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, 1998
| | 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 001-04710
WHITMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-6076573
- -------------------------------- ----------------------
(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 31, 1998, the Registrant had 100,883,753 outstanding shares
(excluding treasury shares) of common stock, without par value, the Registrant's
only class of common stock.
<PAGE>
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Comprehensive Income
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Sales $ 475.0 $ 452.9 $1,235.9 $1,178.9
Cost of goods sold 297.7 283.1 772.0 733.5
-------- -------- -------- --------
Gross profit 177.3 169.8 463.9 445.4
Selling, general and administrative expenses 98.9 99.4 289.1 291.0
Amortization expense 3.9 3.9 11.8 11.7
-------- -------- -------- --------
Operating income before special charges 74.5 66.5 163.0 142.7
Special charges (Note 4) -- (9.4) -- (9.4)
-------- -------- -------- --------
Operating income 74.5 57.1 163.0 133.3
Interest expense, net (Note 5) (9.1) (11.1) (26.9) (32.3)
Other expense, net (2.0) (4.3) (12.1) (14.7)
-------- -------- -------- --------
Income before income taxes 63.4 41.7 124.0 86.3
Income taxes 29.6 21.3 56.8 41.4
-------- -------- -------- --------
Income from continuing operations
before minority interest 33.8 20.4 67.2 44.9
Minority interest 7.6 6.3 16.5 13.8
-------- -------- -------- --------
Income from continuing operations 26.2 14.1 50.7 31.1
Loss from discontinued operations after
taxes (Note 2) -- (47.9) (0.5) (15.7)
Extraordinary loss on early extinguishment of debt
after taxes (Note 3) -- -- (18.3) --
-------- -------- -------- --------
Net income (loss) $ 26.2 $ (33.8) $ 31.9 $ 15.4
======== ======== ======== ========
Average Shares:
Basic EPS - weighted-average common shares 101.2 101.5 101.2 101.8
Incremental effect of stock options 1.5 1.3 1.7 1.1
-------- -------- -------- --------
Diluted EPS - weighted-average common shares 102.7 102.8 102.9 102.9
======== ======== ======== ========
Income (Loss) Per Common Share - Basic:
Continuing operations $ 0.26 $ 0.14 $ 0.50 $ 0.31
Discontinued operations -- (0.47) -- (0.16)
Extraordinary loss on early extinguishment of debt -- -- (0.18) --
-------- -------- -------- --------
Net income (loss) $ 0.26 $ (0.33) $ 0.32 $ 0.15
======== ======== ======== ========
Income (Loss) Per Common Share - Diluted:
Continuing operations $ 0.26 $ 0.14 $ 0.49 $ 0.30
Discontinued operations -- (0.47) -- (0.15)
Extraordinary loss on early extinguishment of debt -- -- (0.18) --
-------- -------- -------- --------
Net income (loss) $ 0.26 $ (0.33) $ 0.31 $ 0.15
======== ======== ======== ========
Cash dividends per common share $ 0.05 $ 0.115 $ 0.15 $ 0.335
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Net income (loss) $ 26.2 $ (33.8) $ 31.9 $ 15.4
Other comprehensive income (loss):
Foreign currency translation adjustment (Note 10) (0.2) (7.2) 2.7 (20.2)
Unrealized (losses) gains on securities arising
during the period, net of tax (benefit) expense
of $(2.7), $0.6, $0.3, and $0.4, respectively (4.9) 1.1 0.6 0.7
------- ------- ------- -------
Other comprehensive income (loss) (5.1) (6.1) 3.3 (19.5)
------- ------- ------- -------
Comprehensive income (loss) $ 21.1 $ (39.9) $ 35.2 $ (4.1)
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(in millions)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 134.1 $ 52.4
Receivables 182.5 131.7
Inventories (Note 7) 75.3 69.9
Other current assets 46.3 36.3
Net current assets of companies held for disposition -- 270.5
----------- -----------
Total current assets 438.2 560.8
----------- -----------
Investments 155.5 157.0
Property (at cost) 960.7 878.2
Accumulated depreciation and amortization (497.7) (471.6)
----------- -----------
Net property 463.0 406.6
----------- -----------
Goodwill, net 450.8 462.6
Other assets 50.5 49.5
Net non-current assets of companies held for disposition -- 393.2
----------- -----------
Total assets $ 1,558.0 $ 2,029.7
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current maturities of long-term debt $ -- $ 282.5
Accounts and dividends payable 142.6 97.8
Other current liabilities 108.9 109.7
----------- -----------
Total current liabilities 251.5 490.0
----------- -----------
Long-term debt 597.0 604.7
Deferred income taxes 97.0 75.4
Other liabilities 72.4 98.4
Minority interest 231.2 221.5
Shareholders' equity:
Common stock (without par value, 250.0 million shares authorized; 113.3
million shares issued at September 30, 1998 and
111.7 million shares issued at December 31, 1997) 493.4 478.2
Retained income 87.1 363.4
Accumulated other comprehensive income:
Cumulative translation adjustment (Note 10) (11.9) (78.8)
Unrealized investment gain 0.8 0.2
