<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 June 30, 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 June 30, 1999 was 73,457,320.
1
<PAGE> 2
INTERNATIONAL HOME FOODS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Income 3
Three Months Ended June 30, 1999 and 1998
Six Months Ended June 30, 1999 and 1998
Condensed Consolidated Balance Sheets 4
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows 5
Six Months Ended June 30, 1999 and 1998
Condensed Consolidated Statements of 6
Comprehensive Income
Three Months Ended June 30, 1999 and 1998
Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Exhibit 12. Computation of Consolidated Ratio of 34
Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule 35
</TABLE>
2
<PAGE> 3
INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 512,574 $ 402,491 $1,026,760 $ 790,942
Cost of sales 272,115 209,492 552,477 411,254
---------- ---------- ---------- ----------
Gross profit 240,459 192,999 474,283 379,688
Marketing expenses 111,508 78,416 221,247 159,430
Selling, general, and administrative expenses 61,995 55,704 122,954 107,145
---------- ---------- ---------- ----------
Income from operations 66,956 58,879 130,082 113,113
---------- ---------- ---------- ----------
Interest expense 24,609 23,672 50,360 46,594
Other (income) expense, net (423) 365 (598) (235)
Gain on sale of business -- -- (15,779) --
---------- ---------- ---------- ----------
Income before provision for income taxes 42,770 34,842 96,099 66,754
Provision for income taxes 16,681 13,762 37,479 26,367
---------- ---------- ---------- ----------
Net income $ 26,089 $ 21,080 $ 58,620 $ 40,387
========== ========== ========== ==========
Basic earnings per share:
Net income $ 0.36 $ 0.27 $ 0.80 $ 0.52
---------- ---------- ---------- ----------
Shares used in computing basic earnings
per share 73,427,938 77,379,921 73,365,602 77,303,053
---------- ---------- ---------- ----------
Diluted earnings per share:
Net income $ 0.34 $ 0.26 $ 0.77 $ 0.50
---------- ---------- ---------- ----------
Shares used in computing diluted earnings
per share 75,781,554 80,958,130 75,792,114 81,018,089
---------- ---------- ---------- ----------
</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 AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,013 $ 17,201
Accounts receivable, net of allowances 176,521 141,422
Inventories 263,005 235,730
Prepaid expenses and other current assets 31,262 16,737
Deferred income taxes 18,079 19,616
---------- ----------
Total current assets 508,880 430,706
Property, plant and equipment, net 276,495 262,771
Intangible assets, net 394,115 396,617
Deferred income taxes 310,484 330,651
Other assets 21,634 24,667
---------- ----------
Total assets $1,511,608 $1,445,412
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to banks $ 25,392 $ 17,470
Current portion of long-term debt 62,284 51,694
Revolving credit facility 68,120 62,526
Accounts payable 63,901 44,854
Accrued salaries, wages and benefits 29,712 22,780
Accrued advertising and promotion 44,823 38,317
Accrued interest 7,891 16,311
Other accrued liabilities 29,650 33,378
---------- ----------
Total current liabilities 331,773 287,330
Long-term debt 1,060,921 1,102,830
Postretirement benefits obligation 26,001 24,487
Other non-current liabilities 801 861
---------- ----------
Total liabilities 1,419,496 1,415,508
---------- ----------
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 77,857,320 and
77,584,348 shares 779 776
Additional paid-in capital 58,963 56,051
Treasury stock, at cost 4,400,000 shares (57,200) (57,200)
Retained earnings 93,117 34,497
Accumulated other comprehensive income (loss) (3,547) (4,220)
---------- ----------
Total stockholders' equity 92,112 29,904
---------- ----------
Total liabilities and stockholders' equity $1,511,608 $1,445,412
========== ==========
</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>
Six Months Ended
June 30,
1999 1998
---- ----
(unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 58,620 $40,387
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 21,099 19,576
Deferred income taxes 21,705 16,241
Stock option compensation 85 686
Gain on sale of business (15,779) --
Changes in assets and liabilities, net of acquisitions and divestiture:
Increase in accounts receivable (19,267) (8,522)
(Increase)/decrease in inventories (11,664) 387
(Increase)/decrease in other current assets (14,357) 807
Increase in accounts payable 13,809 8,791
Decrease in accrued liabilities (4,464) (2,022)
Increase in non-current assets (1,527) (2,688)
Increase in non-current liabilities 2,134 --
--------- --------
Net cash provided by operating activities 50,394 73,643
--------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment, net (23,354) (17,611)
Purchase of businesses, net of cash acquired (38,103) (145,210)
Proceeds from sale of business 30,000 --
--------- --------
Net cash used in investing activities (31,457) (162,821)
--------- --------
FINANCING ACTIVITIES:
Increase/(decrease) in due to banks 7,922 645
Issuance of long-term debt -- 110,000
Payment of debt issuance costs -- (378)
Repayment of long-term debt (31,322) (13,736)
Borrowings from revolving credit facility 45,024 183,000
Repayment of borrowings from revolving credit facility (40,889) (181,000)
Proceeds from exercise of stock options 2,078 1,692
--------- --------
Net cash provided by (used in) financing activities (17,187) 100,223
--------- --------
Effect of exchange rate changes on cash 1,062 (305)
--------- --------
Increase in cash and cash equivalents 2,812 10,740
