<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD COMMISSION FILE NUMBER
ENDED 1-13933
NOVEMBER 1, 1998
[VLASIC LOGO]
NEW JERSEY 52-2067518
STATE OF INCORPORATION I.R.S. EMPLOYER
IDENTIFICATION NO.
VLASIC PLAZA
SIX EXECUTIVE CAMPUS
CHERRY HILL, NEW JERSEY 08002-4112
PRINCIPAL EXECUTIVE OFFICES
TELEPHONE NUMBER: 609-969-7100
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 / /
THERE WERE 45,498,077 SHARES OF COMMON STOCK OUTSTANDING AS OF DECEMBER 1,
1998.
<PAGE> 2
VLASIC FOODS INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION Page
No.
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Earnings (unaudited) for the three month 2
periods ended November 1, 1998 and November 2, 1997
Consolidated Balance Sheets as of November 1, 1998 (unaudited) and 3
August 2, 1998 (audited)
Consolidated Statements of Cash Flows (unaudited) for the three month 4
periods ended November 1, 1998 and November 2, 1997
Consolidated Statements of Shareowners' Equity (unaudited) for the 5
three month periods ended November 1, 1998 and November 2, 1997
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Pro Forma Statements of Earnings (unaudited) 11
Management's Discussion and Analysis of Results of Operations and 12
Financial Condition
Item 3. Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE PAGE 19
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
VLASIC FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
November 1, November 2,
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (including to related parties of
$44,809 and $39,817, respectively) $ 327,050 $ 347,852
- ---------------------------------------------------------------------------------------
Costs and expenses
Cost of products sold 236,539 251,340
Marketing and selling expenses 52,345 56,525
Administrative expenses 18,243 14,884
Research and development expenses 1,502 2,018
Other (income) expenses 542 (1,443)
- ---------------------------------------------------------------------------------------
Total costs and expenses 309,171 323,324
- ---------------------------------------------------------------------------------------
Earnings before interest and taxes 17,879 24,528
Interest expense, net 10,515 539
- ---------------------------------------------------------------------------------------
Earnings before taxes 7,364 23,989
Taxes on earnings 2,700 7,916
- ---------------------------------------------------------------------------------------
Net earnings $ 4,664 $ 16,073
=======================================================================================
Earnings Per Share:
Per share - basic $ 0.10
Weighted average shares outstanding - basic 45,491
Per share - assuming dilution $ 0.10
Weighted average shares outstanding - assuming dilution 45,716
- ---------------------------------------------------------------------------------------
Pro Forma Earnings Per Share:(1)
Per share - basic $ 0.10 $ 0.20
Per share - assuming dilution $ 0.10 $ 0.20
</TABLE>
(1) See PRO FORMA STATEMENTS OF EARNINGS included on page 11 herein.
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
VLASIC FOODS INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
November 1, August 2,
1998 1998
---------------------------
(unaudited) (audited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 7,205 $ 16,333
Accounts receivable 146,551 127,644
Inventories 206,928 183,763
Other current assets 22,735 25,200
- ------------------------------------------------------------------------------------------
Total current assets 383,419 352,940
- ------------------------------------------------------------------------------------------
Plant assets, net 513,179 520,075
Other assets, principally intangible assets, net 87,250 86,258
- ------------------------------------------------------------------------------------------
Total assets $ 983,848 $ 959,273
==========================================================================================
Current liabilities
Notes payable $ 13,088 $ 12,535
Payable to suppliers and others 104,087 121,210
Accrued liabilities 99,022 93,330
- ------------------------------------------------------------------------------------------
Total current liabilities 216,197 227,075
- ------------------------------------------------------------------------------------------
Long-term debt 586,026 558,873
Deferred income taxes 19,509 19,673
Other liabilities 47,161 47,048
- ------------------------------------------------------------------------------------------
Total liabilities 868,893 852,669
- ------------------------------------------------------------------------------------------
Shareowners' equity
Preferred stock, no par value; authorized 4,000 shares; -- --
none issued
Common stock, no par value; authorized 56,000 shares;
issued shares 45,495 and 45,488 at November 1, 1998
and August 2, 1998, respectively 137,612 137,473
Accumulated deficit (20,451) (25,115)
Accumulated other comprehensive income (2,206) (5,754)
- ------------------------------------------------------------------------------------------
Total shareowners' equity 114,955 106,604
- ------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 983,848 $ 959,273
==========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
VLASIC FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
November 1, November 2,
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,664 $ 16,073
Non-cash charges to net earnings
Depreciation and amortization 11,450 11,491
Deferred income taxes 1,586 56
Other, net 112 107
Changes in working capital
