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, 2000.
( ) 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 August 10, 2000
29,859,907
<PAGE>
RALCORP HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statement of Earnings 1
Consolidated Balance Sheet 2
Consolidated Statement of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
(i)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data, shares in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 172.1 $ 154.4 $ 550.2 $ 459.6
-------- -------- -------- --------
Costs and Expenses
Cost of products sold 131.4 114.6 417.8 335.2
Selling, general and administrative 22.9 21.2 69.5 64.6
Advertising and promotion 5.2 5.5 17.4 18.8
Interest expense, net 1.9 .5 4.3 .8
Equity in earnings
of Vail Resorts, Inc. (9.8) (7.0) (8.2) (7.1)
-------- -------- -------- --------
151.6 134.8 500.8 412.3
-------- -------- -------- --------
Earnings before Income Taxes 20.5 19.6 49.4 47.3
Income Taxes 7.6 7.5 18.3 18.0
-------- -------- -------- --------
Net Earnings $ 12.9 $ 12.1 $ 31.1 $ 29.3
======== ======== ======== ========
Basic Earnings per Share $ .43 $ .39 $ 1.03 $ .94
======== ======== ======== ========
Diluted Earnings per Share $ .43 $ .38 $ 1.01 $ .92
======== ======== ======== ========
Weighted average shares for
basic earnings per share 29,875 31,141 30,247 31,231
Dilutive effect of:
Stock options 78 362 256 338
Deferred compensation awards 207 246 205 251
-------- -------- -------- --------
Weighted average shares for
diluted earnings per share 30,160 31,749 30,708 31,820
======== ======== ======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
1
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<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Condensed)
(Dollars in millions)
June 30, Sept. 30,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ .9 $ 1.9
Receivables, net 58.0 59.9
Inventories -
Raw materials and supplies 36.1 31.9
Finished products 50.0 43.4
Prepaid expenses 2.9 2.8
Other current assets 5.6 5.5
--------- ---------
Total Current Assets 153.5 145.4
Investment in Vail Resorts, Inc. 78.9 70.7
Other Investments 1.2 -
Intangible Assets, Net 155.7 100.7
Property, Net 197.0 165.5
Other Assets .5 1.5
--------- ---------
Total Assets $ 586.8 $ 483.8
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 40.3 $ 53.4
Other current liabilities 34.5 23.7
--------- ---------
Total Current Liabilities 74.8 77.1
Long-term Debt 119.3 42.8
Deferred Income Taxes 15.6 6.9
Other Liabilities 32.1 32.9
--------- ---------
Total Liabilities 241.8 159.7
--------- ---------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 110.0 110.1
Retained earnings 287.4 256.3
Common stock in treasury, at cost (52.7) (42.6)
--------- ---------
Total Shareholders' Equity 345.0 324.1
--------- ---------
Total Liabilities and Shareholders' Equity $ 586.8 $ 483.8
========= =========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
2
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<TABLE>
<CAPTION>
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Condensed)
(Dollars in millions)
Nine Months Ended
June 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operations
Net earnings $ 31.1 $ 29.3
Non-cash items included in net earnings 20.9 18.2
Changes in working capital, net of
effects of acquisitions (8.8) (21.7)
Other, net (1.0) 1.6
-------- --------
Net cash flow provided by operations 42.2 27.4
-------- --------
Cash Flows from Investing Activities
Business acquisitions, net of cash acquired (91.8) (53.5)
Additions to property and intangible assets (17.8) (15.2)
Proceeds from sale of property .1 .1
-------- --------
Net cash used by investing activities (109.5) (68.6)
-------- --------
Cash Flows from Financing Activities
Proceeds under credit arrangements, net 76.5 40.8
Purchase of treasury stock (10.6) (10.0)
Proceeds from the exercise of stock options .4 .2
-------- --------
Net cash provided by financing activities 66.3 31.0
-------- --------
Net Decrease in Cash and Cash Equivalents (1.0) (10.2)
Cash and Cash Equivalents, Beginning of Period 1.9 12.3
-------- --------
Cash and Cash Equivalents, End of Period $ .9 $ 2.1
======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
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RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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, 1999.
