<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 Ended Commission File Number
October 31, 1999 1-13933
[VLASIC INTERNATIONAL INC. 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: 856-969-7100
--------------------------------------------------
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 45,502,234 shares of Common Stock outstanding as of
December 1, 1999.
================================================================================
<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 months
ended October 31, 1999 and November 1, 1998 2
Consolidated Balance Sheets as of October 31, 1999 (unaudited) and
August 1, 1999 (audited) 3
Consolidated Statements of Cash Flows (unaudited) for the three months
ended October 31, 1999 and November 1, 1998 4
Consolidated Statements of Shareowners' Equity (Deficit) (unaudited) 5
for the three months ended October 31, 1999 and November 1, 1998
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 10
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 19
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
------------------------------
October 31, November 1,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $264,404 $327,050
-------- --------
Costs and expenses
Cost of products sold 184,315 236,539
Marketing and selling expenses 46,234 52,345
Administrative expenses 12,811 18,243
Research and development expenses 2,179 1,502
Other expense (income) 582 542
-------- --------
Total costs and expenses 246,121 309,171
-------- --------
Earnings before interest and taxes 18,283 17,879
Interest expense 11,619 10,760
Interest income 95 245
-------- --------
Earnings before taxes 6,759 7,364
Taxes on earnings 2,650 2,700
-------- --------
Net earnings $ 4,109 $ 4,664
======== ========
Earnings per share - basic $ 0.09 $ 0.10
Weighted average shares outstanding - basic 45,502 45,491
Earnings per share - assuming dilution $ 0.09 $ 0.10
Weighted average shares outstanding
- - assuming dilution 45,529 45,716
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
VLASIC FOODS INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
October 31, August 1,
1999 1999
----------- ---------
(unaudited) (audited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 256 $ 11,475
Accounts receivable 115,342 91,693
Inventories 164,220 148,631
Other current assets 18,912 16,401
-------- --------
Total current assets 298,730 268,200
-------- --------
Plant assets, net 314,143 317,651
Other assets, principally intangible assets, net 79,028 79,582
-------- --------
Total assets $691,901 $665,433
======== ========
Current liabilities
Notes payable $ 150 $ 194
Payable to suppliers and others 87,978 99,876
Accrued liabilities 55,620 53,987
-------- --------
Total current liabilities 143,748 154,057
-------- --------
Long-term debt 499,262 469,134
Deferred income taxes 13,485 13,429
Other liabilities 50,456 49,214
-------- --------
Total liabilities 706,951 685,834
-------- --------
Shareowners' equity (deficit)
Preferred stock, no par value; authorized 4,000 shares; none issued - -
Common stock, no par value; authorized 56,000 shares;
issued 45,502 shares at October 31, 1999 and August 1, 1999 137,758 137,758
Accumulated deficit (147,337) (151,446)
Accumulated other comprehensive earnings (loss) (5,471) (6,713)
-------- --------
Total shareowners' equity (deficit) (15,050) (20,401)
-------- --------
Total liabilities and shareowners' equity (deficit) $691,901 $665,433
======== ========
</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
------------------------------
October 31, November 1,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 4,109 $ 4,664
Non-cash charges to net earnings
Depreciation and amortization 8,719 11,450
Deferred income taxes 2,148 1,586
Postretirement healthcare benefits 1,050 1,111
Other, net 515 (999)
Changes in working capital
Accounts receivable (23,113) (17,723)
Inventories (14,986) (21,882)
Other current assets and liabilities (15,660) (11,917)
-------- --------
Net cash used in operating activities (37,218) (33,710)
-------- --------
Cash flows from investing activities
Purchases of plant assets (3,952) (8,542)
Sales of plant assets 189 4,849
Other, net (35) (9)
-------- --------
Net cash used in investing activities (3,798) (3,702)
-------- --------
Cash flows from financing activities
Long-term borrowings 64,400 73,542
Repayment of long-term borrowings (34,300) (46,500)
Short-term borrowings (repayments), net (44) 538
Issuance of common stock - 139
-------- --------
Net cash provided by financing activities 30,056 27,719
-------- --------
Effect of exchange rate changes on cash (259) 565
-------- --------
Net change in cash and cash equivalents (11,219) (9,128)
Cash and cash equivalents - beginning of period 11,475 16,333
-------- --------
Cash and cash equivalents - end of period $ 256 $ 7,205
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
VLASIC FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (DEFICIT) (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
--------------------- Comprehensive Shareowners'
Accumulated Earnings Equity
Shares Amount Deficit (Loss)(1) (Deficit)
------ -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at August 2, 1998 45,488 $137,473 $ (25,115) $ (5,754) $106,604
Net earnings 4,664 4,664
Other comprehensive earnings (loss)
Foreign currency translation adjustments 3,548 3,548
--------
Comprehensive earnings (loss) 8,212
Issuance of shares of common stock
as a result of stock options exercised 7 139 139
------ -------- --------- -------- --------
Balance at November 1, 1998 45,495 $137,612 $ (20,451) $ (2,206) $114,955
====== ======== ========= ======== ========
Balance at August 1, 1999 45,502 $137,758 $(151,446) $ (6,713) $(20,401)
Net earnings 4,109 4,109
Other comprehensive earnings (loss)
Foreign currency translation adjustments 1,242 1,242
--------
Comprehensive earnings (loss) 5,351
------ -------- --------- -------- --------
Balance at October 31, 1999 45,502 $137,758 $(147,337) $ (5,471) $ (15,050)
====== ======== ========= ======== ========
</TABLE>
(1) Accumulated other comprehensive earnings (loss) 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. Interim Financial Information
The accompanying unaudited consolidated financial statements for the
three months ended October 31, 1999 and November 1, 1998 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 our opinion, 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 beginning on page 10 and our Annual Report
and Form 10-K for the fiscal year ended August 1, 1999.