Cash and cash equivalents at beginning of period 17,201 11,872
--------- --------
Cash and cash equivalents at end of period $ 20,013 $22,612
======== =======
Cash paid during the period for:
Interest $ 56,459 $45,259
Income taxes $ 16,880 $ 9,340
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 26,089 $ 21,080 $ 58,620 $ 40,387
Other comprehensive income, net of tax:
Foreign currency translation 502 (984) 673 (1,577)
-------- -------- -------- --------
Total other comprehensive income (loss) 502 (984) 673 (1,577)
-------- -------- -------- --------
Comprehensive income $ 26,591 $ 20,096 $ 59,293 $ 38,810
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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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 June 30, 1999, the
results of operations and comprehensive income for the three and six
months ended June 30, 1999 and 1998 and cash flows for the six months
ended June 30, 1999 and 1998. In 1999, the Company converted from monthly
calendar reporting periods to 4-4-5 monthly periods. The impact on the
second quarter and six month results was not material. The results of
operations for the three month and six month periods 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), 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(R), 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, are not allocated to the operating segments.
8
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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>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
Branded Products $209,726 $175,002 $ 415,755 $348,794
Seafood 153,843 99,783 313,808 216,324
Private Label and Foodservice 71,034 63,516 149,596 104,209
-------- -------- ---------- --------
Subtotal - Reportable Segments 434,603 338,301 879,159 669,327
All Other 77,971 64,190 147,601 121,615
-------- -------- ---------- --------
Total $512,574 $402,491 $1,026,760 $790,942
======== ======== ========== ========
1999 1998 1999 1998
---- ---- ---- ----
Segment Operating Income:
Branded Products $ 38,672 $ 35,619 $ 78,473 $ 73,776
Seafood 9,571 7,016 19,405 13,730
Private Label and Foodservice 9,822 7,672 20,215 14,294
-------- -------- ---------- --------
Subtotal - Reportable Segments 58,065 50,307 118,093 101,800
All Other 8,008 6,665 13,758 12,232
-------- -------- ---------- --------
Total $ 66,073 $ 56,972 $ 131,851 $114,032
======== ======== ========== ========
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Reconciliation to Consolidated Results
Segment Operating Income $ 66,073 $ 56,972 $131,851 $114,032
Less:
Stock compensation expense 59 294 85 687
Unallocated (income) expense (942) (2,201) 1,684 232
-------- -------- -------- --------
Total consolidated income from
operations $ 66,956 $ 58,879 $130,082 $113,113
======== ======== ======== ========
</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 its 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 $38.2
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. ("Nestle") 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 overhead 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
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 $38,248 $129,032 $112,813 $41,009
Less: acquired assets
Current assets 40,694 20,218 18,830 4,620
Property, plant and equipment 1,166 31,720 38,190 6,473
Other assets -- -- 287 --
Add: liabilities assumed 10,459 5,528 5,016 --
------- -------- -------- -------
Excess of cost over net assets
acquired $ 6,847 $ 82,622 $ 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 Six Months Ended
June 30, 1998
----------------------------------
IHF Acquisitions Total
----------------------------------
<S> <C> <C> <C>
Net sales $790,942 $103,986 $894,928
Operating income $113,113 $ 5,049 $118,162
Net income (loss) $ 40,387 $ (1,435) $ 38,952
Earnings per share:
Basic $ 0.52 $ (0.02) $ 0.50
Diluted $ 0.50 $ (0.02) $ 0.48
</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 1999 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 $0.13 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 June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Minimum pension liability $ (249) $ (249)
Foreign currency translation (3,298) (3,971)
------- -------
Accumulated other comprehensive
income (loss) $(3,547) $(4,220)
======= ========
</TABLE>
The changes in other comprehensive income (loss), and the related tax
effects, are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Foreign currency translation
Amount before taxes $ 565 $(1,241) $ 476 $(2,204)
------- ------- ------- -------
Income tax benefit (expense) (63) 257 197 627
------- ------- ------- -------
Amount net of taxes 502 (984) 673 (1,577)
------- ------- ------- -------
Total other comprehensive
income (loss) $ 502 $ (984) $ 673 $(1,577)
======= ====== ======= =======
</TABLE>
7. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -----------
<S> <C> <C>
Raw materials $ 67,852 $ 47,468
Work in progress 9,409 18,101
Finished goods 185,744 170,161
--------- --------
Total $ 263,005 $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 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 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 for the three months ended June 30,
1999 and 1998 and $974 and $800 for the six months ended June 30, 1999 and
1998, respectively. In addition, the Company incurred financial advisory
fees of $0 and $1,560 for the three months ended June 30, 1999 and 1998
and $546 and $2,077 for the six months ended June 30, 1999 and 1998,
respectively.
