarterly reporting
periods from a calendar period to a 4-4-5 period. As a result of this
change there were two additional business days in the first quarter of
1999 as compared to 1998 and there will be one fewer business day in each
of the subsequent 1999 quarters as compared to the respective quarters in
1998. The impact on the first quarter results was not material. The
results of operations for the three month period are not necessarily
indicative of the results to be expected for the full year. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1998 Annual Report on Form 10-K.
Use of Estimates
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles and necessarily include
amounts based on judgments and estimates made by management. Actual
results could differ from these estimates. Estimates are used when
accounting for potential bad debts, inventory obsolescence and spoilage,
trade and promotion allowances, coupon redemptions, depreciation and
amortization, stock option compensation, deferred income taxes and tax
valuation allowances, restructuring charges, and contingencies, among
other items.
Reclassifications
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
2. DESCRIPTION OF BUSINESS, MERGER, AND ACQUISITION
Background and Basis of Presentation
The Company was previously an indirect wholly-owned subsidiary of
American Home Products Corporation ("American Home Products"). On
September 5, 1996, American Home Products entered into an agreement
pursuant to which an affiliate ("Hicks Muse Holding") of Hicks, Muse,
Tate & Furst Equity Fund III, L.P. ("Hicks Muse") acquired (the "IHF
Acquisition") an 80% interest in the Company. The IHF Acquisition was
consummated on November 1, 1996.
The IHF Acquisition was accounted for as a leveraged recapitalization.
Accordingly, the Company's assets and liabilities retained their
historical bases for financial reporting purposes. For tax purposes, the
IHF Acquisition was treated as a taxable business combination resulting
in a "step-up" in the tax bases of the Company's assets and liabilities.
7
<PAGE> 8
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Description of Business, Merger, and Acquisition, Continued
Business
The Company manufactures and markets a diversified portfolio of
shelf-stable food products including entrees, side dishes, snacks, canned
fish and canned meats, among others. The Company operates in three
reportable business segments (Note 3). The Company sells its products
primarily in the United States, Canada and Mexico, and is not dependent
on any single or major group of customers for its sales.
3. BUSINESS SEGMENT INFORMATION
The Company has three reportable business segments - Branded Products,
Seafood and Private Label and Foodservice. Branded Products is defined as
U.S. grocery sales for the following products: Chef Boyardee(R),
Libby's(R) brand of canned meats, Southwest brands (Luck's(R), Ro*Tel(R),
Dennison's(R) and Ranch Style(R)), Specialty brands (PAM(R) cooking
spray, Gulden's(R), Maypo(R), Wheatena(R), Maltex(R) and G.
Washington's(R)) and Snack brands (Crunch 'n Munch(R), Jiffy Pop(R) and
Campfire(R)). Seafood includes all sales for the Bumble Bee(R),
Orleans(R), Libby's, Clover Leaf(R) and Paramount(R) brands of canned
seafood products as well as private label and foodservice seafood sales.
Private Label and Foodservice includes all private label canned pasta,
cooking spray, fruit snacks, ready-to-eat cereals, wholesome snack bars,
pie crust and personal care products and the sales to foodservice
distributors. The All Other category is comprised of sales of Polaner(R)
products, sales to the military, contract sales to Nestle and sales of
the International division which includes branded, private label and
foodservice sales in Canada, Mexico, Puerto Rico and other export sales.
The Company sold its Polaner fruit spreads and spices business on
February 5, 1999 (Note 5). For comparative purposes, the Company has
reclassified the Polaner sales and operating income from the Branded
Products Segment where it was reported in the Company's 1998 Annual
Report, to the All Other category for 1999 and 1998.
The Company sells the products in each of its segments primarily to
grocery wholesalers and distributors, grocery stores and supermarkets,
convenience stores, drug and mass merchants and warehouse clubs.
The Company evaluates segment performance based upon segment operating
income (earnings before interest expense, other [income] expense, net and
income taxes excluding unusual or infrequently occurring items,
restructuring charge and stock compensation expense [income]). Certain
centrally incurred costs (Corporate), are not allocated to the operating
segments.
8
<PAGE> 9
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Business Segment Information, (Continued)
A summary of the Company's three reportable business segments - Branded
Products, Seafood, and Private Label and Foodservice is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
Segment
Operating
Net Sales Income
1999 --------- ---------
- ----
<S> <C> <C>
Branded Products $ 206,029 $39,801
Seafood 159,966 9,834
Private Label and Foodservice 78,563 10,393
--------- ---------
Subtotal - Reportable Segments 444,558 60,028
All Other 69,628 5,750
--------- ---------
Total $ 514,186 $65,778
========= =========
1998
Branded Products $ 173,792 $38,157
Seafood 116,542 6,714
Private Label and Foodservice 40,693 6,622
--------- ---------
Subtotal - Reportable Segments 331,027 51,493
All Other 57,424 5,567
--------- ---------
Total $ 388,451 $ 57,060
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------- ---------
Reconciliation to Consolidated Results
<S> <C> <C>
Segment Operating Income $ 65,778 57,060
Less:
Stock compensation expense 26 393
Corporate 2,626 2,433
--------- ---------
Total consolidated income from
operations $ 63,126 54,234
========= =========
</TABLE>
9
<PAGE> 10
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
4. ACQUISITIONS
On January 19, 1999, the Company through it's subsidiary Bumble Bee
Seafoods, Inc. acquired the Cloverleaf and Paramount canned seafood brands
and business of British Columbia Packers ("Cloverleaf/Paramount brands")
from George Weston Ltd. of Canada for a total purchase price of $37.9
million. The acquisition was partially funded with borrowings under the
Company's Senior Bank Facilities and the balance of the purchase price
from the Company's available cash balances as of the date of the closing.
