<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-4199
BESTFOODS
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2385545
(I.R.S. Employer Identification Number)
700 SYLVAN AVENUE
INTERNATIONAL PLAZA
ENGLEWOOD CLIFFS, N.J. 07632-9976
(Address of principal executive offices) (Zip Code)
(201) 894-4000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
Common Stock, $.25 par value 285,757,638 shares
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BESTFOODS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
($ Millions except per share amounts) September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 1,983 $ 2,024 $ 6,219 $ 6,278
Cost of sales 1,065 1,123 3,381 3,505
------- ------- ------- -------
Gross profit 918 901 2,838 2,773
Operating expenses 626 623 1,969 1,979
Restructuring charge -- -- -- 242
------- ------- ------- -------
Operating income 292 278 869 552
------- ------- ------- -------
Financing costs 38 42 122 119
------- ------- ------- -------
Income from continuing operations before
income taxes 254 236 747 433
Provision for income taxes 83 85 258 156
------- ------- ------- -------
171 151 489 277
Minority stockholders' interest 4 4 16 17
------- ------- ------- -------
Income from continuing operations 167 147 473 260
Income from discontinued operations, net of
income tax ($5-1997) -- 8 -- --
Gain (loss) on disposal of discontinued operations
net of income taxes (benefit) ($4-1998; ($5)-1997;
$4 - 1998; ($26)-1997 1 (18) 1 (82)
------- ------- ------- -------
Net income $ 168 $ 137 $ 474 $ 178
======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING:
Basic 286.9 287.5 287.8 287.1
Diluted 297.1 298.0 298.8 297.8
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Continuing operations $ 0.58 $ 0.50 $ 1.62 $ 0.88
Discontinued operations -- 0.03 -- --
Loss on disposal of discontinued operations -- (0.06) -- (0.29)
------- ------- ------- -------
Net income $ 0.58 $ 0.47 $ 1.62 $ 0.59
======= ======= ======= =======
Diluted:
Continuing operations $ 0.56 $ 0.49 $ 1.58 $ 0.87
Discontinued operations -- 0.03 -- --
Loss on disposal of discontinued operations -- (0.06) -- (0.28)
------- ------- ------- -------
Net income $ 0.56 $ 0.46 $ 1.58 $ 0.59
======= ======= ======= =======
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.245 $ 0.225 $ 0.695 $ 0.635
</TABLE>
- ----------
See notes to consolidated financial statements.
1
<PAGE> 3
BESTFOODS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
($ Millions) Sept. 30, 1998 Dec. 31, 1997
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 120 $ 39
Notes and accounts receivable, net 1,171 1,176
Inventories 834 818
Prepaid expenses 106 95
Deferred tax asset 64 60
------- -------
Total current assets 2,295 2,188
------- -------
Investments in and loans to unconsolidated affiliates 17 22
------- -------
Plant and properties 3,304 3,440
Less accumulated depreciation 1,451 1,499
------- -------
1,853 1,941
------- -------
Excess cost over net assets of businesses acquired and other
Intangible assets (net of accumulated amortization of $309 and $271) 1,688 1,742
------- -------
Other assets 191 207
------- -------
$ 6,044 $ 6,100
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and drafts payable $ 455 $ 668
Accounts payable and accrued liabilities 1,390 1,477
Income taxes payable 179 137
Dividends payable 70 65
------- -------
Total current liabilities 2,094 2,347
------- -------
Non-current liabilities 918 780
------- -------
Long-term debt 2,013 1,818
------- -------
Minority interest 71 113
------- -------
Stockholders' equity
Preferred stock, authorized 25 million shares $1 par value -- --
Designations: Series B ESOP convertible 3 million shares
1.8 million shares issued at stated value (1997: 2.0 million shares) 159 180
Series B Junior Participating 600,000 shares designated - none issued -- --
Common stock authorized 900 million shares $.25 par value - issued
390.5 million shares 98 49
Capital in excess of par value of stock 173 207
Unearned ESOP compensation (88) (96)
Accumulated other comprehensive income (445) (386)
Common stock in treasury at cost - 107.4 million shares
(1997: 102.5 million shares) (1,823) (1,517)
Retained earnings 2,874 2,605
------- -------
Total stockholders' equity 948 1,042
------- -------
$ 6,044 $ 6,100
======= =======
</TABLE>
- ----------
See notes to consolidated financial statements.