----------- -----------
Accumulated other comprehensive income (11.1) (78.6)
----------- -----------
Treasury stock (12.5 million shares at September 30, 1998 and
10.6 million shares at December 31, 1997) (260.5) (223.3)
----------- -----------
Total shareholders' equity 308.9 539.7
----------- -----------
Total liabilities and shareholders' equity $ 1,558.0 $ 2,029.7
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
-------- --------
(in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 50.7 $ 31.1
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 57.7 54.9
Cash outlays related to special charges recorded in 1997 (22.1) (0.5)
Special charges not affecting cash -- 9.4
Other 10.9 15.3
Changes in assets and liabilities, exclusive of acquisitions:
Increase in receivables (50.8) (40.4)
Increase in inventories (5.4) (14.2)
Increase in payables 44.8 33.7
Net change in other assets and liabilities 22.4 13.5
------- -------
Net cash provided by continuing operations 108.2 102.8
Net cash (used in) provided by discontinued operations (10.6) 58.2
------- -------
Net cash provided by operating activities 97.6 161.0
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from dispositions of businesses 434.3 --
Capital investments, net (103.4) (54.2)
Companies acquired, net of cash acquired -- (21.1)
Net activity with joint ventures 3.2 (3.8)
Purchases of investments (12.6) (35.1)
Proceeds from sales of investments 14.7 48.4
------- -------
Net cash provided by (used in) investing activities 336.2 (65.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 70.0
Repayment of debt (311.2) (65.5)
Net repayments from bank lines of credit and
commercial paper (8.0) --
Cash dividends (15.2) (34.1)
Treasury stock purchases (37.7) (43.7)
Issuance of common stock 20.0 7.7
------- -------
Net cash used in financing activities (352.1) (65.6)
------- -------
Effects of exchange rate changes on cash and cash equivalents -- (0.5)
------- -------
Change in cash and cash equivalents 81.7 29.1
Cash and cash equivalents at January 1 52.4 4.7
------- -------
Cash and cash equivalents at September 30 $ 134.1 $ 33.8
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein have been
prepared by the Registrant, without audit. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Registrant believes that
the disclosures made are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997. 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.
2. On January 30, 1998, Whitman Corporation ("Whitman" or the "Company")
distributed ("the Distribution") all of the issued and outstanding shares
of Hussmann International, Inc. ("Hussmann") and Midas, Inc. ("Midas") to
Whitman shareholders of record on January 16, 1998. As a result of the
Distribution, Hussmann and Midas became independent, publicly-owned
companies. Whitman has retained Pepsi-Cola General Bottlers, Inc.
("General Bottlers") as its principal operating company. The financial
information has been reclassified to reflect Hussmann and Midas as
discontinued operations. The results from discontinued operations have
been reduced by income taxes of $0.1 and $16.1 million for the nine month
periods ended September 30, 1998 and 1997, respectively. The results for
the quarter ended September 30, 1997 reflect an income tax benefit of $4.1
million.
3. The Company recorded an extraordinary loss after taxes of $18.3 million
during January, 1998, associated with a tender offer made on January 13,
1998, for any and all of the outstanding 7.625% and 8.25% notes maturing
June 15, 2015, and February 15, 2007, respectively. In connection with the
tender offer, the Company repurchased 7.625% and 8.25% notes with
principal amounts of $91.0 million and $88.5 million, respectively. The
Company paid total premiums related to the tender of $26.4 million and
wrote-off the remaining unamortized discount and issue costs of $2.1
million. The Company also repaid a term loan and notes with principal
amounts of $50.0 million scheduled to mature in 1998 and 1999, notes due
in 2002 with principal amounts of $50.0 million and industrial revenue
bonds of $5.0 million due 2013. Charges associated with these repayments
were not significant. Total extraordinary charges of $28.7 million were
offset by tax benefits of $10.4 million.
4. In the third quarter of 1997, the Company recorded special charges of
$107.7 million. Of the total, $9.4 million was recorded in continuing
operations with charges of $3.4 million recorded by General Bottlers,
principally for asset write-downs in its foreign operations, and charges
of $6.0 million recorded at Whitman, the majority of which related to
expenses associated with the spin-offs of Hussmann and Midas. The special
charges reduced income from continuing operations by $7.5 million after
taxes and minority interest, or $0.07 per share.