NOTE 2 - ACQUISITIONS
On October 4, 1999, the Company completed the purchase of Ripon Foods, Inc. for
$43.1, of which $38.3 has been paid in cash as of June 30, 2000. Ripon Foods,
which is included in Ralcorp's Cereals, Crackers & Cookies segment, manufactures
a wide variety of high quality private label and branded cookie products,
including sugar wafers and wire cut and enrobed cookies. Ripon Foods is located
in Ripon, WI, owns two operating facilities in Ripon and has annual sales of
approximately $64.
On January 31, 2000, the Company completed the purchase of Cascade Cookie
Company, Inc. for $22.0. Cascade, which is included in Ralcorp's Cereals,
Crackers & Cookies segment, is a leading manufacturer and marketer of high
quality cookies that are sold to the in-store bakeries of major U.S. grocery
chains and selected mass merchandisers. Cascade is located in Kent, WA, leases
one operating facility in Kent and has annual sales of approximately $19.
On May 1, 2000, the Company completed the purchase of James P. Linette, Inc. for
$31.8. Linette, which is included in Ralcorp's Snack Nuts & Candy segment,
manufactures chocolate products, including peanut butter and caramel cups, as
well as chocolate covered peanuts. Linette is located in Womelsdorf, PA, owns
one operating facility in Womelsdorf and has annual sales of approximately $28.
All of these acquisitions were accounted for using the purchase method, whereby
the results of operations are included in the consolidated statement of earnings
from the date of acquisition. Pro forma results of the Company, assuming these
acquisitions had been made at the beginning of each period presented, would not
be materially different from the results reported. Under purchase accounting,
the purchase price is allocated to acquired assets and liabilities based on
their estimated fair values at the date of acquisition, and any excess is
allocated to goodwill. Such allocations are subject to adjustment when
additional analysis concerning asset and liability balances is finalized.
Management does not expect the final allocations to differ materially from the
preliminary allocation amounts included herein. Goodwill relating to each
acquisition is being amortized on a straight-line basis over 25 years.
NOTE 3 - RECEIVABLES, NET consisted of the following:
<TABLE>
<CAPTION>
June 30, Sep. 30,
2000 1999
-------- --------
<S> <C> <C>
Receivables $ 59.5 $ 62.0
Allowance for doubtful accounts (1.5) (2.1)
-------- --------
$ 58.0 $ 59.9
======== ========
</TABLE>
4
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NOTE 4 - OTHER INVESTMENTS
In March 2000, the Company funded a portion of its deferred compensation
liability by investing $1.2 million in certain mutual funds in the same amounts
as selected by the participating employees. Because management's intent is to
invest in a manner that matches the deferral options chosen by the participants
and those participants can elect to transfer amounts in or out of each of the
designated deferral options at any time, these investments have been classified
as trading assets and are stated at fair value. Both realized and unrealized
gains and losses on these assets are included in earnings and offset the related
change in the deferred compensation liability.
NOTE 5 - INTANGIBLE ASSETS, NET consisted of the following:
<TABLE>
<CAPTION>
June 30, Sep. 30,
2000 1999
-------- --------
<S> <C> <C>
Intangible assets at cost $ 172.8 $ 110.8
Accumulated amortization (17.1) (10.1)
-------- --------
$ 155.7 $ 100.7
======== ========
</TABLE>
NOTE 6 - PROPERTY, NET consisted of the following:
<TABLE>
<CAPTION>
June 30, Sep. 30,
2000 1999
-------- --------
<S> <C> <C>
Property at cost $ 326.0 $ 280.4
Accumulated depreciation (129.0) (114.9)
-------- --------
$ 197.0 $ 165.5
======== ========
</TABLE>
NOTE 7 - LONG-TERM DEBT
The Company had outstanding borrowings of $119.3 and $42.8 as of June 30, 2000
and September 30, 1999, respectively. Of the June 30 balance, $70.0 was
borrowed under the Company's $125 revolving credit agreement and the remaining
$49.3 was made available through uncommitted credit arrangements with banks.
The debt was classified as long-term debt based on management's ability and
intent to refinance it on a long-term basis. The additional borrowings during
the period were used to help fund the acquisitions of Ripon Foods, Cascade and
Linette.
