WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-15019
WHITMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-6167838
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3501 Algonquin Road, Rolling Meadows, Illinois 60008
---------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 818-5000
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 / /
As of October 25, 2000, the Registrant had 136,351,384 outstanding shares
(excluding treasury shares) of common stock, par value $0.01 per share, the
Registrant's only class of common stock.
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 2000
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 15
1
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 2000
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------ --------------------------
2000 1999 2000 1999
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 655.2 $ 680.5 $ 1,886.7 $ 1,556.0
Cost of goods sold 386.2 392.0 1,109.4 909.8
--------- --------- --------- ---------
Gross profit 269.0 288.5 777.3 646.2
Selling, general and administrative expenses 180.9 205.7 552.1 462.6
Amortization expense 9.9 9.6 30.3 19.0
Special charges -- 4.5 -- 27.9
--------- --------- --------- ---------
Operating income 78.2 68.7 194.9 136.7
Interest expense, net (21.8) (19.4) (63.4) (44.9)
Other (expense) income, net (1.2) (2.1) 1.8 (49.9)
--------- --------- --------- ---------
Income before income taxes 55.2 47.2 133.3 41.9
Income taxes 26.3 22.8 63.6 6.9
--------- --------- --------- ---------
Income from continuing operations
before minority interest 28.9 24.4 69.7 35.0
Minority interest -- -- -- 6.6
--------- --------- --------- ---------
Income from continuing operations 28.9 24.4 69.7 28.4
Income from discontinued operations after taxes -- -- 8.9 (27.2)
--------- --------- --------- ---------
Net income $ 28.9 $ 24.4 $ 78.6 $ 1.2
========= ========= ========= =========
Weighted average common shares:
Basic 136.3 141.7 136.9 117.6
Incremental effect of stock options 0.6 0.9 0.4 1.1
--------- --------- --------- --------
Diluted 136.9 142.6 137.3 118.7
========= ========= ========= ========
Income (loss) per share - basic:
Continuing operations $ 0.21 $ 0.17 $ 0.51 $ 0.24
Discontinued operations -- -- 0.06 (0.23)
--------- --------- --------- --------
Net income $ 0.21 $ 0.17 $ 0.57 $ 0.01
========= ========= ========= ========
Income (loss) per share - diluted:
Continuing operations $ 0.21 $ 0.17 $ 0.51 $ 0.24
Discontinued operations -- -- 0.06 (0.23)
--------- --------- --------- --------
Net income $ 0.21 $ 0.17 $ 0.57 $ 0.01
========= ========= ========= ========
Cash dividends per share $ -- $ 0.01 $ 0.04 $ 0.07
========= ========= ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 2000
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
<TABLE>
<CAPTION>
End of Third End of Fiscal
Quarter 2000 Year 1999
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $ 99.9 $ 114.5
Receivables 273.7 265.1
Inventories 120.1 112.1
Other current assets 29.7 46.3
------------ ------------
Total current assets 523.4 538.0
Investments 50.3 47.9
Property (at cost) 1,454.0 1,384.5
Accumulated depreciation (615.3) (552.8)
------------ ------------
Net property 838.7 831.7
------------ ------------
Intangible assets, net 1,396.7 1,416.3
Other assets 38.7 30.4
------------ ------------
Total assets $ 2,847.8 $ 2,864.3
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current maturities of long-term debt $ 414.1 $ 373.3
Accounts and dividends payable 168.5 192.2
Other current liabilities 141.2 173.6
------------ ------------
Total current liabilities 723.8 739.1
------------ ------------
Long-term debt 808.6 809.0
Deferred income taxes 67.7 71.1
Other liabilities 82.9 102.9
Shareholders' equity:
Preferred stock ($0.01 par value, 12.5 million shares authorized;
no shares issued) -- --
Common stock ($0.01 par value, 350.0 million shares authorized;
167.3 million shares issued) 1,634.0 1,634.4
Retained income 149.9 76.7
Accumulated other comprehensive loss:
Cumulative translation adjustment (42.1) (24.4)
Unrealized investment gain 3.6 2.1
------------ ------------
Accumulated other comprehensive loss (38.5) (22.3)
------------ ------------
Treasury stock (30.9 million shares - 2000
and 28.2 million shares - 1999) (580.6) (546.6)
------------ ------------
Total shareholders' equity 1,164.8 1,142.2
------------ ------------
Total liabilities and shareholders' equity $ 2,847.8 $ 2,864.3
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 2000
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
<TABLE>
<CAPTION>
Nine Months
-----------------------------
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 69.7 $ 28.4
Adjustments to reconcile to net cash provided by continuing operations:
Depreciation and amortization 120.6 88.7
Deferred income taxes (0.7) (39.3)
Gain on sale of franchises (1.4) (8.0)
Special charges and real estate impairment -- 84.2
Cash outlays related to special charges (11.9) (9.1)
Other 0.5 7.1
Changes in assets and liabilities, exclusive of acquisitions:
Increase in receivables (9.0) (41.0)
(Increase) decrease in inventories (8.1) 9.7
(Decrease) increase in payables (23.7) 17.2
Net change in other assets and liabilities (2.3) (19.4)
----------- -----------
Net cash provided by continuing operations 133.7 118.5
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of franchises, net of cash divested 2.5 113.6
Franchises acquired, net of cash acquired (2.5) (105.7)