On September 8, 1998 the Company, through its subsidiary Trenton Home
Foods, Inc., acquired the Libby's brand of retail and international canned
meat products ("Libby's"), and the Trenton, Missouri manufacturing
facility for those products from Nestle USA, Inc. for approximately $129.0
million, including transaction fees. The Company, through a fifteen year
license agreement with Nestle, will continue to use the Libby's trademark.
In addition, the Company and Nestle have entered into a long-term supply
agreement through December 31, 2002 with three additional one-year terms
at the option of Nestle under which the Company will continue to
manufacture Nestle foodservice products at the facility in Trenton,
Missouri. This supply agreement primarily is cost-based and provides that
the Company is reimbursed for the variable cost per case, as defined, for
all product which has been produced and packaged by the Company and
shipped on behalf of Nestle, plus an amount paid quarterly which
approximates the Company's fixed costs. The Company financed the
acquisition of the Libby's canned meat business with borrowings under its
Senior Bank Facilities. Libby's is a leading domestic manufacturer,
importer and global marketer of canned meat products, including Vienna
sausages, corned beef, salmon, hash and chili, and the Spreadables(R) and
Broadcast(R) brands.
On April 14, 1998, the Company acquired all of the stock of Grist Mill Co.
("Grist Mill") for approximately $112.8 million, including transaction
fees. The Company financed the acquisition with borrowings under its
Senior Bank Facilities. Grist Mill is a manufacturer and distributor of
private label and value-priced branded food products including
ready-to-eat cereals, fruit snacks, granola bars, fruit-filled cereal
bars, crisp rice marshmallow bars and preformed pie crusts.
On March 9, 1998, the Company, through its Canadian subsidiary,
International Home Foods (Canada), Inc., purchased certain assets relating
to the Puritan stews and canned meats business ("Puritan") from Unilever's
T. J. Lipton Canada division for a total purchase price of approximately
$41.0 million, including transaction fees. The acquisition was funded with
borrowings under the Company's Senior Bank Facilities. Puritan is the
largest processor and marketer of canned stews and meats in Canada, with
products marketed under the Puritan and Fraser Farms brand names.
10
<PAGE> 11
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Acquisitions, (Continued)
The excess of cost over fair value of net assets acquired for the above
acquisitions will be amortized over 15 years for identifiable intangibles
and 40 years for goodwill. These acquisitions have been accounted for
using the purchase method of accounting, and the operating results of the
acquired companies have been included in the consolidated financial
statements from the dates of acquisition. The information below includes
non-cash investing and financing activities supplemental to the
consolidated statements of cash flows. A summary of the excess of cost
over fair value of net assets acquired resulting from preliminary purchase
price allocations for the 1999 and 1998 acquisitions is as follows:
<TABLE>
<CAPTION>
CLOVERLEAF/
PARAMOUNT
BRANDS LIBBY'S GRIST MILL PURITAN
------------ -------- ---------- -------
<S> <C> <C> <C> <C>
Cost of acquisition, including
transaction fees $ 37,878 $129,013 $ 112,813 $41,009
Less: acquired assets
Current assets 41,094 20,218 18,830 4,620
Property, plant and equipment 1,184 25,001 38,190 6,473
Other assets -- -- 287 --
Add: liabilities assumed 9,967 5,528 5,016 --
------------ -------- ---------- -------
Excess of cost over net assets
acquired $ 5,567 $ 89,322 $ 60,522 $29,916
============ ======== ========== =======
</TABLE>
The following unaudited proforma consolidated results of operations have
been prepared as if the acquisitions of Puritan, Grist Mill and Libby's
had occurred as of the beginning of 1998 and reflect proforma adjustments
for goodwill, interest expense and tax expense:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1998
------------------------------------
IHF Acquisitions Total
------------------------------------
<S> <C> <C> <C>
Net sales $388,451 $ 66,429 $454,880
Operating income $ 54,234 $ 3,983 $ 58,217
Net income $ 19,307 $ (429) $ 18,878
Earnings per share:
Basic $ 0.25 $ (0.01) $ 0.24
Diluted $ 0.24 $ (0.01) $ 0.23
</TABLE>
The proforma consolidated results do not purport to be indicative of
results that would have occurred had the acquisitions been in effect for
the period presented, nor do they purport to be indicative of the results
that will be obtained in the future. The acquisition of Cloverleaf/
Paramount brands was not significant, and accordingly, proforma financial
information has not been provided.
5. SALE OF BUSINESS
On February 5, 1999 the Company sold its Polaner fruit spreads and spices
business to B&G Foods, Inc. for approximately $30.0 million in cash,
resulting in a gain of $15.8 million ($9.6 million, net of tax or $.13
per diluted share).
11
<PAGE> 12
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
6. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following amounts are included in Accumulated other comprehensive
income (loss) at March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Minimum pension liability $ (249) (249)
Foreign currency translation $ (3,800) $ (3,971)
--------- ------------
Accumulated other comprehensive
income (loss) $ (4,049) $ (4,220)
========= ============
</TABLE>
The changes in other comprehensive income (loss), and the related tax
effects, are as follows:
<TABLE>
<CAPTION>
Amount
Amount Income Tax Net of
Before Taxes Benefit Taxes
------------ --------- ---------
For the three months ended
March 31, 1999
<S> <C> <C> <C>
Foreign currency translation $ (89) $ 260 $ 171
------------ --------- ---------
Total other comprehensive
income (loss) $ (89) $ 260 $ 171
============ ========= =========
For the three months ended
March 31, 1998
Foreign currency translation $ (963) $ 370 $ (593)
------------ --------- ---------
Total other comprehensive
income (loss) $ (963) $ 370 $ (593)
============ ========= =========
</TABLE>
7. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of: March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Raw materials $ 47,834 $ 47,468
Work in progress 17,079 18,101
Finished goods 161,449 170,161
--------- ------------
Total $ 226,362 $ 235,730
========= ============
</TABLE>
12
<PAGE> 13
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
8. INCOME TAXES
Historically, the Company has generated operating income and realization
of the deferred tax assets is dependent upon the Company's ability to
generate sufficient future taxable income which management believes is
more likely than not. The Company anticipates future taxable income
sufficient to realize the recorded deferred tax assets. Future taxable
income is based on management's forecasts of the operating results of the
Company and there can be no assurance that such results will be achieved.