5
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NOTE 8 - SEGMENT INFORMATION
The tables below present information about the Company's reportable segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales
Cereals, Crackers & Cookies $ 119.9 $ 108.8 $ 380.0 $ 347.4
Snack Nuts & Candy 35.5 27.4 121.5 88.5
Mayonnaise & Dressings 16.7 18.2 48.7 23.7
-------- -------- -------- --------
Total $ 172.1 $ 154.4 $ 550.2 $ 459.6
======== ======== ======== ========
Operating Profit
Cereals, Crackers & Cookies $ 11.7 $ 12.6 $ 42.2 $ 39.9
Snack Nuts & Candy 1.1 1.4 5.6 6.2
Mayonnaise & Dressings .8 .5 1.7 .9
-------- -------- -------- --------
Total segment operating profit 13.6 14.5 49.5 47.0
Equity earnings 9.8 7.0 8.2 7.1
Unallocated corporate expenses (2.9) (1.9) (8.3) (6.8)
-------- -------- -------- --------
Earnings before income taxes $ 20.5 $ 19.6 $ 49.4 $ 47.3
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, Sep. 30,
2000 1999
-------- --------
<S> <C> <C>
Total Assets
Cereals, Crackers & Cookies $ 335.4 $ 272.2
Snack Nuts & Candy 120.4 87.1
Mayonnaise & Dressings 41.1 41.7
Corporate 89.9 82.8
-------- --------
Total $ 586.8 $ 483.8
======== ========
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
On July 10, 2000, the Company entered into a $200 revolving credit agreement to
supplement its existing $125 revolving credit agreement. Borrowings under the
new agreement bear interest at either, at the Company's option, (1) LIBOR plus
the applicable margin rate of 1.00% or (2) the maximum of the federal funds rate
plus the applicable margin rate of 0.50% or the prime rate. Such borrowings are
unsecured and mature on April 10, 2001 unless such date is extended. The new
agreement calls for an unused commitment fee of 0.20%, payable quarterly in
arrears, and contains certain representations, warranties, covenants and
conditions customary to credit facilities of this nature. A copy of the $200
million credit agreement was filed as an exhibit to the Company's Current Report
on Form 8-K filed on July 27, 2000.
On July 14, 2000, the Company completed the purchase of the Red Wing Company,
Inc., for $132.5. Red Wing is a leading manufacturer of a variety of private
label products including mayonnaise, pourable salad dressings, jams and jellies,
peanut butter, table syrups, ketchup and other tomato based sauces. Its plants
are owned and are located in Fredonia, NY; Dunkirk, NY; Streator, IL; San Jose,
6
<PAGE>
CA; and Colusa County, CA. Red Wing recorded sales of $348 million for its
fiscal year ended April 29, 2000. Red Wing and Martin Gillet will be operated
as a single division of Ralcorp.
On July 24, 2000, the Company announced that it plans to relocate Martin
Gillet's Baltimore production lines to Dunkirk, NY.
On August 8, 2000, Ralcorp and Agribrands International, Inc. (NYSE: AGX)
announced they have entered into a definitive agreement to combine in a
merger-of-equals transaction. For more information, refer to the Company's
Current Report on Form 8-K filed on that date.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
OVERVIEW
Net earnings for the third quarter ended June 30, 2000 were $12.9 million ($.43
per diluted share), up $.8 million from the third quarter last year. Net
earnings for the nine-month period ended June 30, 2000 were $31.1 million, up
6.1 percent from $29.3 million last year.
Total net sales were up $17.7 million and $90.6 million for the three and nine
months ended June 30, 2000, respectively. These 11 percent and 20 percent
increases are primarily due to the timing of the Company's strategic business
acquisitions. Net sales by segment are presented in the table below and
discussed in the following segment analysis sections.