2. Restructuring Charges
Severance
and Benefits Other Total
------------ ----- ------
Balance at August 1, 1999 $1,149 $200 $1,349
Fiscal 2000 spending (202) (22) (224)
------ ---- ------
Balance at October 31, 1999 $ 947 $178 $1,125
====== ==== ======
A special charge of $1 million was recorded in the fourth quarter of
fiscal 1999 associated with administrative staff reductions in the United
Kingdom. This restructuring program was designed to align fixed employee costs
with the needs of the SonA and Freshbake businesses. Approximately 40 positions
will be eliminated as part of this program. The $1 million charge represents
severance and employee benefit costs that will be paid in cash. This
restructuring program is expected to be completed by the third quarter of fiscal
2000.
A special charge of $3 million was recorded in the third quarter of
fiscal 1999 associated with the closure of the Dublin, Georgia mushroom farm.
The farm was identified for closure due to the high costs of production and
mechanical harvesting methodology that prevents it from producing high quality
retail mushrooms. As part of the closure, approximately 70 people were
terminated. The assets were written down to the estimated fair value less costs
to sell. The $3 million cost of the program included $2.4 million of non-cash
charges for losses on the disposition of plant assets and $0.6 million
principally related to severance and employee benefit costs that will be paid in
cash. This restructuring program is expected to be completed by the third
quarter of fiscal 2000.
The restructuring accrual is included in Accrued liabilities on the
Consolidated Balance Sheets.
3. Segment and Geographic Area Information
We group our businesses in three operating segments. The FROZEN FOODS
SEGMENT consists of Swanson frozen foods in the United States and Canada and
Freshbake frozen foods in the United Kingdom. The GROCERY PRODUCTS SEGMENT
includes Vlasic retail and foodservice pickles and condiments in the United
States, Open Pit barbecue sauce in the United States, SonA and Rowats pickles,
canned beans and vegetables in the United Kingdom, Kattus gourmet foods
distribution in Germany (which was sold in January 1999) and Swift canned meat
pates and other grocery products in Argentina (which was sold in July 1999). The
AGRICULTURAL PRODUCTS SEGMENT includes the United States fresh mushroom
business, contract manufacturing of frozen foodservice product for Campbell in
the United States and chilled and frozen beef, frozen cooked beef and canned
corned beef exported from Argentina (which was sold in July 1999) . These
operating segments are managed as strategic units due to their distinct
manufacturing processes, marketing strategies and distribution channels.
6
<PAGE> 8
3. Segment and Geographic Area Information (continued)
Corporate expenses and assets have been allocated to the segments.
Intersegment sales presented below as eliminations represent the sale of beef
between the agricultural products segment and the frozen foods segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
October 31, November 1,
SEGMENT INFORMATION 1999 1998
----------- -----------
<S> <C> <C>
Net Sales
Frozen Foods $142,173 $141,315
Grocery Products 71,988 96,964
Agricultural Products 50,243 91,642
Eliminations - (2,871)
-------- --------
Total $264,404 $327,050
======== ========
Earnings (Loss) Before Interest and Taxes
Frozen Foods $ 12,804 $ 13,482
Grocery Products 7,566 8,077
Agricultural Products (2,087) (3,680)
-------- --------
Total $ 18,283 $ 17,879
======== ========
<CAPTION>
October 31, August 1,
1999 1998
----------- ----------
Total Assets
Frozen Foods $320,652 $303,650
Grocery Products 287,962 274,340
Agricultural Products 83,287 87,443
-------- --------
Total $691,901 $665,433
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
October 31, November 1,
GEOGRAPHIC INFORMATION 1999 1998(1)
----------- -----------
<S> <C> <C>
Net Sales
United States $222,225 $213,999
Europe and Canada 42,179 65,262
South America - 50,660
Eliminations - (2,871)
-------- --------
Total $264,404 $327,050
======== ========
Earnings (Loss) Before Interest and Taxes
United States $ 17,577 $ 18,333
Europe and Canada 706 2,483
South America - (2,937)
-------- --------
Total $ 18,283 $ 17,879
======== ========
</TABLE>
(1) Prior quarter amounts have been reclassified to conform with current
year presentation.