Capital investments, net (129.3) (126.5)
Net activity with joint ventures -- 1.2
Proceeds from sale of investments -- 7.0
----------- -----------
Net cash used in investing activities (129.3) (110.4)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt 115.9 (16.8)
Proceeds from issuance of long-term debt -- 298.0
Repayment of long-term debt (75.7) (33.9)
Common stock dividends (5.5) (7.4)
Treasury stock purchases (35.7) (261.1)
Issuance of common stock 1.3 2.5
----------- -----------
Net cash provided by (used in) financing activities 0.3 (18.7)
----------- -----------
Net cash used in discontinued operations (18.5) (19.6)
Effect of exchange rate changes on cash and equivalents (0.8) (0.9)
----------- -----------
Change in cash and equivalents (14.6) (31.1)
Cash and equivalents at beginning of year 114.5 147.6
----------- -----------
Cash and equivalents at end of nine months $ 99.9 $ 116.5
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
WHITMAN CORPORATION
FORM 10-Q
THIRD QUARTER 2000
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements included herein have been
prepared by Whitman Corporation ("Whitman" or the "Company") without
audit. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, although the Company believes that the disclosures made are
adequate to ensure the information presented is not misleading. It is
suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in
the Company's 1999 Annual Report on Form 10-K. In the opinion of
management, the information furnished herein reflects all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
statement of results for the interim periods presented. Certain prior year
amounts have been reclassified to conform to the current year
presentation.
2. Through its principal operating company, Pepsi-Cola General Bottlers, Inc.
("Pepsi General"), the Company produces, distributes, sells and markets
carbonated and non-carbonated Pepsi-Cola beverages and a variety of other
non-alcoholic beverages in the United States and Central Europe. Pepsi
General accounts for about 17 percent of all Pepsi-Cola products sold in
the U.S. It serves a significant portion of a ten state region, primarily
in the Midwest, with a population of approximately 35 million people. In
addition, Pepsi General serves a population of approximately 65 million
people in its territories in Poland, Hungary, the Czech Republic and the
Republic of Slovakia. The Company's business is highly seasonal.
3. The Company's fiscal year consists of 52 or 53 weeks ending on the
Saturday closest to December 31; fiscal 1999 ended on January 1, 2000. The
Company's third quarters of 2000 and 1999 ended on September 30, 2000 and
October 2, 1999, respectively.
4. On August 21, 2000, the Company and PepsiAmericas, Inc. ("PAS") announced
that their respective boards of directors approved an agreement to merge
PAS into a wholly-owned subsidiary of Whitman. In addition, the Company
announced that upon completion of the transaction, PAS Chairman and Chief
Executive Officer Robert Pohlad, 46, will become Chief Executive Officer
of Whitman. PAS is the third largest U.S. based Pepsi bottler, with annual
sales of approximately $576 million and distribution rights in portions of
Arkansas, Iowa, Louisiana, Minnesota, Mississippi, North Dakota, South
Dakota, Tennessee and Texas. PAS also operates in Puerto Rico and Jamaica
and has received certain rights and preferences for expansion of its
business with PepsiCo, including further expansion in the Caribbean. The
combined company will have operations in 20 states and territories and
five overseas countries.
In general terms, PAS shareholders may elect a cash payment or shares of
Whitman common stock in exchange for their PAS shares. PAS shareholders
may also elect to participate in an earn-out provision whereby they accept
fewer Whitman shares but potentially receive additional shares if the PAS
territories meet certain performance goals through 2002. In addition to
issuing cash and stock, Whitman will assume approximately $330 million of
PAS debt. The Company expects to complete the merger on or about November
30, 2000, upon shareholder approval of both companies. A more detailed
description of the merger is included in the Current Report on Form 8-K
filed by Whitman on August 23, 2000.
5. On January 25, 1999, the Company announced that its Board of Directors had
approved a new business relationship with PepsiCo, Inc. ("PepsiCo"). The
new relationship was approved by Whitman shareholders on May 20, 1999 and
is more fully described in the Company's 1999 Annual Report on Form 10-K.
In connection with the new relationship, the Company sold to PepsiCo its
operations in Marion, Virginia; Princeton, West Virginia and the St.
Petersburg area of Russia. Initial proceeds from these sales were $117.8
million and the Company recorded a pretax gain of $11.4 million in the
first quarter of 1999, which is reflected in "Other (expense) income, net"
on the Consolidated Statements of Income. In the fourth quarter of 1999,
the final determination of closing date working capital of the territories
sold resulted in a $1.9 million increase in the pretax gain. The final
gain, after taxes and minority interest, was $7.8 million.
The domestic and Central European territories acquired from PepsiCo in
1999 have been accounted for under the purchase method. Accordingly, the
results of operations of these territories have been included for periods
subsequent to the dates of acquisition.