Management continually reviews such forecasts in comparison with actual
results and expected trends. In the event management determines that
sufficient future taxable income may not be generated to fully realize
the deferred tax assets, the Company will provide a valuation allowance
by a charge to income tax expense in the period of such determination.
9. COMMITMENTS AND CONTINGENCIES
The Company has ongoing royalty arrangements with several parties,
primarily for the use of characters in the Company's canned pasta
business. The accompanying condensed consolidated statements of income
include royalty costs which amounted to $105 and $107 for the three
months ended March 31, 1999 and 1998, respectively.
The Company has responsibility for environmental, safety and cleanup
obligations under various local, state and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability Act,
commonly known as Superfund. Based upon its experience to date, the
Company believes that the future cost of compliance with existing
environmental laws, regulations and decrees and liability for known
environmental claims, will not have a material adverse effect on the
Company's financial statements as a whole. However, future events, such
as changes in existing laws and regulations or their interpretation, and
more vigorous enforcement policies of regulatory agencies, may give rise
to additional expenditures or liabilities that could be material.
In the ordinary course of business, the Company enters into contracts for
the purchase of certain of its raw materials and is involved in various
pending or threatened litigation and claims. Although the outcome of any
legal proceeding cannot be predicted with certainty, management believes
through its discussions with counsel that its liability arising from or
the resolution of any pending or threatened litigation or claims, in the
aggregate will not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
10. RELATED PARTY TRANSACTIONS
Effective November 1, 1996, the Company entered into a 10-year monitoring
and oversight agreement with an affiliate of its majority stockholder.
The agreement provides for an annual fee of the greater of $1,000 or 0.1%
of the budgeted consolidated net sales of the Company for the current
year. In addition, effective November 1, 1996, the Company entered into a
financial advisory agreement with the affiliate under which the affiliate
will be entitled to a fee of 1.5% of the transaction value, as defined,
for each add-on transaction, as defined. The Company incurred monitoring
and oversight fees of $487 and $400 and financial advisory fees of $546
and $744 for the three months ended March 31, 1999 and 1998,
respectively.
13
<PAGE> 14
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
11. FINANCIAL INSTRUMENTS
The Company currently does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives. In accordance with the Senior Bank Facilities, the Company
is required to enter into interest rate protection agreements to the
extent necessary to provide that, when combined with the Company's
Senior Subordinated Notes, at least 50% of the Company's aggregate
indebtedness is subject to either fixed interest rates or interest rate
protection through September 1999.
The Company has entered into interest rate swap, cap and collar
agreements to reduce the impact of changes in interest rates on its
floating rate debt. The swap agreements are contracts to exchange
floating interest rate payments for fixed interest rate payments as well
as fixed interest rate payments for floating interest rate payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do
not represent the amount of exposure to credit loss. For interest rate
instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued and recognized as
an adjustment to interest expense.
The Company is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swap agreements. However, the
Company does not anticipate nonperformance by the counterparties.
As of March 31, 1999, the Company had the following interest rate
instruments in effect for which the fair value of these instruments is
based on estimated current settlement cost (notional amounts are in
millions):
<TABLE>
<CAPTION>
Notional Strike Fair
Amount Rate Value Period Rates
--------- ------ ------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Interest Rate Swaps $ 200 (2) 8.97% $ 4.8 8/98 - 11/01 6 - month
600 (1) 5.43% (8.5) 8/98 - 8/03 3 - month
Interest Rate Cap $ 225 (1) 6.75% -- 10/98 - 10/99 6 - month
200 (2) 6.75% -- 8/98 - 11/01 6 - month
Interest Rate Floor $ 200 (2) 5.20% (4.7) 8/98 - 11/01 6 - month
Interest Rate Collar $ 150 (1) 5.75% (0.2) 10/98 - 10/01 3 - month
3.76%
-------
$ (8.6)
=======
</TABLE>
(1) Agreement exchanges floating interest rate payments for fixed
interest rate payments.
(2) Agreement exchanges fixed interest rate payments for floating
interest rate payments.
14
<PAGE> 15
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12. GUARANTOR FINANCIAL DATA
The Company's Senior Subordinated Notes are fully and unconditionally
guaranteed by each of the Company's subsidiaries on a joint and several
basis. The Company has not presented separate financial statements and
other disclosures concerning each of the subsidiary guarantors because
management has determined that such information is not material to the
holders of the Senior Subordinated Notes. Presented below is summarized
combined financial information of the subsidiary guarantors:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- ------------------
(unaudited)
<S> <C> <C>
Current assets $ 343,737 $ 281,119
Noncurrent assets 616,024 578,206
Current liabilities 166,266 111,632
Noncurrent liabilities 23,632 28,057
For the Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
(unaudited)
Net sales $ 293,515 $ 176,415
Gross profit 104,970 62,226
Net income 25,227 (1) 5,666
Net cash provided by 24,921 18,616
operating activities
Net cash used in (18,067) (3,924)
investing activities
Net cash used in (2,196) (12,950)
financing activities
</TABLE>
December 31, 1998 amounts restated from amounts previously reported. Amounts
are not intended to report results as if the subsidiaries were separate
stand-alone entities.
