<PAGE 1>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission file number: 1-12619
RALCORP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Missouri 43-1766315
(State of Incorporation) (I.R.S. Employer
Identification No.)
800 Market Street, Suite 2900
St. Louis, MO 63101
(Address of principal (Zip Code)
executive offices)
(314) 877-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (x) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at
par value $.01 per share July 31, 1998
32,508,017
<PAGE> 2
RALCORP HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Consolidated Statement of Earnings 1
Condensed Consolidated Balance Sheet 2
Condensed Consolidated Statement of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Unaudited Pro Forma Combined Financial Information 9
Pro Forma Combined Statement of Earnings 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
Other Information 22
(i)
<PAGE> 3
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $ 143.3 $140.7 $427.6 $ 595.0
-------- ------ ------- -------
Costs and Expenses
Cost of products sold 94.8 92.9 277.9 328.4
Selling, general and administrative 25.2 24.6 74.5 101.8
Advertising and promotion 12.2 15.7 43.3 125.0
Interest expense, net - .2 (.1) 8.1
Gain on Branded Sale (516.5)
Restructuring charge 23.0
Equity earnings in Vail Resorts, Inc. (9.7) 2.6 (13.9) (7.9)
-------- ------ ------- --------
122.5 136.0 381.7 61.9
-------- ------ ------ --------
Earnings before Income Taxes 20.8 4.7 45.9 533.1
Income Taxes 7.6 1.6 17.4 6.5
-------- ------ ------ --------
Net Earnings $ 13.2 $ 3.1 $ 28.5 $ 526.6
======== ====== ====== ========
Basic Earnings per Common Share .40 $ .09 $ .87 $ 15.98
======== ====== ====== ========
Diluted Earnings per Common Share $ .40 $ .09 $ .86 $ 15.86
======== ====== ====== ========
<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
1
<PAGE> 4
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Condensed)
(Dollars in millions)
June 30, Sept. 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2.6 $ 8.4
Receivables, less allowance for doubtful
accounts of $1.4 and $1.0, respectively 39.8 52.9
Inventories -
Raw materials and supplies 22.3 23.5
Finished products 54.0 49.0
Prepaid expenses 9.4 9.3
---------- ----------
Total Current Assets 128.1 143.1
---------- ----------
Investments and Other Assets 124.0 89.1
---------- ----------
Deferred Income Taxes 6.2 13.8
---------- ----------
Property at Cost 273.2 264.1
Accumulated depreciation 119.8 109.8
---------- ----------
153.4 154.3
---------- ----------
Total $ 411.7 $ 400.3
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ - $ -
Accounts payable 27.5 40.9
Other current liabilities 30.0 37.3
---------- ----------
Total Current Liabilities 57.5 78.2
---------- ----------
Long-Term Debt 10.7 -
---------- ----------
Other Liabilities 36.5 35.4
---------- ----------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 110.1 110.1
Retained earnings 204.8 176.3
Common stock in treasury, at cost (8.2)
---------- ----------
Total Shareholders' Equity 307.0 286.7
---------- ----------
Total $ 411.7 $ 400.3
========== ==========
<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Condensed)
(Dollars in millions)
Nine Months Ended
June 30,
1998 1997
----------- --------
<S> <C> <C>
Cash Flow from Operations
Net earnings $ 28.5 $ 526.6
Restructuring charge ($23.0 less payments of $17.0) 6.0
Gain on sale of Branded Business (516.5)
Non-cash items included in income 21.5 21.9
Changes in assets and liabilities used in operations,
net of changes resulting from acquisitions (5.0) 21.2
Other, net (12.5) (.7)
----------- --------
Net cash flow from operations 32.5 58.5
----------- --------
Cash Flow from Investing Activities
Acquisitions (25.7) (41.4)
Property and intangible asset additions, net (14.2) (17.9)
Other, net (.9) (3.1)
----------- --------
Net cash used by investing activities (40.8) (62.4)
----------- --------
Cash Flow from Financing Activities
Net proceeds from long-term debt 10.7 11.3
Treasury stock purchases (8.2)
---------- --------
Net cash provided by financing activities 2.5 11.3
---------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (5.8) 7.4
Cash and Cash Equivalents, Beginning of Year 8.4
---------- --------
Cash and Cash Equivalents, End of Period $ 2.6 $ 7.4
========== ========
<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE> 6
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Dollars in millions except per share data)
NOTE 1 - SALE TRANSACTIONS
On January 3, 1997, the United States Department of Justice approved the sale
of Ralcorp's ski resort holdings to Vail Resorts, Inc. Ralcorp sold its three
Colorado ski resort properties of Keystone, Breckenridge and Arapahoe Basin to
Vail Resorts, Inc. in exchange for the assumption of $165 million in Resorts
debt and a 22.6% equity interest in the combined Vail Resorts.
On January 31, 1997, the original Ralcorp Holdings, Inc. (Old Ralcorp) was
merged with a subsidiary of General Mills, Inc. (the Merger). Immediately
prior to the Merger, Old Ralcorp spun-off its private label cereal, branded
baby food and private label cracker and cookie businesses and its ownership
interest in Vail (the Spin-Off) by distributing one share of New Ralcorp
Holdings, Inc. Common Stock for each share of Old Ralcorp Common Stock owned
as of the close of business on January 31, 1997. Immediately prior to the
Spin-Off, New Ralcorp Holdings, Inc. (Ralcorp) changed its name to Ralcorp
Holdings, Inc. and in the Merger, Old Ralcorp changed its name to General
Mills Missouri, Inc. This completed the $570 transaction with General Mills.
The $570 value was reached by General Mills assuming $215 in Ralcorp debt and
related accrued interest and funding the remaining $355 through the
distribution of General Mills stock to Ralcorp shareholders of record on
January 31, 1997.
For financial reporting purposes, Ralcorp is a "successor registrant" to Old
Ralcorp and, as such, the accompanying Ralcorp financial statements represent
the historical financial position and results of operations of Old Ralcorp,
for periods prior to January 31, 1997, and Ralcorp, for subsequent periods.
Therefore, references to the "Company", for periods prior to January 31, 1997,
are references to Old Ralcorp, without giving effect to the Merger or the
Spin-Off.
NOTE 2 - PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited historical financial statements of the Company have
been prepared in accordance with the instructions for Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments
considered necessary for a fair presentation, have been included. Operating
results for any quarter are not necessarily indicative of the results for any
other quarter or for the full year. These statements should be read in
connection with the financial statements and notes included in the Company's
Annual Report to Shareholders for the year ended September 30, 1997.
NOTE 3 - EQUITY INTEREST IN VAIL RESORTS, INC.