2
<PAGE> 4
BESTFOODS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
($ Millions) September 30,
----------------
1998 1997
----- -----
<S> <C> <C>
Cash flows from (used for) operating activities
Net income from continuing operations $ 474 $ 260
Non-cash charges (credits) to net income
Depreciation and amortization 186 197
Deferred taxes 34 (27)
Restructuring charge -- 242
Other, net 5 14
Changes in trade working capital:
Notes and accounts receivable and prepaid expenses (39) 2
Inventories (43) (4)
Accounts payable and accrued liabilities (12) (186)
Net cash flows from discontinued operations -- 122
----- -----
Net cash flows from operating activities 605 620
----- -----
Cash flows from (used for) investing activities
Capital expenditures (178) (210)
Proceeds from disposal of plants and properties 50 10
Proceeds from businesses sold 73 --
Businesses acquired (41) (282)
Net investing activities of discontinued operations -- (83)
----- -----
Net cash flows used for investing activities (96) (565)
----- -----
Net cash flows after investments 509 55
----- -----
Cash flows from (used for) financing activities
Purchase of treasury stock (211) (39)
Repayment of long-term debt (60) (78)
New long-term debt 350 66
Net change in short-term debt (295) 201
Dividends paid on common stock (195) (177)
Dividends paid on preferred stock (6) (7)
Common stock issued 14 20
Other liabilities (assets) (20) 5
----- -----
Net cash flows used for financing activities (423) (9)
----- -----
Effects of exchange rates on cash (5) (7)
----- -----
Increase (decrease) in cash and cash equivalents 81 39
----- -----
Cash and cash equivalents, beginning of year 39 131
----- -----
Cash and cash equivalents, end of period $ 120 $ 170
===== =====
</TABLE>
- ----------
See notes to consolidated financial statements.
3
<PAGE> 5
BESTFOODS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
($ Millions) Accumulated
Capital in Unearned Other
Comprehensive Preferred Common Excess of ESOP Comprehensive Treasury Retained
Income Stock Stock Par Value Compensation Income Stock Earnings
------ ----- ----- --------- ------------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $180 $49 $207 $(96) $(386) $(1,517) $2,605
Comprehensive income
Net income for the period $474 474
Foreign currency translation
adjustment ($90 pre-tax) (59) (59)
-----
Comprehensive income $415
=====
Two-for-one stock split 49 (49)
ESOP compensation earned 8
ESOP shares redeemed (21) (1) 12
Shares held in Rabbi Trust (121)
Dividends:
Common stock (200)
Preferred stock (5)
Shares issued for:
Stock options and deferred
compensation 16 14
Treasury stock acquired (211)
------------------------------------------------------------------------------
Balance, September 30, 1998 $159 $98 $173 $(88) $(445) $(1,823) $2,874
==============================================================================
</TABLE>
- ----------
See notes to consolidated financial statements.
4
<PAGE> 6
BESTFOODS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The unaudited consolidated interim financial statements included herein
were prepared by management and reflect all adjustments (consisting solely of
normal recurring items) which are, in the opinion of management, necessary to
present a fair statement of results of operations for the interim periods ended
September 30, 1998 and 1997 and the financial position as of September 30, 1998.
References to "the Company" are to Bestfoods and its consolidated
subsidiaries. These statements should be read in conjunction with the
consolidated financial statements and the related footnotes to these statements
contained in the Company's Annual Report to Stockholders which were incorporated
by reference in Form 10-K for the fiscal year ended December 31, 1997.
2. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities," which requires the recognition of all derivatives as either assets
or liabilities measured at fair value. The Company is in the process of
determining the impact the adoption of this statement will have on its financial
position and results of operations, but it is not expected to be significant.