The remaining $98.3 million was recorded by Midas and Hussmann, and
therefore is included in "Loss from discontinued operations after taxes"
on the Condensed Consolidated Statements of Income. The after-tax impact
of special charges recorded by discontinued operations during the third
quarter of 1997 was $76.0 million.
5. Interest expense, net, comprised the following:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Interest expense $ (11.6) $ (17.3) $ (35.1) $ (51.9)
Interest income from Hussmann and Midas -- 5.6 1.6 17.9
Interest income 2.5 0.6 6.6 1.7
------- ------- ------- -------
Interest expense, net $ (9.1) $ (11.1) $ (26.9) $ (32.3)
======= ======= ======= =======
</TABLE>
Interest income from Hussmann and Midas related to intercompany loans and
advances. The related interest expense recorded by Hussmann and Midas is
included in "Loss from discontinued operations after taxes" on the
Condensed Consolidated Statements of Income.
6. Net cash provided by operating activities reflected cash payments and
receipts for interest and income taxes as follows:
. Nine Months Ended
September 30,
-------------------------
1998 1997
------ ------
(in millions)
Interest paid $ 48.0 $ 60.0
Interest received 6.2 2.0
Income taxes paid, net of refunds 4.0 41.3
The reduction in income taxes paid during the first nine months of 1998
versus the comparable period in 1997 was due primarily to the impact of
the tax benefits arising from the extraordinary loss recorded during the
first quarter of 1998 (see Note 3).
Whitman also received interest from Hussmann and Midas during the first
quarter of 1998, which was included as part of the funds received to
settle intercompany indebtedness prior to the spin-offs. Interest received
from Hussmann and Midas during the first nine months of 1997 was
essentially the same as the intercompany interest income recorded by the
Company.
7. As of September 30, 1998, the components of inventory were approximately:
raw materials and supplies - 41 percent and finished goods - 59 percent.
8. During the nine months ended September 30, 1998, the Company and General
Bottlers paid, and charged against previously recorded accruals, severance
and related benefits of $16.3 million. The payments were related to
employees terminated during 1997 and nearly 40 positions eliminated during
the first nine months of 1998. In addition to the severance and related
benefits, cash outlays primarily included expenditures associated with the
spin-offs of Hussmann and Midas. These payments are classified in the
Condensed Consolidated Statements of Cash Flows as a component of "Cash
outlays related to special charges recorded in 1997."
9. The Company continues to be subject to certain indemnification obligations
under agreements with previously sold subsidiaries for 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 difficult to estimate, and the Company's share of such 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 September 30, 1998, the Company had accruals of $23.4 million to cover
these potential liabilities. Such amounts are determined using estimated
undiscounted future cash requirements, and have not been reduced by
potential future insurance recoveries.
These estimated liabilities include expenses for the remediation of
identified sites, payments to third parties for claims and expenses, and
the expenses of on-going evaluation and litigation. The estimates are
based upon 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 be filed
against the Company in the future.
The Company also has other contingent liabilities from various pending
claims and litigation on a number of matters, for which the ultimate
liability for each claim, if any, cannot be determined. In the opinion of
management, and based upon information currently available, the ultimate
resolution of these claims and litigation, including potential
environmental exposures, and considering amounts already accrued, will not
have a material effect on the Company's financial condition or the results
of operations. While additional claims and liabilities may develop and may
result in additional charges to income, principally through discontinued
operations, the Company does not believe that such charges, if any, would
have a material effect upon the Company's financial condition or the
results of operations.
10. Foreign currency translation adjustments as shown on the Condensed
Consolidated Statements of Comprehensive Income include currency
translation losses of $3.9 million, $0.5 million and $12.7 million for the
quarter ended September 30, 1997 and nine months ended September 30, 1998
and 1997, respectively, which were related to discontinued operations. The
cumulative translation adjustment as shown in the Condensed Consolidated
Balance Sheet as of December 31, 1997, included cumulative translation
losses of $63.7 million related to discontinued operations.