(1) Includes an after-tax gain of $9.6 million ($15.8 million pre-tax) from
sale of the Polaner fruit spread and spice business.
15
<PAGE> 16
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
13. IMPACT OF RECENT ACCOUNTING STANDARDS
On March 4, 1998 Statement of Position ("SOP") No. 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use",
was issued. The SOP was issued to address diversity in practice regarding
whether and under what conditions the costs of internal-use software
should be capitalized. SOP 98-1 is effective for financial statements for
years beginning after December 15, 1998. The Company adopted this SOP in
1999, the impact of which was immaterial.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued to establish standards for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing standards. This statement requires all derivatives to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS 133. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently evaluating the
effect this statement will have on its financial statements.
14. EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if options to issue
common stock are assumed to be exercised or converted into common stock.
The EPS computations are based on the following amounts:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
Basic EPS computation:
<S> <C> <C>
Net income available to common shares $ 32,531 $ 19,307
Average number of shares outstanding 73,303,266 77,226,185
Basic earnings per share $ 0.44 $ 0.25
Diluted EPS computation:
Net income available to common shares $ 32,531 $ 19,307
Average number of shares outstanding 73,303,266 77,226,185
Effect of dilutive stock options 2,499,408 3,851,863
----------- -----------
Total number of shares outstanding 75,802,674 81,078,048
Diluted earnings per share $ 0.43 $ 0.24
</TABLE>
16
<PAGE> 17
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. RESTRUCTURING
In September 1998, in conjunction with management's plan to reduce costs
and improve operational efficiencies, the Company recorded a
restructuring charge of $118.1 million ($75.3 million after tax). The
principal actions in the restructuring plan involve the closure of the
Vacaville, California and Clearfield, Utah production facilities and the
related impact of the transfer of production to other facilities, mainly
Milton, Pennsylvania, and the write-down of goodwill associated with the
Campfire crisp rice snack bar brand and the Polaner fruit spreads brand.
The Polaner business was subsequently sold (Note 5).
The Vacaville, California production facility ceased operations in
December 1998, while the adjacent distribution center and the
Clearfield, Utah facility are expected to close in the second quarter of
1999.
With the exception of outsourced products, the Company has moved all of
the products that were manufactured at the Vacaville facility to other
facilities, mainly Milton, Pennsylvania. Production of tomato paste used
in Chef Boyardee canned pasta products and of Ro*Tel diced tomatoes,
both of which were manufactured at the Vacaville facility prior to its
closure, have been outsourced. The manufacturing of the Campfire
products is being transferred from Clearfield, Utah to the Company's
Lakeville, Minnesota facility. The Company incurs non-capitalizable
expenses as the transfer and installation of the relocated equipment
from these facilities occurs. The Company has incurred approximately
$1.5 million of such costs to date, including $0.9 million for the three
months ended March 31, 1999 and anticipates incurring an additional $1.5
million, before the entire process is completed by the end of 1999.
At March 31, 1999, $4.4 million of restructuring charges remained in
other accrued liabilities. This amount is comprised of severance and
related costs and facility closure costs. Payments totalling $6.7
million have been made to date, including $3.4 million for the three
months ended March 31, 1999.
17
<PAGE> 18
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
QUARTERLY REPORTING - In order to improve future quarterly comparability and
operating efficiencies in 1999, the Company converted its quarterly reporting
periods from a calendar period to a 4-4-5 period. As a result of this change
there were two additional business days in the first quarter of 1999 as compared
to 1998 and there will be one fewer business day in each of the subsequent 1999
quarters as compared to the respective quarters in 1998. The impact on the first
quarter results was not material.
RESULTS OF OPERATIONS - Three Months Ended March 31, 1999 and 1998.
NET SALES - The Company's net sales were $514.2 million for the three months
ended March 31, 1999 as compared to $388.5 million in the comparable 1998
quarter, an increase of $125.7 million, or 32.4%. Approximately $111.9 million
of the increase was related to sales of companies acquired during 1999 and
1998, which were not reflected in the 1998 amounts, offset by $8.4 million of
lower sales due to the sale of Polaner in February 1999. The remaining $22.2
million increase primarily reflects increases in sales of Bumble Bee products
($13.4 million), Chef Boyardee products ($2.7 million), PAM ($2.7 million) and
Southwest cuisine ($5.8 million), partially offset by decreases in
International sales of the existing business ($2.9 million) (See Results by
Segment on pages 19-21).
COST OF GOODS SOLD - Cost of goods sold was $280.4 million for the three months
ended March 31, 1999 as compared to $201.8 million in the comparable 1998
quarter. Expressed as a percentage of net sales, cost of goods sold increased to
54.5% from 51.9% in 1998. This was primarily attributable to the inclusion of
the results of the Companies acquired during 1999 and 1998, which have lower
average gross margins than the Company's existing products. In connection with
the acquisition of the Libby's canned meat business from Nestle, the Company
entered into a co-packing agreement pursuant to which the acquired production
facility continues to manufacture certain products for Nestle for sale prices
which approximate the Company's cost (contract sales to Nestle). This cost-based
arrangement has a negative impact on realized gross margin of approximately
1.3%. Excluding results of the 1999 and 1998 acquisitions, cost of goods sold
declined to 49.5% of net sales from 52.0% in 1998. This decline in cost of goods
sold as a percentage of net sales primarily reflects the effect of decreases in
some of the Company's commodity prices and management's continuing cost
reduction initiatives.
MARKETING EXPENSES - Marketing expenses increased to $109.7 million for the
three months ended March 31, 1999 as compared to $81.0 million in 1998.