13
<PAGE> 14
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(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 June 30, 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 (1) 6.23% $ 1.5 8/98 - 11/01 6 - month
600 (1) 5.55% -- 5/99 - 5/04 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
600 (2) 6.30% 2.3 5/99 - 5/04 3 - month
Interest Rate Floor $200 (1) 5.20% (2.2) 8/98 - 11/01 6 - month
600 (1) 4.45% (6.8) 5/99 - 5/04 3 - month
Interest Rate Collar $150 (1) 5.75% (0.4) 10/98 - 10/01 3 - month
3.76%
-----
$(5.6)
=====
</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 subsidiary guarantors 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>
June 30, 1999 December 31, 1998
------------- ------------------
(unaudited)
<S> <C> <C>
Current assets $294,287 $255,603
Non-current assets 606,179 549,739
Current liabilities 163,704 104,720
Non-current liabilities 23,709 25,674
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $236,982 $177,445 $488,236 $340,396
Gross profit 90,034 64,758 182,249 120,719
Net income 25,382 7,085 41,754(1) 12,517
Net cash provided by
operating activities 53,215 26,140
Net cash used in
investing activities (31,116) (44,636)
Net cash provided (used) in
financing activities (15,365) 22,441
</TABLE>
The 1998 amounts have been 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, EXCEPT PER SHARE AMOUNTS)
(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, Statement of Financial Accounting Standards ("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. As
issued, SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. However, with the introduction of SFAS 137,
"Deferral of the Effective Date of SFAS 133", SFAS 133 is now effective
for fiscal years beginning after June 15, 2000. 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 For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS computation:
Net income available to common shares $ 26,089 $ 21,080 $ 58,620 $ 40,387
Average number of shares outstanding 73,427,938 77,379,921 73,365,602 77,303,053
Basic earnings per share $ 0.36 $ 0.27 $ 0.80 $ 0.52
Diluted EPS computation:
Net income available to common shares $ 26,089 $ 21,080 $ 58,620 $ 40,387
Average number of shares outstanding 73,427,938 77,379,921 73,365,602 77,303,053
Effect of dilutive stock options 2,353,616 3,578,209 2,426,512 3,715,036
----------- ----------- ----------- -----------
Total number of shares outstanding 75,781,554 80,958,130 75,792,114 81,018,089
Diluted earnings per share $ 0.34 $ 0.26 $ 0.77 $ 0.50
</TABLE>
16
<PAGE> 17
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 closed 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
has been 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 incurred approximately $1.5 million and
$2.4 million of such non-capitalizable costs for the three months and
six months ended June 30, 1999, respectively.
At June 30, 1999, $4.1 million of restructuring charges remained in other
accrued liabilities. This amount is comprised of severance and related
costs and facility closure costs. Payments totalling $7.0 million have
been made to date, including $0.3 million for the three months ended June
30, 1999.
16. SUBSEQUENT EVENTS
On July 19, 1999, the Company, through its subsidiary Bumble Bee
Seafoods, Inc., acquired the manufacturing, sales distribution and
marketing operations of Louis Kemp from Tyson Foods, Inc. Louis Kemp is a
highly automated and value-added surimi business in the fast-growing
refrigerated sector. Surimi-based products are made from North Pacific
Ocean pollack and whiting fish meats. These products are primarily sold
under the tradename Louis Kemp(R) and other trade names such as Captain
Jac, SeaFest and Pacific Mate. The Company financed this acquisition with
borrowings under its Revolving Credit Facility.