5
The pro forma condensed consolidated results of operations presented below
for 2000 and 1999 assume the following:
o The territories described above were sold as of January 1, 1999.
o The domestic and Central European territories were acquired from PepsiCo
as of January 1, 1999.
o The 16 million share repurchase commitment entered into in connection
with the new business relationship was completed as of January 1, 1999.
o The after tax gains from the divestiture of franchise territories in
2000 (see Note 7) and 1999 were excluded.
o The special charges recorded in the second and third quarters of 1999
(see Note 14) were excluded.
In addition, the results from discontinued operations are excluded from
all periods presented. Finally, the 1999 pro forma financial information
presented below adjusts the operating results for the domestic territories
acquired from PepsiCo in 1999 to conform them to Whitman's reporting
calendar and excludes $4.5 million of non-recurring charges recorded in
the first quarter of 1999:
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
(unaudited and in millions, except per share data)
<S> <C> <C> <C> <C>
Sales $ 655.2 $ 639.0 $ 1,886.7 $ 1,807.9
Income from continuing operations 28.9 23.9 68.3 57.5
Income from continuing operations
per share-basic 0.21 0.17 0.50 0.41
Income from continuing operations
per share-diluted 0.21 0.17 0.50 0.41
</TABLE>
The results for the domestic territories acquired from PepsiCo include
thirteen weeks and thirty-nine weeks of activity for the third quarter and
nine months, respectively. The above pro forma results are for
informational purposes only and may not be indicative of actual results
that would have occurred had the new business relationship with PepsiCo
commenced as of January 1, 1999.
6. Discontinued operations in 2000 includes income arising in the second
quarter from certain insurance settlements for environmental matters (see
Note 15) related to a former subsidiary, Pneumo Abex, net of certain
increased environmental and related accruals. Loss from discontinued
operations in 1999 includes a second quarter $12 million settlement of
environmental litigation filed against Pneumo Abex and an increase of
$30.8 million in accruals for estimated future environmental remediation
and other matters. The pretax income from discontinued operations in 2000
has been reduced by income taxes of $5.8 million, and the pretax loss from
discontinued operations in 1999 has been reduced by income tax benefits of
$15.6 million.
7. In the first quarter of 2000, the Company sold its operations in the
Baltics. This sale resulted in a gain of $2.6 million ($1.4 million after
taxes), which is reflected in "Other (expense) income, net" on the
Condensed Consolidated Statements of Income.
8. Based on negotiations for the sale of property held in the downtown area
of Chicago, the Company recorded a charge of $56.3 million ($35.9 million
after tax) in the second quarter of 1999 to reduce the book value of the
property. This charge is reflected in "Other (expense) income, net" on the
Condensed Consolidated Statements of Income.
9. The Company's comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------- --------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
Net income $ 28.9 $ 24.4 $ 78.6 $ 1.2
Foreign currency translation adjustment (9.4) (1.4) (17.7) (6.8)
Unrealized gains (losses) on securities (3.4) 1.2 1.5 1.3
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 16.1 $ 24.2 $ 62.4 $ (4.3)
========== ========== ========== ==========
</TABLE>
6
Unrealized gains (losses) on securities are presented net of tax expense
(benefit) of ($2.1) million, $0.8 million, $0.9 million and $0.9 million,
respectively.
10. Interest expense, net, is comprised of the following:
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------- --------------------------------
2000 1999 2000 1999
--------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
Interest expense $ (22.0) $ (20.0) $ (64.4) $ (47.6)
Interest income 0.2 0.6 1.0 2.7
---------- ---------- ---------- ----------
Interest expense, net $ (21.8) $ (19.4) $ (63.4) $ (44.9)
========== ========== ========== ==========
</TABLE>
11. Net cash provided by operating activities includes cash payments and
receipts for interest and income taxes as follows:
Nine Months
------------------------
2000 1999
-------- --------
(in millions)
Interest paid $ 67.9 $ 48.0
Interest received 0.9 3.2
Income taxes paid, net of refunds 30.8 33.1
12. In the first quarter of 2000, the Company's Board of Directors authorized
an annual cash dividend of $0.04 per share, payable on April 3, 2000.
Prior to 2000, the Company paid cash dividends on a quarterly basis.
13. As of the end of the third quarter of 2000, the components of inventory
were approximately 46 percent comprised of raw materials and supplies and
54 percent comprised of finished goods, which is essentially the same mix
as the end of fiscal year 1999.