Upon the sale of the Company's Resort Operations to Vail Resorts, Inc.,
Ralcorp retained an equity ownership interest in Vail, which as of June 2,
1998 was approximately 22%. In accordance with Accounting Principles Board
Opinion No. 29 - "Accounting for Nonmonetary Transactions" (APB 29), the
Resort Operations sale transaction with Vail has been treated as a nonmonetary
exchange. The assumption of debt and the issuance of equity qualifies this
4
<PAGE> 7
transaction as being nonmonetary in nature. Therefore, by meeting the
provisions of APB 29, the initial equity investment in Vail was recorded at
Ralcorp's net book value of assets contributed, or $50.7. This initial equity
investment is then adjusted by the pre-tax amount of the Company's equity
interest in the net earnings or losses of Vail. Amortization income is
included as a component of the Company's equity earnings. This amortization
income is the result of the Company's equity interest in the underlying net
assets of Vail as of January 3, 1997 exceeding the net book value of the net
assets contributed by the Company to Vail by $37.5. This excess is being
amortized ratably over twenty years.
Through the nine months ended June 30, 1998, the Company's equity stake
in Vail resulted in non-cash, pre-tax earnings of $13.9, including the
appropriate amortization income. Due to a change in Vail Resorts' fiscal year
end, from September 30th to July 31st, the Company's current year nine months
results include only the Company's equity portion of Vail's operating results
for the period October, 1997 through April, 1998.
NOTE 4 - ACQUISITIONS
On April 23, 1998, the Company announced it had completed the purchase of
Flavor House, Inc., a leading store brand snack nut business located in
Dothan, AL, for approximately $21.5. Flavor House's sales in the store brand
jar and can snack nut category were estimated to be $62 for the current fiscal
year, which was scheduled to end May 31, 1998.
On April 21, 1997, the Company completed the purchase of the Wortz
Company, a private label cracker and cookie operation. Wortz, which is being
operated as part of the Company's Bremner operation, is headquartered in
Poteau, OK.
Both acquisitions were financed through a combination of available cash
and debt under the Company's credit facility and accounted for using the
purchase method of accounting, whereby, the results of operations are included
in the consolidated statement of earnings from the date of acquisition.
Goodwill associated with these acquisitions is included in the "Investments
and Other Assets" line of the accompanying Consolidated Balance Sheet. The
purchase price allocation and resulting goodwill associated with the Flavor
House acquisition is based on a preliminary fair valuation of net assets.
NOTE 5 - RESTRUCTURING CHARGES
In the quarter ended March 31, 1997, the Company recorded a pre-tax
restructuring charge of $18.4 ($11.6 after taxes or $.35 per common share) to
cover costs associated with the sale of the Company's Branded Business,
including severance payments to employees whose jobs were eliminated and
financial penalties related to the early termination of information systems
contracts. The level of systems support included in these contracts was no
longer warranted after the Branded Business sale. Also, in the quarter ended
December 31, 1996, the Company recorded a pre-tax restructuring charge of $4.6
($2.9 after taxes or $.09 per basic and diluted share). This charge covered
severance costs for certain employees whose jobs were eliminated in downsizing
initiatives.
5
<PAGE> 8
For the year ended September 30, 1996, the Company recorded a pre-tax
charge of $16.5 ($10.4 after taxes or $.31 per basic and diluted share) to
recognize the costs related to restructuring its ready-to-eat cereal division.
In addition, the restructuring plan included the partial closing of the
Ralston Foods production facility in Battle Creek, MI.
The balance of these restructuring charges and their utilization during
the nine months ended June 30, 1998 are summarized in the following table.
<TABLE>
<CAPTION>
Balance of Utilized in Balance of
Reserve at Nine months Reserve at
Sept. 30, 1997 FY 1998 June 30, 1998
--------------- ------------- --------------
<S> <C> <C> <C>
Salaries, severance and
benefits $ .6 $ - $ .6
Asset writedowns .8 (.8) -
Other 1.4 (.4) 1.0
--------------- ------------- --------------
Total restructuring charges $ 2.8 $ (1.2) $ 1.6
=============== ============= ==============
</TABLE>
NOTE 6 - EARNINGS PER SHARE
In the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 - "Earnings per Share" (FAS 128). By
so doing, prior year earnings per share have been restated to conform to the
presentation required by FAS 128 of basic and diluted earnings per share. The
weighted average shares outstanding used to compute earnings per common share
(basic and diluted) for the three and nine month periods ended June 30, 1998
and 1997 are based on the weighted average number of Ralcorp Stock shares
outstanding for the periods then ended. In addition, the calculation of
diluted earnings per share includes the conversion of outstanding stock
options. Earnings per common share (basic and diluted) are computed
independently for all of the periods presented, therefore, the sum of earnings
per common share amounts (basic and diluted) for the quarters may not total
the year-to-date.
The weighted average numbers of common shares used for all periods (basic and
diluted) are as follows:
Quarter ended June 30, 1998 - Basic.............32,626,000
Quarter ended June 30, 1998 - Diluted...........33,097,000
Quarter ended June 30, 1997 - Basic.............33,011,000
Quarter ended June 30, 1997 - Diluted...........33,150,000
Nine months ended June 30, 1998 - Basic..........32,817,000
Nine months ended June 30, 1998 - Diluted.......33,208,000
Nine months ended June 30, 1997 - Basic.........32,962,000
Nine months ended June 30, 1997 - Diluted.......33,193,000
Actual outstanding shares of Ralcorp Common Stock at June 30, 1998 were
32,534,000.
6
<PAGE> 9
NOTE 7 - RECEIVABLES consists of the following:
<TABLE>
<CAPTION>
June 30, Sept. 30,
1998 1997
---------- -----------
<S> <C> <C>
Trade receivables $ 39.4 $ 43.7
Other 1.8 10.2
Allowance for doubtful accounts (1.4) (1.0)
---------- -----------
$ 39.8 $ 52.9
========== ===========
</TABLE>
NOTE 8 - INVESTMENTS AND OTHER ASSETS consists of the following:
<TABLE>
<CAPTION>
June 30, Sept. 30,
1998 1997
--------- ----------
<S> <C> <C>
Intangible assets $ 53.5 $ 32.3
Investments in affiliated companies 69.3 55.4
Deferred charges and other assets 1.2 1.4
--------- ----------
$ 124.0 $ 89.1
========= ==========
</TABLE>
NOTE 9 - OTHER CURRENT LIABILITIES consists of the following:
<TABLE>
<CAPTION>
June 30, Sept. 30,
1998 1997
--------- ----------
<S> <C> <C>
Accrued advertising and promotion $ 9.9 $ 4.9
Incentive compensation, salaries
and vacations 4.8 4.9
Restructuring and shutdown reserves 2.8 4.2
Accrued Wortz acquisition-related items 4.4
Other items 12.5 18.9
--------- ----------
$ 30.0 $ 37.3
========= ==========
</TABLE>
NOTE 10 - LONG-TERM DEBT
As of June 30, 1998, the Company had $10.7 of outstanding long-term debt
on its Consolidated Balance Sheet. The balance of this long-term debt was
made available through the Company's Bank Credit Agreements. Original
proceeds of this outstanding debt were used primarily to help fund the
purchase of Flavor House, Inc., see "Note 5 - Acquisitions".