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
achieve operating efficiencies in 1999, the Company converted from monthly
calendar reporting periods to 4-4-5 monthly periods. The impact on the second
quarter and six month results was not material.
RESULTS OF OPERATIONS - Three and Six Months Ended June 30, 1999 and 1998.
NET SALES - The Company's net sales were $512.6 million for the three months
ended June 30, 1999 as compared to $402.5 million in the comparable 1998
quarter, an increase of $110.1 million, or 27.4%. Approximately $87.0 million of
the increase was related to sales of Libby's and the Cloverleaf/Paramount
brands, which were acquired in September 1998 and January 1999, respectively,
and are not reflected in the 1998 amounts, offset by $12.5 million of lower
sales due to the sale of Polaner in February 1999. The remaining $35.6 million
increase primarily reflects increases in sales of Branded Products ($8.6
million), Seafood ($16.7 million), Private Label and Foodservice ($4.1 million)
and International ($6.8 million).
For the six months ended June 30, 1999, net sales were $1,026.8 million as
compared to $790.9 million in the comparable 1998 period, an increase of $235.9
million, or 29.8%. Approximately $202.1 million was related to sales of
companies acquired during 1999 and 1998, which were not fully reflected in the
1998 amounts, offset by $20.9 million of lower sales due to the sale of Polaner
in February 1999. The remaining $54.7 million increase primarily reflects
increases in sales of Branded Products ($18.8 million), Seafood ($30.0 million),
Private Label and Foodservice ($3.6 million) and International ($3.5 million).
See Results by Segment on pages 21-24.
COST OF GOODS SOLD - Cost of goods sold was $272.1 million for the three months
ended June 30, 1999 as compared to $209.4 million in the comparable 1998
quarter. Expressed as a percentage of net sales, cost of goods sold increased to
53.1% from 52.0% in 1998. This was primarily attributable to the inclusion of
the results of the Companies acquired during 1999 and 1998, which have products
with 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 1.2%. Excluding results of the 1999 and 1998 acquisitions, cost of
goods sold declined to 48.3% of net sales from 51.2% in 1998. This improvement
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, particularly seafood and
management's continuing cost reduction initiatives.
18
<PAGE> 19
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Cost of Goods Sold, (Continued)
For the six months ended June 30, 1999, cost of goods sold was $552.5 million as
compared to $411.3 million for the comparable 1998 period. Expressed as a
percentage of net sales, cost of goods sold increased to 53.8% from 52.0% in
1998. This was primarily attributable to the inclusion of the results of the
Companies acquired during 1999 and 1998, which have products with 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 48.9% of net sales from 51.6% in 1998. This improvement 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, particularly seafood and
management's continuing cost reduction initiatives.
MARKETING EXPENSES - Marketing expenses increased to $111.5 million for the
three months ended June 30, 1999 as compared to $78.4 million in 1998. Expressed
as a percentage of net sales, marketing expenses increased to 21.8% from 19.5%
for the comparable 1998 period. The increase of $33.1 million was primarily
attributable to Bumble Bee ($12.8 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 ($9.7 million),
increases in Chef Boyardee ($4.3 million) primarily due to new product
introductions, PAM ($7.5 million) primarily to improve the price/value
relationship versus competitive brands and the International business ($2.1
million), partially offset by a decrease in Polaner ($3.7 million) due to the
sale of the business.
For the six months ended June 30, 1999, marketing expenses increased to $221.2
million as compared to $159.4 million for the comparable 1998 period. Expressed
as a percentage of sales, total marketing expenses increased to 21.5% from 20.2%
for the comparable 1998 period. The increase of $61.8 million was primarily
attributable to Bumble Bee ($22.8 million), the 1999 and 1998 acquisitions
($21.2 million), increases in Chef Boyardee ($8.5 million), PAM ($8.7 million)
and the International business ($3.1 million), primarily as a result of the same
factors discussed above. This was partially offset by a decrease in Polaner
($5.7 million) due to the sale of the business.
SELLING, GENERAL AND ADMINISTRATIVE ("S,G & A") EXPENSES - S,G & A expenses were
$62.0 million for the three months ended June 30, 1999 as compared to $55.7
million in 1998, an increase of $6.3 million. However, S,G & A expenses as a
percentage of net sales declined to 12.1% in the three months ended June 30,
1999 from 13.8% in the comparable 1998 quarter. The 1999 and 1998 acquisitions
contributed $6.4 million to the increase of S,G & A expenses. The decrease in
the existing business ($0.1 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.