Expressed as a percentage of net sales, marketing expenses increased to 21.3%
from 20.9% from the comparable 1998 period. The increase of $28.7 million was
primarily attributable to Bumble Bee ($9.9 million) principally due to higher
trade expenses related to lower commodity costs which are passed through to
retailers as trade marketing dollars, the 1999 and 1998 acquisitions ($11.5
million), increases in Chef Boyardee ($4.3 million), PAM ($1.2 million) and the
International existing business ($1.0 million), partially offset by a decrease
in Polaner ($2.0 million) due to the sale of the business.
18
<PAGE> 19
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
SELLING, GENERAL AND ADMINISTRATIVE ("S,G & A") EXPENSES - S,G & A expenses
were $60.9 million for the three months ended March 31, 1999 as compared to
$51.4 million in 1998, an increase of $9.5 million. However, S,G & A expenses
as a percentage of net sales declined to 11.9% in the three months ended March
31, 1999 from 13.2% in the comparable 1998 quarter. The 1999 and 1998
acquisitions contributed $10.1 million to the increase of S,G & A expenses. The
decrease in the existing business ($0.6 million) and the overall decrease as a
percentage of net sales reflects the more efficient utilization of the
Company's administrative resources as the Company's sales have grown.
INTEREST EXPENSE - Interest expense for the three months ended March 31, 1999
was $25.8 million as compared to $22.9 million for the comparable 1998 period.
The increase in interest expense reflects a higher outstanding debt balance
during the quarter ended March 31, 1999 as compared to the comparable 1998
quarter, primarily due to the acquisitions of Grist Mill, Libby's and
Cloverleaf/Paramount, all of which occurred after March 31, 1998 offset by
lower interest rates.
GAIN ON SALE OF BUSINESS - On February 5, 1999 the Company sold its Polaner
fruit spreads and spices business to B&G Foods, Inc. for $30.0 million in cash,
resulting in a gain of $15.8 million ($9.6 million, net of tax, or $.13 per
diluted share).
PROVISION FOR INCOME TAXES - Income taxes increased to $20.8 million for the
three months ended March 31, 1999 from $12.6 million in the comparable 1998
quarter due to higher income before taxes. The effective tax rate decreased
slightly to 39.0% in 1999 from 39.5% in 1998. The Company anticipates
sufficient future income to realize deferred tax assets recorded at March 31,
1999. In the event management determines that sufficient future taxable income
may not be generated to fully realize the deferred tax assets, the Company will
provide a valuation allowance by a charge to income tax expense in the period
of such determination.
NET INCOME - For the three month period ended March 31, 1999, net income
increased by $13.2 million over the comparable 1998 period, primarily
reflecting the factors discussed above. Basic earnings per share were $0.44 and
$0.25 for the three months ended March 31, 1999 and 1998, respectively, and
diluted earnings per share were $0.43 and $0.24 for the three months ended
March 31, 1999 and 1998, respectively.
RESULTS BY SEGMENT - The Company has three reportable business segments -
Branded Products, Seafood and Private Label and Foodservice. Branded Products
is defined as U.S. grocery sales for the following products: Chef Boyardee,
Libby's brand of canned meats, Southwest brands (Luck's, Ro*Tel, Dennison's and
Ranch Style Brands), Specialty brands (PAM cooking spray, Gulden's, Maypo,
Wheatena, Maltex and G. Washington's) and Snack brands (Crunch 'n Munch, Jiffy
Pop and Campfire). Seafood includes all sales for the Bumble Bee, Orleans,
Libby's, Clover Leaf and Paramount brands of canned seafood products as well as
private label and foodservice seafood sales. Private Label and Foodservice
includes all private label canned pasta, cooking spray, fruit snacks,
ready-to-eat cereals, wholesome snack bars, pie crust and personal care
19
<PAGE> 20
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Results by Segment, (Continued)
products and the sales to foodservice distributors. The All Other category is
comprised of sales of Polaner products, sales to the military, contract sales
to Nestle and sales of the International division which includes branded,
private label and foodservice sales in Canada, Mexico, Puerto Rico and other
export sales.
The Company sold its Polaner fruit spreads and spices business on February 5,
1999 (Note 5). For comparative purposes, the Company has reclassified the
Polaner sales and operating income from the Branded Products Segment where it
was reported in the Company's 1998 Annual Report, to the All Other category for
the three months ended March 31, 1999 and 1998.
The Company sells the products in each of its segments primarily to grocery
wholesalers and distributors, grocery stores and supermarkets, convenience
stores, drug and mass merchants and warehouse clubs.
The Company evaluates segment performance based upon segment operating income
(earnings before interest expense, other [income] expense, net and income taxes
excluding unusual or infrequently occurring items, restructuring charge and
stock compensation expense [income]). Certain centrally incurred costs
(Corporate), are not allocated to the operating segments.
The following table sets forth certain segment information for the three months
ended March 31, 1999 and March 31, 1998:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
Net Sales: -------- --------
<S> <C> <C>
Branded Products $206,029 $173,792
Seafood 159,966 116,542
Private Label and Food Service 78,563 40,693
-------- --------
Subtotal - Reportable Segments 444,558 331,027
All Other 69,628 57,424
-------- --------
Total $514,186 $388,451
======== ========
1999 1998
-------- --------
Segment Operating Income:
Branded Products $ 39,801 $ 38,157
Seafood 9,834 6,714
Private Label and Foodservice 10,393 6,622
-------- --------
Subtotal - Reportable Segments 60,028 51,493
All Other 5,750 5,567
-------- --------
Total $ 65,778 $ 57,060
======== ========
</TABLE>
20
<PAGE> 21
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Results by Segment, (Continued)
BRANDED PRODUCTS - The Branded Products segment net sales increased $32.2
million, or 19%, for the three months ended March 31, 1999 versus the
comparable 1998 period. This increase is primarily the net result of the
Libby's acquisition ($22.1 million), increased sales of Chef Boyardee ($2.7
million), PAM ($2.7 million), Crunch 'n Munch ($0.7 million), Ro*Tel ($2.7
million) and Dennison's ($1.9 million), partially offset by lower sales of
Campfire ($1.9 million). All other Branded Products sales increased $1.3
million.