Accounts receivable (17,723) (42,986)
Inventories (21,882) (20,777)
Other current assets and liabilities (11,917) (39,765)
- ---------------------------------------------------------------------------------
Net cash used in operating activities (33,710) (75,801)
- ---------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of plant assets (8,542) (10,607)
Sales of plant assets 4,849 457
Other, net (9) 201
- ---------------------------------------------------------------------------------
Net cash used in investing activities (3,702) (9,949)
- ---------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term borrowings 73,542 --
Repayment of long-term borrowings (46,500) 221
Short-term borrowings 538 3,117
Issuance of common stock 139 --
Net transactions with Campbell -- 74,592
- ---------------------------------------------------------------------------------
Net cash provided by financing activities 27,719 77,930
- ---------------------------------------------------------------------------------
Effect of exchange rate changes on cash 565 20
- ---------------------------------------------------------------------------------
Net change in cash and cash equivalents (9,128) (7,800)
Cash and cash equivalents - beginning of period 16,333 9,409
- ---------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 7,205 $ 1,609
=================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
VLASIC FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Issued Accumulated
Common Stock Campbell Other Total
------------------- Accumulated Net Comprehensive Shareowners'
Shares Amount Deficit Investment Income(1) Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 3, 1997 -- $ -- $ -- $633,168 $ (870) $632,298
Net earnings -- -- -- 16,073 -- 16,073
Foreign currency translation
adjustments -- -- -- -- 5,684 5,684
Net transactions with Campbell -- -- -- 74,592 -- 74,592
- --------------------------------------------------------------------------------------------------------------------------
Balance at November 2, 1997 -- $ -- $ -- $723,833 $ 4,814 $728,647
==========================================================================================================================
Balance at August 2, 1998 45,488 $137,473 $(25,115) -- $ (5,754) $106,604
Net earnings -- -- 4,664 -- -- 4,664
Issuance of shares of common
stock as a result of exercised
stock options 7 139 -- -- -- 139
Foreign currency translation -- -- -- -- 3,548 3,548
adjustments
- --------------------------------------------------------------------------------------------------------------------------
Balance at November 1, 1998 45,495 $137,612 $(20,451) -- $ (2,206) $114,955
==========================================================================================================================
</TABLE>
(1) Accumulated other comprehensive income consists solely of foreign currency
translation adjustments.
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
(in thousands)
1. VLASIC FOODS INTERNATIONAL SPIN-OFF FROM CAMPBELL SOUP COMPANY
On March 30, 1998, one share of Vlasic Foods International Inc. (the
Company), no par value common stock, was distributed to shareowners of Campbell
Soup Company (Campbell) for every ten shares of Campbell capital stock held by
such shareowners at the record date in a tax-free distribution. At the time of
distribution, the Company began operations as a separate independent
publicly-owned company.
In connection with the spin-off, the Company incurred incremental debt of
approximately $560 million under a five year $750 million unsecured revolving
credit facility, consisting of $500 million assumed from Campbell and $60
million incurred to repay certain intercompany payables representing advances
from Campbell to subsidiaries of the Company.
The historical financial statements of the Company for the three months ended
November 2, 1997 reflect periods during which the Company did not operate as a
separate, independent company; certain estimates, assumptions and allocations
were made in preparing such financial statements. Therefore, such historical
financial statements do not necessarily reflect the results of operations that
would have existed had the Company been separate and independent.
2. INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements for the three
month periods ended November 1, 1998 and November 2, 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they 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
solely of normal recurring adjustments) necessary for a fair presentation of the
consolidated financial statements have been included. The results of the interim
periods are not necessarily indicative of the results to be expected for the
full fiscal year. The consolidated financial statements and footnotes should be
read in conjunction with Management's Discussion and Analysis of Results of
Operations and Financial Condition contained herein and the Company's Annual
Report and Form 10-K for the fiscal year ended August 2, 1998.
3. EARNINGS PER SHARE
Earnings per share have been calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Weighted
average shares outstanding assuming dilution reflects outstanding stock option
grants. Historical earnings per share for the three months ended November 2,
1997 are not presented since the Company's common stock was not part of the
capital structure of Campbell for this period. Pro forma earnings per share
assume common shares outstanding as of the spin-off date were outstanding for
the entire period.
4. COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS 130 establishes new standards for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net earnings or shareowners'
equity. Comprehensive income is defined as the change in shareowners' equity
during a period from transactions from nonowner sources. For the Company,
comprehensive income consists of net earnings and foreign currency translation
adjustments. Prior year financial statements have been reclassified to conform
to the requirements of SFAS 130.
6
<PAGE> 8
4. COMPREHENSIVE INCOME (CONTINUED)
During the first quarter of fiscal 1999 and 1998, total comprehensive income
amounted to $6,910 and $19,881, respectively. The components of comprehensive
income, net of related tax, for the Company are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
November 1, November 2,
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Net earnings $ 4,664 $16,073
Other comprehensive income
Foreign currency translation adjustments 2,246 3,808
- ------------------------------------------------------------------------
Comprehensive income $ 6,910 $19,881
========================================================================
</TABLE>
5. RESTRUCTURING CHARGES
<TABLE>
<CAPTION>
Loss on
Asset Severance
Disposition and Benefits Other Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 2, 1998 $ 14,679 $ 6,951 $ 3,104 $ 24,734
First quarter fiscal 1999 activity (3,690) (1,527) (334) (5,551)
- -------------------------------------------------------------------------------------------------
Balance at November 1, 1998 $ 10,989 $ 5,424 $ 2,770 $ 19,183
=================================================================================================
</TABLE>
A special charge of $28,050 ($21,815 after tax) was recorded in the third
quarter of fiscal 1998 to cover the costs of a restructuring program. The
restructuring program was designed to improve operational efficiency by exiting
certain U.S. and European administrative offices and production facilities and
is expected to be completed during the third quarter of fiscal 1999. The
worldwide workforce will be reduced by approximately 425 full-time
administrative and operational positions. As part of this restructuring program,
in September 1998 the Company sold its Peterlee frozen foods facility in the
U.K. Additionally, during November 1998, the Company commenced closing of its
seasonal pickle plant in Bridgeport, Michigan. The plant employed approximately
25 full-time workers and an additional 375 seasonal workers from May through
September. The restructuring charge included approximately $11,600 primarily
related to severance and employee benefit costs which will be paid in cash. The
balance of the restructuring charge, amounting to $16,500, related to non-cash
charges for losses on the disposition of plant assets.
The above restructuring accruals as of November 1, 1998 are included in
Accrued liabilities on the Consolidated Balance Sheet.
7
<PAGE> 9
6. SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company groups its businesses in three operating segments: frozen foods,
grocery products and agricultural products. These operating segments are managed
as strategic units due to their distinct manufacturing processes, marketing
strategies and distribution channels. The FROZEN FOODS SEGMENT consists of
Swanson frozen foods in the U.S. and Canada and Freshbake frozen foods in the
U.K. The GROCERY PRODUCTS SEGMENT includes Vlasic retail and foodservice pickles
and condiments in the U.S., Open Pit barbecue sauce in the U.S., SonA and Rowats
pickles, canned beans and vegetables in the U.K., Kattus gourmet foods
distribution in Germany and Swift canned meat pates and other grocery products
in Argentina. The AGRICULTURAL PRODUCTS SEGMENT includes the U.S. fresh mushroom
business, chilled and frozen beef, frozen cooked beef and canned corned beef
exported from Argentina and contract manufacturing of frozen foodservice product
for Campbell's Foodservice in the U.S. Corporate expenses and assets have been
allocated to the segments. Intersegment sales represent the sale of beef between
Agricultural Products and Frozen Foods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
November 1, November 2,
SEGMENT INFORMATION 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Net Sales
Frozen Foods $ 141,315 $ 157,654
Grocery Products 96,964 102,195
Agricultural Products 91,642 91,669
Eliminations (2,871) (3,666)
- -------------------------------------------------------------------
Total $ 327,050 $ 347,852
===================================================================
Earnings Before Interest and Taxes
Frozen Foods $ 13,482 $ 18,802
Grocery Products 8,077 4,986
Agricultural Products (3,680) 740
- -------------------------------------------------------------------
Total $ 17,879 $ 24,528
===================================================================
</TABLE>
<TABLE>
<CAPTION>
November 1, August 2,
1998 1998
-------------------------
<S> <C> <C>
Total Assets
Frozen Foods $298,292 $286,197
Grocery Products 393,586 374,178
Agricultural Products 291,970 298,898
- -----------------------------------------------------------------
Total $983,848 $959,273
=================================================================
</TABLE>
8
<PAGE> 10
6. SEGMENT AND GEOGRAPHIC AREA INFORMATION (CONTINUED)
The following presents information about operations in different geographic
areas:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
November 1, November 2,
GEOGRAPHIC INFORMATION 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Net Sales
United States $ 213,999 $ 228,451
Europe 65,262 67,261
South America 50,660 55,806
Eliminations (2,871) (3,666)
- -------------------------------------------------------------------
Total $ 327,050 $ 347,852
===================================================================
Earnings Before Interest and Taxes
United States $ 19,203 $ 23,981
Europe 1,908 (32)
South America (3,232) 579
- -------------------------------------------------------------------
Total $ 17,879 $ 24,528
===================================================================
</TABLE>
7. INVENTORIES
<TABLE>
<CAPTION>
November 1, August 2,
1998 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Raw materials, containers and supplies $ 55,766 $ 52,074
Finished goods 164,475 144,044
- -----------------------------------------------------------------------
220,241 196,118
Less: Adjustment to LIFO basis (13,313) (12,355)
- -----------------------------------------------------------------------
Total $ 206,928 $ 183,763
=======================================================================
</TABLE>
Inventories for which the LIFO method of determining cost is used represented
approximately 63% and 62% of inventories at November 1, 1998 and August 2, 1998,
respectively.