<TABLE>
<CAPTION>
NET SALES BY SEGMENT Three Months Ended Nine Months Ended
(in millions) June 30, June 30,
----------------------------- -------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Ralston Foods $ 66.5 $ 68.8 $ 210.3 $ 219.1
Bremner 53.4 40.0 169.7 128.3
--------- --------- --------- ---------
CEREALS, CRACKERS & COOKIES 119.9 108.8 380.0 347.4
SNACK NUTS & CANDY 35.5 27.4 121.5 88.5
MAYONNAISE & DRESSINGS 16.7 18.2 48.7 23.7
--------- --------- --------- ---------
Total Net Sales $ 172.1 $ 154.4 $ 550.2 $ 459.6
========= ========= ========= =========
</TABLE>
Cost of products sold as a percentage of sales was 76.4% and 75.9% for the
quarter and nine months ended June 30, 2000, respectively, compared to 74.2% and
72.9% for the quarter and nine months ended June 30, 1999. The increases are
primarily the result of the change in the segment sales mix, with larger
portions coming from the more commodity-driven Snack Nuts & Candy and Mayonnaise
& Dressings businesses, which have higher costs of sales than the Cereals,
Crackers & Cookies businesses. This effect has been compounded by temporary
ingredient and labor cost increases within the snack nuts operation.
Selling, general and administrative expenses were 13.3% and 12.6% of sales for
the quarter and nine months ended June 30, 2000, respectively, down from 13.7%
and 14.1% in the corresponding periods last year. This decrease is again
attributable to the Company's changing business mix, since both the Snack Nuts &
Candy segment and the Mayonnaise & Dressings segment operate on a lower
administrative cost base. This category of expenses was also affected by
favorable mark-to-market adjustments related to the Company's deferred
compensation liability, largely based on changes in Ralcorp's stock price.
These adjustments yielded pre-tax income of $.6 million and $1.6 million for the
7
<PAGE>
quarter and nine months ended June 30, 2000, respectively, compared to pre-tax
income of $.4 million for last year's third quarter and pre-tax expense of $.7
million for the nine months ended June 30, 1999.
Advertising and promotion expenses were 3.0% and 3.2% of sales for the quarter
and nine-month periods ended June 30, 2000, respectively, down from 3.6% and
4.1% in the corresponding periods last year. The decline was primarily due to
the aforementioned changing business mix. As a predominantly store brand
company, the level of advertising and promotional expenditures will likely
remain minor.
Interest expense for the quarter and nine months ended June 30, 2000 was $1.9
and $4.3, respectively, compared to $.5 million and $.8 million for the
corresponding periods a year ago. The increase is the result of additional debt
outstanding throughout the current year periods due to the acquisitions of Ripon
Foods in October 1999, Cascade Cookie Company in January 2000, and James P.
Linette in May 2000.
For the third quarter ended June 30, 2000, the Company's 21.8 percent ownership
interest in Vail Resorts, Inc. resulted in non-cash pre-tax earnings of $9.8
million, compared to $7.0 million for last year's third quarter. Vail Resorts
reported an increase in skier days and a favorable skier visit mix in its third
fiscal quarter this year, which includes February, March and April. That
quarter also included expected net proceeds from a Reduced Skier Day Insurance
Policy claim related to its second fiscal quarter, which was hurt by both poor
early season snowfall and a significant decline in vacation travel around the
New Years' holiday due to Y2K concerns. Ralcorp's equity in the earnings of
Vail Resorts, Inc. was up $1.1 million, or 15.5%, for the nine months ended June
30, 2000.
The effective income tax rate was 37.0 percent for the quarter and nine months
ended June 30, 2000 and 38.0 percent in the corresponding periods ended June 30,
1999. The decrease is primarily due to reduced state income taxes.
CEREALS, CRACKERS & COOKIES
Third quarter and nine-month net sales for the Cereals, Crackers & Cookies
segment were up $11.1 million and $32.6 million, respectively, from last year.
This increase is due to the additional revenue acquired through the current year
purchases of Ripon Foods, Inc. and Cascade Cookie Company, Inc., which are
operated as part of Bremner, Ralcorp's cracker and cookie division. Ripon
Foods, a cookie, sugar wafer and breakfast bar producer, was acquired on October
4, 1999, and Cascade, which produces cookies for in-store bakeries, was acquired
on January 31, 2000. Third quarter cracker volumes of the pre-existing Bremner
businesses declined 5 percent from the prior year, primarily due to lower
industry demand in the saltines category. Nevertheless, cracker volumes for the
nine-month period were up slightly from last year due to strong sales in this
year's first fiscal quarter.