In July 1998, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested." This EITF concluded that
all Company stock placed in a rabbi trust to meet deferred compensation
obligations to executives should be classified as treasury stock. The Company
has several rabbi trusts which invest in the Company's own stock for the purpose
of meeting deferred compensation liabilities. Accordingly, the Company has
reclassified those assets to treasury stock in the accompanying Consolidated
Balance Sheet at September 30, 1998. In accordance with the guidance in EITF
97-14, the rabbi trust shares are excluded from the weighted average shares
outstanding in the calculation of basic and diluted earnings per share.
3. ACQUISITIONS AND DIVESTITURES
In the first quarter of 1998, the Company purchased additional ownership
interests in two affiliates where it did not own 100% and included the results
of such businesses in the first quarter of 1998. In Israel, the Company
increased its ownership of this affiliate to 100% by purchasing the remaining
15% interest. In South Africa, the Company also increased its ownership to 100%
in the first quarter when it purchased its partner's share of CPC Tongaat, a
consumer foods company established in 1994. In addition, the Company sold a
small non-core tea business in Spain.
At the end of the third quarter of 1998, the Company formed a joint
venture, in which it has a controlling interest, with Consolidated Grocery
Products (CGP), a South African consumer goods company that has the rights to
several of the Company's brands. This joint venture (the results of which will
be included starting with the fourth quarter of 1998) will combine the Company's
businesses in South Africa and Israel as well as other businesses in Africa,
with Robertsons, the consumer foods business of CGP.
5
<PAGE> 7
Prior to the formation of the joint venture, the Company sold, in the third
quarter, its mushroom and dry milling business in South Africa, and contributed
the remaining South African business to the new venture.
None of the above mentioned acquisitions is considered material.
4. STOCK INFORMATION
On March 17, 1998, the Company's Board of Directors declared a two-for-one
stock split of the outstanding common stock on March 31, 1998, which was
effected in the form of a 100% stock dividend payable on April 24, 1998. The
number of common shares outstanding and earnings per common share for prior
years have been adjusted to reflect this stock split.
On May 19, 1998, the Company announced a plan to repurchase up to 15
million of its outstanding common shares. The program began immediately upon
announcement and the shares will be purchased over a three-year period at times
determined by management. This program replaces the previous share repurchase
program for 10 million shares, which began in January 1995 and concluded in May
1998.
5. INVENTORIES
Inventories are summarized as follow:
<TABLE>
<CAPTION>
($ Millions) Sept. 30, 1998 Dec. 31, 1997
<S> <C> <C>
Finished and goods in process $ 541 $ 510
Raw materials 174 202
Supplies 119 106
----- -----
$ 834 $ 818
===== =====
</TABLE>
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
($ Millions) Sept. 30, 1998 Dec. 31, 1997
<S> <C> <C>
7.71% ESOP guaranteed notes due December 2004 $ 122 $ 131
5.625% -- 6.75% pollution control revenue bonds due
2007-2016 15 15
5.6% notes due 2097 (effective rate 7.3%) 100 100
7.0% notes due 2017 150 150
6.15% notes due 2006 300 300
7.25% notes due 2026 300 300
6.625% notes due 2028 250 --
Medium term notes at various rates due 1998-2005 175 200
5% Swiss franc debentures 144 138
6.75% German mark debentures 120 114
2.3% Japanese yen term loan 21 24
Other secured and unsecured notes and loans at various
rates and due dates 427 427
------ ------
2,124 1,899
------ ------
Less current maturities 111 81
------ ------
$2,013 $1,818
====== ======
</TABLE>
6
<PAGE> 8
On March 24, 1998, the Company issued $250 million of 6.625% medium-term
notes due in 2028 under a previously filed shelf registration incorporating a
$500 million medium-term note program. The issuance of these notes completed the
authorization under the shelf registration. On September 25, 1998, the Company
filed a shelf registration statement with the Securities and Exchange Commission
for borrowings of up to $500 million which has not yet been declared effective.
7. CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplementary information for the consolidated statements of cash flows is set
forth below:
<TABLE>
<CAPTION>
($ Millions) Nine Months Ended Sept. 30,
1998 1997
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest $ 99 $124
Income taxes 159 143
Details of businesses acquired were as follows:
Fair value of assets acquired 56 308
Less: Liabilities assumed 15 26
---- ----
Net cash paid $ 41 $282
==== ====
</TABLE>
8. FINANCIAL INSTRUMENTS
The Company's policies regarding hedging of foreign currency cash flows and
commodity purchases are set forth on page 28 in the Annual Report to
Stockholders which was filed as Exhibit 13 to Form 10-K for the year ended
December 31, 1997.
FOREIGN EXCHANGE CONTRACTS - At September 30, 1998, the Company had forward
exchange contracts to deliver $189 million of foreign currencies comprising $74
million in Swiss francs, $24 million in Italian lira, $28 million in Dutch
guilders, $42 million in French francs, and $21 million in various other
currencies. The Company also had, at September 30, 1998, contracts to purchase
$64 million of foreign currencies comprising $11 million in German marks, $42
million in French francs and $11 million in other currencies.
At December 31, 1997, the Company had forward exchange contracts to deliver
$237 million of foreign currencies comprising $ 51 million in Spanish pesetas,
$45 million in French francs, $39 million in Italian lira, $30 million in Dutch
guilders, and $72 million in various other currencies. The Company also had
contracts to purchase $120 million in foreign currencies consisting of $20
million in Italian lira, $21 million in Dutch guilders, and the remaining
balance in various other currencies.
COMMODITIES - At September 30, 1998 and December 31, 1997 the outstanding
commodity contracts were not material to the Company's financial position or
results of operations.
7
<PAGE> 9
9. RESTRUCTURING RESERVE
In the second quarter of 1997, the Company recorded a $242 million pre-tax
restructuring charge for its continuing consumer foods operations. At September
30, 1998, the restructuring charge was substantially utilized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Worldwide sales for the three months ended September 30, 1998 were $2
billion, which were 2% lower compared to the third quarter of 1997, reflecting
unfavorable European, Latin American and Asian currency values in this quarter
compared to last year. A small volume improvement along with increased prices
partially offset the currency declines.
For the three months ended September 30, 1998, net income increased 15%
to $168 million or $.58 per basic common share ($.56 diluted) compared to $137
million or $.47 per basic common share ($.46 diluted) last year. Included in
last year results was income from discontinued operations of $8 million or $.03
per basic and diluted share; and an $18 million or $.06 per basic and diluted
share for the loss on disposal on discontinued operations. Operating income
improved by 5.2% due to some volume growth as well as margin improvements from
restructuring and other cost initiatives partially offset by unfavorable
currency rates. Also contributing to the improved results were: a reduction in
the Company's effective tax rate to 34.5%; lower financing costs which resulted
from interest on the favorable settlement of an environmental case; and a
slight reduction in the number of shares outstanding due to the continuation of
the share repurchase program announced in May.
Net income in 1998 includes a gain of $.7 million on the disposal of
discontinued operations. This gain resulted from the finalization of amounts
related to the spin-off of the company's corn refining operations in 1997 offset
by the recovery of expenses related to the favorable settlement of an
environmental case.
Worldwide sales for the first nine months ended September 30, 1998 were
$6.2 billion, which were down less than 1% compared to the same period in 1997,
as a 3.1% volume improvement and better prices were more than offset by
unfavorable currency movements for the Company's international operations.
For the first nine months ended September 30, 1998, the Company had net
income of $474 million or $1.62 per basic common share ($1.58 diluted) compared
to $178 million or $.59 per basic and diluted common share last year. The 1998
results include a gain of $.7 million on the disposal of discontinued
operations. Included in last year's results was an after-tax restructuring
charge of $155 million or $.54 per basic common share ($.52 diluted), as well
as an after-tax charge of $82 million or $.29 per basic common share ($.28
diluted) for the loss on disposal of discontinued operations. Excluding these
items from both year's results, net income increased 14% and operating income
for the period was 9.5% higher, advancing to $869 million from $794 million in
1997. Contributing to the increase was volume growth as well as margin
improvements from restructuring activities and other cost initiatives and also
a gain on the sale of the Horniman's tea business in Spain. This improvement
was partially offset by unfavorable currency rates.