11. On October 15, 1998, the Company confirmed that it is in negotiations with
PepsiCo, Inc. ("PepsiCo") concerning a realignment of their business
relationship. The proposed transaction would include a swap of both
domestic and international territories that could increase Whitman's
annualized revenues by about 50 percent. The proposed agreement would also
eliminate PepsiCo's 20 percent equity interest in General Bottlers in
exchange for cash and an equity interest of less than 50 percent in
Whitman. The Company is also negotiating a new Master Franchise Agreement
with PepsiCo, which would designate the Company as an anchor bottler in
the Pepsi-Cola system.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash from operating activities decreased by $63.4 million
in the first nine months of 1998 to $97.6 million. Net cash provided by
continuing operations increased $5.4 million to $108.2 million in the first nine
months of 1998 compared with the same period of the prior year. Income from
continuing operations for the first nine months of 1998 was $50.7 million, $12.1
million higher than a year ago, excluding the impact of special charges (after
taxes and minority interest) recorded in 1997. Cash outlays related to special
charges amounted to $22.1 million during the first nine months of 1998, compared
to $0.5 million during the same period in 1997. As of September 30, 1997, the
Company recorded a receivable of $42.8 million representing a tax settlement for
the years 1988 through 1991, of which $10.2 million related to continuing
operations. In addition, the Company had adjusted its deferred tax balances in
connection with the tax settlement. Excluding the impact of the receivable
recorded for the tax settlement, the net change in primary working capital
(defined as receivables and inventories, less payables) for the first nine
months of 1998 versus the comparable period in 1997 was not significant. The
change in other assets and liabilities provided cash of $22.4 million in the
first nine months of 1998, which compared favorably to the $13.5 million
provided in the comparable period of 1997. Contributing to the improvement were
reduced estimated tax payments during the first nine months of 1998 compared
with the same period of 1997.
Investing activities during the first nine months of 1998 included $434.3
million received in January, 1998, from Hussmann and Midas prior to their
spin-offs to settle intercompany indebtedness and to pay special dividends.
Capital investments, net of proceeds from asset sales, amounted to $103.4
million, up $49.2 million from the same period of last year, with the increased
spending principally attributable to additional vending machines placed in the
market. Cash used for acquisitions of $21.1 million in the first nine months of
1997 related to General Bottlers' first quarter acquisition of the St.
Petersburg, Russia bottling operations. The net activity with joint ventures
represented loan repayments from and additional net investments in the
Pepsi-Cola bottling joint venture in Poland. Purchases and sales of investments
principally related to the Company's insurance subsidiary, which provides
certain levels of insurance for General Bottlers and for the discontinued
operations of Hussmann and Midas up to the date of the spin-offs. Funds provided
through premiums are invested by the insurance subsidiary and proceeds from the
sale of investments are used by the insurance subsidiary to pay claims and other
expenses. A substantial portion of the purchases and sales of such investments
are reinvested as the investments mature.
The Company's total debt has decreased to $597.0 million at September 30,
1998, from $887.2 million at December 31, 1997, for a net change of $290.2
million. In the first quarter of 1998, as discussed in Note 3 to the Condensed
Consolidated Financial Statements, the Company made debt repayments, including
premiums, of $311.2 million. As part of its ongoing share repurchase program,
the Company repurchased approximately 2.0 million shares and 1.8 million shares
of its stock for $37.7 million and $43.7 million in the first nine months of
1998 and 1997, respectively. Management currently has the authority to
repurchase approximately 2.3 million additional shares under the existing
program. The Company paid common stock dividends of $15.2 million in the first
nine months of 1998, based on a quarterly cash dividend of $0.05 per share,
compared with $34.1 million in the first nine months of 1997, based on a
quarterly cash dividend of $0.105, $0.115 and $0.115 per share in the first,
second and third quarters of 1997, respectively. The issuance of common stock,
including shares from Treasury, for the exercise of stock options resulted in
cash inflows of $20.0 million and $7.7 million for the first nine months of 1998
and 1997, respectively.
The Company has $200 million available under its commercial paper program
and $300 million available under a contractual revolving credit facility for
necessary borrowings or as back-up for the Company's commercial paper program.
Neither facility was in use at September 30, 1998. In addition, the Company
maintains a revolving credit facility related to its operations in Russia,
permitting total borrowings of up to $35.0 million. Borrowings under the
facility were paid down to a balance of $17.0 million as of September 30, 1998,
with an $18 million capital infusion made by the Company into the Russian
operations during the third quarter. The Company believes that with its
operating cash flows, available lines of credit, and the potential for
additional debt and equity offerings, it has sufficient resources to fund its
future growth and expansion, including potential domestic or international
franchise acquisitions.
