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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
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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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
<S> <C> <C>
Common Stock, $.25 par value 285,757,638 shares
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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. Unfavorable currency rates reduced
operating earnings.
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.
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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.
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.
The value of raw materials subject to commodity hedging represents approximately
15% of the total worldwide cost of sales. The historical price volatility of raw
materials, combined with the relatively low percentage of raw materials to cost
of sales, have never yielded a material adverse effect on gross margins and are
not expected to in the future. In addition, any significant change in commodity
prices can generally be recovered in higher selling prices, thereby, further
minimizing the impact on the Company's margins.
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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. The Company's
$400 million revolving credit agreement expired and was not replaced. The $800
million revolving credit agreement, established in 1997, continues in effect and
matures in 2002. Covenants in this agreement were amended as follows: (1) the
Company is required to maintain total debt to total capitalization at no more
than 75% for the life of the agreement and (2) a new covenant was added
requiring the Company to maintain earnings before interest, taxes, and
depreciation and amortization ("EBITDA") to interest expense of 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.
On September 25, 1998, the Company filed a shelf registration with the
Securities and Exchange Commission which has not yet been declared effective,
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. Reasonable worst-case scenarios for the Company with
respect to the Y2K issue could be either: (1) the widespread failure of critical
suppliers and/or customers to correct their systems or (2) a production stoppage
due to the failure of manufacturing equipment, either of which could have a
material adverse effect on the operations of the Company.
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.
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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 continues 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.
The Company hedges foreign currency cash flows, such as planned dividends,
fees and intercompany loans utilizing foreign exchange contracts. In hedging
these transactions, the timing and amount of the remittance are matched exactly.
Using this approach any market risks related to subsequent changes in foreign
currency values are eliminated and U.S. dollar amounts are locked-in. As a
matter of policy the Company does not speculate in foreign currencies.
For commodity purchases, the Company hedges commodity price fluctuations
with commodity futures contracts for certain North American raw material
purchases. The amount of raw materials subject to commodity hedging is not
significant and additionally, because of the Company's pricing flexibility
significant changes in commodity prices can generally be recovered through price
increases. The Company's exposure to market risk is virtually eliminated using
this approach.
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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: December 21, 1998
/S/ Philip V. Terenzio
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(Philip V. Terenzio)
Vice President and Controller
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