The Company's ready-to-eat and hot cereal division, Ralston Foods, recorded
decreased sales for the three-month and nine-month periods, principally due to
lower volumes. Previously, Company management disclosed that a cereal
co-manufacturing agreement was terminated effective December 31, 1999. The
reduction of volume related to this agreement was the primary factor in the
revenue decline at Ralston Foods. Importantly, Ralston Foods' base store brand
ready-to-eat cereal (RTE) volume declined less than 1 percent during the three
months ended June 30, 2000, outperforming the overall RTE cereal category.
Couple this minor volume decline with a favorable product mix and revenue
related to Ralston Foods' store brand RTE business actually improved
quarter-over-quarter. The Company's hot cereal volume declined 6 percent for
the seasonally slow quarter ended June 30, 2000. While the hot cereal volume
was off from the prior year third quarter, a continued product mix improvement
offset a significant portion of the volume decline. Volume comparisons for the
nine months ended June 30, 2000 reflected declines as store brand RTE cereal
volumes fell 1.6 percent from last year compared to a corresponding .2 percent
increase for the prior year period. Hot cereal volume for the same period was
down 6 percent from last year compared to a corresponding 23 percent increase
for the prior year period. The nine-month year-over-year revenue decline at
Ralston Foods, however, was primarily due to the loss of the co-manufacturing
agreement.
8
<PAGE>
From an operating results perspective, the Cereals, Crackers & Cookies segment
recorded third quarter operating profit down $.9 million from the prior year and
nine-month profit up $2.3 million. Bremner operating profit improved in both
the quarter and nine-month periods due to the current year cookie business
acquisitions, as well as favorable product mix and raw material and packaging
supply costs in the cracker operations. Ralston Foods' third quarter operating
profit decline more than offset the third quarter improvements at Bremner,
mainly because of the aforementioned loss of co-manufacturing business and the
resulting unfavorable effect on production volume and plant efficiencies. The
Company previously disclosed that the loss of this co-manufacturing agreement
could negatively impact diluted earnings per share for the last nine months of
fiscal 2000 in the range of $.08 to $.10 per share. While this range continues
to appear reasonable, the Company remains very active in its efforts to replace
this lost business via other co-manufacturing opportunities, increased
distribution and new product emulations. For the nine-month period, Ralston
Foods reported lower operating profit, again driven principally by the reduction
of co-manufacturing business. Offsetting a portion of this unfavorability was
an improved product mix and lower overall costs.
SNACK NUTS & CANDY
Third quarter net sales for the Snack Nuts & Candy segment increased 30 percent,
reflecting incremental business from James P. Linette, Inc., as well as
significantly improved organic volumes. Linette, a chocolate candy
manufacturer, was acquired on May 1, 2000. For the year to date, the Company
also benefited from a full nine months of business from its acquisition of
Southern Roasted Nuts of Georgia. Southern Roasted Nuts was acquired in late
March 1999. The Georgia facility was closed the end of April 2000,
consolidating the operations of the three snack nut businesses into two
locations at Billerica, MA and Dothan, AL.
Despite the improved volumes and net sales, Snack Nuts third quarter operating
profit fell $.3 million from last year as the segment continued to be negatively
impacted by high ingredient costs, as well as increased labor costs due to
initial inefficiencies related to the moving of production lines from the
Georgia plant to the other facilities. Management anticipates improved
ingredient costs and operating efficiencies for the Company's fourth quarter.
Furthermore, management believes fiscal 2001 operating profit will reflect
increased efficiencies from the combined nut facilities.
MAYONNAISE & DRESSINGS
The Company's fiscal 2000 third quarter net sales and operating profit included
$16.7 million and $.8 million, respectively, from Martin Gillet, a maker of
private label mayonnaise and salad dressings. Martin Gillet's third quarter net
sales were down 8 percent from the prior year as a result of customer mix, with
higher co-manufacturing and retail volume partially offset by lower foodservice
volume. Operating profit was up $.3 million for the third quarter, which
benefited from lower ingredient costs. For the nine months ended June 30, 2000,
net sales were $48.7 and operating profit was $1.7. Martin Gillet was acquired
at the beginning of March 1999, so prior year net sales and operating profit
included only $23.7 million and $.9 million, respectively, for Ralcorp's nine
months ended June 30, 1999.