RESULTS OF OPERATIONS
1998 THIRD QUARTER COMPARED WITH 1997 THIRD QUARTER
Sales increased 4.9 percent to $475.0 million in the third quarter of
1998, as summarized below:
Quarter Ended
September 30,
----------------------- %
1998 1997 Change
-------- -------- ------
(in millions)
Domestic $ 443.2 $ 417.3 6.2
International 31.8 35.6 -10.7
------- -------
Total Sales $ 475.0 $ 452.9 4.9
======= =======
General Bottlers' domestic sales increased $25.9 million in the third
quarter of 1998 compared with the same period of 1997. This increase reflected
improved pricing and increased volumes. The average domestic net selling prices
for actual physical ("raw") cases rose 2.6 percent and volume, in raw cases,
grew 4.4 percent over the third quarter of 1997. In 8-ounce equivalent cases,
volume, including foodservice, increased 6.6 percent in the third quarter of
1998 compared with the same period of 1997. Sales growth was driven principally
by the convenience/gas station channel, the vending channel, and the fountain
channel. Volume growth was led primarily by improved demand for the Mountain Dew
and Dr Pepper brands. Also contributing to the increased volume was stronger
growth in Lipton teas and the water brands Aquafina and Avalon. In the first
quarter of 1998, the Company began reporting volume on an 8-ounce equivalent
basis, as well as raw cases, to better reflect the impact of a package mix shift
towards the 20/24-ounce non-returnable ("NR") packages. The 20-ounce NR package
growth benefited primarily from a significant increase in vending machine
placements during the first nine months of 1998.
Internationally, General Bottlers' sales for the third quarter of 1998
were $3.8 million lower than the same period of 1997. The decrease principally
reflected a $3.7 million decline in low margin contract sales in Russia.
Gross profit improved 4.4 percent to $177.3 million, primarily due to the
increase in revenues. The gross profit margin decreased to 37.3 percent of sales
in the third quarter of 1998, compared with 37.5 percent of sales in the
comparable period of 1997. This decrease reflected higher ingredient and
polyethylene ("PET") packaging costs domestically, partially offset by improved
profit margins on international sales, reflecting the decline in Russia in low
margin contract sales.
Selling, general and administrative ("S,G&A") expenses decreased $0.5
million, or 0.5 percent. The decline reflected a reduction in corporate
headquarters' management and staff, partially offset by increased costs
corresponding to higher sales volumes. S,G&A expenses represented 20.8 percent
of sales in the third quarter of 1998, down 1.1 percentage points from the same
period last year. Amortization expense was essentially unchanged from last year.
Operating income for the Company's two geographic segments, including the
special charges recorded in the third quarter of 1997 (see Note 4 to the
Condensed Consolidated Financial Statements), as well as corporate
administrative expenses, is summarized below:
Quarter Ended
September 30,
--------------------- %
1998 1997 Change
------ ------ ------
(in millions)
Domestic $ 77.8 $ 67.7 14.9
International (0.2) 0.1 NM
------ ------
General Bottlers' Operating Income 77.6 67.8 14.5
Corporate Administrative Expenses (3.1) (10.7) 71.0
------ ------
Total Operating Income $ 74.5 $ 57.1 30.5
====== ======
Excluding special charges recorded in 1997, General Bottlers' domestic
operating income increased $6.7 million, or 9.4 percent. The improvement in
operating income was primarily due to higher volumes and improved pricing caused
by a more favorable package and channel mix. Excluding the impact of the special
charges, domestic operating margins increased to 17.6 percent in the third
quarter of 1998 from 17.0 percent for the comparable period of 1997.
International operations were essentially flat compared to the third
quarter of last year. Operating income in Poland was reduced by $1.2 million to
$0.3 million, due, in part, to decreased sales, reflecting unseasonably cool and
wet weather conditions, and higher S,G&A expenses. Business in eastern Europe is
especially seasonal, with approximately 50 percent of sales occurring during the
four month summer selling season, and can be dramatically affected by poor
weather conditions. This decline was partially offset by decreased operating
losses in Russia and the Baltics, principally reflecting the reduction in low
margin contract sales in Russia. Due to the Company's two month lag in reporting
international operations, operating results for Russia do not yet reflect any
impact related to the economic crisis, which intensified in August, 1998. The
devaluation of the ruble is expected to result in approximately $1 million in
translation losses, which will be recorded in the fourth quarter of 1998.
Net interest expense decreased $2.0 million to $9.1 million, primarily due
to the repayment of debt using funds received from Hussmann and Midas prior to
the spin-off transactions. Cash in excess of debt repayments was invested in
short term instruments, resulting in higher external interest income in the
current quarter compared with the third quarter of 1997. Decreases in net
external interest expense were partially offset by the absence of interest
income on loans and advances to Hussmann and Midas, which were repaid in
conjunction with the spin-off transactions.