9
<PAGE> 11
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
November 1, August 2,
1998 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Bank borrowings $584,000 $557,000
Capital lease obligations and other 2,026 1,873
- ---------------------------------------------------------------------
Total $586,026 $558,873
=====================================================================
</TABLE>
In connection with the spin-off, the Company incurred incremental debt of
approximately $560 million under a five year $750 million unsecured revolving
credit facility, consisting of $500 million assumed from Campbell and $60
million incurred to repay certain intercompany payables representing advances
from Campbell to subsidiaries of the Company. As of September 30, 1998, the
Company amended its existing revolving credit facility whereby $100 million was
converted to a term loan and the commitment under the revolving credit facility
was reduced to $550 million. At November 1, 1998, $484 million was outstanding
under the revolving credit facility and $100 million was outstanding under the
term loan. The term loan has the same terms and conditions as the amended
revolving credit facility. The amended agreement contains covenants, including
but not limited to, the mandatory repayment of debt, the reduction of the
commitment upon the sale of assets and equity, the incurrence of additional
debt, limitations on capital spending, restrictions of dividend payments, and
certain other financial ratio covenants.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PRO FORMA STATEMENTS OF EARNINGS (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands except per share amounts)
The Company's Pro Forma Statements of Earnings presented below produce more
meaningful comparisons as the three month period ended November 2, 1997 includes
interest expense on a pro forma basis. Only the Company's historical Statements
of Earnings for the three month period ended November 1, 1998 include interest
expense on the incremental debt incurred as of the spin-off. The pro forma
information assumes the spin-off occurred at the beginning of fiscal 1998.
However, the pro forma information is not necessarily indicative of results that
would have occurred if the Company had been independent since the beginning of
fiscal 1998 or of future results. The Pro Forma Statements of Earnings of the
Company should be read in conjunction with the Company's historical consolidated
financial statements and the accompanying notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
November 1, November 2,
1998 1997
-------------------------
<S> <C> <C>
Net sales $ 327,050 $ 347,852
- -------------------------------------------------------------------------------------------
Costs and expenses
Cost of products sold 236,539 251,340
Marketing and selling expenses 52,345 56,525
Administrative expenses 18,243 14,884
Research and development expenses 1,502 2,018
Other (income) expenses 542 (1,443)
- -------------------------------------------------------------------------------------------
Total costs and expenses 309,171 323,324
- -------------------------------------------------------------------------------------------
Pro Forma Earnings:(1)
Earnings before interest and taxes 17,879 24,528
Interest expense, net 10,515 10,316
- -------------------------------------------------------------------------------------------
Earnings before taxes 7,364 14,212
Taxes on earnings 2,700 5,013
- -------------------------------------------------------------------------------------------
Pro forma earnings $ 4,664 $ 9,199
===========================================================================================
Pro Forma Earnings Per Share assuming dilution $ 0.10 $ 0.20
Weighted average shares outstanding assuming dilution(2)(3) 45,716 45,941
</TABLE>
(1) Pro Forma Earnings for the quarter ended November 2, 1997 gives effect for
interest expense on incremental debt incurred as of the spin-off as if it were
outstanding for the entire period. The related tax impact of the pro forma
interest expense is included within the provision for income taxes.
