<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 MARCH 31, 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 May 13, 1998
32,656,417
<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 Financial Statements 4
Unaudited Pro Forma Combined Financial Information 8
Pro Forma Combined Statement of Earnings 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Other Information 16
(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 Six Months Ended
March 31, March 31,
-------------------- ------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 147.1 $ 161.4 $ 284.3 $ 454.3
--------- -------- -------- --------
Costs and Expenses
Cost of products sold 92.9 94.3 183.1 235.5
Selling, general and administrative 25.7 38.8 49.3 77.2
Advertising and promotion 17.4 29.0 31.1 109.3
Interest expense, net - 1.0 (.1) 7.9
Gain on Branded Sale (516.5) (516.5)
Restructuring charge 18.4 23.0
Equity earnings in Vail Resorts, Inc. (6.2) (10.5) (4.2) (10.5)
--------- -------- -------- --------
129.8 (345.5) 259.2 (74.1)
--------- -------- -------- --------
Earnings before Income Taxes 17.3 506.9 25.1 528.4
Income Taxes 6.8 (3.5) 9.8 4.9
--------- -------- -------- --------
Net Earnings $ 10.5 $ 510.4 $ 15.3 $ 523.5
========= ======== ======== ========
Basic Earnings per Common Share $ .32 $ 15.47 $ .46 $ 15.91
========== ======== ======== ========
Diluted Earnings per Common Share $ .32 $ 15.33 $ .46 $ 15.77
========== ======== ======== ========
<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)
March 31, Sept. 30,
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12.6 $ 8.4
Receivables, less allowance for doubtful
accounts of $1.1 and $1.0, respectively 37.6 52.9
Inventories -
Raw materials and supplies 24.5 23.5
Finished products 50.1 49.0
Prepaid expenses 9.6 9.3
----------- ---------
Total Current Assets 134.4 143.1
----------- ---------
Investments and Other Assets 96.5 89.1
----------- ---------
Deferred income taxes 11.7 13.8
----------- ---------
Property at Cost 268.7 264.1
Accumulated depreciation 117.7 109.8
----------- ---------
151.0 154.3
----------- ---------
Total $ 393.6 $ 400.3
=========== =========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Current maturities of long-term debt $ - $ -
Accounts payable 29.0 40.9
Other current liabilities 32.3 37.3
----------- ---------
Total Current Liabilities 61.3 78.2
----------- ---------
Long-Term Debt - -
----------- ---------
Other Liabilities 36.1 35.4
----------- ---------
Shareholders Equity
Common stock .3 .3
Capital in excess of par value 110.1 110.1
Retained earnings 191.6 176.3
Common stock in treasury, at cost (5.8)
----------- ---------
Total Shareholders Equity 296.2 286.7
----------- ---------
Total $ 393.6 $ 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)
Six Months Ended
March 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash Flow from Operations
Net earnings $ 15.3 $ 523.5
Restructuring charge ($23.0 less payments of $16.0) 7.0
Gain on sale of Branded Business (516.5)
Non-cash items included in income 11.3 16.6
Changes in assets and liabilities used in operations .2 13.2
Other, net (3.6) (4.6)
--------- --------
Net cash flow from operations 23.2 39.2
--------- --------
Cash Flow from Investing Activities
Acquisition (4.2)
Property and intangible asset additions, net (7.7) (15.5)
Other, net (1.3) (.6)
---------- --------
Net cash used by investing activities (13.2) (16.1)
---------- --------
Cash Flow from Financing Activities
Net cash flow used by debt (3.1)
Treasury stock purchases (5.8)
---------- --------
Net cash used by financing activities (5.8) (3.1)
---------- --------
Net Increase in Cash and Cash Equivalents 4.2 20.0
Cash and Cash Equivalents, Beginning of Year 8.4
---------- --------
Cash and Cash Equivalents, End of Period $ 12.6 $ 20.0
========= ========
<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE> 6
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 December
31, 1997 was 22.1%. 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
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.
4
<PAGE> 7
Through the six months ended March 31, 1998, the Company's equity stake
in Vail resulted in non-cash, pre-tax earnings of $4.2 million, 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 six months
results include only the Company's equity portion of Vail's operating results
for the period October, 1997 through January, 1998.
NOTE 4 - ACQUISITION
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. The acquisition was financed by 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.