Other expense, net, decreased $2.3 million to $2.0 million in the third
quarter of 1998. The improvement was due in part to losses from asset
sales/retirements in the third quarter of 1997.
RESULTS OF OPERATIONS
1998 FIRST NINE MONTHS COMPARED WITH 1997 FIRST NINE MONTHS
Sales and revenues increased 4.8 percent to $1,235.9 million in the first
nine months of 1998 compared with the same period of 1997, as summarized below:
Nine Months Ended
September 30,
----------------------- %
1998 1997 Change
-------- -------- ------
(in millions)
Domestic $1,168.5 $1,110.8 5.2
International 67.4 68.1 -1.0
-------- --------
Total Sales $1,235.9 $1,178.9 4.8
======== ========
General Bottlers' domestic sales increased $57.7 million in the first nine
months of 1998 compared with the same period of 1997. This increase reflected
improved pricing and increased volumes. The average domestic net selling prices
for raw cases rose 2.5 percent and volume, in raw cases, grew 3.2 percent over
the first nine months of 1997. For the first nine months of the year, 8-ounce
equivalent case volume, including foodservice, increased 5.0 percent. Channel
growth was principally in convenience/gas stations, vending and fountain,
reflecting a shift in package mix to 20/24-ounce NR packages and increased focus
on fountain. The 20-ounce NR package growth was also aided by an increase in
vending machine placements during the first nine months of the year. Volume
growth was driven by higher demand for Mountain Dew and Dr Pepper brands. Also
contributing to increased volumes was strong growth in Lipton teas and the water
brands Aquafina and Avalon.
Internationally, General Bottlers' sales for the first nine months of 1998
were $0.7 million lower than the same period of 1997. The decrease principally
reflects a $9.6 million decline in low margin contract sales in Russia,
partially offset by the inclusion of a full nine months of revenues in 1998,
compared with seven months in the first nine months of 1997. In addition,
operations in Poland have experienced sales growth from a realignment to more
PET packaging and favorable results from newly introduced juice products, offset
by the effects of the poor weather conditions during the summer selling season.
Gross profit improved 4.2 percent to $463.9 million, primarily due to the
increase in revenues. The gross profit margin decreased to 37.5 percent of sales
in the first nine months of 1998, compared with 37.8 percent of sales in the
comparable period of 1997. This decrease reflected higher ingredient and
packaging costs domestically, partially offset by improved profit margins on
international sales.
S,G&A expenses decreased $1.9 million, or 0.7 percent. The year-over-year
decline reflected a reduction in Whitman corporate staffing in 1998 and General
Bottlers' $2.7 million charge recorded in the second quarter of 1997 for
reductions in administrative overhead. S,G&A expenses represented 23.4 percent
of sales in the first nine months of 1998, down 1.1 percentage points from the
same period last year, excluding the impact of the charge. Amortization expense
was essentially unchanged from last year.
Operating income for the Company's two geographic segments, including the
special charges recorded in the third quarter of 1997, as well as corporate
administrative expenses, is summarized below:
Nine Months Ended
September 30,
------------------- %
1998 1997 Change
------ ------ ------
(in millions)
Domestic $183.4 $163.6 12.1
International (11.0) (11.5) 4.3
------ ------
General Bottlers' Operating Income 172.4 152.1 13.3
Corporate Administrative Expenses (9.4) (18.8) 50.0
------ ------
Total Operating Income $163.0 $133.3 22.3
====== ======
Excluding special charges recorded in 1997, General Bottlers' domestic
operating income increased $16.4 million, or 9.8 percent. The improvement in
operating income was due in part to higher volumes, improved pricing and the
effects of the $2.7 million charge taken in the second quarter of 1997.
Excluding the impact of the charges in 1997, domestic operating margins
increased 0.4 percentage points to 15.7 percent in the first nine months of 1998
from the comparable period in the previous year. The improved domestic operating
margins reflected a favorable shift in product mix to the more profitable NR
packages and a more favorable channel mix.
International operating losses decreased $0.5 million, or 4.3 percent.
Operating losses in Poland were reduced by $1.8 million to $4.8 million, due, in
part, to increased case volumes and lower S,G&A expenses. This reduction was
partially offset by higher operating losses in Russia and the Baltics,
reflecting costs from continuing start-up and expansion efforts.
Net interest expense decreased $5.4 million to $26.9 million, primarily due
to the repayment of debt using funds received from Hussmann and Midas prior to
the spin-off transactions. Cash in excess of debt repayments was invested in
short term instruments, resulting in higher external interest income in the
first nine months of 1998 compared with the first nine months of 1997. Decreases
in net external interest expense were partially offset by the decrease in
interest income on loans and advances to Hussmann and Midas, which were repaid
in conjunction with the spin-off transactions.