7
<PAGE> 9
4. Inventories
October 31, August 1,
1999 1999
----------- ---------
Raw materials, containers and supplies $ 43,133 $ 43,883
Finished product 134,528 119,089
-------- --------
177,661 162,972
Less: Adjustment to LIFO basis (13,441) (14,341)
-------- --------
Total $164,220 $148,631
======== ========
Inventories for which the last in, first out (LIFO) method of
determining cost is used represented approximately 75% of inventories at October
31, 1999 and August 1, 1999.
5. Long-Term Debt
<TABLE>
<CAPTION>
October 31, August 1,
1999 1999
----------- ---------
<S> <C> <C>
Senior credit facility $302,000 $271,900
$200 million 10 1/4% Senior subordinated notes due 2009,
less unamortized discount 197,006 196,962
Capital lease obligations and other 256 272
-------- --------
Total $499,262 $469,134
======== ========
</TABLE>
The senior credit facility consists of (1) a senior secured term loan
in a principal amount of $100 million and (2) senior secured revolving credit
commitments providing for revolving loans, initially in the aggregate amount of
up to $550 million. We are required to make mandatory prepayments on the senior
credit facility and permanently reduce revolving credit commitments under
certain circumstances, including upon certain asset sales, issuance of debt
securities, issuance of equity securities and receipt of casualty proceeds which
include property insurance proceeds and condemnation awards. At our option,
subject to certain requirements, loans may be prepaid in whole or in part. As a
result of the application of the net proceeds from the sale of our senior
subordinated notes in fiscal 1999 and the divestiture of our Swift-Armour
Argentine beef business in fiscal 1999, the amount available to be borrowed
under the revolving credit commitments was permanently reduced to $279 million.
Loans under the revolving credit commitments will be available at any time
through the final maturity date on February 20, 2003 and the term loan matures
on February 20, 2003. As of October 31, 1999, $77.0 million was available under
the revolving credit commitments. Borrowings under the senior credit facility
bear interest at rates that, at our option, vary with the prime rate, CD rate,
LIBOR or money market rates plus applicable credit margins. The average interest
rate at October 31, 1999 was 7.6%. We are obligated to pay a facility fee
ranging from 0.15% to 0.5% on the credit exposure of the banks.
In fiscal 1999, we issued senior subordinated notes with an aggregate
principle amount of $200 million at an issue price of 98.472%. The notes mature
on July 1, 2009. Interest on the notes accrues at the rate of 10 1/4% per annum
and is payable semi-annually in arrears on January 1 and July 1 of each year,
commencing on January 1, 2000. On or after July 1, 2004, the notes may be
redeemed in whole or in part at a stated price.
The senior credit facility and our senior subordinated debt contain a
number of significant covenants that, among other things, restrict our ability
to engage in mergers and sales of assets, create liens on our assets, incur
additional indebtedness, make investments and acquisitions, or engage in
transactions with our subsidiaries and affiliates. In addition, under the senior
credit facility, we are required to comply with specified ratios and tests,
including maximum debt/EBITDA ratio, minimum fixed charge coverage ratio and a
limitation on capital
8
<PAGE> 10
5. Long-Term Debt (continued)
expenditures. A breach of any of these covenants could result in a default
under our debt agreements. A default, if not waived, could result in
acceleration of our indebtedness, in which case the debt would become
immediately due and payable. If this occurs, we may not be able to repay our
debt or borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to us. As of October 31,
1999, we were in compliance with the covenants. It is anticipated that we will
not be in compliance with the financial ratio covenants as of the end of the
second and third quarters of fiscal 2000. We are currently in discussion with
our lenders to renegotiate the financial ratio covenants of the senior credit
facility and expect the agreement will be amended for the second quarter of
fiscal 2000 so that we would expect to be in compliance with the amended
financial ratio covenants, although no assurances can be given. We do not
believe the amended terms will have a material impact on our results of
operations, financial position or cash flows.