7
<PAGE> 10
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 requires all
derivative financial instruments to be reflected on an entity's balance sheet
at fair value, with periodic changes in fair value recognized in either
earnings or equity, depending on the nature of the exposure being hedged.
Adoption of FAS 133 requires that the entity record a cumulative-type
adjustment to recognize the fair value of its derivative portfolio on the
balance sheet. This adjustment is to be recorded as an adjustment to either
earnings or other comprehensive income depending on the hedged item. Due to
the Company's limited use of derivative instruments, the Company anticipates
minimal, if any, earnings impact from initial adoption of FAS 133. This new
accounting pronouncement is required to be adopted no later than Ralcorp's
fiscal year 2000, beginning October 1, 1999. The Company has not yet made a
determination as to when it will adopt FAS 133.
NOTE 12 - SUBSEQUENT EVENTS
On July 28, 1998, the Company announced it had reached a definitive
agreement to acquire Sugar Kake Cookie Inc., a privately held cookie
manufacturer located in Tonawanda, NY. Sugar Kake primarily manufactures and
sells a full range of sandwich creme cookies, as well as fig bars and
shortbread cookies. Net sales for Sugar Kake's fiscal 1997 were $28.6, the
majority of which were with co-packing and private label customers. Sugar
Kake will be operated as part of the Company's Bremner, Inc. cracker and
cookie subsidiary. The Company expects to close the transaction within 30
days pending appropriate government approvals.
On July 29, 1998, the Company announced the signing of a definitive
agreement to sell its branded baby food subsidiary, Beech-Nut Nutrition
Corporation, to the Milnot Company for $68 million in cash. Milnot is a
privately held company based in St. Louis, MO. This transaction is expected
to be completed within 45 days pending the appropriate government approvals.
Due to the significance of this transaction, included elsewhere in this
document are Unaudited Pro Forma Combined Statements of Earnings for the nine
months and year ended June 30, 1998 and September 30, 1997, respectively, as
well as an Unaudited Pro Forma Combined Balance Sheet as of June 30, 1998. In
addition, the Unaudited Pro Forma Combined Statement of Earnings for the nine
months ended June 30, 1997 has been included to provide comparisons between
interim periods. This pro forma financial information reflects operating
results and financial position of the Company exclusive of the baby food
subsidiary. (See Unaudited Pro Forma Combined Financial Information)
8
<PAGE> 11
RALCORP HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Ralcorp was organized for the purpose of effecting the Spin-Off and the Merger
and has operated as an independent company only since January 31, 1997. The
Ralcorp historical financial information presented in the "Ralcorp Historical"
column of the unaudited pro forma combined statements of earnings for the nine
months ended June 30, 1997 and year ended September 30, 1997 reflect four
months, October 1, 1996 through January 31, 1997, during which the various
spun-off businesses operated as divisions or subsidiaries of Old Ralcorp.
These historical financial statements include the results of operations of the
branded cereal and snack businesses (the Branded Business), which Ralcorp sold
to General Mills on January 31, 1997 and the Resort Operations, which Ralcorp
sold to Vail Resorts, Inc. on January 3, 1997. In addition, on July 29, 1998,
the Company announced the planned sale of its branded baby food subsidiary
(Beech-Nut) to the Milnot Company. Historical financial information presented
in the "Ralcorp Historical" column of the unaudited pro forma combined
statements of earnings for the nine month periods ended June 30, 1998 and 1997
and year ended September 30, 1997 and unaudited pro forma combined balance
sheet at June 30, 1998 reflect operating results and financial position
including Beech-Nut. The "Ralcorp Historical" column in the unaudited pro
forma combined statement of earnings for the nine months ended June 30, 1998
already reflects the dispositions of the Branded Business and Resort
Operations. Therefore, the historical financial statements for all periods
shown do not reflect the combined results of operations or financial position
that would have existed had Ralcorp operated independently and without
Beech-Nut. The unaudited pro forma information may not necessarily reflect
future results of operations or what the results of operations would have been
had the formation of Ralcorp, exclusive of Beech-Nut, and its related
businesses occurred at the beginning of the periods shown.
The pro forma combined statements of earnings for the nine month period ended
June 30, 1997 and year ended September 30, 1997 presents the combined results
of Ralcorp's operations assuming that the sales of the Branded Business and
the Resort Operations and the intended sale of Beech-Nut had occurred as of
October 1, 1996. The pro forma combined statement of earnings for the nine
month period ended June 30, 1998 presents the combined results of Ralcorp's
operations assuming that the intended sale of Beech-Nut had occurred as of
October 1, 1997. These statements of earnings have been prepared by adjusting
the historical information for the effect of costs and expenses and the
recapitalization which might have occurred had the Spin-Off, the sale of the
Resort Operations and intended sale of Beech-Nut occurred at the beginning of
fiscal 1997 and, as appropriate, had the intended sale of Beech-Nut solely
occurred at the beginning of fiscal 1998.
The pro forma combined balance sheet at June 30, 1998 presents the combined
financial position of Ralcorp assuming the intended sale of Beech-Nut had
occurred at that date. At June 30, 1998, the historical balance sheet already
reflects the Branded Business and Resort Operations sales. This balance sheet
data has been prepared by adjusting the historical balance sheet for the
effect of assets, liabilities and recapitalization which might have occurred
had the intended sale of Beech-Nut occurred on June 30, 1998.
The "Branded Business," "Resort Operations" and "Beech-Nut Operations" columns
in the pro forma combined statements of earnings represent the combined
historical results of operations of the Branded Business, the consolidated
historical operating results of the Resort Operations and the consolidated
historical operating results of Beech-Nut, respectively. The "Beech-Nut"
column in the pro forma combined balance sheet at June 30, 1998 represents the
specific assets and liabilities related to Beech-Nut that the Company
anticipates will be acquired by Milnot after closing this sale transaction.
Please read the notes to the respective unaudited pro forma combined financial
statements, following each statement, for a discussion of adjustments made to
the historical financial information in order to calculate the Ralcorp pro
forma financial information.