19
<PAGE> 20
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, (Continued)
S,G & A expenses were $123.0 million for the six months ended June 30, 1999 as
compared to $107.1 million in 1998, an increase of $15.9 million. However, S,G &
A expenses as a percentage of net sales declined to 12.0% in 1999 versus 13.5%
in 1998. The 1999 and 1998 acquisitions contributed $16.5 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 June 30, 1999 was
$24.6 million as compared to $23.7 million for the comparable 1998 period.
Interest expense for the six months ended June 30, 1999 increased to $50.4
million from $46.6 million for the comparable 1998 period. The increase in
interest expense reflects a higher outstanding debt balance during 1999 as
compared to the comparable 1998 period, primarily due to the acquisitions of
Grist Mill, Libby's and Cloverleaf/Paramount, each 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 $0.13 per
diluted share).
PROVISION FOR INCOME TAXES - Income taxes increased to $16.7 million for the
three months ended June 30, 1999 from $13.8 million in the comparable 1998
quarter due to higher income before taxes. Income taxes increased to $37.5
million for the six months ended June 30, 1999 from $26.4 million in 1998 due to
higher income before taxes. The Company anticipates sufficient future income to
realize deferred tax assets recorded at June 30, 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.
20
<PAGE> 21
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
NET INCOME - For the three month period ended June 30, 1999, net income
increased by $5.0 million over the comparable 1998 period, primarily reflecting
the factors discussed above. Basic earnings per share were $0.36 and $0.27 for
the three months ended June 30, 1999 and 1998, respectively, and diluted
earnings per share were $0.34 and $0.26 for the three months ended June 30, 1999
and 1998, respectively.
For the six month period ended June 30, 1999, net income increased by $18.2
million, primarily reflecting the factors discussed above. Basic earnings per
share were $0.80 and $0.52 for the six months ended June 30, 1999 and 1998,
respectively, and diluted earnings per share were $0.77 and $0.50 for the six
months ended June 30, 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, 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 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 and six months ended June 30, 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, are not
allocated to the operating segments.
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)
BRANDED PRODUCTS - The Branded Products segment net sales increased $34.7
million, or 20%, for the three months ended June 30, 1999 versus the comparable
1998 period. This increase is primarily the net result of the Libby's
acquisition ($26.1 million), increased sales of Chef Boyardee ($2.5 million),
PAM ($8.1 million), and Ro*Tel ($1.2 million), partially offset by lower sales
of Campfire ($2.4 million). All other Branded Products sales decreased $0.8
million.
Sales of the Chef Boyardee brand increased approximately 3% for the three months
ended June 30, 1999 versus the comparable 1998 period. In terms of the brand's
various product lines, canned pasta sales increased 6% primarily due to new
product introductions and microwave sales were up 3%, partially offset by
declines in Pizza Kits and Dinners.
PAM sales were primarily driven by strong consumer promotion support to improve
the price/value relationship versus competitive brands, the July 1998 launch of
two new flavors, lemon and garlic and increased sales to club stores and mass
merchandisers.
The decline in Campfire sales largely correlates to a continuing decline in our
crisp rice bar business ($2.0 million).
Segment operating income of the Branded Products segment increased $3.1 million
largely reflecting the factors discussed above. As a percentage of net sales,
segment operating income of the Branded Products segment decreased from 20.4%
during the three months ended June 30, 1998 to 18.4% for the same period 1999.
This decrease reflects the change in product mix caused by the addition of
Libby's, which has lower operating margins than other products within the
segment, and an increase in promotional support related to the Branded Products
over the comparable 1998 period.
For the six months ended June 30, 1999, the Branded Products segment net sales
increased $67.0 million, or 19%, versus the comparable 1998 period. This
increase is primarily the net result of the Libby's acquisition ($48.1 million),
increased sales of Chef Boyardee ($5.2 million), PAM ($10.7 million), Ro*Tel
($3.9 million) primarily due to geographical expansion and Dennison's ($2.3
million), partially offset by lower sales of Campfire ($4.3 million).
Sales of the Chef Boyardee brand increased approximately 3% for the six months
ended June 30, 1999 versus the comparable 1998 period. In terms of the various
product lines, canned pasta sales increased 4%, primarily due to new product
introductions and microwave sales were up 7%, partially offset by declines in
Pizza Kits and Dinners.