14. In the second and third quarters of 1999 and in the third and fourth
quarters of 1997, Whitman and Pepsi General recorded special charges for
staff reductions and asset and investment write-downs. The special charges
totaled $27.9 million ($19.0 million after taxes) in 1999 and $49.3
million ($31.6 million after taxes and minority interest) in 1997. A
further description of the charges taken is presented in the Company's
1999 Annual Report on Form 10-K.
The following table summarizes activity associated with the special charges:
<TABLE>
<CAPTION>
1997 1999
Charges Charges Total
------- ------- -------
(in millions)
<S> <C> <C> <C>
Accrued liabilities as of fiscal year end 1999
(all employee related costs) $ 8.3 $ 4.3 $ 12.6
Expenditures for employee related costs (8.3) (3.6) (11.9)
------- ------- -------
Accrued liabilities at the end of the third quarter of 2000 $ -- $ 0.7 $ 0.7
======= ======= =======
</TABLE>
Employee related costs recorded in the 1999 special charges include
severance payments for management and staff affected by the consolidation
of international headquarters and operations in Poland and management
changes in certain domestic markets. Employee related costs recorded in
the 1997 special charges include severance payments for the management and
staff affected by changes in organizational structure, as well as other
headcount reduction programs. The 1997 charges affected approximately 125
positions at Pepsi General and essentially all employees at Whitman
Corporate. All remaining payments for employee related costs were made
during the first quarter of 2000 to employees affected by the 1997 staff
reductions. The charges recorded in 1999 were related to the elimination
of approximately 310 positions, of which approximately 3 positions are yet
to be eliminated as of the end of the third quarter of 2000.
7
The accrued liabilities remaining as of the end of the third quarter of
2000 are comprised of deferred severance payments and certain employee
benefits, which principally relate to previously severed employees. The
Company expects to pay the $0.7 million of employee related costs, using
cash from operations, during the next twelve months; accordingly, such
amounts are included in other current liabilities.
15. The Company continues to be subject to certain indemnification obligations
under agreements with previously sold subsidiaries, including potential
environmental liabilities. There is significant uncertainty in assessing
the Company's share of the potential liability for such claims. The
assessment and determination for cleanup at the various sites involved is
inherently speculative during the early stages, and the Company's share of
related costs is subject to various factors, including possible insurance
recoveries and the allocation of liabilities among many other potentially
responsible and financially viable parties.
At the end of the third quarter of 2000, the Company had accruals of $21.5
million to cover these potential liabilities, including $5 million
included in other current liabilities. Such amounts are determined using
estimated undiscounted future cash requirements, and have not been reduced
by potential future insurance recoveries. During the second quarter of
2000, the Whitman-Pneumo Abex Settlement Trust (the "Trust") was
established for purposes of satisfying a portion of the Company's future
environmental obligations. At the end of the third quarter, the Trust held
approximately $33.5 million, which will be responsive to the Company's
future environmental obligations. No payments were made by the Trust
during the third quarter of 2000.
The estimated liabilities include expenses for the remediation of
identified sites, payments to third parties for claims and expenses, and
the expenses of on-going evaluations and litigation. The estimates are
based upon the judgments of outside consultants and experts and their
evaluations of the characteristics and parameters of the sites, including
results from field inspections, test borings and water flows. The
estimates are based upon the use of current technology and remediation
techniques, and do not take into consideration any inflationary trends
upon such claims or expenses, nor do they reflect the possible benefits of
continuing improvements in remediation methods. The accruals also do not
provide for any claims for environmental liabilities or other potential
issues which may occur in the future.
The Company has contingent liabilities from various pending claims and
litigation on a number of matters, including indemnification claims under
agreements with previously sold subsidiaries for product liability and
toxic torts. The ultimate liability for these claims cannot be determined.
In the opinion of management, based upon information currently available,
the ultimate resolution of these claims and litigation, including
potential environmental exposures, and considering amounts already accrued
and the funds in the Trust, should not have a material effect on the
Company's financial condition, although amounts recorded in a given period
could be material to the results of operations or cash flows for that
period. Existing environmental liabilities associated with the Company's
continuing operations are not material.
16. Basic earnings per share are based upon the weighted-average number of
common shares outstanding. Diluted earnings per share assume the exercise
of all options which are dilutive, whether exercisable or not. The
dilutive effects of stock options are measured under the treasury stock
method.
Options to purchase the following shares were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of the common shares during the related period:
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------ -------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shares under options outstanding 7,497,963 3,632,844 8,610,776 2,651,000
Weighted-average exercise price per
share $ 17.97 $ 20.97 $ 17.30 $ 22.27
</TABLE>
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
2000 THIRD QUARTER COMPARED WITH 1999 THIRD QUARTER
Reported results for the third quarter of 1999 include 16 weeks of
activity for the domestic territories acquired from PepsiCo in May, 1999
(commonly referred to as the Heartland territories). In 2000, the reporting
calendar of these territories was adjusted to conform to Whitman's reporting
calendar. Accordingly, reported results for the third quarter of 2000 include 13
weeks of activity for the Heartland territories.
Reported sales and operating income for the third quarter of 2000 and 1999
are summarized below ($ in millions):
<TABLE>
<CAPTION>
Reported
Reported Sales Operating Income
------------------------ % ------------------------ %
2000 1999 Change 2000 1999 Change
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 582.4 $ 603.3 (3.5) $ 83.6 $ 72.9 14.7
International 72.8 77.2 (5.7) (5.4) (4.2) (28.6)
-------- --------- --------- ---------
Total $ 655.2 $ 680.5 (3.7) $ 78.2 $ 68.7 13.8
======== ========= ========= =========
</TABLE>
On a reported basis, domestic sales decreased $20.9 million, or 3.5
percent, in the third quarter of 2000 compared to 1999, primarily as a result of
the three fewer weeks of results this year for the Heartland territories.