(2) Pro Forma Earnings Per Share for the quarter ended November 2, 1997 assumes
common shares outstanding as of the spin-off date were outstanding for the
entire period.
(3) Weighted average shares outstanding assuming dilution reflects outstanding
stock option grants during the periods.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
INTRODUCTION
On March 30, 1998, one share of Vlasic Foods International Inc. (the
Company), no par value common stock, was distributed to shareowners of Campbell
Soup Company (Campbell) for every ten shares of Campbell capital stock held by
such shareowners at the record date in a tax-free distribution. At the time of
the distribution, the Company began operations as a separate independent
publicly-owned company.
In connection with the spin-off, the Company incurred incremental debt of
approximately $560 million under a five year $750 million unsecured revolving
credit facility, consisting of $500 million assumed from Campbell and $60
million incurred to repay certain intercompany payables representing advances
from Campbell to subsidiaries of the Company.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of the Company for the
three months ended November 1, 1998 and November 2, 1997. Results for the first
quarter of fiscal 1998 presented may not necessarily be indicative of the
results of operations that would have occurred if the Company had operated as an
independent company as of the beginning of fiscal 1998 or of the Company's
future performance. The following discussion of results of operations and
liquidity and capital resources should be read in conjunction with the
consolidated financial statements and the related accompanying notes thereto.
RESULTS OF OPERATIONS
Overview
Net sales for the first quarter of fiscal 1999 were $327.1 million, a
decrease of 6% from the same period in fiscal 1998. Net earnings of $4.7 million
or $0.10 per share for the first quarter of fiscal 1999 represents an $11.4
million decrease in earnings from the first quarter of fiscal 1998. However, the
first quarter fiscal 1999 earnings amount includes one-time pre-tax charges of
approximately $3.5 million for overlapping administrative transition costs and
information technology expenses incurred to create the Company's long-term
infrastructure. In addition, the historical financial statements for the first
quarter of fiscal 1998 reflect minimal interest expense prior to the spin-off as
there was no allocation of interest expense on Campbell's net investment.
Subsequent to the spin-off, interest expense includes interest on the debt
assumed from Campbell as well as the debt related to the increase in working
capital. Management believes the pro forma financial information appearing on
page 11 provides more meaningful comparisons.
Assuming that the spin-off had been consummated as of the beginning of fiscal
1998, pro forma net interest expense would have been approximately $10.3 million
and pro forma net earnings would have been approximately $9.2 million or $0.20
per share for the first quarter of fiscal 1998. Net earnings before one-time
charges were $6.9 million or $0.15 per share for the first quarter of fiscal
1999 or a decrease of $2.3 million on a comparable basis.
12
<PAGE> 14
Consolidated Statements of Earnings
The following table sets forth certain items in the Company's consolidated
statements of earnings as percentages of its net sales for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
November 1, November 2,
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
- -------------------------------------------------------------------------
Cost of products sold 72.3% 72.3%
Marketing and selling expenses 16.0% 16.2%
Administrative expenses 5.6% 4.2%
Research and development expenses 0.4% 0.6%
Other (income) expenses 0.2% -0.4%
- -------------------------------------------------------------------------
Total costs and expenses 94.5% 92.9%
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Earnings before interest and taxes 5.5% 7.1%
=========================================================================
</TABLE>
Three Months Ended November 1, 1998 Compared to Three Months Ended November
2, 1997
Net sales of $327.1 million in the first quarter of fiscal 1999 decreased 6%
from the first quarter of fiscal 1998. The sales decrease was primarily due to
lower sales in the Swanson U.S. frozen food and Vlasic pickle businesses as a
result of decreased volumes driven by lower consumption attributable to reduced
merchandising and increased competitive activities. Declines in exports from
Argentina as well as sales in the UK frozen foods businesses contributed to the
overall decline in net sales, partially offset by increases in the German
gourmet foods businesses.
Cost of products sold as a percentage of net sales remained the same at 72.3%
in the first quarter of fiscal 1999 and the same period of the prior year as
benefits of cost savings programs were offset by higher cattle costs in
Argentina.
Marketing and selling expenses as a percentage of net sales decreased
slightly in the first quarter of fiscal 1999 to 16.0% from 16.2% in the first
quarter of fiscal 1998.
Administrative and research and development expenses, as a percentage of net
sales, increased 1.2 points in the first quarter of fiscal 1999 to 6.0% from
4.8% in the same period of the prior year primarily as a result of duplicative
transition related costs and costs related to the development of the Company's
information technology infrastructure.