PAM sales were primarily driven by strong consumer promotion support to improve
the price/value relationship versus competitive brands, the July 1998 launch of
two new flavors, lemon and garlic and increased sales to club stores and mass
merchandisers.
22
<PAGE> 23
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Results by Segment, (Continued)
The decline in Campfire sales largely correlates to a continuing decline in our
crisp rice bar business ($4.0 million).
Segment operating income of the Branded Products segment for the six months
ended June 30, 1999 increased $4.7 million largely reflecting the factors
discussed above. As a percentage of net sales, segment operating income
decreased from 21.2% during the six months ended June 30, 1998 to 18.9% for the
same period 1999. This decrease reflects the change in product mix caused by the
addition of Libby's which has lower operating margins than other products within
the segment and an increase in promotional support related to the Branded
Products over the comparable 1998 period.
SEAFOOD - The Seafood segment net sales for the three months ended June 30, 1999
increased $54.1 million, or 54%, over the comparable 1998 period, due to the
acquisition of the Cloverleaf/Paramount brands ($35.6 million), an increase in
Bumble Bee sales ($16.6 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 ($1.8 million). Segment operating income correspondingly increased
$2.6 million or 36%.
The Seafood segment net sales for the six months ended June 30, 1999 increased
$97.5 million, or 45%, over the comparable 1998 period, due to the acquisition
of the Cloverleaf/Paramount brands ($62.7 million), an increase in Bumble Bee
sales ($30.0 million) primarily due to incremental distribution in mass
merchandising and club stores, increased sales in Puerto Rico and in specialty
seafood products and the acquisitions of Libby's and its related salmon sales
($4.8 million). Segment operating income correspondingly increased $5.7 million,
or 41%.
PRIVATE LABEL AND FOOD SERVICE - Net sales of the Private Label and Foodservice
segment for the three months ended June 1999 increased $7.5 million, or 12%,
over the comparable 1998 period, primarily due to the April 1998 acquisition of
Grist Mill ($2.8 million), the addition of Libby's private label and foodservice
sales ($3.4 million) and an increase in Foodservice sales ($0.7 million).
Segment operating income increased $2.2 million, or 28%, primarily due to the
acquisition of Grist Mill and the factors discussed above.
For the six months ended June 30, 1999, net sales of the Private Label and
Foodservice segment, increased $45.4 million, or 44%, primarily due to the April
1998 acquisition of Grist Mill ($34.4 million), the addition of Libby's private
label and foodservice sales ($7.4 million) and an increase in Foodservice sales
($2.3 million). Segment operating income for the six months ended June 30, 1999
increased $5.9 million, or 41%, primarily due to the acquisition of Grist Mill
and the factors discussed above.
23
<PAGE> 24
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 for the three months ended June 30, 1999 increased $13.8
million, or 21%, over the comparable 1998 period, primarily due to contract
manufacturing sales to Nestle ($13.6 million) at prices which approximate the
Company's cost of production, the acquisition of Libby's ($6.5 million), an
increase in PDM sales ($4.8 million) and an increase in Puerto Rico net sales
($2.5 million), primarily offset by a decrease in export sales ($1.4 million).
The Company sold its Polaner business in February 1999, and accordingly, sales
for Polaner decreased $12.6 million as compared to the comparable 1998 period.
All Other operating income increased $1.3 million, or 20%, largely reflecting
the factors discussed above.
The All Other Net Sales for the six months ended June 30, 1999 increased $26.0
million, or 21%, primarily due to contract manufacturing sales to Nestle ($28.0
million) at prices which approximate the Company's cost of production, the
acquisition of Libby's ($10.0 million), the acquisition of Puritan in March 1998
($6.7 million), an increase in PDM sales ($6.6 million), primarily offset by a
decrease in Export sales ($2.1 million) and a decrease in Puerto Rico net sales
($1.0 million). The Company sold its Polaner business in February 1999, and
accordingly, sales for Polaner decreased $21.0 million as compared to the
comparable 1998 period. All Other operating income increased $1.5 million, or
12%, largely reflecting the factors discussed above.
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
closed 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, has been
outsourced. The manufacturing of the Campfire products has been 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 incurred
approximately $1.5 million and $2.4 million of such non-capitalizable costs for
the three and six months ended June 30, 1999, respectively.
