<PAGE>
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, 1999.
( ) 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 14, 1999
31,140,949
<PAGE>
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 6
Unaudited Pro Forma Combined Statement of Earnings 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Other Information 14
(i)
<PAGE>
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 150.3 $ 147.1 $ 305.2 $ 284.3
-------- -------- -------- --------
Costs and Expenses
Cost of products sold 108.6 92.9 220.6 183.1
Selling, general and administrative 21.1 25.7 43.4 49.3
Advertising and promotion 6.8 17.4 13.3 31.1
Interest expense (income), net .3 - .3 (.1)
Equity earnings in Vail Resorts, Inc. (4.1) (6.2) (.1) (4.2)
-------- -------- -------- --------
132.7 129.8 277.5 259.2
-------- -------- -------- --------
Earnings before Income Taxes 17.6 17.3 27.7 25.1
Income Taxes 6.7 6.8 10.5 9.8
-------- -------- -------- --------
Net Earnings $ 10.9 $ 10.5 $ 17.2 $ 15.3
======== ======== ======== ========
Basic Earnings per Share $ .35 $ .32 $ .55 $ .46
======== ======== ======== ========
Diluted Earnings per Share $ .34 $ .32 $ .54 $ .46
======== ======== ======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Condensed)
(Dollars in millions)
March 31, Sept. 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3.6 $ 12.3
Receivables, net 57.1 45.2
Inventories -
Raw materials and supplies 28.9 23.7
Finished products 35.0 37.8
Prepaid expenses 3.8 1.8
Other current assets 6.2 6.2
--------- ---------
Total Current Assets 134.6 127.0
Investment in Vail Resorts, Inc. 66.1 66.0
Intangible Assets, Net 104.4 70.3
Property, Net 161.8 150.2
Deferred Income Taxes .6 3.1
Other Assets 1.2 1.3
--------- ---------
$ 468.7 $ 417.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 39.0 $ 50.7
Other current liabilities 31.6 30.7
--------- ---------
Total Current Liabilities 70.6 81.4
--------- ---------
Long-term Debt 53.4 -
--------- ---------
Other Liabilities 30.0 29.2
--------- ---------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 110.0 110.1
Retained earnings 237.1 219.9
Common stock in treasury, at cost (32.7) (23.0)
--------- ---------
Total Shareholders' Equity 314.7 307.3
--------- ---------
$ 468.7 $ 417.9
========= =========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Condensed)
(Dollars in millions)
Six Months Ended
March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operations
Net earnings $ 17.2 $ 15.3
Non-cash items included in net earnings 13.3 7.1
Changes in assets and liabilities, net of
effects of acquisitions (20.3) .2
Other, net 1.1 .6
-------- --------
Net cash flow provided by operations 11.3 23.2
-------- --------
Cash Flows from Investing Activities
Business acquisitions, net of cash acquired (53.2) (4.2)
Additions to property and intangible assets, net (10.5) (7.7)
Proceeds from sale of property .1 -
Other, net - (1.3)
-------- --------
Net cash used by investing activities (63.6) (13.2)
-------- --------
Cash Flows from Financing Activities
Proceeds under credit agreement, net 53.4 -
Purchase of treasury stock (10.0) (5.8)
Proceeds from the exercise of stock options .2 -
-------- --------
Net cash provided (used) by financing activities 43.6 (5.8)
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (8.7) 4.2
Cash and Cash Equivalents, Beginning of Period 12.3 8.4
-------- --------
Cash and Cash Equivalents, End of Period $ 3.6 $ 12.6
======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Dollars in millions, shares in thousands)
NOTE 1 - PRESENTATION OF CONDENSED 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, 1998.
NOTE 2 - ACQUISITIONS
On March 4, 1999, the Company completed the purchase of Martin Gillet & Co.,
Inc., a leading private label manufacturer of mayonnaise and pourable,
shelf-stable salad dressings. Martin Gillet's general offices and a
manufacturing plant are located in Baltimore, MD, with additional plants
located in Kansas City, KS and Los Angeles, CA. Annual sales total
approximately $70 and are comprised of both retail and foodservice accounts.
On March 24, 1999, the Company purchased Southern Roasted Nuts of Georgia, Inc.,
a private label and value brand snack nut operation located in Fitzgerald, GA.
Annual sales for Southern Roasted are approximately $30.
Both of the above acquisitions were 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.