Reported international sales decreased $4.4 million, or 5.7 percent, in
the third quarter of 2000 compared to 1999 due to poor weather conditions in
Central Europe and currency devaluation. Comparable volumes on an 8-ounce
equivalent basis, including Toma in 1999, were down 6.6 percent from the third
quarter of 1999, and foreign currency devaluation caused a $9.5 million decrease
in reported sales. Lower overall volumes and currency devaluation were partially
offset by Toma's sales. Toma was acquired on December 1, 1999 and contributed
$9.6 million of sales in the third quarter of 2000.
On a reported basis, the consolidated gross profit margin of 41.1 percent
in the third quarter of 2000 compared with 42.4 percent in 1999. The lower gross
profit margin percentage was driven primarily by lower international margins
caused by the lower margin sales contributed by Toma and the underabsorption of
international fixed costs due to lower volumes, as well as the impact of
currency devaluation. The impact of currency devaluation arises because a
portion of the ingredients and packaging content of the products sold was priced
in U.S. dollars.
On a reported basis, selling, general and administrative ("S,G&A")
expenses, excluding amortization expense and special charges, were 27.6 percent
of sales in the third quarter of 2000, compared with 30.2 percent in 1999. The
decrease in S,G&A expenses as a percent of sales principally reflects the
benefits of higher selling prices achieved in the domestic territories and cost
reduction efforts initiated in 1999, as well as the absence of certain strike
costs, integration costs and Year 2000 remediation costs which were incurred in
the third quarter of 1999, and lower distribution costs incurred by Toma.
Reported domestic operating income in 2000 increased $10.7 million, or
14.7 percent. Included in third quarter 1999 domestic operating income was $4.5
million of special charges for staff reductions in certain domestic markets.
Excluding these charges, reported operating income increased $6.2 million, or
8.0 percent, principally due to improved pricing and favorable S,G&A cost
comparisons due to the previously mentioned costs incurred in the third quarter
of 1999.
Reported international operating losses of $5.4 million in the third
quarter were $1.2 million greater than operating losses of $4.2 million in the
previous year. The incurred operating loss in 2000 reflects the poor weather
conditions in the current quarter, as well as the impact of currency
devaluation.
Net interest expense increased $2.4 million to $21.8 million in the third
quarter of 2000, due to higher U.S. short-term interest rates and additional
debt incurred to fund share repurchases in late 1999 and early 2000.
The Company reported other expense, net of $1.2 million in the third
quarter of 2000, compared with other expense, net of $2.1 million in the third
quarter of 1999. The improvement was not attributed to any one significant item.
9
Due to the 1999 transaction with PepsiCo that resulted in the divestiture
of certain of the Company's operations, as well as the acquisition of
significant domestic and Central European territories from PepsiCo, as described
in Note 5 to the Condensed Consolidated Financial Statements, the Company
believes that comparable results provide a better indication of current
operating trends than reported results. Comparable operating results are
determined by adjusting, as of the beginning of each period, the results for
1999 to give effect to the 1999 PepsiCo transaction as if it occurred at the
beginning of 1999. In addition, comparable operating results adjust the 1999
results of the acquired domestic territories to align them with Whitman's
reporting calendar; exclude the special charges incurred in the second and third
quarters of 1999; exclude the $4.5 million of charges incurred in the first
quarter of 1999 related to the settlement of insurance, severance and legal
matters; and exclude the second quarter 1999 impact of eliminating the two-month
reporting lag in consolidating international results.
Comparable sales and operating income for the third quarter of 2000 and
1999 are summarized below, which include thirteen weeks of activity for the
domestic territories acquired from PepsiCo in each respective period ($ in
millions):
<TABLE>
<CAPTION>
Comparable
Comparable Sales Operating Income
------------------------ % ------------------------ %
2000 1999 Change 2000 1999 Change
-------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 582.4 $ 561.8 3.7 $ 83.6 $ 71.7 16.6
International 72.8 77.2 (5.7) (5.4) (4.2) (28.6)
-------- --------- --------- ---------
Total $ 655.2 $ 639.0 2.5 $ 78.2 $ 67.5 15.9
======== ========= ========= =========
</TABLE>
Comparable domestic sales in the quarter increased $20.6 million, or 3.7
percent, reflecting a 2.6 percent increase in the average net selling price per
raw case and higher volume. Bottle and can volume on an 8-ounce equivalent basis
increased by 0.4 percent. Despite relatively flat overall volume levels,
positive growth trends were achieved in vending, supermarkets and drug stores,
as well as in the 20-ounce and 24-ounce polyethylene ("PET") packages, which
reflect the benefits of continued investment in the cold drink channel. Brand
growth occurred in Aquafina and Fruitworks, which was introduced in late 1999,
as well as within trademark Pepsi brands.
On a comparable basis, international sales decreased $4.4 million, or 5.7
percent, in the third quarter of 2000 compared to 1999, due to the
aforementioned poor weather conditions and currency devaluation, partially
offset by Toma sales.
On a comparable basis, the consolidated gross profit margin was 140 basis
points below the comparable period of 1999 due to lower international margins
caused by the lower margin products sold by Toma and the underabsorption of
international fixed costs due to lower volumes, as well as the impact of
currency devaluation.