8
<PAGE> 10
The Company's North American consumer foods business reported lower
sales and operating income for the third quarter, chiefly due to lower volumes.
Significant category declines in cooking oil and pasta contributed to the lower
volumes. For the nine-month period sales were relatively flat compared to last
year while operating income increased almost 1% due to margin improvements.
In Europe, net sales were lower while operating income increased for
the quarter and nine-month period. Volumes were relatively flat for the quarter
and up 3.4% for the nine-month period while gross margins improved compared to
the same period last year. The improvement in gross margins is mainly due to
recent restructuring activities as well as the harmonization or raw materials
and packaging. Unfavorable currency values continued to impact results for both
periods, although the impact began to lessen in the third quarter.
In Latin America, sales were flat for the quarter while operating
income improved compared to last year's third quarter as improved volumes of
6.2% along with margin improvements were partially offset by currency declines.
The Company's Brazilian business had a difficult quarter as the gain achieved in
volumes and margin improvements were more than offset by weaker currencies.
However, the Company's Argentine and Mexican operations continue to show
improved results compared to last year for both the third quarter and nine-month
period.
In Asia, the ongoing economic problems continued to negatively impact
results with sale and operating income declining compared to last year for both
the third quarter and nine-month period. Margins continued to improve and
volumes increased 5.8% and 1.6% for the third quarter and nine-month period,
respectively but the weaker currencies more than offset these improvements.
The baking division had a strong quarter and continued to perform well.
Volumes improved by 2.4% and 3.7% for the quarter and nine-month period,
respectively, led by Thomas' products and Arnold, Brownberry, Freihofer's and
Oroweat breads.
RISKS AND UNCERTAINTIES
The Company operates in more than sixty countries, and in each country, the
business is subject to varying degrees of risk and uncertainty. It insures its
business and assets in each country against insurable risks in a manner it deems
appropriate. Because of its diversity, the Company believes that the risk of
loss from non-insurable events in any one business or country would not have a
material adverse affect on the Company's operations as a whole. Additionally,
the Company believes there is no concentration of risk with any single customer
or supplier, or small group of suppliers or customers, whose failure or
non-performance would materially affect the Company's results.
Also because of the Company's broad operational reach, it is subject to
risks due to changes in foreign currencies that could affect earnings. As a
practical matter, it is not feasible to cover these fluctuations with currency
hedges. Additionally, the Company believes that over time most currencies of
major countries in which it operates will equalize against the U.S. dollar.
However, the Company does maintain a policy of hedging its exposure to foreign
currency cash flows to cover planned dividends, fees and royalties, intercompany
loans, and other similar transactions. In addition, the Company hedges certain
net investments with borrowings denominated in the particular currency. As a
matter of policy, the Company does not speculate in foreign currencies.
9
<PAGE> 11
For certain of its North American raw material purchases, the Company
hedges its exposure to commodity price fluctuations with commodity futures
contracts. The Company's products are manufactured from a number of raw
materials, including soybean and other edible oils, peanuts and wheat, all of
which is, and is expected to be, in adequate supply. Such raw materials may or
may not be hedged at any given time based on management's decisions as to the
need to fix the costs of raw materials to protect the Company's profitability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's indebtedness at September 30, 1998 and December 31, 1997 is
summarized herein under the caption "Long-term debt" on page 6. Material terms
of all loans, lines of credit and loan covenants are discussed in the
"Long-term" debt footnote found on page 31 of the Company's 1997 Annual Report
and filed as Exhibit 13.1 to the 1997 Form 10-K with two modifications. The
Company's covenant regarding the debt to total capitalization ratio has been
increased to 75% through the life of the agreement and a new covenant was added
requiring that the ratio of earnings before interest, taxes, depreciation, and
amortization ("EBITDA") to interest expense be not less than 6.0.
At September 30, 1998, the debt to total capitalization ratio was 70.8%
and the ratio of EBITDA to interest was 8.9.
READINESS FOR THE YEAR 2000
Early computer programming used two digits instead of four to identify the
applicable year, thus creating the Year 2000 ("Y2K") problem. If systems are not
corrected as we move to the year 2000 there could be systems failures or
miscalculations leading to delays and disruptions in the Company's operations.