NOTE 3 - EQUITY INTEREST IN VAIL RESORTS, INC.
On November 6, 1997, Vail announced a change in its fiscal year end from
September 30 to July 31. As a result, the Company reports equity earnings on a
two-month time lag. The Company's results for the six months ended March 31,
1999 reflect the Company's equity portion of Vail's earnings for the six months
ended January 31, 1999. Because of the timing of the change in fiscal year
end, the Company's results for the six months ended March 31, 1998 include
earnings from Vail for only the four months ended January 1998.
NOTE 4 - EARNINGS PER SHARE
Basic and diluted earnings per share were calculated using the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 10.9 $ 10.5 $ 17.2 $ 15.3
======== ======== ======== ========
Weighted average shares for
basic earnings per share 31,133 32,827 31,276 32,912
Dilutive effect of:
Stock options 385 262 327 265
Deferred compensation awards 284 111 254 82
-------- -------- -------- --------
Weighted average shares for
diluted earnings per share 31,802 33,200 31,857 33,259
======== ======== ======== ========
</TABLE>
4
<PAGE>
NOTE 5 - RECEIVABLES, NET consisted of the following:
<TABLE>
<CAPTION>
Mar. 31, Sep. 30,
1999 1998
-------- --------
<S> <C> <C>
Receivables $ 58.6 $ 46.4
Allowance for doubtful accounts (1.5) (1.2)
-------- --------
$ 57.1 $ 45.2
======== ========
</TABLE>
NOTE 6 - INTANGIBLE ASSETS, NET consisted of the following:
<TABLE>
<CAPTION>
Mar. 31, Sep. 30,
1999 1998
-------- --------
<S> <C> <C>
Intangible assets at cost $ 111.7 $ 74.8
Accumulated amortization (7.3) (4.5)
-------- --------
$ 104.4 $ 70.3
======== ========
</TABLE>
NOTE 7 - PROPERTY, NET consisted of the following:
<TABLE>
<CAPTION>
Mar. 31, Sep. 30,
1999 1998
-------- --------
<S> <C> <C>
Property at cost $ 268.6 $ 250.2
Accumulated depreciation (106.8) (100.0)
-------- --------
$ 161.8 $ 150.2
======== ========
</TABLE>
NOTE 8 - LONG-TERM DEBT
As of March 31, 1999, the Company had $53.4 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. Proceeds of this
outstanding debt were used primarily to fund acquisitions and second quarter
estimated income tax payments. The Company was debt-free at September 30, 1998.
NOTE 9 - COMMON STOCK IN TREASURY
<TABLE>
<CAPTION>
Shares Cost
-------- --------
<S> <C> <C>
Common stock in treasury, September 30, 1998 1,300 $ 23.0
Purchase of treasury stock 586 10.0
Activity under stock plans (16) (.3)
-------- --------
Common stock in treasury, March 31, 1999 1,870 $ 32.7
======== ========
</TABLE>
5
<PAGE>
RALCORP HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Combined Statement of Earnings for the six months ended
March 31, 1998 presents the combined results of Ralcorp's operations assuming
the divestiture of Beech-Nut Nutrition Corporation was completed as of the
beginning of that period. Please read the Notes to Unaudited Pro Forma Combined
Statement of Earnings that follow the Unaudited Pro Forma Combined Statement of
Earnings for a discussion of adjustments made to the historical financial
information in order to calculate the Ralcorp pro forma financial information.
This pro forma financial information may not necessarily reflect the actual
results of operations that would have been achieved, nor are they necessarily
indicative of future results of operations.
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
(In millions except per share data)
Six Months Ended March 31, 1998
Historical Beech-Nut Pro Forma Pro Forma
Ralcorp Operations Adjustments Ralcorp
-------------------------------------------
<S>
<C> <C> <C> <C>
Net Sales $ 284.3 $ (65.2) $ - $ 219.1
--------- --------- --------- ---------
Costs and Expenses
Cost of products sold 183.1 (33.0) 150.1
Selling, general and administrative 49.3 (11.8) .5 (a) 38.0
Advertising and promotion 31.1 (19.5) 11.6
Interest income, net (.1) (1.7)(b) (1.8)
Equity earnings in Vail Resorts, Inc. (4.2) (4.2)
--------- --------- --------- ---------
259.2 (64.3) (1.2) 193.7
--------- --------- --------- ---------
Earnings before Income Taxes 25.1 (.9) 1.2 25.4
Income Taxes 9.8 (.3) .4 (c) 9.9
--------- --------- --------- ---------
Net Earnings $ 15.3 $ (.6) $ .8 $ 15.5
========= ========= ========= =========
Basic Earnings per Share $ .46 $ .47
========= =========
Diluted Earnings per Share $ .46 $ .47
========= =========
Weighted Average Shares Outstanding -
Basic 32.9 32.9
Diluted 33.3 33.3
<FN>
Notes to Unaudited Pro Forma Combined Statement of Earnings
(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 sale of Beech-Nut.