Other expense, net, decreased $2.6 million to $12.1 million in the first
nine months of 1998. The improvement was not related to any single significant
item.
YEAR 2000 ISSUES
The Year 2000 ("Y2K") issue relates to computer applications being
designed using only two digits, rather than four, to represent a year. As a
result, computer applications could fail or create erroneous results by
recognizing "00" as the year 1900 rather than the year 2000. The Company
considers Y2K readiness as the ability to manage and process date-related
information without materially abnormal or incorrect outcomes beyond January 1,
2000.
Beginning in 1997, the Company initiated a company-wide effort to address
the Y2K issues that affect its operations and to minimize service interruptions.
This effort consists of five phases: (1) inventory, (2) assessment, (3)
remediation, (4) testing and (5) developing contingency plans. The contingency
plans will include addressing issues associated with any non-compliant suppliers
and key customers in order to minimize the potential material adverse effects of
any Y2K problems. During 1998, the Company designated one of its senior managers
as its Vice President - Y2K Planning and Compliance. This position is
responsible for coordinating all facets of the Company's Y2K initiative,
including coordinating efforts and responsibilities between corporate
Information Technology ("IT") and non-IT personnel and local division management
to identify, evaluate and implement changes to centralized and non- centralized
computer systems, applications and equipment necessary to achieve Y2K readiness.
Local management has identified and evaluated major areas of potential business
impact, including critical suppliers and customers, to enable proper monitoring
of Y2K conversion efforts on a centralized basis.
In the first quarter of 1998, the Company began implementation of an
integrated enterprise-wide resource planning ("ERP") system. The ERP system will
address the Company's financial applications during the first phase of
implementation and address manufacturing systems during the second phase. The
ERP project was begun with the goal of expanding existing system capacity for
future growth and improving processing efficiencies, as well as addressing any
Y2K compliance issues associated with the Company's existing systems. The first
phase of the ERP implementation is targeted for completion in January, 1999.
Phase two is expected to be completed during the latter half of 1999 and first
half of the Year 2000. The stages of the second phase targeted for completion in
the Year 2000 do not involve any Y2K compliance issues. In conjunction with the
implementation of the ERP system, certain hardware and software components have
been or will be upgraded to expand existing capacity. Through September, 1998,
costs incurred in the ERP implementation amounted to approximately $5.5 million,
and are expected to total nearly $9 million in 1998. Implementation costs for
the entire ERP project currently are expected to be $25 to $30 million. These
costs have been, and will be, funded through operating cash flows. A majority of
the costs, as they relate to purchased hardware, software and the implementation
thereof, will be capitalized.
The Company has conducted an inventory of its IT systems and has corrected
substantially all of those critical-path systems that were found to have
date-related deficiencies, excluding the financial systems addressed by phase
one of the ERP implementation. In the case of non-IT systems (i.e., including
embedded chip technology), the Company is conducting an inventory of its
facilities with completion expected by the end of 1998. Correction of
date-deficient systems and equipment will occur upon completion and evaluation
of this survey. The Company is also surveying selected third parties, including
its principal suppliers and customers, as well as governmental entities, to
determine the status of their Year 2000 compliance programs.
The inventory, assessment, remediation and testing phases of the Y2K
project are in progress. As part of the Company's testing phase, it intends to
conduct verification testing of selected mainframe/network component upgrades
received from suppliers. In addition, selected critical components are scheduled
to undergo testing in a controlled environment that replicates the current
mainframe/network configuration to simulate the turn of the century and leap
year dates. In the event these efforts do not address all potential systems
problems, the Company is beginning the process of developing contingency plans
to ensure that it will be able to operate the critical areas of its business.
This process includes developing alternative plans to engage in business
activities with customers and suppliers should they or the Company not be Y2K
compliant, including resorting to paper records of certain transactions
presently handled electronically. The development of overall contingency plans
is expected to be finalized by the end of the first quarter of 1999, with
refinements occurring as needed thereafter. The ultimate execution of
contingency plans, if necessary, would be expected during the fourth quarter of
1999.