The total consideration given in relation to this acquisition was $45.8,
of which, $4.2 was paid in the quarter ended December 31, 1997. Goodwill
associated with this acquisition is included in the "Investments and Other
Assets" line of the accompanying Consolidated Balance Sheet.
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 common share). This charge covered severance
costs for certain employees whose jobs were eliminated in downsizing
initiatives.
For the year ended September 30, 1996, the Company recorded a pre-tax
charge of $16.5 ($10.4 after taxes or $.31 per common 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 six months ended March 31, 1998 are summarized in the following table.
<TABLE>
<CAPTION>
Balance of Utilized in Balance of
Reserve at Six months Reserve at
Sept. 30, 1997 FY 1998 Mar. 31, 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Salaries, severance and
benefits $ .6 $ - $ .6
Asset writedowns .8 (.5) .3
Other 1.4 (.2) 1.2
-------------- ------------- --------------
Total restructuring charges $ 2.8 $ (.7) $ 2.1
============== ============= ==============
</TABLE>
5
<PAGE> 8
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 six month periods ended March 31, 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 March 31, 1998 - Basic 32,827,000
Quarter ended March 31, 1998 - Diluted 33,200,000
Quarter ended March 31, 1997 - Basic 32,990,000
Quarter ended March 31, 1997 - Diluted 33,258,000
Six months ended March 31, 1998 - Basic 32,912,000
Six months ended March 31, 1998 - Diluted 33,259,000
Six months ended March 31, 1997 - Basic 32,937,000
Six months ended March 31, 1997 - Diluted 33,215,000
Actual outstanding shares of Ralcorp Common Stock at March 31, 1998 were
32,656,000.
NOTE 7 - RECEIVABLES consists of the following:
<TABLE>
<CAPTION>
Mar. 31, Sept. 30,
1998 1997
---------- -----------
<S> <C> <C>
Trade receivables $ 36.5 $ 43.7
Other 2.2 10.2
Allowance for doubtful accounts (1.1) (1.0)
---------- -----------
$ 37.6 $ 52.9
========== ===========
</TABLE>
NOTE 8 - INVESTMENTS AND OTHER ASSETS consists of the following:
<TABLE>
<CAPTION>
Mar. 31, Sept. 30,
1998 1997
-------- ----------
<S> <C> <C>
Intangible assets $ 35.5 $ 32.3
Investments in affiliated companies 59.6 55.4
Deferred charges and other assets 1.4 1.4
-------- ----------
$ 96.5 $ 89.1
========= ==========
</TABLE>
6
<PAGE> 9
NOTE 9 - OTHER CURRENT LIABILITIES consists of the following:
<TABLE>
<CAPTION>
Mar. 31, Sept. 30,
1998 1997
--------- ----------
<S> <C> <C>
Accrued advertising and promotion $ 11.8 $ 4.9
Incentive compensation, salaries
and vacations 4.9 4.9
Restructuring and shutdown reserves 2.8 4.2
Accrued Wortz acquisition-related items 4.4
Other items 12.8 18.9
--------- ----------
$ 32.3 $ 37.3
========= ==========
</TABLE>
NOTE 10 - SUBSEQUENT EVENT
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. Flavor House's sales in the store brand jar and can snack nut
category are estimated to be $62 for the current fiscal year, which was
scheduled to end May 31, 1998.
The acquisition was funded through a combination of available cash and
debt funded through the Company's credit facility.
7
<PAGE> 10
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 statement of earnings for the six
months ended March 31, 1997 reflects four months, October 1, 1996 through
January 31, 1997, during which the various spun-off businesses operated as
divisions or subsidiaries of Old Ralcorp. This historical financial statement
includes 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. Therefore, the historical financial statement does not
reflect the combined results of operations that would have existed had Ralcorp
been an independent company. Since Ralcorp did not operate independently
during the entire period shown, 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 and its related
businesses occurred at the beginning of the period shown.
The pro forma combined statement of earnings for the six months ended March
31, 1997 presents the combined results of Ralcorp's operations assuming that
the sale of the Branded Business and the sale of the Resort Operations had
occurred as of October 1, 1996. This statement of earnings has 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 and the
sale of the Resort Operations occurred at the beginning of this period.