6. Subsequent Event
On December 7, 1999, we announced we began exploring strategic options
for our fresh mushroom business. The Vlasic fresh mushroom business is a leading
producer of fresh mushrooms in the United States, with annual production of
approximately 100 million pounds and net sales of approximately $120 million.
The mushroom business has eight farms located throughout the United States and
employs approximately 2,000 people.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Introduction
On March 30, 1998, Campbell Soup Company distributed one share of
Vlasic common stock to shareowners of Campbell for every ten shares of Campbell
capital stock held at the record date in a tax-free distribution (the
"spin-off"). At the time of the spin-off, we began operations as a separate
independent publicly-owned company. In connection with the spin-off, Campbell
contributed the following businesses: Swanson frozen foods in the United States
and Canada, Vlasic retail and foodservice pickles and condiments in the United
States, Open Pit barbecue sauce, Campbell mushrooms in the United States,
Freshbake and non-branded frozen foods and SonA and Rowats pickles and beans in
the United Kingdom, Swift and non-branded processed beef in Argentina and Kattus
gourmet foods distribution in Germany. We sold the Kattus business in January
1999 and sold our Argentine beef business, Swift-Armour, in July 1999. Prior to
the spin-off, the businesses contributed by Campbell had been separately managed
within multiple Campbell business divisions.
The discussion below summarizes the significant factors affecting our
consolidated operating results, financial condition and liquidity for the three
months ended October 31, 1999 and November 1, 1998. The results for the three
months ended October 31, 1999 are not necessarily indicative of the results of
operations to be expected for the full year. The following discussion of results
of operations and liquidity and capital resources should be read in conjunction
with our historical consolidated financial statements and the related
accompanying notes.
Results of Operations
Overview
Net sales for the three months ended October 31,1999 were $264.4
million compared to net sales of $327.1 million for the three months ended
November 1, 1998. Excluding net sales from the Kattus and Swift-Armour
businesses (which were divested in January 1999 and July 1999, respectively),
net sales increased 1.4% in the first quarter of fiscal 2000 compared to last
year, including 13.4% and 4.0% increases in our core Vlasic and Swanson U.S.
businesses, respectively.
Net earnings for the three months ended October 31, 1999 were $4.1
million compared to $4.7 million for the three months ended November 1, 1998.
However, the net earnings for the three months ended November 1, 1998 included
one-time costs of $3.5 million ($2.2 million after-tax), or $0.05 per share, for
duplicative administrative transition costs and costs related to the development
of our information technology infrastructure. On a comparable basis, earnings
per share were $0.09 and $0.15 for the three months ended October 31, 1999 and
November 1, 1998, respectively.
10
<PAGE> 12
Consolidated Statements of Earnings
The following table sets forth certain items in our consolidated statements
of earnings as percentages of our net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
October 31, November 1,
1999 1998
----------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
----- -----
Cost of products sold 69.7% 72.3%
Marketing and selling expenses 17.5% 16.0%
Administrative expenses 4.8% 5.6%
Research and development expenses 0.8% 0.4%
Other expense (income) 0.2% 0.2%
----- -----
Total costs and expenses 93.0% 94.5%
----- -----
Earnings before interest and taxes 7.0% 5.5%
===== =====
</TABLE>
Three Months Ended October 31, 1999 Compared to Three Months Ended November 1,
1998
Net Sales. Net sales of $264.4 million for the three months ended
October 31, 1999 decreased from net sales of $327.1 million for the three months
ended November 1, 1998. However, excluding net sales from the divested Kattus
and Swift-Armour businesses, net sales increased 1.4% in the first quarter of
fiscal 2000 compared to last year, including 13.4% and 4.0% increases in our
core Vlasic and Swanson U.S. businesses, respectively, while our international
business in the United Kingdom suffered an overall decline in net sales.
Cost of Products Sold. Cost of products sold as a percentage of net
sales decreased to 69.7% for the three months ended October 31, 1999 compared to
72.3% for the three months ended November 1, 1998. Excluding the divested Kattus
and Swift-Armour businesses, cost of products as a percentage of net sales would
have been 69.2% for the three months ended November 1, 1998. On a comparable
basis, the increase in cost of products sold is largely attributable to poor
yields and higher costs at our mushroom farms in the first quarter of fiscal
2000.
Marketing and Selling Expenses. Marketing and selling expenses as a
percentage of net sales increased to 17.5% for the three months ended October
31, 1999 compared to 16.0% for the three months ended November 1, 1998.