Comparable S,G&A expenses, excluding amortization expense, as a percentage
of sales were 290 basis points lower in the current year. The reduction
principally reflects the improved domestic pricing, the benefits of the cost
reduction efforts begun in 1999, the absence of certain strike costs,
integration and Year 2000 remediation costs which were incurred in the third
quarter of 1999, and lower distribution costs incurred by Toma.
On a comparable basis, domestic operating income increased $11.9 million,
or 16.6 percent, due to improved pricing and favorable S,G&A cost comparisons.
On a comparable basis, international operating losses of $5.4 million were
$1.2 million greater than the comparable period of 1999, reflecting the poor
weather conditions and the impact of currency devaluation in the current
quarter.
10
RESULTS OF OPERATIONS
2000 FIRST NINE MONTHS COMPARED WITH 1999 FIRST NINE MONTHS
Reported sales and operating income for the first nine months of 2000 and
first nine months of 1999 are summarized below ($ in millions):
<TABLE>
<CAPTION>
Reported
Reported Sales Operating Income
------------------------ % ------------------------ %
2000 1999 Change 2000 1999 Change
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 1,674.6 $ 1,422.0 17.8 $ 210.1 $ 173.0 21.4
International 212.1 134.0 58.3 (15.2) (36.3) 58.1
--------- --------- --------- ---------
Total 1,886.7 $ 1,556.0 21.3 $ 194.9 $ 136.7 42.6
========= ========= ========= =========
</TABLE>
On a reported basis, domestic sales increased $252.6 million, or 17.8
percent, in the first nine months of 2000 compared to 1999, primarily reflecting
sales contributed by the territories acquired in May, 1999 and improved pricing
Reported international sales increased significantly in the first nine
months of 2000 compared to 1999 due to sales contributed by the territories in
Central Europe acquired from PepsiCo, as well as sales contributed by Toma.
Toma's sales in the first nine months of 2000 were $32.5 million, while no Toma
sales were included in 1999.
The consolidated gross profit margin on a reported basis declined to 41.2
percent in the first nine months of 2000 compared with 41.5 percent in 1999. The
lower gross profit margin percentage primarily reflects the lower margin sales
contributed by Toma and the impact of currency devaluation, which were partially
offset by improved domestic margins aided by higher net selling prices.
On a reported basis, S,G&A expenses, excluding amortization expense and
special charges, increased by $89.5 million, or 19.3 percent, and represented
29.3 percent of sales in the first nine months of 2000, compared with 29.7
percent in 1999. The increase in S,G&A was principally attributable to the
acquisitions made in May, 1999 and December, 1999, net of divestitures. The
lower S,G&A expenses as a percent of sales primarily reflect the benefits of
higher selling prices achieved in the domestic territories and cost reduction
efforts initiated in 1999. The favorable comparisons associated with the absence
of certain strike costs and Year 2000 remediation costs incurred in 1999 were
offset by integration costs associated with the acquired territories.
Reported domestic operating income in the first nine months of 2000
increased $37.1 million, or 21.4 percent, principally due to the operating
income contributed by the acquired domestic operations and better domestic
pricing, partially offset by higher amortization expense. Additionally,
operating income in the first nine months of 1999 was reduced by special charges
of $7.3 million for management changes in certain domestic markets (see Note 14
to the Condensed Consolidated Financial Statements), and $4.5 million of
one-time charges in the first quarter of 1999 for the settlement of insurance,
severance and legal matters.
Reported international operating losses of $15.2 million in the first nine
months of 2000 compared favorably with operating losses of $36.3 million in the
previous year. Included in the first nine months of 1999 were special charges of
$20.6 million resulting principally from the acquisition of the Central European
territories from PepsiCo (see Note 14 to the Condensed Consolidated Financial
Statements). The special charges in international were principally for asset
write-downs and severance related payments, as well as the write-down of the
investment in the Baltics. The operations in the Baltics were subsequently sold
in the first quarter of 2000. Excluding the charges, the operating losses of
$15.2 million in 2000 were $0.5 million less than operating losses of $15.7
million in the previous year. The reduction in reported operating losses
occurred despite the inclusion in 2000 of a full nine months of operating losses
of the Central European territories acquired on June 1, 1999. However, the
comparisons were benefited by the inclusion of $5.1 million of operating losses
in 1999 reported results for the divested territories in Russia and the Baltics.
Net interest expense increased $18.5 million to $63.4 million in the first
nine months of 2000. The increase reflects the higher outstanding debt in the
first nine months of 2000 resulting from the transaction with PepsiCo and
subsequent share repurchase activity, along with the impact of higher U.S.
short-term interest rates in 2000.