The "Branded Business" and "Resort Operations" columns in the pro forma
combined statement of earnings represents the combined historical results of
operations of the Branded Business and the consolidated historical operating
results of the Resort Operations, respectively.
Please read the Notes to the Unaudited Pro Forma Combined Financial
Information for a discussion of adjustments made to the historical financial
information in order to calculate the Ralcorp pro forma financial information.
8
<PAGE> 11
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(in millions except per share data)
Six Months Ended March 31, 1997
Pro Forma
Ralcorp Branded Resort Adjustments Pro Forma
----------------------------
Historical Business Operations Debit Credit Ralcorp
------------ ---------- ------------ ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 454.3 $ (172.5) $ (33.1) $ 248.7
------------ ---------- ------------ ------------- -------- -----------
Costs and Expenses
Cost of products sold 235.5 (43.4) (27.5) 1.4 (a) 166.0
Selling, general and
administrative 77.2 (20.9) (3.5) 6.1 (a) 3.3 (g) 55.6
Advertising and promotion 109.3 (78.1) (1.8) 29.4
Interest expense, net 7.9 (1.4) (2.8) 4.0 (c) (.3)
Gain on Branded Sale (516.5) 516.5 (f) -
Restructuring charge 23.0 18.4 (h) 4.6
Equity earnings in
Vail Resorts, Inc. (10.5) 2.3 (b) (12.8)
------------ ---------- ------------ ------------- -------- -----------
(74.1) (143.8) (35.6) 524.0 28.0 242.5
------------ ---------- ------------ ------------- -------- -----------
Earnings before
Income Taxes 528.4 (28.7) 2.5 (524.0) (28.0) 6.2
Income Taxes 4.9 (11.2) 1.0 (7.7) (d) 2.4
------------ ---------- ------------ ------------- -------- -----------
Net Earnings $ 523.5 $ (17.5) $ 1.5 $ (524.0) $ (20.3) $ 3.8
============ ========== ============ ============= ======== ===========
Earnings per common share - Basic(e) $ 15.91 $ .12
============ ===========
Earnings per common share - Diluted(e) $ 15.77 $ .12
============ ===========
Weighted average shares outstanding:
Basic(e) 32.9 32.9
Diluted(e) 33.2 33.2
<FN>
Notes to Unaudited Pro Forma Combined Financial Information
(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 absorbed by Ralcorp with the sale of the
Branded Business.
(b) To reflect Ralcorp's equity earnings in Vail Resorts. The equity earnings include $.9 million for the six months ended
March 31, 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 million for the six months ended March 31, 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 six months ended
March 31, 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 two 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>
9
<PAGE> 12
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 second quarter ended March 31, 1998 were
$147.1 million and $10.5 million, respectively, compared to unaudited pro
forma net sales and earnings for the same quarter last year of $126.9 million
and $4.9 million, respectively. Basic and diluted earnings per share for the
current year's second quarter were $.32 compared to last year's pro forma
second quarter basic and diluted earnings per share of $.15.
On a comparison of actual results for the six month period ended March 31,
1998 to unaudited pro forma results for the same period of the prior year, net
sales were $284.3 million and $248.7 million, respectively, or an improvement
of $35.6 million. Net earnings for the current year's first six months were
$15.3 million, or $.46 per share (basic and diluted), compared to prior year
pro forma net earnings of $3.8 million, or $.12 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 $6.7 million, or
$.21 per share (basic and diluted). The Company took no charges during the
first six months of the current fiscal year.
The unaudited pro forma prior year information assumes the divestitures of the
Company's Branded Business and Resort Operations were completed as of the
beginning of the prior 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 Business was sold to General Mills, Inc. on January 31, 1997.
Therefore, comparisons of actual results in the current year to the unaudited
pro forma results of the prior year provide a more meaningful analysis of
operating results and trends.
Actual net sales for the three and six month periods ended March 31, 1997 were
$161.4 million and $454.3 million, respectively, compared to $147.1 million
and $284.3 million for the same periods of the current fiscal year. Again,
the significant decline in net sales year-over-year is due to the prior year
periods including sales of the Company's Branded Business through January 31,
1997 and revenues attributable to the Company's ski resort operations through
January 3, 1997.