Excluding the divested Kattus and Swift-Armour businesses, marketing and selling
expenses as a percentage of net sales would have been 16.2% for the three months
ended November 1, 1998. The increase in the first quarter of fiscal 2000 was
predominately caused by greater advertising and trade spending resulting from
heavier promotions and new product introductions such as our Vlasic Hamburger
Stackers and our innovative Swanson potato-topped pot pies.
Administrative Expenses. Administrative expenses as a percentage of net
sales decreased for the three months ended October 31, 1999 to 4.8% from 5.6%
for the three months ended November 1, 1998, or 5.8% excluding the divested
Kattus and Swift-Armour businesses. This decrease is a result of duplicative
administrative transition costs and costs related to the development of our
information technology infrastructure incurred in the first quarter of fiscal
1999, partially offset by comparatively higher staffing levels in the first
quarter of fiscal 2000.
Research and Development Expenses. Research and development expenses as
a percentage of net sales increased to 0.8% for the three months ended October
31, 1999 compared to 0.4% for the three months ended November 1, 1998, or 0.5%
excluding the divested Kattus and Swift-Armour businesses.
11
<PAGE> 13
Other Expense (Income). Other expense is principally goodwill
amortization. There was no significant change in the first quarter of fiscal
2000 compared to the same period of the prior year.
Earnings Before Interest and Taxes. Earnings before interest and taxes
for the three months ended October 31, 1999 were $18.3 million compared to $17.9
million for the three months ended November 1, 1998. On a comparable basis,
excluding the divested Kattus and Swift-Armour businesses and excluding one-time
costs of $3.5 million relating to duplicative administrative transition costs
and costs related to the development of our information technology
infrastructure incurred in the first quarter of fiscal 1999, earnings before
interest and taxes for the three months ended November 1, 1999 were $24.3
million. This decrease of $6.0 million in the first quarter of fiscal 2000 was
driven by:
o poor yields, higher costs and reduced contract sales at our
mushroom farms;
o operational difficulties encountered in the United Kingdom
frozen foods business; and
o increased marketing and advertising costs in our core Vlasic
and Swanson U.S. businesses in the first quarter of fiscal
2000 compared to last year.
Interest Expense, Net. Interest expense, net, for the three months
ended October 31, 1999 was $11.5 million compared to $10.5 million for the three
months ended November 1, 1998. We incurred higher interest expense in the first
quarter of fiscal 2000 as a result of higher interest rates associated with our
public bond offering.
Taxes on Earnings. The effective tax rate was 39.2% for the three
months ended October 31, 1999 compared to 36.7% for the three months ended
November 1, 1998. For fiscal year 2000, we expect an effective tax rate of
approximately 39%.
Results by Segment
The following table sets forth certain segment information for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
October 31, November 1,
SEGMENT INFORMATION 1999 1998
----------- -----------
<S> <C> <C>
Net Sales
Frozen Foods $142,173 $141,315
Grocery Products 71,988 96,964
Agricultural Products 50,243 91,642
Eliminations - (2,871)
-------- --------
Total $264,404 $327,050
======== ========
Earnings (Loss) Before Interest and Taxes
Frozen Foods $ 12,804 $ 13,482
Grocery Products 7,566 8,077
Agricultural Products (2,087) (3,680)
-------- --------
Total $ 18,283 $ 17,879
======== ========
</TABLE>
Three Months Ended October 31, 1999 Compared to Three Months Ended November 1,
1998
Net sales of the frozen foods segment decreased approximately 0.6% to
$142.2 million for the three months ended October 31, 1999 compared to the same
period of the prior year. Customer sales in our Swanson U.S. business increased
approximately 4.0% primarily attributable to new product introductions. However
this increase was largely offset by sales declines in first quarter of fiscal
2000 in the United Kingdom frozen foods business. The segment's earnings before
interest and taxes were $12.8 million for the three months ended October 31,
1999 compared to $13.5 million for the three months ended November 1, 1998.
Excluding the impact of certain
12
<PAGE> 14
one-time infrastructure charges incurred in the first quarter of fiscal 1999,
earnings before interest and taxes for the segment were $15.5 million. On this
basis, the segment's earnings decreased approximately $2.7 million, or 17.2% in
the first quarter of fiscal 2000. This decline was driven primarily by increased
trade spending associated with our new product introductions in our Swanson U.S.
business and lower sales and manufacturing inefficiencies in our United Kingdom
frozen food business.
Net sales of the grocery products segment decreased 25.8% to $72.0
million for the three months ended October 31, 1999 compared to fiscal 1998.