11
The Company reported other income, net of $1.8 million in the first nine
months of 2000, compared with other expense, net of $49.9 million in the first
nine months of 1999. The first nine months of 2000 included a $2.6 million gain
from the sale of the operations in the Baltics. The first nine months of 1999
included a charge of $56.3 million to reduce the book value of impaired real
estate located in the downtown area of Chicago; a gain from the sale of
franchises of $11.4 million; and the benefit of eliminating real estate tax
accruals of $3.6 million related to non-operating property. Absent these items,
other expense, net improved by $7.8 million. The improvement was attributed, in
part, to the elimination of management fees paid to PepsiCo, which were $3.1
million, and losses of $2 million from the manufacturing joint venture in
Poland, both included in the first nine months of 1999. There were no other
individually significant changes between the periods.
See "Results of Operations - 2000 Third Quarter Compared with 1999 Third
Quarter" for discussion of the basis used below for determining comparable
results of operations.
Comparable sales and operating income for the first nine months of 2000
and first nine months of 1999 are summarized below, which include thirty-nine
weeks of activity for the domestic territories acquired from PepsiCo in each
respective period ($ in millions):
<TABLE>
<CAPTION>
Comparable
Comparable Sales Operating Income
------------------------ % ------------------------ %
2000 1999 Change 2000 1999 Change
-------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $1,674.6 $ 1,619.2 3.4 $ 210.1 $ 189.5 10.9
International 212.1 188.7 12.4 (15.2) (25.8) 41.1
-------- --------- --------- ---------
Total $1,886.7 $ 1,807.9 4.4 $ 194.9 $ 163.7 19.1
======== ========= ========= =========
</TABLE>
Comparable domestic sales in the first nine months increased $55.4
million, or 3.4 percent, reflecting a 4.1 percent increase in the average net
selling price per raw case, partially offset by lower volumes. Bottle and can
volume on an 8-ounce equivalent basis declined by 1.4 percent. Despite the
overall volume decrease, positive growth trends were achieved in both vending
and in the 20-ounce and 24-ounce PET packages, which reflect the benefits of
continued investment in the cold drink channel. In addition, Aquafina had strong
double-digit growth in the first nine months.
On a comparable basis, international sales increased $23.4 million, or
12.4 percent. The increase in sales included Toma's sales of $32.5 million in
the first nine months of 2000 (no Toma sales were included in 1999), offset by a
decline in sales of more than $21 million due to currency devaluation. The
impact of weather had mixed results in 2000 as the second quarter benefited from
unseasonably warm conditions, while the third quarter was adversely impacted by
cold and inclement weather in July.
The comparable consolidated gross profit margin was 0.8 percentage points
below the comparable period of 1999 due, in part, to currency devaluation and
the lower margin products sold by Toma. Results for Toma were not included in
the comparable period of 1999. The gross profit margin for the domestic
operations, on a comparable basis, was essentially unchanged from the previous
year. The benefit of price increases was offset by increases in the cost of
concentrate, packaging and other ingredients and underabsorption of fixed costs.
On a comparable basis, S,G&A expenses, excluding amortization expense, as
a percentage of sales were 200 basis points lower in the current year. The
reduction principally reflects the benefits of improved domestic pricing, the
benefits of the cost reduction efforts begun in 1999, lower distribution costs
incurred by Toma and lower depreciation expense. Incremental integration costs
in the first nine months of 2000 were offset by the absence of certain strike
costs and Year 2000 remediation costs incurred in 1999.
Comparable domestic operating income increased $20.6 million, or 10.9
percent, in the first nine months of 2000. The domestic operating margin was
12.5 percent, compared with 11.7 percent in 1999. The improved margin percentage
reflects the benefits of higher domestic pricing and the reduction in S,G&A
expenses as a percentage of sales.
12
On a comparable basis, international's combined operating losses of $15.2
million in the first nine months of 2000 were $10.6 million better than the
operating losses of $25.8 million incurred in the comparable period of 1999. The
improvement primarily reflects the benefit of the unseasonably warm weather in
the second quarter of 2000, cost reduction efforts begun in 1999 and lower
depreciation expense, partially offset by currency devaluation and poor weather
conditions in the third quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased by $15.2 million to
$133.7 million for the first nine months of 2000. The increase in cash from
continuing operations is due primarily to operating cash flow provided by the
acquired domestic territories and improved operating cash flow in the existing
domestic territories.
Investing activities included $2.5 million of net proceeds received from
the Company's sale of its Baltic operations in the first quarter of 2000.
Included in 1999 were $113.6 million of proceeds from the sale of its franchise
territories in Marion, Virginia; Princeton, West Virginia; and Russia. The
Company paid $2.5 million in the second quarter of 2000 related to a contingent
payout provision on a 1999 acquisition. Investing activities in the first nine
months of 1999 include $105.7 million of net cash paid for the domestic and
Central European franchises acquired from PepsiCo. The Company made capital
investments, net of proceeds from asset sales, of $129.3 million in the first
nine months of 2000 compared with $126.5 million in the first nine months of
1999. The increase reflects a full nine months of capital spending in the
territories acquired in 1999, offset by reduced spending in 2000 for fleet and
cold drink equipment across the Company's domestic operations. More than half of
the Company's domestic capital spending supports its cold drink initiative.