Other (income) expenses in the first quarter of fiscal 1998 included a gain
on fire insurance settlement.
Earnings before interest and taxes as a percentage of net sales were 5.5% in
the first quarter of fiscal 1999 compared to 7.1% in the first quarter of fiscal
1998. Excluding the one-time charges for overlapping administrative transition
costs and information technology expenses incurred to create the Company's
long-term infrastructure in the first quarter of fiscal 1999, earnings before
interest and taxes would have been 6.5% of net sales.
The historical financial statements for the first quarter of fiscal 1998
reflect minimal interest expense prior to the spin-off as there was no
allocation of interest expense on Campbell's net investment. Subsequent to the
spin-off, interest expense includes interest on the debt assumed from Campbell
as well as the debt related to the
13
<PAGE> 15
increase in working capital. Management believes the pro forma financial
information appearing on page 11 provides more meaningful comparisons.
The effective tax rate was 36.7% in the first quarter of fiscal 1999 compared
to 33.0% in the first quarter of fiscal 1998. The higher tax rate in the current
year is primarily driven by lower earnings in Argentina where the tax rates
benefit from export rebates and other tax incentives which are excludable from
taxable income.
Results by Segment
The following table sets forth certain segment information for the fiscal
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
November 1, November 2,
SEGMENT INFORMATION 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Net Sales
Frozen Foods $ 141,315 $ 157,654
Grocery Products 96,964 102,195
Agricultural Products 91,642 91,669
Eliminations (2,871) (3,666)
- -----------------------------------------------------------------------
Total $ 327,050 $ 347,852
=======================================================================
Earnings Before Interest and Taxes
Frozen Foods $ 13,482 $ 18,802
Grocery Products 8,077 4,986
Agricultural Products (3,680) 740
- -----------------------------------------------------------------------
Total $ 17,879 $ 24,528
=======================================================================
</TABLE>
Net sales of the frozen foods segment decreased 10.4% to $141.3 million in
the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998.
Lower Swanson U.S volumes due to lower consumption as a result of reduced
merchandising and increased competitive activities drove the sales decrease. The
segment's earnings before interest and taxes decreased 28.3% to $13.5 million in
the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998,
driven primarily by lower sales volumes and the allocation of one-time charges
for overlapping administrative transition costs and certain information
technology expenses.
Net sales of the grocery products segment decreased 5.1% to $97.0 million in
the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998.
The decrease was primarily driven by lower Vlasic pickle volumes driven by lower
consumption as a result of reduced merchandising and advertising and increased
competitive activities. Partially offsetting this decline was an increase in
sales in the German gourmet foods business. The segment's earnings before
interest and taxes increased 62.0% to $8.1 million in the first quarter of
fiscal 1999 driven predominately by significant improvements in the German
gourmet foods business, partially offset by the allocation of one-time charges
for overlapping administrative transition costs and certain information
technology expenses. Vlasic pickle earnings for the first quarter of fiscal 1999
approximated the earnings for the first quarter of fiscal 1998 as lower
advertising expenses offset the impact of lower volume.
Net sales of the agricultural products segment remained relatively consistent
in the first quarter periods of both fiscal 1999 and fiscal 1998. The segment
incurred a loss of $3.7 million in the first quarter of fiscal 1999 compared to
earnings of $0.7 million in the same period of the prior year. This is primarily
due to the highest cattle costs in over a decade in Argentina, a reduction of
non-operating income in Argentina and the allocation of one-time charges for
overlapping administrative transition costs and certain information technology
expenses.
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
In connection with the spin-off, the Company incurred incremental debt of
approximately $560 million under a five year $750 million unsecured revolving
credit facility, consisting of $500 million assumed from Campbell and $60
million incurred to repay certain intercompany payables representing advances
from Campbell to subsidiaries of the Company. As of September 30, 1998, the
Company amended its existing revolving credit facility whereby $100 million was
converted to a term loan and the commitment under the revolving credit facility
was reduced to $550 million. The term loan has the same terms and conditions as
the amended revolving credit facility. The amended agreement contains
covenants, including but not limited to, the mandatory repayment of debt, the
reduction of the commitment upon the sale of assets and equity, the incurrence
of additional debt, limitations on capital spending, restrictions of dividend
payments, and certain other financial ratio covenants. At November 1, 1998,
$484 million was outstanding under the revolving credit facility and $100
million was outstanding under the term loan with $66 million available to
support the Company's capital requirements including working capital needs and
capital expenditures.