Excluding net sales from the divested Kattus business and Swift-Armour retail
business in the first quarter of fiscal 1999, net sales increased approximately
$5.8 million, or 8.8% in the first quarter of fiscal 2000. This increase was
primarily driven by increased sales in our core Vlasic pickles business as a
result of higher volumes. The segment's earnings before interest and taxes were
$7.6 million for the three months ended October 31, 1999 compared to $8.1
million for the three months ended November 1, 1998. Excluding the results of
the divested Kattus business and Swift-Armour retail business and excluding the
impact of certain one-time charges incurred in the first quarter of fiscal 1999,
earnings before interest and taxes for this segment were $8.6 million for the
three months ended November 1, 1998. On this basis, the segment's earnings
decreased approximately 1.0 million, or 11.9% in the first quarter of fiscal
2000. This decline was predominately attributable to greater advertising and
marketing costs in our core Vlasic business.
Net sales of the agricultural products segment decreased 45.2% to $50.2
million for the three months ended October 31, 1999 compared to the same period
of the prior year. Excluding net sales for the divested Swift-Armour business,
net sales decreased 5.8% in the first quarter of fiscal 2000 compared to the
first quarter of fiscal 1999 due to reduced contract sales and poor yields at
our mushroom farms. The segment's earnings (loss) before interest and taxes of
$(2.1) million for the three months ended October 31, 1999 compared to $(3.7)
million for the three months ended November 1, 1998. On a comparable basis,
excluding the results of the divested Swift-Armour business and the one-time
infrastructure charges incurred in the first quarter of fiscal 1999, the
segment's earnings before interest and taxes for the three months ended November
1, 1998 were $0.3 million. The significant decline in earnings was entirely
attributable to poor yields, higher costs and reduced contract sales at our
mushrooms operations.
Liquidity and Capital Resources
The senior credit facility consists of (1) a senior secured term loan
in a principal amount of $100 million and (2) senior secured revolving credit
commitments providing for revolving loans, initially in the aggregate amount of
up to $550 million. We are required to make mandatory prepayments on the senior
credit facility and permanently reduce revolving credit commitments under
certain circumstances, including upon certain asset sales, issuance of debt
securities, issuance of equity securities and receipt of casualty proceeds which
include property insurance proceeds and condemnation awards. At our option,
subject to certain requirements, loans may be prepaid in whole or in part. As a
result of the application of the net proceeds from the sale of our senior
subordinated notes in fiscal 1999 and the divestiture of our Swift-Armour
Argentine beef business in fiscal 1999, the amount available to be borrowed
under the revolving credit commitments was permanently reduced to $279 million.
Loans under the revolving credit commitments will be available at any time
through the final maturity date on February 20, 2003 and the term loan matures
on February 20, 2003. As of October 31, 1999, $77.0 million was available under
the revolving credit commitments. Borrowings under the senior credit facility
bear interest at rates that, at our option, vary with the prime rate, CD rate,
LIBOR or money market rates plus applicable credit margins. The average interest
rate at October 31, 1999 was 7.6%. We are obligated to pay a facility fee
ranging from 0.15% to 0.5% on the credit exposure of the banks.
In fiscal 1999, we issued senior subordinated notes with an aggregate
principle amount of $200 million at an issue price of 98.472%. The notes mature
on July 1, 2009. Interest on the notes accrues at the rate of 10 1/4% per annum
and is payable semi-annually in arrears on January 1 and July 1 of each year,
commencing on January 1, 2000. On or after July 1, 2004, the notes may be
redeemed in whole or in part at a stated price.
Our liquidity needs will be primarily for capital expenditures, working
capital and interest service requirements on our debt obligations. Capital
expenditures for fiscal year 2000 are expected to approximate $35 million. We
believe that our capital expenditures for the foreseeable future will be focused
on preventive maintenance and equipment replacement, projects intended to result
in cost savings and projects related to new product
13
<PAGE> 15
introductions. The senior credit facility imposes annual limits on capital
expenditures as follows: $41 million in fiscal 2000; $41 million in fiscal 2001;
$42 million in fiscal 2002; and $42 million in fiscal 2003.
We anticipate that our operating cash flows, together with available
borrowings under our revolving credit facility, will be sufficient to meet our
working capital requirements, capital expenditure requirements and interest
service requirements on our debt obligations.