24
<PAGE> 25
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Restructuring, (Continued)
At June 30, 1999, $4.1 million of restructuring charges remained in other
accrued liabilities. This amount is comprised of severance and related costs and
facility closure costs. Payments totalling $7.0 million have been made to date,
including $0.3 million for the three months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS - Net cash provided by operating activities for the six months ended
June 30, 1999 was $50.3 million, or $23.3 million less than the comparable 1998
period primarily due to an increase in inventory levels ($10.8 million)
principally related to increased tuna inventories, offset by outsourcing of
tomato paste and Ro*Tel diced tomatoes, the gain on the Polaner sale ($15.8
million) and changes in other assets and liabilities ($21.3 million), primarily
offset by increased net income ($18.2 million) and a decrease in deferred income
taxes ($5.5 million).
Net cash used by investing activities for the six months ended June 30, 1999
improved by $131.4 million, as a result of fewer acquisitions and the $30.0
million in proceeds from the sale of Polaner, partially offset by higher capital
expenditures. In 1999, the Company through its subsidiary, Bumble Bee Seafoods,
Inc., acquired the Cloverleaf/Paramount brands for approximately $38.2 million,
net of cash acquired. In 1998, the Company purchased Grist Mill for
approximately $106.2 million, net of cash acquired, and through its Canadian
subsidiary, International Home Foods (Canada), Inc., the Company 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 $39.0
million.
Cash used in financing activities was $17.2 million for the six month period
ended June 30, 1999, compared to $100.2 million provided in the comparable 1998
period. In 1999, the principal factors of the decrease relate to the Company's
borrowing of $45.0 million to fund working capital and to partially fund the
Cloverleaf/Paramount brands acquisition and its repayment of $40.9 million,
$25.8 million and $5.5 million under the terms of its revolving credit facility,
its Senior Bank Facilities and Grist Mill term loan, respectively. In 1998, the
Company amended its Senior Bank Facilities by borrowing an additional $110.0
million in term loans and also borrowed $183.0 million under the terms of its
revolving credit facility. The net additional borrowings were used to fund
working capital and the acquisitions of Puritan and Grist Mill. The Company also
repaid $181.0 million and $13.7 million under the terms of its revolving credit
facility and its Senior Bank Facilities, respectively, in 1998.
25
<PAGE> 26
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, (Continued)
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 June 30, 1999, the
outstanding balance of the Senior Bank Facilities was $791.3 million, which
included $68.1 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.
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.
26
<PAGE> 27
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Financial Instruments, (Continued)
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 June 30, 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 (1) 6.23% $ 1.5 8/98 - 11/01 6 - month
600 (1) 5.55% -- 5/99 - 5/04 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
600 (2) 6.30% 2.3 5/99 - 5/04 3 - month
Interest Rate Floor $200 (1) 5.20% (2.2) 8/98 - 11/01 6 - month
600 (1) 4.45% (6.8) 5/99 - 5/04 3 - month
Interest Rate Collar $150 (1) 5.75% (0.4) 10/98 - 10/01 3 - month
3.76% ------
$(5.6)
======
</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.
27
<PAGE> 28
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Impact of Recent Accounting Standards, (Continued)
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. As issued, SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. However, with the introduction of SFAS 137, "Deferral of the Effective
Date of SFAS 133", SFAS 133 is now effective for fiscal years beginning after
June 15, 2000. The Company is currently evaluating the effect this statement
will have on its financial statements.
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 ("Y2K").
As a result, entities are at risk for possible miscalculations or systems
failures causing disruption in business operations. This Y2K issue can arise at
any point in the Company's manufacturing processing, distribution and financial
chains.
A Y2K 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
Y2K 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 Y2K compliance for our business systems will largely be a by-product
of 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 Y2K compliance was completed as of November 15, 1998. This software is
generally being/or will be used in all existing operations by the foruth quarter
of 1999. Other non-Y2K compliant business software is being replaced or upgraded
to versions which are Y2K compliant. Total business systems compliance costs,
excluding internal costs, are not expected to be material.
28
<PAGE> 29
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Readiness for Year 2000, (Continued)
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 have been tested and are
believed to be compliant. The Company will conduct a records review on these
systems in the third quarter of 1999 to verify compliance.
The Company has undertaken efforts to verify that all of its material vendors
and suppliers will be Y2K compliant. Specifically, the Company sent a
comprehensive questionnaire to all of its significant suppliers and vendors
regarding their Y2K compliance in an attempt to identify any problem areas with
respect to these groups. Although the results of the questionnaire indicated
that its material vendors and suppliers intend to be Y2K compliant before the
end of 1999, they were not able to provide us any assurances.
The Company will develop contingency plans as it becomes apparent that such
plans are warranted.