Sales of the Chef Boyardee brand increased approximately 2.6% for the three
months ended March 31, 1999 versus the comparable 1998 period. In terms of the
brand's various product lines, canned pasta sales increased 2% and Microwave
sales were up 12%, partially offset by declines in Pizza Kits and Dinners.
PAM sales increased due to higher category consumption and the July 1998
introduction of two new items, PAM Lemon Flavor Seasoning Spray and PAM Garlic
Flavor Seasoning Spray.
The decline in Campfire sales ($2.1 million) largely correlates to a decline in
the crisp rice bar category in general. This decline was partially offset by an
increase in Campfire marshmallow sales ($0.2 million).
Segment operating income of the Branded Products segment increased $1.6 million
largely reflecting the factors discussed above. As a percentage of net sales,
segment operating income of the Branded Products segment decreased from 22.0%
during the three months ended March 31, 1998 to 19.3% for the same period 1999.
This decrease reflects the change in product mix caused by the addition of
Libby's, which has lower operating income than other products within the
segment, and an increase in promotional spending related to the Branded
Products over the comparable 1998 period.
SEAFOOD - The Seafood segment net sales increased $43.4 million or 37%, due to
the acquisition of the Cloverleaf/Paramount brands ($27.0 million), an increase
in Bumble Bee sales ($13.4 million) primarily due to incremental distribution
in mass merchandising and club stores, increased sales in Puerto Rico and in
specialty seafood products, and the acquisition of Libby's and its related
salmon sales ($3.0 million). Segment operating income correspondingly increased
$3.1 million or 47%.
PRIVATE LABEL AND FOOD SERVICE - Net sales of the Private Label and Foodservice
segment increased $37.9 million, or 93%, primarily due to the April 1998
acquisition of Grist Mill ($31.6 million), and increases in private label
canned pasta ($1.2 million), Libby's private label sales ($3.9 million) and an
increase in Foodservice sales ($1.7 million). Segment operating income
increased $3.8 million, or 57%, primarily due to the acquisition of Grist Mill
($2.3 million) and the factors discussed above.
21
<PAGE> 22
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Results by Segment, (Continued)
The All Other net sales increased $12.2 million, or 21%, primarily due to a
full quarter's results of the acquisition of Puritan, which was acquired in
March 1998 ($6.3 million), the acquisition of Libby's ($3.5 million), contract
manufacturing sales to Nestle ($14.4 million) at prices which approximate the
Company's cost of production, an increase in Productos Del Monte sales ($1.8
million), primarily offset by a decrease in Puerto Rico net sales ($3.5
million) and a decrease in export sales of the existing business ($0.8
million). The Company sold its Polaner business in February 1999, and
accordingly, sales for Polaner decreased $8.4 million as compared to the
comparable 1998 period. Segment operating income increased $0.2 million largely
reflecting the factors discussed above, offset by the contract manufacturing
sales to Nestle.
RESTRUCTURING - In September 1998, in conjunction with management's plan to
reduce costs and improve operational efficiencies, the Company recorded a
restructuring charge of $118.1 million ($75.3 million after tax). The principal
actions in the restructuring plan involve the closure of the Vacaville,
California and Clearfield, Utah production facilities and the related impact of
the transfer of production to other facilities, mainly Milton, Pennsylvania,
and the write-down of goodwill associated with the Campfire crisp rice snack
bar brand and the Polaner fruit spreads brand. The Polaner business was
subsequently sold (Note 5).
The Vacaville, California production facility ceased operations in December
1998, while the adjacent distribution center and the Clearfield, Utah facility
are expected to close in the second quarter of 1999.
With the exception of outsourced products, the Company has moved all of the
products that were manufactured at the Vacaville facility to other facilities,
mainly Milton, Pennsylvania. Production of tomato paste used in Chef Boyardee
canned pasta products and of Ro*Tel diced tomatoes, both of which were
manufactured at the Vacaville facility prior to its closure, have been
outsourced. The manufacturing of the Campfire products is being transferred
from Clearfield, Utah to the Company's Lakeville, Minnesota facility. The
Company incurs non-capitalizable expenses as the transfer and installation of
the relocated equipment from these facilities occurs. The Company has incurred
approximately $1.5 million of such costs to date, including $0.9 million for
the three months ended March 31, 1999 and anticipates incurring an additional
$1.5 million, before the entire process is completed by the end of 1999.
At March 31, 1999, $4.4 million of restructuring charges remained in other
accrued liabilities. This amount is comprised of severance and related costs
and facility closure costs. Payments totalling $6.7 million have been made to
date, including $3.4 million for the three months ended March 31, 1999.
22
<PAGE> 23
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS - Net cash provided by operating activities for the three months
ended March 31, 1999 was $78.5 million, or $28.5 million higher than the
comparable 1998 period primarily due to a decrease in inventory ($22.1 million)
primarily due to outsourcing of tomato paste and Ro*Tel diced tomatoes, the
sale of Polaner and continued improvement in inventory management, increased
net income ($13.2 million), a decrease in deferred income taxes ($3.2 million),
additional depreciation and amortization ($1.4 million), changes in assets and
liabilities ($4.8 million), offset by the gain on the Polaner sale ($15.8
million) and reduced stock compensation expense ($0.4 million).