The senior credit facility and our senior subordinated debt contain a
number of significant covenants that, among other things, restrict our ability
to engage in mergers and sales of assets, create liens on our assets, incur
additional indebtedness, make investments and acquisitions, or engage in
transactions with our subsidiaries and affiliates. In addition, under the senior
credit facility, we are required to comply with specified ratios and tests,
including maximum debt/EBITDA ratio, minimum fixed charge coverage ratio and a
limitation on capital expenditures. A breach of any of these covenants could
result in a default under our debt agreements. A default, if not waived, could
result in acceleration of our indebtedness, in which case the debt would become
immediately due and payable. If this occurs, we may not be able to repay our
debt or borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to us. As of October 31,
1999, we were in compliance with the covenants. It is anticipated that we will
not be in compliance with the financial ratio covenants as of the end of the
second and third quarters of fiscal 2000. We are currently in discussion with
our lenders to renegotiate the financial ratio covenants of the senior credit
facility and expect the agreement will be amended for the second quarter of
fiscal 2000 so that we would expect to be in compliance with the amended
financial ratio covenants, although no assurances can be given. We do not
believe the amended terms will have a material impact on our results of
operations, financial position or cash flows.
Interest and principal payments on the indebtedness outstanding under
our senior credit facility and senior subordinated debt represent significant
cash requirements. Our ability to raise funds to service our debt may be
restricted by our debt agreements and our ability to effect equity financing is
dependent on our results of operations and market conditions. In the event that
we are unable to refinance such indebtedness or raise funds through asset sales,
sales of equity or otherwise, our ability to pay principal of, and interest on,
our debt would be adversely affected.
On December 7, 1999, we announced we began exploring strategic options
for our fresh mushroom business. The Vlasic fresh mushroom business is a leading
producer of fresh mushrooms in the United States, with annual production of
approximately 100 million pounds and net sales of approximately $120 million.
The mushroom business has eight farms located throughout the United States and
employs approximately 2,000 people.
Three Months Ended October 31, 1999 Compared to Three Months Ended November 1,
1998
Net cash used in operating activities was $37.2 million for the three
months ended October 31, 1999 compared to $33.7 million for the three months
ended November 1, 1998. The change in cash flows from operations was principally
driven by a larger increase in working capital of $53.8 million for the first
quarter of fiscal 2000 compared to $51.5 million for the first quarter of fiscal
1999, as well as the impact of lower net earnings and decreased depreciation and
amortization in the first quarter of fiscal 2000.
Net cash used in investing activities was $3.8 million for the three
months ended October 31, 1999 compared to $3.7 million for the three months
ended November 1, 1998. Capital expenditures were $4.0 million for the three
months ended October 31, 1999 compared to $8.5 million for the three months
ended November 1, 1998. Capital expenditures were greater in the first quarter
of the prior year as we built our information technology infrastructure, and
also due to the inclusion of Kattus and Swift-Armour. The disposition of the
Peterlee frozen food facility in the United Kingdom in September 1998 partially
offset capital expenditures incurred in the first quarter of fiscal 1999.
Net cash provided by financing activities was $30.1 million for the
three months ended October 31, 1999 compared to 27.7 million for the three
months ended November 1, 1998 principally due to an increase in borrowings under
the senior credit facility.
14
<PAGE> 16
Seasonality
Our sales and cash flows are affected by seasonal cyclicality during
certain parts of the year. Sales of frozen foods and mushrooms tend to be
marginally higher during the winter months. Sales of pickles, relishes and
barbecue sauce tend to be higher in the summer months. The majority of pickles
are packed during a season extending from May through September. As a result,
our inventory levels tend to be higher in the first quarter of the fiscal year
which makes our working capital requirements significantly higher in the first
quarter, requiring us to draw more heavily on the revolving credit commitments
under our senior credit facility.
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 our 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
was to identify and remediate non-ready systems and devices before business
processes were affected. We completed a global business impact assessment and
formulated plans for timely correction, retirement, replacement or updating of
non-ready systems. We were aided in this effort by the fact that we were only
recently spun-off as an independent entity on March 30, 1998 and many of our
business and information systems in the United States have been newly purchased
and implemented with Year 2000 compliant technologies. The implementation of
newly purchased systems is complete.
We completed the work on our identified critical systems and our other
systems. 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 our results of
operations, financial condition and cash flows. We partner with experienced
systems integration and Year 2000 vendors in the execution of our Year 2000
master plan.
Our project has had clear management responsibility, budgets, plans and
reporting requirements. 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, our infrastructure, including plant floor
devices, and our service partners, including logistical operations. An
assessment of our global information technology infrastructure has been
completed. Remediation of the technology infrastructure is complete, except for
select plant production equipment for which alternative production processes
have been developed in the event of a Year 2000 related failure.
We completed our testing of electronic interfaces with trading partners
and suppliers as part of the new system development project. Additionally,
questionnaires have been sent to major suppliers. Responses from suppliers have
been evaluated.