Net earnings for the quarter ended March 31, 1997, excluding a $18.4 million
pre-tax restructuring charge and a one-time, tax-free gain of $516.5 million,
were $5.5 million, or $.17 per share (basic and diluted) compared to net
earnings for the three months ended March 31, 1998 of $10.5 million, or $.32
per share (basic and diluted). For the six months ended March 31, 1997, the
Company recorded net earnings of $21.5 million, or $.65 per share (basic and
diluted) compared to the aforementioned net earnings for the corresponding
current year period of $15.3 million, or $.46 per share (basic and diluted).
Excluded from the first six months of fiscal 1997 net earnings is the $18.4
million second quarter restructuring charge and the separate severance-related
charge taken in the first quarter of 1997, as well as the gain from the sale
of the branded businesses. These two restructuring charges totaled $23.0
million pre-tax ($14.5 million or $.44 per basic and diluted share after tax).
The gain on the sale of the branded businesses for the six months was $516.5
million or $15.70 per basic share and $15.56 per diluted share.
10
<PAGE> 13
<TABLE>
<CAPTION>
NET SALES BY DIVISION
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
1998 1997* 1998 1997*
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Ralston Foods $ 73.8 $ 67.4 $ 140.2 $ 130.1
Bremner 39.1 22.3 78.9 44.8
Beech-Nut 34.2 37.2 65.2 73.8
--------- -------- --------- -------
$ 147.1 $ 126.9 $ 284.3 $ 248.7
========= ======== ========= =======
<FN>
* On a pro forma basis
</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 were down $10.4 million for the
quarter and $136.9 million for the six months, as the prior year periods
include the four month sales of the now divested branded cereal and snack
business. On a comparison of current year quarter sales to prior year quarter
sales, excluding the benefit of the Branded Business, sales improved $20.2
million. Comparing sales of the first six months of the current fiscal year
to the same prior year period, again excluding the benefit of the Branded
Business, sales rose $35.6 million. These significant sales dollar increases
can be attributed primarily to the increase from the Bremner cracker and
cookie operation, which benefited in the current year from two 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 8.8
percent volume increase on a current quarter to prior year quarter comparison
and a 7.4 percent volume improvement when comparing six month periods. The
noted store brand cereal volume improvement marks the fourth consecutive
quarter of year-over-year volume gains. Offsetting some of the sales
improvement, were year-over-year sales declines of $3.0 million for the
quarter (on a 10.4 percent case volume decline) and $8.6 million for the six
months (on a 14.7 percent case volume decline) from Beech-Nut baby foods. The
baby food business, while still profitable, continues to be negatively
effected by both significant competitive pricing pressures and a shrinking
category.
11
<PAGE> 14
From an operating results perspective, Ralcorp recorded an operating profit of
$13.3 million for the current quarter and $24.0 million for the six months
ended March 31, 1998. While the operating profit for the six months is
significantly below the Branded Business-enhanced operating profit level of
the prior year's first six months, the operating profit for the current
quarter represents a $9.6 million improvement over the same quarter of the
prior year, a quarter that included one month of branded business operations.
On an EBITDA basis (earnings before interest, taxes, depreciation and
amortization) the Company recorded $30.0 million for the six months ended
March 31, 1998, excluding the equity earnings from its Vail Resorts, Inc.
investment. Ralston Foods recorded operating profit improvement on the
strength of volume growth, while maintaining a significantly lower cost base
across primarily all operations. Bremner operating profit improved
considerably in both the quarter and six 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, again, due to the
continued heavy competitive pricing pressure and the 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.
EQUITY INTEREST IN VAIL RESORTS, INC.
Upon the sale of the Company's Resort Operations to Vail in January 1997,
Ralcorp retained an equity ownership interest in Vail, which as of December
31, 1997 was 22.1 percent. Maintaining an equity interest in Vail Resorts
does not eliminate the Company's exposure to the seasonality issues inherent
in the winter ski resort industry. Through the six months ended March 31,
1998, the Company's equity stake in Vail resulted in non-cash, pre-tax
earnings of $4.2 million compared to $10.5 million for the same prior year
period. Ralcorp's reporting through the six months ended March 31, 1998
includes only the period of October 1997 through January 1998 and the prior
year's equity earnings reflects only the historically high profit months of
January through March (the period subsequent to the Vail transaction). A
change in Vail's fiscal year end from September 30th to July 31st, caused
Ralcorp's current year first quarter to include only its equity portion of
Vail's operating results for October 1997 while the second fiscal quarter
includes the months of November 1997 through January 1998. The Company's
equity ownership interest in Vail earnings for Vail's quarter ending April 30,
1998 will be reported in the Company's quarter ending June 30, 1998.