These delays and disruptions could include problems with: timely receipt of
materials necessary for manufacturing, supply of customers in a timely manner,
timely receipt of customer orders and payments, and overall maintenance of
proper accounting records.
To address this potential problem, the Company has a program in place for
all operating divisions throughout the world and for corporate management to
identify and correct Y2K issues. The program consists of five phases:
- Phase 1 Inventory - This phase requires all units to identify any
systems that can be impacted by the Y2K problem; this includes central
and distributed systems, embedded chips, interfaces with other
internal systems, and systems for which there is interaction with
third parties (suppliers, service providers and customers).
- Phase 2 Impact Assessment - This phase requires managers to prioritize
the Company's Y2K efforts by identifying the impact of each system on
the business as either: critical 1 (having a significant impact),
critical 2 (having a moderate impact), or critical 3 (having a low
impact).
- Phase 3 Remediation - This phase requires all operating divisions to
report their progress in achieving compliance by classifying the
percentage of systems that will either be: converted to meet Y2K
requirements, replaced by new systems, or upgraded with compliant
systems.
- Phase 4 Testing - This phase requires testing of individual systems on
a stand alone basis, and of the integration of systems with other
internal and external systems interfaces.
- Phase 5 Implementation - This final stage requires implementation of
remediated or replaced systems.
10
<PAGE> 12
The Inventory and Impact Assessment phases of this program have been
completed in their entirety. The Remediation, Testing and Implementation phases
of the program should be substantially completed for critical 1 and critical 2
systems by January 31, 1999 and for critical 3 systems by June 30, 1999.
Based upon the Company's progress with its Y2K program, the cost of
remediation, replacement and acceleration of replacement systems is not expected
to exceed $20 million.
Contingency plans, especially for interfaces with third party systems, are
currently being developed and will be given greater focus in 1999 during the
testing phase.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member states of the European
Union ("Participating Countries") will establish fixed conversion rates from
their existing currencies ("Legacy Currencies") to the Euro and have agreed to
adopt the Euro as their common legal currency as of that same date. During a
Transition Period from January 1, 1999 until January 1, 2002 the Legacy
Currencies will remain legal tender and parties will have the option to pay in
Euros or Legacy Currencies of Participating Countries. On January 1, 2002
Participating Countries are expected to issue Euro currency and withdraw all
bills and coinage of Legacy Currencies by July 1, 2002.
Conversion to the Euro will necessitate some modification to the Company's
information systems to produce dual currency invoices and accounts during the
Transition Period. Also modifications will be required to enable use of the Euro
as a base currency for the year 2002 and thereafter.
Euro conversion is expected to have little impact on prices and competition
due to the fact that the Company's product offerings vary greatly among the
Participating Countries. Given the differences in products sold throughout the
Participating Countries, conversion to a single currency should not result in
pressure to harmonize prices. The Company has realized some cost savings due to
the fact that, as of May, 1998, it ceased hedging activity among the
participating currencies. The Company's Euro task force continue to monitor the
impact of Euro conversion. The conversion to the Euro is also not expected to
impact material contracts of the Company. The Company's overall costs of
conversion to the Euro are not expected to exceed $5 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosure - There have been no material changes in the
Company's market risk during the nine months ended September 30, 1998.
Qualitative Disclosure - This information is set forth on pages 28 and 29,
under the caption "Financial Instruments," of the Company's 1997 Annual Report
which was filed as Exhibit 13 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and is incorporated herein by reference.
11
<PAGE> 13
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings as
previously reported in Form 10-Q for the quarter ended June 30, 1998.