On July 14, 2000, Ralcorp completed the purchase of the Red Wing Company, Inc.,
a leading manufacturer of private label shelf-stable wet filled type products
with sales of $348 million for its fiscal year ended April 29, 2000. Red Wing
and Martin Gillet will be operated as a single division of Ralcorp. On July 24,
2000, the Company announced that it plans to relocate Martin Gillet's Baltimore
production lines to Dunkirk, NY. The Company expects to record a charge to
fourth quarter earnings of between $.04 and $.08 per diluted share for employee
severance and other costs associated with this move
FINANCIAL CONDITION
At June 30, 2000, the Company continued to show substantial liquidity with net
working capital (excluding cash and cash equivalents) of $77.8 million, up from
$66.4 million at September 30, 1999. Excluding the net working capital acquired
9
<PAGE>
during the nine months, which was $2.6 million, the increase for the period was
$8.8 million. Capital resources remained strong with a net worth of $345.0
million and a long-term debt to total capital ratio of 25.7 percent at June 30,
2000.
The Company's primary source of liquidity is cash flows from operations, which
provided $41.7 million in the nine months ended June 30, 2000 through net
earnings (excluding noncash expenses and earnings) offset by the increase in
working capital. Net cash used by investing activities included $38.2 million
for the acquisition of Ripon Foods, Inc. in October 1999, $22.0 million for the
January 2000 acquisition of Cascade Cookie Company, Inc., and $31.6 million for
the acquisition of James P. Linette, Inc. in May 2000. Capital expenditures
were $17.8 million for the first nine months this year, up from $15.2 million
for the same period last year, a trend which is expected to continue. During
February, March and May 2000, the Company repurchased more than 700,000 shares
of its common stock for $10.6 million. During the nine months ended June 30,
2000, long-term debt increased $76.5 million as a result of additional
borrowings under uncommitted credit arrangements with banks, as well as under
the Company's $125 million revolving credit agreement. These borrowings were
used to fund the acquisition costs of Ripon, Cascade and Linette.
Management believes the Company 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 flows and, as necessary, borrowings under committed and
uncommitted credit arrangements. See Note 9 of the accompanying Notes to
Condensed Consolidated Financial Statements for information about the Company's
new $200 revolving credit agreement.
During the first quarter of the prior fiscal year, 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 August
11, 2000, 690,700 shares remained available for repurchase pursuant to such
authorization.
OUTLOOK
The Company's management believes that the opportunities in the private label
and value brand areas are favorable for long-term growth. The Company
anticipates maintaining its business and growth focus on these areas of food
retailing.
Ralcorp operates in intensely competitive food categories. It is because of
this competitive environment that it is important for the Company to continue to
diversify and strengthen its business mix. The Company has taken significant
steps to reshape the Company and lessen its reliance on any one business segment
and to achieve sufficient scale in the categories in which it operates.
Management expects to continue to improve its business mix through volume and
profit growth of existing businesses, as well as through key strategic
acquisitions or alliances. Acquisitions are opportunistic; therefore management
does not control the availability of acquisition targets and acquisition timing.
The level of competition in the ready-to-eat cereal category is intense.
Competition comes from large branded box cereal manufacturers, branded bagged
cereal producers and other private label cereal providers. Recently, the cereal
category has failed to record meaningful growth, which has added to the
competitive environment. When the competition focuses on gaining volume through
price/promotion, as has been the case in recent periods, the environment for a
private label producer becomes even more challenging, while the profitability of
the entire category is diminished. Ralston Foods must maintain an effective
price gap between its quality private label cereal products and those of branded
cereal producers, thereby providing the best value alternative for the consumer.
Aggressive cost containment - and where possible, cost reductions - will
continue to be a primary focus of the organization. Finally, the cereal
division hopes to further its private label leading position through expanded
distribution, garnering additional volume with the consolidating retail base and
new product development/emulations.
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The Company's cracker and cookie division, Bremner, 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. In light of this
environment, the Company's cracker and cookie business has had to defend its
leading store brand cracker position. Bremner's ability to successfully respond
to market conditions will be important to its results of operations. In
addition, further integration of recent acquisitions should aid the division's
outlook. However, just as they have been key to Bremner's operating results to
date, a focus on cost containment, the production of quality alternatives to
branded products, an emphasis on improving its product mix, where possible, and
organic volume growth, will be important to its future.