(b) To reflect 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%.
</TABLE>
6
RALCORP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
HIGHLIGHTS
Net sales and net earnings for the second quarter ended March 31, 1999 were
$150.3 million and $10.9 million, respectively, compared to net sales and
earnings for the same quarter last year of $147.1 million and $10.5 million,
respectively. These figures represent a 2.2 percent increase in net sales and a
3.8 percent increase in net earnings. Basic and diluted earnings per share for
the current year's second quarter were $.35 and $.34, respectively, compared to
$.32 (basic and diluted) for last year's second quarter.
On a comparison of results for the six-month period ended March 31, 1999 to
results for the same period of the prior year, net sales were $305.2 million and
$284.3 million, respectively, an improvement of $20.9 million or 7.4 percent.
Net earnings for the current year's first six months improved 12.4 percent to
$17.2 million, or $.55 per basic share and $.54 per diluted share, compared to
prior year net earnings of $15.3 million, or $.46 per share (basic and diluted).
The decline in equity earnings from the Company's investment in Vail Resorts,
Inc. negatively affected its results for the current year quarter and six-month
periods. For the quarter ended March 31, 1999, the Company recorded $4.1
million in pre-tax equity earnings, a 34 percent decline from the $6.2 million
in pre-tax equity earnings recorded in the same prior year period. In a
comparison of six-month periods, the Company recorded $.1 million of pre-tax
equity earnings in the current year versus $4.2 million in the prior year.
Exclusive of the results from the Company's equity interest in Vail Resorts for
all periods, net earnings from Ralcorp's foods businesses improved
significantly. For the quarter ended March 31, 1999 net earnings for the foods
businesses were $8.4 million compared to $6.8 million for the same prior year
period, or an improvement of 23.5 percent. For the six months ended March 31,
1999, net earnings for the foods businesses were $17.1 million compared to
$12.75 million for the same fiscal 1998 period, an improvement of 34 percent.
These year-over-year earnings improvements can be attributed to organic growth
within the Company's Consumer Foods segment, as well as to favorable results of
its acquired entities compared to prior year results of the now divested baby
food business.
The prior year's second quarter and six months ended March 31, 1998 included the
operating results of the Company's branded baby food business, the Beech-Nut
Nutrition Corporation (Beech-Nut). The Unaudited Pro Forma Combined Financial
Information included elsewhere in this document, reflects the pro forma results
of operations of the Ralcorp businesses assuming the divestiture of Beech-Nut
was completed as of October 1, 1997. The sale of Beech-Nut was actually
completed on September 10, 1998.
<TABLE>
<CAPTION>
NET SALES BY DIVISION
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Ralston Foods $ 77.3 $ 73.8 $ 150.3 $ 140.2
Bremner 43.8 39.1 88.3 78.9
Beech-Nut - 34.2 - 65.2
-------- -------- -------- --------
Consumer Foods $ 121.1 $ 147.1 $ 238.6 $ 284.3
-------- -------- -------- --------
Snack Nuts 23.7 - 61.1 -
Martin Gillet 5.5 - 5.5 -
-------- -------- -------- --------
$ 150.3 $ 147.1 $ 305.2 $ 284.3
======== ======== ======== ========
</TABLE>
7
DISCUSSION OF BUSINESSES
The Company's Consumer Foods operating segment is comprised of ready-to-eat and
hot cereals, through its Ralston Foods division, and crackers and cookies,
through its Bremner subsidiary. The Snack Nuts operating segment includes
operations of Flavor House, Inc. and Nutcracker Brands, Inc., both acquired in
fiscal 1998, and Southern Roasted Nuts of Georgia, Inc., which was acquired on
March 24, 1999. On March 4, 1999 the Company acquired the mayonnaise and
shelf-stable salad dressings business of Martin Gillet & Co., Inc., which
comprises the Company's third operating segment. Lastly, the Company maintains
an equity interest in Vail Resorts, Inc.