ITEM 5. OTHER INFORMATION
The Company hereby provides net sales and operating income by division
for the periods presented below:
<TABLE>
<CAPTION>
($ Millions) FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------
1998 1997 % 1998 1997 %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES:
North America $ 411.2 $ 420.1 (2.1) $1,274.9 $1,278.2 (0.3)
Europe 808.1 829.8 (2.6) 2,589.7 2,673.5 (3.1)
Latin America 276.0 275.3 0.2 861.5 833.6 3.4
Asia 77.3 95.7 (19.2) 245.7 292.5 (16.0)
Baking 410.8 402.6 2.0 1,247.3 1,199.7 4.0
-------- -------- -------- -------- -------- --------
Total $1,983.4 $2,023.5 (2.0) $6,219.1 $6,277.5 (0.9)
======== ======== ======== ======== ======== ========
OPERATING INCOME:
North America $ 66.2 $ 70.2 (5.7) $ 207.3 $ 156.8 N/M
Europe 122.9 109.6 12.2 397.4 299.1 N/M
Latin America 70.8 63.4 8.4 184.6 147.4 N/M
Asia 10.4 13.4 (22.6) 34.0 29.1 N/M
Baking 30.3 26.1 16.2 71.5 (22.7) N/M
Corporate Expenses (8.2) (4.8) -- (27.6) (58.2) N/M
-------- -------- -------- -------- -------- --------
Total $ 292.4 $ 277.9 4.5 $ 869.2 $ 551.5 N/M
======== ======== ======== ======== ======== ========
</TABLE>
Note: The 1997 results shown above for the nine month period ended
September 30, 1997 include the effect of a $242.3 million pre-tax restructuring
charge.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits pursuant to Item 601 of Regulation S-K.
Exhibit 11 - Statements regarding the computation of earnings per common
share.
Exhibit 12 - Statement regarding the computation of ratios of earnings
to fixed charges.
Exhibit 27.1 - Financial data schedule.
Exhibit 27.2 - Restated Financial data schedule.
b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the third quarter of
1998.
12
<PAGE> 14
BESTFOODS AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BESTFOODS
DATE: November 13, 1998
/s/ Bernard H. Kastory
----------------------------------------
(Bernard H. Kastory)
Senior Vice President, Finance
and Administration
DATE: November 13, 1998
/s/ Philip V. Terenzio
----------------------------------------
(Philip V. Terenzio)
Vice President and Controller
13
<PAGE> 15
EXHIBIT INDEX
-------------
Exhibit 11 - Statements regarding the computation of earnings per common
share.
Exhibit 12 - Statement regarding the computation of ratios of earnings
to fixed charges.
Exhibit 27.1 - Financial data schedule.
Exhibit 27.2 - Restated Financial data schedule.
<PAGE> 1
EXHIBIT 11
BESTFOODS AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
BASIC 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ 167.9 $ 146.4 $ 473.5 $ 259.7
Preferred stock dividends, net of taxes (2.5) (2.9) (7.6) (8.5)
------- ------- ------- -------
Income (loss) from continuing operations
available to common stockholders 165.4 143.5 465.9 251.2
Income (loss) from discontinued operations -- 8.3 -- .4
Loss on disposal of discontinued operations .7 (18.2) .7 (82.6)
------- ------- ------- -------
Net income (loss) $ 166.1 $ 133.6 $ 466.6 $ 169.0
======= ======= ======= =======
Weighted average shares outstanding 286.9 287.5 287.8 287.1
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations $ 0.58 $ 0.50 $ 1.62 $ 0.88
Income (loss) from discontinued operations -- 0.03 -- --
Loss on disposal of discontinued operations -- (0.06) -- (0.29)
------- ------- ------- -------
Net income (loss) $ 0.58 $ 0.47 $ 1.62 $ 0.59
======= ======= ======= =======
DILUTED
Income (loss) from continuing operations $ 167.9 $ 146.4 $ 473.5 $ 259.7
Adjustments to net income:
Assumed additional cost if ESOP shares
are fully converted net of tax benefits (.8) (.5) (1.8) (1.9)
------- ------- ------- -------