9
<PAGE> 12
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
(in millions except share and per share data)
Nine Months Ended June 30, 1998
Pro Forma
Ralcorp Beech-Nut Adjustments Pro Forma
----------------------------
Historical Operations Debit Credit Ralcorp
------------ ------------ ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 427.6 $ (96.9) $ 330.7
------------ ------------ -----------
Costs and Expenses
Cost of products sold 277.9 (49.8) 228.1
Selling, general and administrative 74.5 (17.6) $ .8 (a) 57.7
Advertising and promotion 43.3 (29.1) 14.2
Interest expense, net (.1) $ 2.6 (b) (2.7)
Equity earnings in Vail Resorts (13.9) (13.9)
------------ -----------
381.7 (96.5) (.8) 2.6 283.4
------------ ------------ ------------- -------- -----------
Earnings before Income Taxes 45.9 (.4) (.8) (2.6) 47.3
Income Taxes 17.4 (.2) (.7) (c) 17.9
------------ ------------ ------------- -----------
Net Earnings $ 28.5 $ (.2) $ (1.5) $ (2.6) $ 29.4
============ ============ ============= ======== ===========
Basic Earnings per Common Share(d) $ .87 $ .90
============ ============ ============= ======== ===========
Diluted Earnings per Common Share(d) $ .86 $ .89
============ ============ ============= ======== ===========
Weighted Average Shares Outstanding - Basic(d) 32.8 32.8
Weighted Average Shares Outstanding - Diluted(d) 33.2 33.2
<FN>
Notes to Unaudited Pro Forma Combined Statement of Earnings for Nine Months Ended June 30, 1998
(a) To reflect the fixed costs (i.e., information systems, general administrative and corporate overhead) included
in the historical results of operations of Beech-Nut absorbed by Ralcorp with the intended sale of Beech-Nut.
(b) Interest income shown of $2.7 million for the nine months ended June 30, 1998, reflects residual interest earned
on short term investments.
(c) To reflect the tax effect of the pro forma adjustments shown at an effective rate of 38%.
(d) The weighted average number of shares used to compute Ralcorp earnings per share (basic and diluted) is based on
the weighted average number of Ralcorp common shares outstanding (basic and diluted) during the nine months ended
June 30, 1998.
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(in millions except share and per share data)
Twelve Months Ended September 30, 1997
Pro Forma
Ralcorp Branded Resort Beech-Nut Adjustments
-------------
Historical Business Operations Operations Debit
------------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 739.7 $ (172.5) $ (33.1) $ (151.0)
------------ ---------- ------------ ------------
Costs and Expenses
Cost of products sold 425.2 (43.4) (27.5) (79.4) $ 1.4 (a)
Selling, general and administrative 126.5 (20.9) (3.5) (23.4) 6.6 (a)
Advertising and promotion 138.6 (78.1) (1.8) (41.0)
Interest expense, net 7.9 (1.4) (2.8)
Gain on Branded Sale (515.4) 515.4 (f)
Restructuring charge 19.7 -
Equity earnings in Vail Resorts (4.7)
------------
197.8 (143.8) (35.6) (143.8) 523.4
------------ ---------- ------------ ------------ -------------
Earnings before Income Taxes 541.9 (28.7) 2.5 (7.2) (523.4)
Income Taxes 10.4 (11.2) 1.0 (2.8)
------------ ---------- ------------ ------------
Net Earnings $ 531.5 $ (17.5) $ 1.5 $ (4.4) $ (523.4)
============ ========== ============ ============ =============
Basic Earnings per Common Share(e) $ 16.11
============
Diluted Earnings per Common Share(e) $ 16.01
============
Weighted Average Shares Outstanding - Basic(e) 33.0
Weighted Average Shares Outstanding - Diluted(e) 33.2
Pro Forma
Adjustments Pro Forma
-----------
Credit Ralcorp
----------- -----------
<S> <C> <C> <C>
Net Sales $ 383.1
-----------
Costs and Expenses
Cost of products sold 276.3
Selling, general and administrative $ 3.3 (g) 82.0
Advertising and promotion 17.7
Interest expense, net 7.4 (c) (3.7)
Gain on Branded Sale -
Restructuring charge 15.1 (h) 4.6
Equity earnings in Vail Resorts 2.3 (b) (7.0)
-------- -----------
28.1 369.9
-------- -----------
Earnings before Income Taxes (28.1) 13.2
Income Taxes (7.7) (d) 5.1
-------- -----------
Net Earnings $ (20.4) $ 8.1
======== ===========
Basic Earnings per Common Share(e) $ .25
===========
Diluted Earnings per Common Share(e) $ .24
===========
Weighted Average Shares Outstanding - Basic(e) 33.0
Weighted Average Shares Outstanding - Diluted(e) 33.2
<FN>
Notes to Unaudited Pro Forma Combined Statement of Earnings for the Year Ended September 30, 1997
(a) To reflect the fixed costs (i.e., fixed manufacturing, information systems, general administrative and corporate
overhead) included in the combined historical results of operations of the Branded Business and Beech-Nut absorbed
by Ralcorp with the sale of the Branded Business and the intended sale of Beech-Nut.
(b) To reflect Ralcorp's equity earnings in Vail Resorts. The equity earnings include $1.9 million for the year ended
September 30, 1997, of amortization income. The amortization income is the result of the basis difference between
the net book value of the Resort Operations' net assets contributed to Vail Resorts and Ralcorp's approximate
22.6% equity interest in Vail Resorts' net assets. This basis difference is being amortized ratably over 20 years.
(c) To reduce interest expense due to General Mills assuming $215.0 million of Ralcorp debt upon the sale of the
Branded Business. Interest income shown of $3.7 million for the year ended September 30, 1997, reflects residual
interest earned on short term investments.
(d) To reflect the tax effect of the pro forma adjustments shown at an effective rate of 38%.
(e) The weighted average number of shares used to compute Ralcorp earnings per share (basic and diluted) is based on
the weighted average number of Ralcorp common shares outstanding (basic and diluted) during the year ended
September 30, 1997.
(f) To eliminate the tax-free gain on sale of the Branded Business.
(g) To eliminate certain expenses incurred directly as a result of the Branded Business and Resort Operations sale
transactions.
(h) To eliminate the amount of the second quarter of fiscal 1997 restructuring charge that was specifically related
to the sale of the Branded Business.