RESULTS OF OPERATIONS
Cost of products sold as a percentage of sales was 63.2% for the current year
second quarter compared to 58.4% for the same quarter of the prior year, and
for the six months ended March 31, 1998, increased to 64.4% of sales from
51.8% in the same prior year period. Such increases 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 six months of the current year to
six month prior year pro forma results reflects a decline to 64.4% from pro
forma levels of 66.8%. 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
six month periods ended March 31, 1998 was 17.5% and 17.3%, 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 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 six month-to-six month comparisons, reflecting the
reduced level of advertising and promotional support necessary for a
predominantly private label company. Income taxes were 39.0% of earnings
before income taxes and equity earnings for the six months ended March 31,
1998, up slightly from the 38.7% of earnings before income taxes,
restructuring charges and equity earnings of a year-ago.
12
<PAGE> 15
FINANCIAL CONDITION
The Company's primary source of liquidity is cash flow from operations, which
decreased to $23.2 million for the six months ended March 31, 1998 compared to
$39.2 million for the same period in the prior year. Through the current year
six 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 $60.5 million at March 31, 1998
compared to $56.5 million at September 30, 1997.
Property and intangible asset additions decreased to $7.7 million for the
first six months of fiscal 1998 compared to $15.5 million in the prior year
period. Of the prior year amount, approximately $7.4 million represented
Resort Operations additions. Through the six month period ended March 31,
1998, the Company repurchased $5.8 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 March 31, 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 share of the Company's
Common Stock from time to time as management determines. As of May 13, 1998,
the Company had repurchased 355,000 shares for approximately $5.8 million
pursuant to such authorization.
OUTLOOK
Ralcorp, through its Ralston Foods division, continues to operate in the
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. To be successful, however, 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 in order
to attain a cost basis that will allow it 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.
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. Bremner continues to achieve good results on the effects of
the Wortz acquisition and an improved product mix. Despite the present
positive performance, Bremner still faces significant competition from large
branded and regional private label producers.
In baby foods, continued significant competitive pricing pressures and an
overall decline in the baby food category are important concerns for the
management of Beech-Nut. In response to the competitive pressures, Beech-Nut
is focusing on the production of high quality products, the positioning of its
"BEECH-NUT NATURALS" line, maintaining its presence in key regional markets
and emphasizing cost reductions and controls during this very difficult time.
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.
13
<PAGE> 16
Company management realizes that in addition to improved operations and
enhanced efficiencies, a key growth opportunity may exist through strategic
acquisitions. The Wortz and Flavor House (see Note 10 - Subsequent Event)
acquisitions 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 should provide the Company greater flexibility to
act upon any such opportunities.
RALCORP LIQUIDITY
To meet its on-going working capital needs Ralcorp has obtained 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.
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 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
is substantially 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, there can be no absolute assurance that there will not be a
material adverse effect on the Company if modifications and conversions are
not made on a timely basis. In addition, the potential for a material adverse
effect on Ralcorp 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.
14
<PAGE> 17
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
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, 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;
(vi) The Company's businesses compete in mature segments with
competitors having large percentages of segment sales; and
(vii) The Company's profit growth depends largely on the ability to
successfully introduce new products and aggressively manage costs across all
parts of the Company.
15
<PAGE> 18
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
16
<PAGE> 19
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
17
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3
<SECURITIES> 10
<RECEIVABLES> 39
<ALLOWANCES> 1
<INVENTORY> 75
<CURRENT-ASSETS> 134
<PP&E> 269
<DEPRECIATION> 118
<TOTAL-ASSETS> 394
<CURRENT-LIABILITIES> 61
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 296
<TOTAL-LIABILITY-AND-EQUITY> 394
<SALES> 284
<TOTAL-REVENUES> 284
<CGS> 183
<TOTAL-COSTS> 183
<OTHER-EXPENSES> 80
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25
<INCOME-TAX> 10
<INCOME-CONTINUING> 15
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