We reviewed the risks of Year 2000 issues and believe the risks are
minimized due to our policy of implementing standard tested and certified Year
2000 systems. The completed risk analysis performed by the independent engineers
for plant non-information technology systems has not identified any significant
risks. Because our Year 2000 compliance is dependent upon key third parties also
being Year 2000 compliant on a timely basis, there can be no guarantee that our
efforts will prevent a material adverse impact on our 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 our
results of operations, financial condition and cash flows if we are unable to
conduct business in the ordinary course. We believe that our readiness program
should significantly reduce the adverse effect any such disruptions may have.
15
<PAGE> 17
Concurrently with the Year 2000 readiness measures described above, we
and our operating subsidiaries developed contingency plans intended to mitigate
the possible disruption in business operations that may result from the Year
2000 issue. These contingency plans and related cost estimates are continually
refined as additional information becomes available.
The anticipated costs associated with modifying current systems to be
Year 2000 compliant are expensed as incurred; such anticipated costs and the
costs of contingency plans total $2.5 million of which approximately $0.1
million was incurred in the three months ended October 31, 1999, $1 million was
incurred during fiscal 1999 and $1 million was incurred during fiscal 1998.
While there can be no assurance that we and our 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 issue is expected
to have a material impact on our operations, liquidity or financial position.
Recent Developments
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, effective in the first fiscal quarter
beginning after December 15, 1999. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. We
are currently evaluating the effect that implementation of the new guidance will
have, if any, on our results of operations and financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FAS Statement 133," which postponed the adoption date of SFAS No. 133. We
must adopt the statement beginning fiscal 2001. We are currently evaluating the
effect that implementation of the new standard will have on our results of
operations and financial position.
Forward-Looking Information
This report and our filings with the Securities and Exchange Commission
contain certain forward-looking statements within the meaning of the Securities
Act of 1933 and the Securities Exchange Act of 1934. We caution readers that any
such forward-looking statements made by us or on our behalf are based on our
current expectations and beliefs but are not guarantees of future performance.
Actual results could differ materially from those expressed or implied in the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to:
o our ability to successfully negotiate an amendment of our
senior credit facility;
o our ability to continue to comply with covenants and the terms
of the senior credit facility and the senior subordinated
notes;
o our ability to maintain capital expenditures within the
forecast limits, which are based on assumptions about
infrastructure requirements;
o issues associated with our business and information systems
and embedded technology, including Year 2000 and other system
problems which could disrupt our operations--we would also be
impacted by software and system problems of our vendors and
customers;
o Campbell Soup Company's future requirements for mushrooms and
foodservice products;
o the impact of strong competitive response to our efforts to
leverage our brand power with product innovation and new
advertising;
o the inherent risks in the marketplace associated with our
products, including uncertainties about trade and consumer
acceptance;
o the inherent risks associated with an agricultural business;
o changes in prices of raw materials and other inputs;
o the impact of unforeseen economic and political changes in
international markets where we compete;
o the market risks associated with financial instruments which
may be subject to unforeseen economic changes, such as
currency exchange rates, interest rates, inflation rates and
recessionary trends;
o our ability to achieve the gains anticipated from our cost
productivity programs; and
o our ability to achieve the forecasted savings related to
restructuring programs.
16
<PAGE> 18
ITEM 3. MARKET RISK
We use or are permitted to use financial instruments, including fixed
and variable rate debt, as well as swap, forward and option contracts, to
finance our 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. We do not enter into contracts for speculative purposes, nor
are we a party to any leveraged instrument.
As disclosed in our Annual Report, we entered into an interest rate
swap contract with a notional value of $50 million to hedge a portion of our
U.S. variable interest rate bank borrowings. As of October 31, 1999, the
interest rate swap contract provided that we pay an average interest rate of
5.9% and receive an average interest rate of 6.1%. We would have received
approximately $0.7 million to settle the interest rate swap contract as of
October 31, 1999.
There have been no other material changes in our market risk during the
three months ended October 31, 1999. For additional information, refer to page
20 of our Annual Report for the fiscal year ended August 1, 1999.
17
<PAGE> 19
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
As previously reported in our Form 10-K, dated October 15, 1999, we are
not aware of any pending claims or litigation the outcome of which would have a
material adverse effect on our 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 our 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 of this Quarterly Report on Form 10-Q and in our
Annual Report on Form 10-K for the fiscal year ended August 1, 1999.
18
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
(27) Financial Data Schedule
B. Reports on Form 8-K
We filed a Current Report on Form 8-K, dated July 30, 1999 with the
Securities and Exchange Commission, on August 16, 1999.
SIGNATURE
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 9, 1999 By: /s/ Joseph Adler
-----------------------------
Joseph Adler
Vice President and Controller
19
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