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(in millions except share and per share data)
Nine Months Ended June 30, 1997
Pro Forma
Ralcorp Branded Resort Beech-Nut Adjustments
-------------
Historical Business Operations Operations Debit
------------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 595.0 $ (172.5) $ (33.1) $ (118.3)
------------ ---------- ------------ ------------
Costs and Expenses
Cost of products sold 328.4 (43.4) (27.5) (62.3) $ 1.4 (a)
Selling, general and administrative 101.8 (20.9) (3.5) (17.8) 6.5 (a)
Advertising and promotion 125.0 (78.1) (1.8) (30.6)
Interest expense, net 8.1 (1.4) (2.8)
Gain on Branded Sale (516.5) 516.5 (f)
Restructuring charge 23.0 -
Equity earnings in Vail Resorts (7.9)
------------
61.9 (143.8) (35.6) (110.7) 524.4
------------ ---------- ------------ ------------ -------------
Earnings before Income Taxes 533.1 (28.7) 2.5 (7.6) (524.4)
Income Taxes 6.5 (11.2) 1.0 (2.8)
------------ ---------- ------------ ------------
Net Earnings $ 526.6 $ (17.5) $ 1.5 $ (4.8) $ (524.4)
============ ========== ============ ============ =============
Basic Earnings per Common Share(e) $ 15.98
============
Diluted Earnings per Common Share(e) $ 15.86
============
Weighted Average Shares Outstanding - Basic(e) 33.0
Weighted Average Shares Outstanding - Diluted(e) 33.2
Pro Forma
Adjustments Pro Forma
-----------
Credit Ralcorp
----------- -----------
<S> <C> <C> <C>
Net Sales $ 271.1
-----------
Costs and Expenses
Cost of products sold 196.6
Selling, general and administrative $ 3.3 (g) 62.8
Advertising and promotion 14.5
Interest expense, net 6.6 (c) (2.7)
Gain on Branded Sale -
Restructuring charge 18.4 (h) 4.6
Equity earnings in Vail Resorts 2.3 (b) (10.2)
-------- -----------
30.6 265.6
-------- -----------
Earnings before Income Taxes (30.6) 5.5
Income Taxes (8.5) (d) 2.0
-------- -----------
Net Earnings $ (22.1) $ 3.5
======== ===========
Basic Earnings per Common Share(e) $ .11
===========
Diluted Earnings per Common Share(e) $ .11
===========
Weighted Average Shares Outstanding - Basic(e) 33.0
Weighted Average Shares Outstanding - Diluted(e) 33.2
<FN>
Notes to Unaudited Pro Forma Combined Statement of Earnings for the Nine Months Ended June 30, 1997
(a) To reflect the fixed costs (i.e., fixed manufacturing, information systems, general administrative and corporate
overhead) included in the combined historical results of operations of the Branded Business and Beech-Nut absorbed
by Ralcorp with the sale of the Branded Business and the intended sale of Beech-Nut.
(b) To reflect Ralcorp's equity earnings in Vail Resorts. The equity earnings include $1.0 million for the nine months
ended June 30, 1997, of amortization income. The amortization income is the result of the basis difference between
the net book value of the Resort Operations' net assets contributed to Vail Resorts and Ralcorp's approximate 22.6%
equity interest in Vail Resorts' net assets. This basis difference is being amortized ratably over 20 years.
(c) To reduce interest expense due to General Mills assuming $215.0 million of Ralcorp debt upon the sale of the
Branded Business. Interest income shown of $2.7 million for the nine months ended June 30, 1997, reflects residual
interest earned on short term investments.
(d) To reflect the tax effect of the pro forma adjustments shown at an effective rate of 38%.
(e) The weighted average number of shares used to compute Ralcorp earnings per share (basic and diluted) is based on
the weighted average number of Ralcorp common shares outstanding (basic and diluted) during the nine months ended
June 30, 1997.
(f) To eliminate the tax-free gain on sale of the Branded Business.
(g) To eliminate certain expenses incurred directly as a result of the Branded Business and Resort Operations sale
transactions.
(h) To eliminate the amount of the second quarter of fiscal 1997 restructuring charge that was specifically related
to the sale of the Branded Business.
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
Pro Forma Combined Balance Sheet
(in millions)
June 30, 1998
Pro Forma
Ralcorp Adjustments Ralcorp
--------------------------
Historical Beech-Nut Debit Credit Pro Forma
------------ ---------- ------------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2.6 $ - $ 68.0 (a) $ 1.2 (b) $ 69.4
Receivables, less allowance for doubtful
accounts 39.8 10.4 29.4
Inventories 76.3 31.1 45.2
Prepaid expenses 9.4 .3 .9 (c) 8.2
------------ ---------- ------------ ------- -----------
Total Current Assets 128.1 41.8 68.0 2.1 152.2
------------ ---------- ------------ ------- -----------
Investments and Other Assets 124.0 124.0
------------ ---------- ------------ -------- -----------
Deferred income taxes 6.2 6.2
------------ ---------- ------------ -------- -----------
Property at Cost 273.2 39.8 .8 (d) 232.6
Accumulated depreciation 119.8 22.0 97.8
------------ ---------- ------------ ------- -----------
153.4 17.8 - .8 134.8
------------ ---------- ------------ ------- -----------
Total $ 411.7 $ 59.6 $ 68.0 $ 2.9 $ 417.2
============ ========== ============ ======= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ - $ - $ - $ - $ -
Accounts payable 27.5 2.3 6.3 (e) 31.5
Other current liabilities 30.0 3.3 1.1 (f) 25.6
------------ ---------- ------------ ------- -----------
Total Current Liabilities 57.5 5.6 1.1 6.3 57.1
------------ ---------- ------------ ------- -----------
Long-Term Debt 10.7 - - - 10.7
------------ ---------- ------------ ------- -----------
Other Liabilities 36.5 3.5 .9 (c) 32.1
------------ ---------- ------------ ------- -----------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 110.1 110.1
Retained earnings 204.8 10.3 (g) 215.1
Common stock in treasury, at cost (8.2) (8.2)
------------ ---------- ------------ ------- -----------
Total Shareholders' Equity 307.0 - - 10.3 317.3
------------ ---------- ------------ ------- -----------
Total $ 411.7 $ 9.1 $ 2.0 $ 16.6 $ 417.2
============ ========== ============ ======= ===========
<FN>
Notes to Unaudited Pro Forma Combined Balance Sheet at June 30, 1998
(a) To reflect the cash proceeds of the Beech-Nut sale transaction.
(b) To reflect payment of transaction costs related to the Beech-Nut sale transaction.
(c) To reflect the write off of the current and deferred tax assets and liabilities associated
with the specific assets and liabilities to be sold in the Beech-Nut sale transaction.
(d) To reflect fair value of assets on the records of Ralcorp to be sold as part of the Beech-Nut sale.
(e) To reflect estimated taxes payable on net cash proceeds.
(f) To adjust amount of certain liabilities retained by Ralcorp.
(g) To record the estimated gain on sale of the Beech-Nut baby food subsidiary.
</TABLE>
13
<PAGE> 16
RALCORP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For financial reporting purposes, Ralcorp is a "successor registrant" to the
Ralcorp Holdings, Inc. that was acquired by General Mills, Inc. on January 31,
1997 (Old Ralcorp) and, as such, all financial information of Ralcorp included
in this discussion and the accompanying financial statements represent the
historical financial information of Old Ralcorp. Therefore, references to the
"Company," as they relate to financial information for periods prior to
January 31, 1997, are references to Old Ralcorp.
HIGHLIGHTS
Net sales and net earnings for the third quarter ended June 30, 1998 were
$143.3 million and $13.2 million, respectively, compared to net sales and
earnings for the same quarter last year of $140.7 million and $3.1 million,
respectively. Basic and diluted earnings per share for the current year's
third quarter were $.40 compared to last year's third quarter basic and
diluted earnings per share of $.09. The earnings increase is primarily due to
the continued operating improvements of the Company's private label businesses
and favorable equity earnings related to Ralcorp's investment in Vail Resorts,
Inc. Partially offsetting these gains are the continued competitive and
category difficulties that are negatively effecting the Company's branded baby
food subsidiary.