The Company anticipates that its operating cash flow, together with available
borrowings under its credit facility, will be sufficient to meet its working
capital requirements, capital expenditure requirements and interest service
requirements on its debt obligations.
Net cash used in operating activities was $33.7 million in the first quarter
of fiscal 1999 compared to $75.8 million in the first quarter of fiscal 1998.
The improvement in cash flow from operations was principally driven by a smaller
seasonal increase in working capital of $51.5 million in the first quarter of
fiscal 1999 compared to $103.5 million in the first quarter of fiscal 1998,
partially offset by the impact of lower net earnings in the first quarter of
fiscal 1999. The increase in working capital was attributed to an increase in
receivables and inventory, partially offset by an increase in domestic marketing
and interest accruals. The increase in receivables results from trade
receivables from Campbell previously eliminated as intercompany balances and
seasonal increases in frozen food and pickle receivables. The increase in
inventory represents a seasonal increase in primarily pickles and frozen food
inventories.
Cash used in investing activities was principally for capital expenditures.
Capital expenditures were $8.5 million in the first quarter of fiscal 1999
compared to $10.6 million in the same period of the prior year. Capital
expenditures were higher in the prior year due to new capacity added to certain
Vlasic pickle and Swanson frozen food production facilities. Capital
expenditures for fiscal year 1999 are expected to approximate $50 million.
Cash provided by financing activities was principally funded from $27.0
million of net borrowings under the revolving credit facility. Such financing
activities were used primarily for working capital requirements.
YEAR 2000
The Year 2000 issue is the result of date-sensitive computer programs using
two digits rather than four to define the applicable year. If not corrected,
this could result in system failures or miscalculations leading to significant
disruptions in a company's operations. Prior to the Company's spin-off from
Campbell, a worldwide information technology project was initiated to identify
areas impacted by Year 2000 issues. The purpose of this high-priority project is
to identify and remediate non-ready systems and devices before business
processes are affected. The Company has completed a global business impact
assessment and has plans for timely correction, retirement, replacement or
updating of non-ready systems. The Company has been aided in this effort by the
fact that it was only recently spun-off as an independent entity on March 30,
1998 and many of its business and information systems in the U.S. have been
newly purchased and implemented with Year 2000 compliant technology. The
implementation of newly purchased systems is targeted for completion by April 2,
1999 and is approximately 70% completed.
The actual work of remediating and testing those systems that are not new has
begun and is targeted for completion by December 31, 1998 for the Company's
identified critical systems and July 31, 1999 for other systems. These phases of
the project are approximately 65% completed. Critical systems include business
planning and control process manufacturing, sales order billing and warehouse
management systems, that, if shut down or interrupted, could have a material
adverse effect on the Company's results of operations, financial condition and
cash flow. The Company is partnering with experienced systems integration and
Year 2000 vendors in the execution of the Year 2000 master plan.
15
<PAGE> 17
The project has clear management responsibility, budgets, plans and reporting
requirements. Comprehensive budgets and a master plan have been developed.
Monthly project tracking and management reporting processes are in place. The
tracking process measures progress (plan versus actual) for applications at a
milestone level. The scope of the project covers information technology systems,
Company infrastructure, including plant floor devices, and the Company's service
partners, including logistical operations. An assessment of the Company's global
information technology infrastructure has been completed and engineers are
currently remediating the plant production facilities. Remediation of the
technology infrastructure is targeted for completion by October 31, 1999 and is
approximately 50% completed.
The Company will test all electronic interfaces with trading partners and
suppliers as part of the new system development project which are scheduled to
be completed by July 31, 1999. Additionally, questionnaires have been sent to
all major suppliers. Responses from suppliers are continually evaluated and
updated reports are being requested.
The Company reviewed the risks of Year 2000 issues and believes the risks are
minimized due to the policy of implementing standard tested and certified Year
2000 systems after the spin-off. The completed risk analysis performed by the
independent engineers for plant non-information technology systems has not
identified any significant risks. Because the Company's Year 2000 compliance is
dependent upon key third parties also being Year 2000 compliant on a timely
basis, there can be no guarantee that the Company's efforts will prevent a
material adverse impact on its results of operations, financial condition and
cash flows. The possible consequences of not being fully Year 2000 compliant
include temporary plant closings, delays in the delivery of finished products,
delays in the receipt of key ingredients, containers and packaging supplies,
invoice and collection errors and inventory and supply obsolescence. These
consequences could have a material adverse impact on the Company's results of
operations, financial condition and cash flows if the Company is unable to
conduct its business in the ordinary course. The Company believes that its
readiness program should significantly reduce the adverse effect any such
disruptions may have.