CONSUMER FOODS
Actual Consumer Foods sales were down $26.0 million for the quarter and $45.7
million for the six months, as the prior year periods include the sales of the
now divested branded baby food business, Beech-Nut. On a comparison of current
year quarter sales to prior year quarter sales, excluding the benefit of the
branded baby food business, sales improved $8.2 million. Comparing sales of the
first six months of the current fiscal year to the same prior year period, again
excluding Beech-Nut, sales rose $19.5 million. Sales from the Company's cereal
business improved 4.7 percent when comparing second quarter results for fiscal
years 1999 and 1998. Key attributes of the business driving this sales growth
were volume improvements in ready-to-eat and hot cereals and an improved product
mix. On a comparison of current year second quarter volume to the same period
of the prior year, store brand ready-to-eat cereal volume improved 3.5 percent,
outpacing a domestic cereal category that was relatively flat. For the same
comparative periods, the Company's hot cereal volume rose nearly 23 percent,
continuing the impressive growth realized in the Company's first fiscal quarter.
Volume comparisons for the current and prior year six-month periods also
reflected year-over-year improvement. Ready-to-eat cereal volume improved 1.3
percent, reversing the 1.2 percent volume decline recorded in the first fiscal
quarter of 1999, while hot cereal volume grew 26.6 percent.
Sales revenue increases were also achieved in both current year periods by the
Bremner cracker and cookie operation. Both the quarter and six-month periods of
the current fiscal year benefited from the addition of sales revenue from Sugar
Kake Cookie Inc. Sugar Kake, a primarily private label cookie operation, was
acquired in August 1998. Volumes for the pre-existing cracker and cookie
operation (excluding Sugar Kake) increased nearly 1 percent in the current
year's second quarter compared to the same prior year quarter, with continued
volume improvement in the higher margin specialty crackers driving much of this
growth. In a comparison of six-month periods, cracker and cookie volume, again
excluding the Sugar Kake acquisition, declined 1.5 percent driven primarily by a
strategic product mix shift to less volume in lower margin saltine and graham
crackers.
From an operating results perspective, Ralcorp's Consumer Foods segment recorded
an operating profit of $14.3 million for the current quarter and $27.3 million
for the six months ended March 31, 1999. This compares to operating profit of
$13.3 million for the quarter ended March 31, 1998, including $.5 million from
the now divested branded baby food business, and $24.0 million for the six
months ended March 31, 1998, including $.9 million from Beech-Nut. Ralston
Foods recorded operating profit improvement in the quarter on the strength of
ready-to-eat and hot cereal volume growth and a favorable product mix. For the
year to date period ended March 31, 1999, the Company's cereal division
benefited primarily from hot cereal and co-packing volume gains, a product mix
improvement and favorable raw material costs, while maintaining a significantly
lower cost base. Bremner operating profit improved considerably in both the
quarter and six months due to the addition of Sugar Kake in current year
operations. In addition, the pre-existing Bremner operation had slightly
improved volumes in the quarter, and continued to benefit from a strategic
product mix shift to higher margin products.
8
SNACK NUTS
The Company's snack nuts business, which consists of Nutcracker Brands, Inc.,
Flavor House Products, Inc. and, as of March 24, 1999, Southern Roasted Nuts of
Georgia, Inc., recorded net sales and operating profit for the quarter ended
March 31, 1999 of $23.7 million and $1.1 million, respectively. Net sales for
the six months ended March 31, 1999 were $61.1 million with a corresponding
operating profit of $4.8 million. There are no prior year comparisons, as the
Company first began operating in the snack nut category in April 1998, with the
acquisition of Flavor House.
As noted above, the Company acquired Southern Roasted Nuts of Georgia, Inc.
on March 24, 1999. Southern Roasted, the Company's third snack nut operation,
is a private label and value brand snack nut operation located in Fitzgerald,
GA. This acquisition had no effect on results of operations for the periods
presented.
Operations in the Snack Nuts segment are somewhat seasonal, with a higher
percentage of sales and operating profits recorded in the first fiscal quarter.
MARTIN GILLET
Ralcorp Holdings began operating in mayonnaise and shelf-stable salad dressings
with the March 4, 1999 acquisition of Martin Gillet & Co., Inc. The nearly one
month of Martin Gillet operations provided the Company $5.5 million in net sales
revenue and approximately $.4 million of operating profit. Such results were in
line with the Company's early expectations for this business.