Net cash used by investing activities for the three months ended March 31, 1999
improved by $21.8 million, as a result of the $30.0 million in proceeds from
the sale of Polaner, partially offset by higher capital expenditures.
Acquisitions were made in both years. In 1999, the Company through it's
subsidiary, Bumble Bee Seafoods, Inc., acquired the Cloverleaf/Paramount brands
for approximately $37.7 million, net of cash acquired. In 1998, the Company
through it's Canadian subsidiary, International Home Foods (Canada), Inc.,
purchased substantially all of the assets relating to the Puritan stews and
canned meats business from Unilever's T. J. Lipton Canada division for
approximately $34.5 million.
Cash used in financing activities was $54.7 million for the three month period
ended March 31, 1999, compared to $0.7 million in the comparable 1998 period.
In 1999, the principal factors of the increase relate to the Company borrowing
$13.1 million to partially fund the Cloverleaf/ Paramount brands acquisition
and repaying $40.2 million and $25.8 million under the terms of its revolving
credit facility and its Senior Bank Facilities, respectively. In 1998, the
Company borrowed $35.0 million to fund the Puritan acquisition and repaid $25.0
million and $13.7 million under the terms of its revolving credit facility and
its Senior Bank Facilities, respectively.
The Company is highly leveraged with Senior Bank Facilities that comprise (i) a
$516.5 million Tranche A term loan facility, maturing in 2004, (ii) a $149.8
million Tranche B term loan facility, maturing in 2005, (iii) a $100.0 million
Tranche B-1 term loan facility, maturing in 2006, and (iv) a $230.0 million
revolving credit facility, maturing in 2004. As of March 31, 1999, the
outstanding balance of the Senior Bank Facilities was $759.3 million, which
included $36.1 million of borrowings under the revolving credit facility. In
addition to scheduled periodic repayments aggregating $25.7 million for the
remainder of 1999, the Company is also required to make mandatory repayments of
the loans under the Senior Bank Facilities with a portion of its excess cash
flow, as defined.
The Company also has outstanding $400.0 million of 10 3/8% Senior Subordinated
Notes due 2006, without any scheduled repayments of principal prior to
maturity, requiring semi-annual interest payments.
23
<PAGE> 24
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, (Continued)
Both the Senior Bank Facilities and the Senior Subordinated Notes contain a
number of significant covenants that, among other things, restrict the ability
of the Company to dispose of assets, incur additional indebtedness, repay other
indebtedness or amend other debt instruments, pay dividends, create liens on
assets, enter into capital leases, make investments or acquisitions, engage in
mergers or consolidations, make capital expenditures, engage in certain
transactions with affiliates and otherwise restrict corporate activities. In
addition, under the Senior Bank Facilities the Company is required to comply
with specified minimum interest coverage, maximum indebtedness to earnings
before interest, taxes, depreciation and amortization (EBITDA) and minimum
fixed charge coverage ratios.
Management believes that cash generated from operations and borrowings under
the Senior Bank Facilities will be sufficient to satisfy working capital
requirements and required capital expenditures. Further expansion of the
business through acquisitions may require the Company to incur additional
indebtedness or issue equity securities. There can be no assurance that
additional debt or equity will be available to the Company, or if available,
will be on terms acceptable to the Company.
FINANCIAL INSTRUMENTS
The Company currently does not use derivative financial instruments for trading
or speculative purposes, nor is the Company a party to leveraged derivatives.
In accordance with the Senior Bank Facilities, the Company is required to enter
into interest rate protection agreements to the extent necessary to provide
that, when combined with the Company's Senior Subordinated Notes, at least 50%
of the Company's aggregate indebtedness is subject to either fixed interest
rates or interest rate protection through September 1999.
The Company has entered into interest rate swap, cap and collar agreements to
reduce the impact of changes in interest rates on its floating rate debt. The
swap agreements are contracts to exchange floating interest rate payments for
fixed interest rate payments as well as fixed interest rate payments for
floating interest rate payments periodically over the life of the agreements
without the exchange of the underlying notional amounts. The notional amounts
of interest rate agreements are used to measure interest to be paid or received
and do not represent the amount of exposure to credit loss. For interest rate
instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued and recognized as an
adjustment to interest expense.
The Company is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate nonperformance by the counterparties.
24
<PAGE> 25
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Financial Instruments, (Continued)
As of March 31, 1999, the Company had the following interest rate instruments
in effect for which the fair value of these instruments is based on estimated
current settlement cost (notional amounts are in millions):
<TABLE>
<CAPTION>
Notional Strike Fair
Amount Rate Value Period Rates
-------- ------ ------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Interest Rate Swaps $ 200 (2) 8.97% $ 4.8 8/98 - 11/01 6 - month
600 (1) 5.43% (8.5) 8/98 - 8/03 3 - month
Interest Rate Cap $ 225 (1) 6.75% -- 10/98 - 10/99 6 - month
200 (2) 6.75% -- 8/98 - 11/01 6 - month
Interest Rate Floor $ 200 (2) 5.20% (4.7) 8/98 - 11/01 6 - month
Interest Rate Collar $ 150 (1) 5.75% (0.2) 10/98 - 10/01 3 - month
3.76%
------
$ (8.6)
======
</TABLE>
(1) Agreement exchanges floating interest rate payments for fixed
interest rate payments.
(2) Agreement exchanges fixed interest rate payments for floating
interest rate payments.
IMPACT OF RECENT ACCOUNTING STANDARDS
On March 4, 1998 Statement of Position ("SOP") No. 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use", was issued.