Concurrently with the Year 2000 readiness measures described above, the
Company and its operating subsidiaries are developing contingency plans intended
to mitigate the possible disruption in business operations that may result from
the Year 2000 issue, and are developing cost estimates for such plans. Once
developed, contingency plans and related cost estimates will be continually
refined as additional information becomes available.
The anticipated costs associated with modifying current systems to be Year
2000 compliant will be expensed as incurred; such costs total $3 million of
which $0.3 million was incurred during the first quarter of fiscal 1999 and $1.0
million was incurred during fiscal 1998. While there can be no assurance that
the Company and its suppliers and customers will fully resolve all Year 2000
issues, neither the estimated cost to become Year 2000 operationally effective
nor the outcome of the Year 2000 problem is expected to have a material impact
on the Company's operations, liquidity or financial position.
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933 and the Securities Exchange Act of 1934. This
information is based on management's current views and assumptions regarding
future events and financial performance and is subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in this report and filings with the Securities and Exchange
Commission. Important facts that could cause such differences include, but are
not limited to:
- - Completion of the German gourmet foods distribution business divestiture in
1999, which is dependent on the Company's ability to find a buyer to purchase
the business at a price considered appropriate.
- - Market risks associated with financial instruments that may vary due to the
impact of unforeseen economic changes, such as currency exchange rates,
inflation rates and recessionary trends.
- - Continued compliance with the covenants and the terms of the amended
credit facility.
- - The Company's ability to maintain capital expenditures within the forecasted
limits.
16
<PAGE> 18
- - Impact of the Year 2000 issues associated with the Company's business and
information systems and embedded technology as well as the information
technology of its vendors, suppliers, service providers and customers.
- - Implementation of information technology systems by the targeted
completion dates.
- - Inherent risks in the marketplace associated with new product introductions,
including uncertainties about trade and consumer acceptance.
- - The Company's ability to achieve the forecasted savings related to the
restructuring program.
ITEM 3. MARKET RISK
The Company uses or is permitted to use financial instruments, including
fixed and variable rate debt, as well as swap, forward and option contracts, to
finance its operations and to hedge interest rate and currency exposures. The
swap, forward and option contracts are entered into for periods consistent with
related underlying exposures and do not constitute positions independent of
those exposures. The Company does not enter into contracts for speculative
purposes, nor is it a party to any leveraged instrument.
As disclosed in the Company's Annual Report, the Company has entered into a
forward starting swap contract with a 10 year maturity and a notional amount of
$50 million which hedges a portion of the treasury interest rate exposure
associated with the planned issuance of longer term debt in fiscal 1999. The
forward starting swap will be settled in cash on or about the time longer term
debt is issued. It would have cost approximately $2.4 million to settle the
contract as of November 1, 1998.
There have been no other material changes in the Company's market risk during
the first quarter ended November 1, 1998. For additional information, refer to
pages 21 and 22 of the Company's Annual Report for the fiscal year ended August
2, 1998.
17
<PAGE> 19
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's Form 10-K, dated October 20, 1998,
management is not aware of any pending claims or litigation the outcome of which
would have a material adverse effect on the Company's business, financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
A. Cautionary Statement on Forward-Looking statements
This report contains certain forward-looking statements within the meaning
of the Securities Act of 1933 and the Securities Exchange Act of 1934.
This information is based upon management's current views and assumptions
regarding future events and financial performance and is subject to risks
and uncertainties that could cause actual results to differ materially
from those expressed in this report. Additional information concerning
factors that could cause actual results to vary materially from the
results anticipated can be found on page 16 in Management's Discussion and
Analysis of Results of Operations and Financial Condition and in the
Company's Annual Report on Form 10-K for the fiscal year ended August 2,
1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
(27) Financial Data Schedule
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
November 1, 1998.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VLASIC FOODS INTERNATIONAL INC.
Dated: December 15, 1998 By: /s/ Mitchell P. Goldstein
--------------------------
Mitchell P. Goldstein
Vice President and Chief
Financial Officer
19
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED NOVEMBER 1, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
</LEGEND>
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<ALLOWANCES> 3,520
<INVENTORY> 206,928
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