The Company's total debt increased $40.4 million during the first nine
months of 2000 to $1,222.7 million. The Company repurchased 3.0 million shares
and 14.0 million shares of its common stock for $35.7 million and $261.1 million
in the first nine months of 2000 and 1999, respectively. The Company declared an
annual dividend of four cents per share in the first quarter of 2000, which was
paid in the second quarter of 2000. The quarterly dividend rate was five cents
per share in the first quarter of 1999 and one cent per share in second and
third quarters of 1999. The issuance of common stock, including treasury shares,
for the exercise of stock options resulted in cash inflows of $1.3 million in
the first nine months of 2000, compared to $2.5 million in the first nine months
of 1999.
In November, 2000, the Company increased its revolving credit agreements
to maximum borrowings of $750 million. These agreements act as back-up for the
Company's commercial paper program, which the Company is also increasing to $750
million in November, 2000, resulting in a total of $750 million available under
the commercial paper program and revolving credit facilities combined. In
addition, the Company has uncommitted money market loans with maturities of less
than 90 days. Total commercial paper borrowings and money market loans were
$396.8 million at the end of the third quarter of 2000. The Company believes
that with its existing operating cash flows, available lines of credit, and the
potential for additional debt and equity offerings, it will have sufficient
resources to fund its future growth and expansion, as well as any potential
acquisitions.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking
information that reflects management's expectations, estimates and assumptions,
based on information available at the time this Form 10-Q was prepared. When
used in this document, the words "anticipate," "believe," "estimate," "expect,"
"plan," "intend" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements involve risks,
uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements, including, but not limited to, the following: competition, including
product and pricing pressures; changing trends in consumer tastes; changes in
the Company's relationship and/or support programs with PepsiCo and other brand
owners; market acceptance of new product offerings; weather conditions; cost and
availability of raw materials; availability of capital; labor and employee
benefit costs; unfavorable interest rate and currency fluctuations; costs of
environmental remediation; costs of legal proceedings; and general economic,
business and political conditions in the countries and territories where the
Company operates.
These events and uncertainties are difficult or impossible to predict
accurately and many are beyond the Company's control. The Company assumes no
obligation to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
13
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137
and 138, is effective for fiscal 2001. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of a derivative and whether it
qualifies for hedge accounting. The Company will adopt SFAS No. 133, as amended,
in the first quarter of 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to various market risks, including risks from
changes in commodity prices, interest rates and currency exchange rates.
Commodity Prices
The risk from commodity price changes relates to the Company's ability to
recover higher product costs through price increases to customers, which may be
limited due to the competitive pricing environment that exists in the soft drink
business. The Company uses swap contracts to hedge against price fluctuations
for a portion of its aluminum requirements. Costs for other raw material
requirements are managed by entering into firm commitments for materials used.
Interest Rates
In the first nine months of 2000, the risk from changes in interest rates
was not material to the Company's operations because a significant portion of
the Company's debt issues were fixed rate obligations. Substantially all of the
Company's floating rate exposure related to changes in LIBOR and the overnight
Federal Funds rate. Assuming consistent levels of floating rate debt with those
held by the Company at the end of the third quarter of 2000, a 50 basis point
change in each of these rates would have had an impact of approximately $1.5
million on the Company's interest expense in the first nine months of 2000. The
Company uses interest rate swaps on a limited basis to manage floating rate debt
exposure. In the first nine months of 2000, the Company had cash equivalents
throughout the period, principally invested in money market funds and commercial
paper, which were most closely tied to overnight Federal Funds rates. Assuming a
change of 50 basis points in the rate of interest associated with the Company's
short-term investments, interest income would not have changed by a significant
amount.
Currency Exchange Rates
Because the Company operates international franchise territories, it is
subject to exposure resulting from changes in currency exchange rates. Currency
exchange rates fluctuate based on a variety of economic factors including local
inflation, growth, interest rates and governmental actions, as well as other
factors. The Company currently does not hedge the translation risks of
investments in its international operations. Historically, any positive cash
flows generated have been reinvested in the operations, other than loan
repayments from the manufacturing operations in Poland.
International operations represent approximately 10 percent of the
Company's total sales. Changes in currency exchange rates impact the translation
of the results of the international operations from their local currencies into
U.S. dollars. The devaluation of Central European currencies in the first nine
months of 2000 reduced operating income by approximately $4 million. The Company
estimates that a 5 percent change in the currency exchange rates across the
combined international operations in the first nine months would have changed
operating income by approximately $2 million. This estimate does not take into
account the possibility that specific currency exchange rates can move in
opposite directions and that gains in one category may or may not be offset by
losses from another category.
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12. Statement of Calculation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedules for the first nine months of 2000 and
1999.
(b) Reports on Form 8-K.
On August 23, 2000, the Company filed a current report which, under Item
5, described the merger agreement entered into between the Company and
PepsiAmericas, Inc. The proposed merger has been approved by each company's
board of directors, and is currently subject to shareholder approval. The
current report also included, under Item 7, various exhibits including the
merger agreement.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITMAN CORPORATION
Date: November 14, 2000 By: /s/ MARTIN M. ELLEN
----------------- -------------------
Martin M. Ellen
Senior Vice President and Chief Financial
Officer
(As Chief Accounting Officer and Duly
Authorized Officer of Whitman Corporation)
15