EQUITY INTEREST IN VAIL RESORTS, INC.
As a result of the sale of Ralcorp's resort operations to Vail Resorts, Inc.
(Vail), Ralcorp maintains an approximate 21.9 percent equity ownership interest
in Vail. Aberrant weather conditions during the peak ski season hurt the
operating results of Vail. Such difficult weather conditions, plus timing
issues resulting from a fiscal year end change at Vail, combined to negatively
affect the Company's equity earnings from its investment in Vail. For the
three- and six-month periods ended March 31, 1999, the Company's equity stake in
Vail resulted in non-cash, pre-tax earnings of $4.1 million and $.1 million,
respectively. This compares to non-cash, pre-tax equity earnings for the same
prior year periods of $6.2 million and $4.2 million, respectively. Due to the
timing of a fiscal year end change at Vail, the prior year equity income amounts
represent the Company's portion of Vail's operating results for only the period
of October 1997 through January 1998. The current year equity earnings are
based on the full six-month period of August 1998 through January 1999, a period
that includes the historically unprofitable ski months of August through
October. Ralcorp's equity ownership interest in Vail earnings for Vail's
quarter ending April 30, 1999 will be reported in the Company's third fiscal
quarter ending June 30, 1999.
RESULTS OF OPERATIONS
Cost of products sold as a percentage of sales was 72.3% for the current year
second quarter compared to 63.2% for the same quarter of the prior year, and for
the six months ended March 31, 1999, increased to 72.3% of sales from 64.4% in
the same prior year period. Such increases can be attributable to changes in
the Company's business mix. The products of the Company's snack nut and
mayonnaise/salad dressings businesses generally have lower gross margins than
the higher margin products eliminated through the sale of the branded baby food
business. Selling, general and administrative expense as a percent of sales for
the quarter ended March 31, 1999 was 14.0% compared to 17.5% for the same prior
year period. For the comparative six-month periods, selling, general and
administrative expense was 14.2% of sales in the current year compared to 17.3%
of sales in the prior year period. The decline in selling, general and
administrative expense is again a function of the shift in the Company's
business mix. The Beech-Nut baby food business had a significantly higher cost
structure than the snack nut and mayonnaise/salad dressings businesses. In
addition, both the cereal and cracker and cookie operations have been able to
9
keep costs relatively flat on increased sales revenue. Advertising and promotion
expense as a percentage of sales was 4.5% and 4.4% for the quarter and six-month
periods ended March 31, 1999, respectively, compared to 11.8% and 10.9% for the
quarter and six months ended March 31, 1998. The favorable reduction in
advertising and promotion expense can be primarily attributed to the elimination
of Beech-Nut, whose branded products required a higher level of advertising and
promotional support than store brands. Income taxes were 38.0% of earnings
before income taxes for the six months ended March 31, 1999, down from 39.0% in
the same year ago period, indicating a year-over-year change in effective state
income tax rates.
FINANCIAL CONDITION
The Company's primary source of liquidity is cash flow from operations, which
decreased to $11.3 million for the six months ended March 31, 1999 compared to
$23.2 million for the same period in the prior year. Key contributors to the
decline in operating cash flows were a significant reduction in accounts
payable, exclusive of the additional accounts payable resulting from March
acquisition activity, and higher estimated income tax payments. Partially
offsetting these cash use items, however, was a decline in finished goods
inventories, exclusive of inventories added as a result of March acquisitions.
Strong sales volumes, particularly late in the second fiscal quarter of 1999,
significantly reduced finished products inventories at March 31, 1999. Net
working capital, excluding cash and cash equivalents, was $60.4 million at March
31, 1999 compared to $33.3 million at September 30, 1998.
Property and intangible asset additions increased to $10.5 million for the first
six months of fiscal 1999 compared to $7.7 million in the prior year period.
During the six-month period ended March 31, 1999, the Company repurchased $10.0
million of its Common Stock, which reflects repurchase activity through the
Company's Dutch Auction self-tender offer completed in November 1998. The
Company repurchased $5.8 million of stock during the same prior year period. As
reflected on the Consolidated Balance Sheet, the Company had $53.4 million of
long-term debt outstanding at March 31, 1999, the proceeds of which were used
primarily to fund fiscal 1999 second quarter acquisitions (see Note 2 -
Acquisitions). At September 30, 1998, the Company was debt-free.