Diluted income from continuing operations 167.1 145.9 471.7 257.8
Income (loss) from discontinued operations -- 8.3 -- .4
Loss on disposal of discontinued operations .7 (18.2) .7 (82.6)
------- ------- ------- -------
Net income (loss) $ 167.8 $ 136.0 $ 472.4 $ 175.6
======= ======= ======= =======
Weighted average shares outstanding 286.9 287.5 287.8 287.1
Add incremental shares representing:
Exercise of stock options 2.6 2.0 2.6 2.0
Performance plan shares .3 .3 .3 .3
Conversion of ESOP shares 7.3 8.2 8.1 8.4
------- ------- ------- -------
Weighted average shares as adjusted 297.1 298.0 298.8 297.8
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations $ 0.56 $ 0.49 $ 1.58 $ 0.87
Income (loss) from discontinued operations -- 0.03 -- --
Loss on disposal of discontinued operations -- (0.06) -- (0.28)
------- ------- ------- -------
Net income (loss) $ 0.56 $ 0.46 $ 1.58 $ 0.59
======= ======= ======= =======
</TABLE>
14
<PAGE> 1
EXHIBIT 12
BESTFOODS AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
($ Millions) FOR THE NINE
MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31,
SEPT. 30, 1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES: $ 747.2 $ 704.2(1) $ 880.2 $ 654.9(2) $ 446.6(3) $ 624.4
-------- -------- -------- -------- -------- --------
Add (subtract):
Portion of rents representative
of interest 24.9 32.2 33.4 25.6 24.6 20.2
Interest on bonds, mortgages
& similar debt 93.9 100.9 68.4 52.6 50.1 53.6
Other interest 42.1 72.8 100.0 55.7 33.9 42.4
Interest expense included in
cost of plant construction (2.6) (3.4) (4.8) (3.7) (4.2) (5.6)
Income of unconsolidated
venture -- -- -- -- 3.9 --
-------- -------- -------- -------- -------- --------
Income as adjusted $ 905.5 $ 906.7 $1,077.2 $ 785.1 $ 554.9 $ 735.0
======== ======== ======== ======== ======== ========
FIXED CHARGES:
Portion of rents representative
of interest $ 24.9 $ 32.2 $ 33.4 $ 25.6 $ 24.6 $ 20.2
Interest on bonds, mortgages
& similar debt 93.9 100.9 68.4 52.6 50.1 53.6
Other interest 42.1 72.8 100.0 55.7 33.9 42.4
-------- -------- -------- -------- -------- --------
$ 160.9 $ 205.9 $ 201.8 $ 133.9 $ 108.6 $ 116.2
======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 5.6 4.4 5.3 5.9 5.1 6.3
======== ======== ======== ======== ======== ========
</TABLE>
Notes:
(1) Includes a restructuring charge of $242.3 million.
(2) Includes a restructuring charge of $60 million; a gain of $20 million on
the sale of a business; and an integration charge of $55 million for
the cost of combining an acquired baking business.
(3) Includes a restructuring charge of $208 million.
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 120
<SECURITIES> 0
<RECEIVABLES> 1,171
<ALLOWANCES> 0
<INVENTORY> 834
<CURRENT-ASSETS> 2,295
<PP&E> 3,304
<DEPRECIATION> 1,451
<TOTAL-ASSETS> 6,044
<CURRENT-LIABILITIES> 2,094
<BONDS> 2,013
0
159
<COMMON> 98
<OTHER-SE> 691
<TOTAL-LIABILITY-AND-EQUITY> 6,044
<SALES> 6,219
<TOTAL-REVENUES> 0
<CGS> 3,381
<TOTAL-COSTS> 5,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122
<INCOME-PRETAX> 747
<INCOME-TAX> 258
<INCOME-CONTINUING> 473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 474
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 170
<SECURITIES> 0
<RECEIVABLES> 1,178
<ALLOWANCES> 0
<INVENTORY> 873
<CURRENT-ASSETS> 2,359
<PP&E> 3,477
<DEPRECIATION> 1,555
<TOTAL-ASSETS> 7,154
<CURRENT-LIABILITIES> 2,601
<BONDS> 1,696
0
182
<COMMON> 49
<OTHER-SE> 1,734
<TOTAL-LIABILITY-AND-EQUITY> 7,154
<SALES> 6,278
<TOTAL-REVENUES> 0
<CGS> 3,505
<TOTAL-COSTS> 5,484
<OTHER-EXPENSES> 242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 433
<INCOME-TAX> 156
<INCOME-CONTINUING> 260
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