On a comparison of unaudited pro forma results for the nine month period ended
June 30, 1998 to unaudited pro forma results for the same period of the prior
year, net sales were $330.7 million and $271.1 million, respectively, an
improvement of $59.6 million, or nearly 22 percent. Pro forma net earnings
for the current year's first nine months were $29.4 million, or $.90 per basic
share and $.89 per diluted share, compared to prior year pro forma net
earnings of $3.5 million, or $.11 per share (basic and diluted). Included in
the prior year pro forma results is a $4.6 million ($2.9 million after tax)
charge to cover certain severance-related costs. Excluding this charge, prior
year pro forma net earnings would have been $6.4 million, or $.20 per share
(basic and diluted). The Company took no unusual charges during the current
nine month period. The noted improvement in sales and earnings between pro
forma nine month periods further accents the significant operating progress of
the Company's private label cereal and cracker and cookie divisions, as well
as the favorable equity earnings from Ralcorp's Vail investment.
The unaudited pro forma information assumes the divestitures of the Company's
branded cereal and snack mix businesses and ski resort operations were
completed as of the beginning of the prior fiscal year periods. Actual timing
of these divestitures occurred during the quarter ended March 31, 1997. The
Company's ski resort holdings were sold to Vail Resorts, Inc. on January 3,
1997 and the Company's branded cereal and snack mix businesses were sold to
General Mills, Inc. on January 31, 1997. In addition, both current and prior
year unaudited pro forma information reflects the elimination of operating
results related to the Company's branded baby food subsidiary. On July 29,
1998, Ralcorp announced the planned sale of Beech-Nut Nutrition Corporation to
the Milnot Company. Comparisons of unaudited pro forma results in the
current year to the unaudited pro forma results of the prior year are deemed,
therefore, to provide a more meaningful analysis of operating results and
trends.
14
<PAGE> 17
Actual net sales for the nine month period ended June 30, 1997 were $595.0
million compared to $427.6 million for the same period of the current fiscal
year. The significant decline in net sales year-over-year is due to the prior
year period including sales of the Company's branded cereal and snack business
through January 31, 1997 and revenues attributable to the Company's ski resort
operations through January 3, 1997.
Net earnings for the nine months ended June 30, 1997, were $24.6 million, or
$.74 per diluted share compared to the net earnings for the corresponding
current year period of $28.5 million, or $.86 per diluted share. Excluded
from the first nine months of fiscal 1997 net earnings are two separate
restructuring charges totaling $23.0 million pre-tax ($14.5 million after tax
or $.44 per basic and diluted share) and a one-time, tax-free gain on the sale
of the branded businesses of $516.5 million or $15.56 per diluted share.
<TABLE>
<CAPTION>
NET SALES BY DIVISION
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Ralston Foods $ 66.9 $ 63.0 $207.1 $193.1 *
Bremner 36.5 33.2 115.4 78.0
Beech-Nut 31.7 44.5 96.9 118.3
Flavor House 8.2 8.2
------- ------ ------ ------
$ 143.3 $140.7 $427.6 $389.4
======= ====== ====== ======
<FN>
* On a pro forma basis, reflecting elimination of sales related to the
branded cereal and snack business.
</TABLE>
DISCUSSION OF BUSINESSES
With the sale of its Resort Operations on January 3, 1997 to Vail Resorts,
Inc., the Company operates solely in the Consumer Foods segment, while
maintaining an equity interest in Vail Resorts, Inc.
CONSUMER FOODS
Comparisons of operating results in the Consumer Foods segment on a historical
basis are complicated by the fact that the operations of the Company's Branded
Business are included through the first four months of the prior fiscal year.
As previously mentioned, the sale of the Branded Business to General Mills
occurred on January 31, 1997.
Actual current year Consumer Foods sales improved $2.6 million for the quarter
and declined $134.3 million for the nine months, as the prior year nine month
period includes the four month sales of the now divested branded cereal and
15
<PAGE> 18
snack business. Comparing sales of the first nine months of the current
fiscal year to the same prior year period, again excluding the benefit of the
Branded Business, sales rose $38.2 million, or nearly 10 percent. These sales
dollar increases can be attributed primarily to the increase from the Bremner
cracker and cookie operation, which benefited in the current year from three
full quarters of integrating the Wortz Company sales. The Wortz Company, a
private label cracker and cookie operation, was acquired on April 21, 1997.
In addition, store brand ready-to-eat cereal sales improved over the prior
year on a 7.3 percent volume increase on a current quarter to prior year
quarter comparison and a 6.5 percent volume improvement when comparing nine
month periods. The noted store brand cereal volume improvement marks the
fifth consecutive quarter of year-over-year volume gains. Net sales for the
quarter were also aided by the Company's acquisition of Flavor House, Inc., a
snack nut business, on April 23, 1998. Flavor House, which is currently being
managed by the private label cereal subsidiary, contributed $8.2 million in
net sales. Offsetting some of the sales improvement, were year-over-year
sales declines of $12.8 million for the quarter (on a nearly 31 percent case
volume decline) and $21.4 million for the nine months (on a 20.7 percent case
volume decline) from Beech-Nut baby foods. Beech-Nut's quarter-to-quarter
comparison is difficult as the prior year's third quarter benefited from the
grocery trade's buy-in in advance of a July 1, 1997 price increase. The baby
food business, however, continues to be negatively affected by both
significant competitive pricing pressures and a declining category.
From an operating results perspective, Ralcorp recorded an operating profit of
$12.6 million for the current quarter and $36.6 million for the nine months
ended June 30, 1998. While the operating profit for the nine months is
significantly below the Branded Business-enhanced operating profit level of
the prior year's first nine months, the operating profit for the current
quarter represents a $3.0 million (more than 31 percent) improvement over the
same quarter of the prior year, the first comparable quarter also reflecting
no benefit of branded business operations. On an EBITDA basis (earnings
before interest, taxes, depreciation and amortization) the Company recorded
$45.6 million for the nine months ended June 30, 1998, excluding the equity
earnings from its Vail Resorts, Inc. investment. Ralston Foods recorded
significant operating profit improvement in the quarter on the strength of
volume growth, while maintaining the substantially lower cost base achieved
through previous restructuring and cost containment efforts. Bremner
operating profit improved considerably in both the quarter and nine months due
primarily to the addition of Wortz and an improved product mix. Operating
profit at Beech-Nut was significantly down from both prior year comparison
periods. Beech-Nut recorded a modest operating loss for the quarter ended
June 30, 1998. As mentioned earlier, the Company's baby food subsidiary has
been and continues to be plagued by heavy competitive pricing pressure and a
significant decline in the overall baby food category.