During the quarter ended December 31, 1998, the Company's Board of Directors
approved an authorization to buy back up to two million shares of the Company's
Common Stock from time to time as management determines. As of May 14, 1999,
the Company had not repurchased any shares pursuant to such authorization.
OUTLOOK
Fiscal 1999 represents Ralcorp's first fiscal year as a predominantly private
label, or store brand, operation. The Company's management firmly believes that
the opportunities in the private label and value brand areas are favorable for
future growth and prosperity. The results for the first six months of fiscal
1999 have been encouraging.
Ralcorp does, however, continue to operate in some intensely competitive food
categories. It is because of this level of competition that it is important to
the Company's outlook to continue to diversify and strengthen its business mix.
Significant steps have been taken to reshape the Company and lessen its reliance
on any one area of its business. Management anticipates that it will continue
to improve its business mix both through sales and profit growth of existing
businesses, as well as through key strategic acquisitions or alliances.
The level of competition in the ready-to-eat cereal category continues to be
very intense. Competition comes from large branded box cereal manufacturers,
branded bagged cereal producers and other private label cereal providers. In
recent history the category has failed to record any meaningful growth, which
has added to the competitive nature. When the competition focuses on
price/promotion, as has been the case with certain branded cereal manufacturers,
the environment for a private label producer becomes even more challenging.
There has, however, been some encouraging developments in the category, as
various competitors have recently announced price increases and there appears to
be an increasing focus on brand-building initiatives such as product development
and advertising, rather than pure price competition. Nonetheless, Company
10
management realizes that the competition for the consumer dollar will remain
intense in the ready-to-eat cereal category and Ralston Foods must continue to
maintain an effective price gap between its private label cereal products and
those of branded cereal producers. Aggressive cost containment will remain an
important focus of the entire organization to ensure price gaps can be
maintained. Finally, the cereal division hopes to continue to diversify its
internal business mix. The first six months of fiscal 1999 results reflect some
of this mix change as the hot cereal business and co-packing initiatives were
significant contributors to operations.
The Company's Bremner cracker and cookie subsidiary also conducts business in a
very competitive category. Major branded competitors continue to aggressively
market and promote their branded offerings and many smaller, regional
participants provide additional competitive pressures. Despite this
environment, the Company's cracker and cookie business has performed well.
Further integration of recent acquisitions should aid the subsidiary's outlook.
Bremner continues to realize improved operating efficiencies on the cracker side
of the business and the August 1998 addition of Sugar Kake provides the Company
a quality, low cost producer, as well as critical mass on the cookie side of the
operation. Just as it has been key to Bremner's operating results to date,
continuing to focus on cost containment, the production of quality alternatives
to branded products and an emphasis on shifting its product mix to higher margin
products, while re-instituting organic volume growth, will be key to its future.
Cumulatively, the first six months of operations for the combined Nutcracker and
Flavor House snack nut operation were successful. The snack nut business is
seasonal, however, and the Company expects that its first fiscal quarter, which
encompasses the holiday season, will result in a significant portion of the
year's revenues and profits. As anticipated, however, the second fiscal quarter
of 1999 did produce a meaningful profit. The financial outlook for this
business for the second half of fiscal 1999 is to continue to post quarterly
profits, but not to the level experienced during the first half of fiscal 1999,
which benefited from the seasonally strong first quarter. In addition, during
the second half of the current fiscal year the Company's snack nut business will
face the challenge of integrating Southern Roasted Nuts of Georgia, Inc., which
was acquired on March 24, 1999. From an operational perspective, the Company's
snack nut business will continue to focus on fully leveraging the combined
strengths of its three operations, growing its customer base and maintaining the
quality of its products.
As noted earlier, Ralcorp management realizes that in addition to improved
operations, effective cost containment and enhanced efficiencies, a key growth
opportunity may exist through strategic acquisitions. On March 4, 1999, the
Company added Martin Gillet & Co., Inc., a leading producer of high quality
private label mayonnaise and pourable, shelf-stable salad dressings. Martin
Gillet's reputation for quality products and excellent customer service makes it
a particularly good addition to Ralcorp's private label product offerings. The
acquisition of Martin Gillet also contributes to the Company strategy of
diversifying its business portfolio, thereby reducing its reliance on any one
operation. While adding Martin Gillet does expand Ralcorp's private label
product offerings, it also takes the Company into another competitive,
commodity-driven category with large branded players and numerous regional
mayonnaise and salad dressing producers. Management, however, believes the
opportunity exists to increase private label penetration in this category, and
to benefit from a more diversified portfolio of product offerings.