The SOP was issued to address diversity in practice regarding whether and under
what conditions the costs of internal-use software should be capitalized. SOP
98-1 is effective for financial statements for years beginning after December
15, 1998. The Company adopted this SOP in 1999, the impact of which was
immaterial.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued to establish standards for accounting for derivatives
and hedging activities and supersedes and amends a number of existing
standards. This statement requires all derivatives to be recognized in the
statement of financial position as either assets or liabilities and measured at
fair value. In addition, all hedging relationships must be designated,
reassessed and documented pursuant to the provisions of SFAS 133. This
statement is effective for fiscal years beginning after June 15, 1999. The
Company is currently evaluating the effect this statement will have on its
financial statements.
25
<PAGE> 26
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
READINESS FOR YEAR 2000
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year, and as a result may be unable to
accurately process certain data before, during or after the Year 2000. As a
result, entities are at risk for possible miscalculations or systems failures
causing disruption in business operations. This Year 2000 issue can arise at
any point in the Company's manufacturing processing, distribution and financial
chains.
A Year 2000 Compliance Project, directed by the Company's Vice President of
Information Systems, has been in process at the Company since 1997. The
Company's business systems are either being replaced with newer systems that
are Year 2000 compliant or each system that will be retained is being
remediated. The internal project team for manufacturing systems compliance is
complemented by a project control review by an outside consulting firm. The
project scope is not limited to computerized business systems. Infrastructure
issues including, but not limited to, telephone switches, personal computers,
data communication network control software and production process control
software, are being addressed.
Achieving Year 2000 compliance for our business systems will largely be a
by-product the Company's initiative to improve access to business information
through a common, integrated computing system across the organization. The
Company has implemented an Enterprise Resource Planning (ERP) System based on
SSA's Business Planning and Control System (BPCS) software. The remediation of
this software for Year 2000 compliance was completed as of November 15, 1998.
This software is generally being/or will be used in all existing operations by
the third quarter of 1999. Other non-Year 2000 compliant business software is
being replaced or upgraded to versions which are Year 2000 compliant. Total
business systems compliance costs are not expected to be material, excluding
internal costs.
The Company's infrastructure issues have been assessed and a remediation plan
has been completed. Remediation cost estimates are not expected to be material.
All critical manufacturing process control systems are anticipated to be Year
2000 compliant by May 31, 1999.
The Company is in the process of surveying its business partners, including
customers and vendors, as well as original equipment manufacturers, financial
institutions, and employee benefit providers to determine the status of their
Year 2000 compliance efforts.
The Company will develop contingency plans as it becomes apparent that such
plans are warranted.
26
<PAGE> 27
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Readiness for Year 2000, (Continued)
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. The Company believes that with the completion of the remediation of
operations. The Company believes that with the completion of the remediation of
the business system, the possibility of significant interruptions of normal
operations should be reduced, however, due to the general uncertainty inherent
in the Year 2000 problem, resulting in part from the inability to ensure
readiness of third parties, the Year 2000 compliance issue could have a
material adverse impact on the Company's results of operations, cash flows and
financial condition. Based upon information available at this time, the Company
believes that the cost of Year 2000 readiness will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company. Year 2000 expenditures are being funded through operating
cash flow.
INFORMATION ABOUT FORWARD LOOKING STATEMENTS
The Company may make statements about the trends, future plans and the Comany's
prospects. Actual results may differ from these described in such forward
looking statements based on the risks and uncertainties facing the Company,
including but not limited to changes in the economic conditions and charges in
the food products manufacturing industry, possible acquisitions of assets or
business and other factors.
27
<PAGE> 28
INTERNATIONAL HOME FOODS, INC.
PART II
<TABLE>
<CAPTION>
ITEM 6 EXHIBITS AND REPORT ON FORM 8-K
-------------------------------
<S> <C>
(a) Exhibits:
(12) Statements showing computation of ratio of earnings to
fixed charges based on SEC Regulation S-K, Item 503.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None noted.
</TABLE>
28
<PAGE> 29
INTERNATIONAL HOME FOODS, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIGNATURES
Pursuant to the requirement 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.
International Home Foods, Inc.
(Registrant)
Date: May 14, 1999 /s/ C. Dean Metropoulos
----------------------------
C. Dean Metropoulos
Chairman of the Board and
Chief Executive Officer
Date: May 14, 1999 /s/ N. Michael Dion
----------------------------
N. Michael Dion
Senior Vice President and
Chief Financial Officer
29
<PAGE> 30
\
INTERNATIONAL HOME FOODS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -------
<S> <C>
12 Computation of Consolidated Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
30
<PAGE> 1
INTERNATIONAL HOME FOODS, INC.
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
EXHIBIT 12 COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Income before provision for income taxes $ 53,329 $ 31,912
Add (subtract):
Interest on term loans and notes 24,663 21,732
Amortization of debt cost 1,088 1,190
Portion of rents representative of interest 474 558
-------------- --------------
Income as adjusted $ 79,554 $ 55,392
Fixed Charges
Interest on term loans and notes $ 24,663 $ 21,732
Amortization of debt costs 1,088 1,190
Portion of rents representative of interest 474 558
-------------- --------------
Total fixed charges $ 26,225 $ 23,480
Consolidated Ratio of Earnings to Fixed Charges 3.03 2.36
============== ==============
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 184
<ALLOWANCES> (9)
<INVENTORY> 226
<CURRENT-ASSETS> 467
<PP&E> 425
<DEPRECIATION> (161)
<TOTAL-ASSETS> 1,471
<CURRENT-LIABILITIES> 320
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 63
<TOTAL-LIABILITY-AND-EQUITY> 1,471
<SALES> 514
<TOTAL-REVENUES> 0
<CGS> 280
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 171
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 53
<INCOME-TAX> 21
<INCOME-CONTINUING> 33
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