RESORT OPERATIONS
Resort Operations recorded, through January 3, 1997, sales and operating
profit of $33.1 million and $.3 million, respectively. Due to the sale of the
Company's Resort Operations to Vail Resorts, Inc. on January 3, 1997, there
are no comparable current year figures.
16
<PAGE> 19
EQUITY INTEREST IN VAIL RESORTS, INC.
Upon the sale of Ralcorp's resort operations to Vail Resorts, Inc. in January
1997, Ralcorp retained an equity ownership interest in Vail, which as of June
2, 1998 was approximately 22 percent. On November 6, 1997, Vail announced a
change in its fiscal year end from September 30 to July 31. As a result,
Ralcorp reports current year equity earnings on a two month time lag and the
Company's entire current fiscal year will include only ten months of equity
earnings from Vail.
The quarter ended June 30, 1998, benefited from non-cash, pre-tax equity
earnings of $9.7 million compared to an equity loss of $2.6 million in the
same prior year period. As explained, this significant difference is due to
timing, in that, Ralcorp's reporting for the current year quarter includes the
historically profitable months of February through April. The prior year
equity loss amount relates to the months of April 1997 through June 1997.
Through the nine months ended June 30, 1998, the Company's equity stake in
Vail Resorts resulted in non-cash, pre-tax earnings of $13.9 million compared
to $7.9 million during the same prior year period. Ralcorp's reporting
through the first nine months of fiscal 1998 includes Vail's results for only
the period of October 1997 through April 1998 and the prior year's equity
earnings reflects only the months of January through June (the period
subsequent to the Vail transaction). Ralcorp's equity ownership interest in
Vail earnings for Vail's fourth quarter ending July 31, 1998 will be reported
in the Company's quarter ending September 30, 1998.
RESULTS OF OPERATIONS
Cost of products sold as a percentage of sales was 66.2% for the current year
third quarter compared to 66.0% for the same quarter of the prior year, and
for the nine months ended June 30, 1998, increased to 65.0% of sales from
55.2% in the same prior year period. This year-to-date increase can be
attributable to the fact that many of the Company's higher margin products
were eliminated through the sale of the Branded Business, store brand products
by their market nature usually are priced at a lower margin. A comparison of
cost of products sold as a percentage of sales for the first nine months of
the current year to nine month prior year results, both periods on a pro forma
basis, reflects a decline to 69.0% from 72.5%. This favorable change can be
attributed primarily to lower ingredient costs and improved manufacturing
efficiencies. Selling, general and administrative expense as a percent of
sales for the quarter and nine month periods ended June 30, 1998 was 17.6% and
17.4%, respectively. The level of selling, general and administrative expense
in these two current year periods is consistent with the levels experienced by
the Company subsequent to the two completed sale transactions and reflects a
significantly reduced cost structure from that which was in place to support
the larger corporation. Advertising and promotion expense as a percentage of
sales has declined for both quarter-to-quarter and nine month-to-nine month
comparisons, reflecting the reduced level of advertising and promotional
support necessary for a predominantly private label company. Income taxes
were 38.0% of earnings before income taxes and equity earnings for the nine
months ended June 30, 1998, down slightly from the 38.5% of earnings before
income taxes, restructuring charges and equity earnings of a year-ago.
17
<PAGE> 20
FINANCIAL CONDITION
The Company's primary source of liquidity is cash flow from operations, which
decreased to $32.5 million for the nine months ended June 30, 1998 compared to
$58.5 million for the same period in the prior year. Through the current year
nine month period the favorable effect of reducing the level of accounts
receivable has been offset by a significant reduction in accounts payable and
accrued liabilities. The decline in accrued liabilities includes the payment
of certain one-time items including, a final payment related to the Wortz
acquisition and a fee paid to terminate a contract with Ralston Purina
regarding international distribution of cereal products. Net working capital,
excluding cash and cash equivalents, was $68.0 million at June 30, 1998
compared to $56.5 million at September 30, 1997.
On April 23, 1998, Ralcorp acquired Flavor House, Inc., a snack nut business
located in Dothan, AL, for approximately $21.5 million. As reflected in the
accompanying Consolidated Statement of Cash Flows, during the prior year nine
month period, the Company acquired the Wortz Company for an initial cash
outflow of approximately $41.4 million.
Property and intangible asset additions decreased to $14.2 million for the
first nine months of fiscal 1998 compared to $17.9 million in the prior year
period. Of the prior year amount, approximately $7.4 million represented
Resort Operations additions. Through the nine month period ended June 30,
1998, the Company repurchased $8.2 million of its Common Stock. The Company
transacted no stock repurchases during the same prior year period. As
reflected on the Consolidated Balance Sheet, the Company remains essentially
debt free at June 30, 1998, as was the case at September 30, 1997.
During the quarter ended December 31, 1997, the Company's Board of Directors
approved an authorization to buy back up to one million shares of the
Company's Common Stock from time to time as management determines. As of
August 14, 1998, the Company had repurchased 561,000 shares for approximately
$9.9 million pursuant to such authorization.
OUTLOOK
Ralcorp, through its Ralston Foods division, continues to operate in the
highly competitive environment that exists in the ready-to-eat cereal
category. In addition to the competition that exists from branded box cereal
manufacturers, management believes the increased presence of competitors'
branded bagged cereals is having, and may continue to have, a negative impact
on industry-wide cereal sales and profitability. Bagged cereals, like store
brand box cereals, compete at the lower end of the price spectrum. Despite
the competitiveness inherent in the cereal category, recent volume trends in
store brand cereals have been positive, while the category in total has shown
no meaningful growth. To be successful, Ralcorp must maintain an effective
price gap between its private label cereal products and those products of top
branded cereal competitors. Ralcorp management has been successful at
removing excess costs from its cereal operations and sustaining the reduced
cost structure brought about by previous restructuring and cost containment
efforts. The result is a current cost basis that will allow Ralston Foods to
maintain an adequate price gap and still provide a quality alternative to
branded cereals. Management intends to continue to focus on cost elimination
where appropriate.
18
<PAGE> 21
With regard to the Bremner cracker and cookie business, the addition of the
Wortz Company has had a positive effect on sales, operating profit and
customer base. April 21, 1998 marked the one year anniversary of the Wortz
acquisition. Bremner continues to achieve good results on the effects of the
Wortz acquisition and an improved product mix. On July 28, 1998, the Company
announced the intended acquisition of Sugar Kake Cookie Inc., a cookie
manufacturer located in Tonawanda, NY. Sugar Kake, which will be operated as
part of Bremner, represents an important addition to Bremner as it should
afford the opportunity to increase Bremner's presence and capacity in private
label cookies. Despite the present positive performance, and the expected
benefit of current and future acquisitions, Bremner still faces significant
competition from large branded and regional private label producers.