The outlook for Ralcorp's Snack Nuts & Candy segment remains favorable, as the
snack nut category leader continues to drive growth in this snack food segment.
As referred to above, the current year's first nine months results were
negatively impacted by the high cost of cashews - a key commodity ingredient -
due to a worldwide shortage. In recent months, cashew costs have trended down
from significant highs. This easing of cashew prices should improve the
profitability outlook for the Company's snack nut operation in the remainder of
fiscal 2000 and in fiscal 2001. In addition, the Company's snack nut business
has completed its consolidation of three plant operations down to two plants.
The addition of chocolate candy capability through the acquisition of James P.
Linette has increased the scope of products offered by the segment. From an
operational perspective, the segment will continue to focus on fully leveraging
the combined strengths of all of its operations, growing its customer base and
maintaining the quality of its products.
The March 4, 1999 acquisition of Martin Gillet & Co., Inc. and the July 14, 2000
acquisition of The Red Wing Company, Inc. demonstrate the Company's strategy of
diversifying its business portfolio, thereby reducing its reliance on any one
operation. While adding Martin Gillet and Red Wing does expand Ralcorp's
private label product offerings into private label mayonnaise, dressings, etc.,
it also takes the Company into another competitive, commodity-driven category
with large branded players and numerous regional producers. Management,
however, believes opportunities exist to expand this new segment's customer base
and remove costs from this operation. Ultimately, the key opportunity is 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 underleveraged
balance sheet should provide the Company the necessary flexibility to act upon
any such opportunities. Furthermore, on August 8, 2000, the Company and
Agribrands International, Inc. announced they have entered into a definitive
agreement to combine in a merger-of-equals transaction. The transaction
combines Ralcorp's leadership position in U.S. private label foods with
Agribrands' portfolio of premium animal feed businesses in 16 countries around
the world. The combined company should have greater economic scale and greater
geographic and product line diversification. The transaction should enable the
combined company to expand its domestic private label food business. In order
to maintain operational focus, the businesses will continue to be managed
separately with oversight from the new holding company. On August 8, 2000, the
Company filed a Current Report on form 8-K attached to which was a copy of the
press release announcing the transaction and a copy of the Agreement and Plan of
Reorganization related to the transaction.
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," "should," "expects," "anticipates" or similar expressions elsewhere
in this document. The Company's results of operations and financial condition
may differ materially from those in the forward-looking statements. Such
statements are based on management's current views and assumptions, and involve
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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, 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 (e.g., wheat,
soybean oil, various nuts) 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;
(iv) In light of its significant ownership in Vail Resorts, Inc., the Company's
non-cash earnings can be adversely affected by Vail Resorts' unfavorable
performance;
(v) The Company is currently generating profit from certain co-manufacturing
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 affect the
Company's operating results;
(vi) The Company's businesses compete in mature segments with competitors having
large percentages of segment sales;
(vii) Nabisco Group Holdings has announced that it intends to sell Nabisco to
the Kraft division of Phillip Morris. Further, Flowers Industries announced
that it plans to explore the sale of Keebler. The impact of these transactions
upon the Company, if any, cannot be determined at this time; and
(viii) The merger of the Company and Agribrands International, Inc. is
conditioned, among other things, upon two-thirds approval of Ralcorp and
Agribrands shareholders, receipt of a ruling from the Internal Revenue Service
that the transaction will not affect the tax-free status of Agribrands' spin-off
from Ralston Purina Company in 1998, and customary regulatory approvals. The
Company's Current Report on Form 8-K filed on August 8, 2000 contains additional
factors that may negatively impact the merger.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management believes that there have been no material changes in the Company's
market risk during the nine months ended June 30, 2000. For additional
information, refer to Item 7(A) of the Company's Annual Report on Form 10-K for
the year ended September 30, 1999.
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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 April 27, 2000, the Registrant announced earnings for the second quarter
ended March 31, 2000.
On June 16, 2000, the Registrant announced Ralcorp's signing of a definitive
agreement to purchase The Red Wing Company, 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
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EXHIBIT INDEX
Exhibit
Number Description
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27 Financial Data Schedule