The failure to correct a material Y2K 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 the business systems,
the possibility of significant interruptions of normal operations should be
reduced. However, due to the general uncertainty inherent in the Y2K problem,
resulting in part from the inability to ensure readiness of third parties, the
Y2K 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 Y2K
readiness will not have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company. Y2K expenditures
are being funded through operating cash flow.
SUBSEQUENT EVENTS
On July 19, 1999, the Company, through its subsidiary Bumble Bee Seafoods, Inc.,
acquired the manufacturing, sales distribution and marketing operations of Louis
Kemp from Tyson Foods, Inc. Louis Kemp is a highly automated and value-added
surimi business in the fast-growing refrigerated sector. Surimi-based products
are made from North Pacific Ocean pollack and whiting fish meats. These products
are primarily sold under the tradename Louis Kemp and other trade names such as
Captain Jac, SeaFest and Pacific Mate. The Company financed this acquisition
with borrowings under its Revolving Credit Facility.
INFORMATION ABOUT FORWARD LOOKING STATEMENTS
The Company may make statements about the trends, future plans and the Company's
prospects. Actual results may differ from those 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 changes in
the food products manufacturing industry, possible acquisitions of assets or
business and other factors.
29
<PAGE> 30
INTERNATIONAL HOME FOODS, INC.
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
---------------------------------------------------
(a) The matters described under item 4 (c) below were submitted to a vote
of security holders, through the solicitation of proxies pursuant to
Section 14 under the Securities Exchange Act of 1934, as amended, at
the Annual Meeting of Stockholders held on May 5, 1999 (the "Annual
Meeting").
(b) Not applicable
(c) The following describes the matters voted upon at the Annual Meeting
and sets forth the number of votes cast for, against or withheld and
the number of abstentions as to each such matter:
(i) Election of directors:
<TABLE>
<CAPTION>
<S> <C> <C>
Nominee For Withheld
----------------- ----------- --------
Michael J. Cramer 66,165,573 110,785
Michael J. Levitt 66,165,698 110,660
M. L. Lowenkron 66,163,948 112,410
</TABLE>
(ii) Ratification of the appointment of
PricewaterhouseCoopers LLP as independent
auditors for 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
For Against Abstain
----------------- ----------- --------
66,257,906 6,675 11,777
</TABLE>
(d) Not applicable
30
<PAGE> 31
INTERNATIONAL HOME FOODS, INC.
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 6 EXHIBITS AND REPORT ON FORM 8-K
-------------------------------
(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
</TABLE>
(b) Reports on Form 8-K:
None noted.
31
<PAGE> 32
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: August 16, 1999 /s/ C. DEAN METROPOULOS
---------------------------------
C. Dean Metropoulos
Chairman of the Board and
Chief Executive Officer
Date: August 16, 1999 /s/ LAWRENCE K. HATHAWAY
---------------------------------
Lawrence K. Hathaway
President and
Chief Operating Officer
Date: August 16, 1999 /s/ N. MICHAEL DION
---------------------------------
N. Michael Dion
Senior Vice President and
Chief Financial Officer
32
<PAGE> 33
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>
<PAGE> 1
INTERNATIONAL HOME FOODS, INC.
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
EXHIBIT 12 COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Income before provision for income taxes $ 96,099 $ 66,754
Add:
Interest on term loans and notes 48,204 44,823
Amortization of debt cost 2,156 1,771
Interest Portion of rentals 950 1,142
------------ ------------
Income as adjusted $ 147,409 $ 114,490
Fixed Charges
Interest on term loans and notes $ 48,204 $ 44,823
Amortization of debt costs 2,156 1,771
Interest Portion of rentals 950 1,142
------------ ------------
Total fixed charges $ 51,310 $ 47,736
Ratio of Earnings to Fixed Charges 2.87 2.40
============ ============
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6 MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 20
<SECURITIES> 0
<RECEIVABLES> 191
<ALLOWANCES> (14)
<INVENTORY> 263
<CURRENT-ASSETS> 509
<PP&E> 441
<DEPRECIATION> (165)
<TOTAL-ASSETS> 1,512
<CURRENT-LIABILITIES> 332
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 91
<TOTAL-LIABILITY-AND-EQUITY> 1,512
<SALES> 1,027
<TOTAL-REVENUES> 0
<CGS> 552
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 96
<INCOME-TAX> 37
<INCOME-CONTINUING> 59
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59
<EPS-BASIC> 0.80
<EPS-DILUTED> 0.77
</TABLE>