As referred to earlier in this discussion, the Company announced, on July 29,
1998, the signing of a definitive agreement to sell its branded baby food
subsidiary, Beech-Nut, to the Milnot Company (Milnot is privately held).
Pending the receipt of appropriate government approvals, however, the Company
is still engaged in a baby food category that is in significant decline and is
burdened by competitive pricing pressures. Beech-Nut, for the period it
remains part of Ralcorp, will continue to focus on the production of quality
products and taking the necessary steps to adequately defend its market share,
especially in key regional markets.
The third leg of the Company's private label businesses is in the snack nut
category with the addition of Flavor House, Inc. The snack nut category is
another that is very competitive, with a strong branded market leader. The
Company, however, believes there is opportunity for growth in private label
snack nuts, both through internal means and through acquisitions.
Ralcorp management intends to take the appropriate steps to grow and improve
the Company's predominantly private label businesses. Such steps could
include enhanced operating efficiencies, expanding the customer base where
possible, continued product improvement and innovation, and, as previously
mentioned, maintaining a meaningful price gap between branded products and all
of its private label offerings.
Company management understands that in addition to improved operations and
enhanced efficiencies, a key growth opportunity exists through further
strategic acquisitions. Recent and intended acquisitions of Wortz, Flavor
House and Sugar Kake serve as examples of such key acquisitions. Management
intends to explore, where appropriate, further acquisition opportunities that
strategically fit with the Company's current mix of businesses. Ralcorp's low
level of outstanding debt and cash generated by the pending sale of Beech-Nut
should provide the Company greater flexibility to act upon any such
opportunities.
RALCORP LIQUIDITY
To meet its on-going working capital needs Ralcorp has a $50 million working
capital credit facility. The proceeds of the facility may be used to fund
Ralcorp's working capital needs, capital expenditures, and other general
corporate purposes. Provisions of the $50 million credit facility require
Ralcorp to maintain certain financial ratios and a minimum level of
shareholders' equity.
19
<PAGE> 22
Management believes that Ralcorp will be able to generate positive operating
cash flows through its mix of businesses and expects that future liquidity
requirements will be met through a combination of existing cash balances,
operating cash flow and, as necessary, use of borrowings available under its
working capital credit facility.
INFORMATION SYSTEMS DEVELOPMENTS AND YEAR 2000 ISSUES
The Company uses computer hardware and software in various aspects of its
business, including production, distribution and administration, which will
require modification or replacement in order to interpret the year 2000
appropriately. The Company has developed and begun to implement a plan to
identify and correct all affected hardware and software. As part of this
plan, the Company monitors and tests the implementation of needed corrections.
The plan necessarily includes communications with the Company's significant
customers, vendors and other outside parties to determine the extent to which
the Company's systems and operations are vulnerable to any failures by these
outside parties to satisfactorily address the year 2000 issue. The plan also
includes the development of contingency plans to be implemented in the event
of untimely or incomplete remediation of either internal or third party year
2000 issues.
The Company's on-going information technology strategy includes the
elimination of existing mainframe computer systems and the migration to a
server environment in order to reduce costs and improve functionality. A key
component to the execution of this strategy is currently in process as the
Company is replacing, upgrading or enhancing primary systems and technology
necessary to manage the business. The Company's current accounting policy is
to capitalize the related external costs and amortize them over a period not
to exceed five years. The Company's replacement of primary systems is
scheduled to be completed before September 30, 1998, at which time the
resulting information systems hierarchy will be substantially year 2000
compliant. The initial assessment of all other systems hardware and software,
including processors within production and other equipment, is complete. The
Company anticipates that most modifications and replacements to these systems
will be in place in early fiscal 1999. Based upon current expectations,
management anticipates that the total costs to the Company to modify or
replace its systems in order to remediate the year 2000 issue should not be
material to its financial position or results of operations.
While the Company believes its planning efforts are adequate to address its
year 2000 issues, if modifications and replacements are not made on a timely
basis there can be no absolute assurance that there will not be a material
adverse effect on the Company. In addition, the potential for a material
adverse effect on the Company exists if critical third parties do not convert
their systems in a timely manner and in a way that is compatible with the
Company's systems which results in an interruption of critical service to the
Company.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis and this document, and are preceded by, followed by or
include the words "intends," "believes," "expects," "anticipates," "should" or
20
<PAGE> 23
similar expressions. The Company's results of operations, liquidity status
and year 2000 compliance may differ materially from those in the
forward-looking statements. Such statements are based on management's current
views and assumptions, and involve risks and uncertainties that could affect
expected results. For example any of the following factors cumulatively or
individually may impact expected results:
(i) If the Company is unable to maintain a meaningful price gap between
its private label products and the branded products of its competitors,
successfully introduce new products or successfully manage costs across all
parts of the Company, then the Company's private label businesses could incur
operating losses;
(ii) Consolidation among members of the grocery trade may lead to
increased wholesale price pressure from larger grocery trade customers and
could result in the loss of key cereal accounts if the surviving entities are
not customers of the Company;
(iii) Significant increases in the cost of certain raw materials used in
the Company's products, to the extent not reflected in the price of the
Company's products, could adversely impact the Company's results. For
example, the cost of wheat can change significantly;
(iv) In light of its significant ownership interest in Vail Resorts,
Inc., the Company's non-cash earnings can be adversely affected by Vail's
unfavorable performance;
(v) The Company's baby food business has experienced significant volume
declines which have, and could continue to have, a negative impact on the
Company's operating results should the anticipated sale of this business not
close for a protracted period of time;
(vi) The Company's businesses compete in mature segments with
competitors having large percentages of segment sales; and
(vii) The Company's disclosure under the heading "INFORMATION SYSTEMS
DEVELOPMENTS AND YEAR 2000 ISSUES" includes cautionary statements regarding the
Company's ability to successfully address Year 2000 compliance issues, and such
statements are incorporated herein.
21
<PAGE> 24
PART II. OTHER INFORMATION
There is no information required to be reported under any items except those
indicated below.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RALCORP HOLDINGS, INC.
By: /s/ T. G. GRANNEMAN
---------------------
T. G. Granneman
Duly Authorized Signatory and
Chief Accounting Officer
22
<PAGE> 25
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 41
<ALLOWANCES> 1
<INVENTORY> 76
<CURRENT-ASSETS> 128
<PP&E> 273
<DEPRECIATION> 120
<TOTAL-ASSETS> 412
<CURRENT-LIABILITIES> 58
<BONDS> 11
<COMMON> 0
0
0
<OTHER-SE> 307
<TOTAL-LIABILITY-AND-EQUITY> 412
<SALES> 428
<TOTAL-REVENUES> 428
<CGS> 278
<TOTAL-COSTS> 278
<OTHER-EXPENSES> 118
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 46
<INCOME-TAX> 17
<INCOME-CONTINUING> 29
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.86
</TABLE>