Management will continue to explore those acquisition opportunities that
strategically fit with the Company's intentions of being the premier provider of
private label, or value-oriented, food products. Ralcorp's low level of
outstanding debt should provide the Company greater flexibility to act upon any
such opportunities.
RALCORP LIQUIDITY
On April 28, 1999, the Company announced it had entered into a new $125 million,
three-year working capital credit facility with a group of six banks. The
proceeds of the facility may be used to fund Ralcorp's working capital needs,
capital expenditures, and other general corporate purposes, including stock
repurchases and acquisitions of new businesses. Provisions of the $125 million
credit facility require Ralcorp to maintain certain financial ratios and a
minimum level of shareholders' equity, but, in general, the established
requirements of the new facility are less restrictive than those in place under
the previous credit facility.
11
Management believes 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 is in the process of implementing 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 Company's on-going information technology strategy includes the elimination
of 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 progress 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 direct external
costs and employee-related costs, and amortize them over a period not to exceed
five years. The Company's replacement of primary systems is now substantially
complete and the resulting information systems hierarchy is substantially Year
2000 ready. The initial assessment of all other systems hardware and software,
including processors within production and other equipment, is complete and
remediation is progressing on schedule. The Company anticipates that
modifications and replacements to these systems and equipment will be
substantially complete by June 30, 1999. Testing of these changes is taking
place as soon as they are completed. The Company expects all testing should be
completed by the end of fiscal 1999.
Based upon current expectations, management anticipates that the incremental
costs to the Company to modify or replace its systems in order to remediate the
Year 2000 issue should not exceed $1 million, most of which will be expended in
fiscal 1999. Such costs do not include normal system upgrades and replacements.
The Company has implemented a program of contacting significant customers,
critical suppliers 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 their Year 2000 issues. In the event
that any of the Company's significant customers, critical suppliers or outside
parties do not successfully and timely achieve Year 2000 readiness, and the
Company is unable to replace them with new customers or alternate suppliers, the
Company's business or operations could be adversely affected.
While the Company expects to identify and resolve 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, if critical third parties fail to convert their systems
in a timely manner and in a way that is compatible with the Company's systems,
such failures would result in an interruption of critical service to the Company
resulting in a number of operational inconveniences and inefficiencies for the
Company and its customers.
The Company is in the process of developing contingency plans to be implemented
in the event of untimely or incomplete remediation of both internal and third
party Year 2000 issues. Such contingency plans are being designed to mitigate
any Year 2000 failures encountered, but there can be no absolute assurance that
these plans, even if successful, will totally mitigate all Year 2000 related
failures.
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 readiness are forward-looking statements. The Company's ability to
achieve Year 2000 readiness and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
of testing resources, vendors ability to modify proprietary software, and
unanticipated problems identified in the ongoing compliance review.
12
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of the Exchange
Act are made throughout this document and include information under the section
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and are preceded by, followed by or include the words
"believes," "expects," "anticipates" or similar expressions elsewhere in this
document. The Company's results of operations and liquidity status 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 and various nuts can change significantly;
(iv) In light of its significant ownership in Vail Resorts, Inc., the Company's
non-cash earnings can be adversely affected by Vail's unfavorable performance;
(v) The Company is currently generating profit from certain co-packing contract
arrangements with other manufacturers within its competitive categories. The
termination or expiration of these contracts, and the inability of the Company
to replace this level of business could negatively effect 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 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.
13
<PAGE>
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
On March 11, 1999 the Registrant filed a Form 8-K announcing the calculation of
equity earnings from its ownership interest in Vail Resorts, Inc.
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
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 59
<ALLOWANCES> 2
<INVENTORY> 64
<CURRENT-ASSETS> 135
<PP&E> 269
<DEPRECIATION> 107
<TOTAL-ASSETS> 469
<CURRENT-LIABILITIES> 71
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 315
<TOTAL-LIABILITY-AND-EQUITY> 469
<SALES> 305
<TOTAL-REVENUES> 305
<CGS> 221
<TOTAL-COSTS> 221
<OTHER-EXPENSES> 57
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28
<INCOME-TAX> 11
<INCOME-CONTINUING> 17
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.54
</TABLE>