It is expected the Company's IT systems will be Y2K compliant by the end of
the first quarter of 1999 and the Company's non-IT systems and equipment will be
compliant by June, 1999. Compliance by the aforementioned target dates is
subject to additional evaluation, remediation and testing efforts. Incremental
costs, over and above the aforementioned ERP system project spending, related to
the Y2K project will be expensed as incurred and funded through operating cash
flows. Through September 30, 1998, the Company has expensed approximately $0.5
million of such incremental costs. Total incremental costs to ensure Y2K
compliance are estimated to be $2-5 million, with the majority of the costs
being incurred in 1999. This expectation assumes that the Company will not be
obligated to incur significant Y2K-related costs on behalf of its customers or
suppliers. The projection of Y2K-related costs is based on numerous assumptions
and estimates; consequently, actual costs could be materially greater than
anticipated. Plans will continue to be monitored for completion. Incomplete or
untimely resolution of the Y2K issue by the Company, by critically important
suppliers and customers of the Company, or by governmental entities, could have
a materially adverse impact on the Company's business, operations or financial
condition in the future.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking information
which reflects management's expectations, estimates and assumptions, which were
based on information available at the time this Form 10-Q was prepared. Future
results, performance or achievements of the Company may vary significantly from
such information and are subject to future events and uncertainties, including,
among other factors, weather, economic and market conditions, currency exchange
rates, unexpected costs associated with Year 2000 conversions or the business
risk associated with Year 2000 noncompliance by the Company, customers and/or
suppliers, cost and availability of raw materials and competitive activities or
other business conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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 nine months ended September 30,
1998 and 1997.
(b) Reports on Form 8-K.
None filed during the quarter ended September 30, 1998.
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 13, 1998 By: /s/ MARTIN M. ELLEN
-------------------------------------------------
Martin M. Ellen
Senior Vice President and Chief Financial Officer
(As Chief Financial Officer and Duly Authorized
Officer of Whitman Corporation)
EXHIBIT 12
WHITMAN CORPORATION
STATEMENT OF CALCULATION
OF THE RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Years Ended December 31,
--------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income from Continuing Operations
before Taxes $ 124.0 $ 86.3 $ 69.9 $ 127.7 $ 118.2 $ 80.3 $ 81.1
Fixed Charges 39.0 56.8 75.6 74.4 76.7 72.2 96.4
-------- -------- -------- -------- -------- -------- --------
Earnings as Adjusted $ 163.0 $ 143.1 $ 145.5 $ 202.1 $ 194.9 $ 152.5 $ 177.5
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest Expense $ 35.1 $ 51.9 $ 69.0 $ 68.2 $ 70.3 $ 67.0 $ 93.0
Preferred Stock Dividend Requirements
Of Majority Owned Subsidiary -- 1.2 1.7 1.5 1.4 1.1 --
Portion of Rents Representative of
Interest Factor 3.9 3.7 4.9 4.7 5.0 4.1 3.4
-------- -------- -------- -------- -------- -------- --------
Fixed Charges $ 39.0 $ 56.8 $ 75.6 $ 74.4 $ 76.7 $ 72.2 $ 96.4
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges* 4.2x 2.5x 1.9x 2.7x 2.5x 2.1x 1.8x
======== ======== ======== ======== ======== ======== ========
</TABLE>
* Intercompany interest income from Hussmann and Midas was $1.6 million and
$17.9 million for the nine months ended September 30, 1998 and 1997,
respectively, and was $23.1 million, $23.7 million, $21.8 million, $20.6
million and $16.2 million for the years ended December 31, 1997, 1996, 1995,
1994 and 1993, respectively. Such amounts are included in income from
continuing operations before taxes. If this intercompany interest income had
reduced interest expense, thereby reducing fixed charges and earnings as
adjusted, the ratio of earnings to fixed charges for the nine months ended
September 30, 1998 and 1997 and the years ended December 31, 1997, 1996,
1995, 1994 and 1993 would have been 4.3x, 3.2x, 2.3x, 3.5x, 3.2x, 2.6x and
2.0x, respectively.
Whitman Corporation recorded special charges of $9.4 million and $39.9
million during the third and fourth quarters of 1997, respectively. Excluding
these special charges, the ratio of earnings to fixed charges for the year
ended December 31, 1997 and the nine months ended September 30, 1997 would
have been 2.6x and 2.7x, respectively. If the fixed charges for 1997 were
adjusted for the intercompany interest income noted above, the ratio of
earnings to fixed charges would have been 3.3x and 3.5x, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WHITMAN
CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000049573
<NAME> WHITMAN CORPORATION
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 134,100 0
<SECURITIES> 0 0
<RECEIVABLES> 184,800 0
<ALLOWANCES> 2,300 0
<INVENTORY> 75,300 0
<CURRENT-ASSETS> 438,200 0
<PP&E> 960,700 0
<DEPRECIATION> 497,700 0
<TOTAL-ASSETS> 1,558,000 0
<CURRENT-LIABILITIES> 251,500 0
<BONDS> 597,000 0
0 0
0 0
<COMMON> 493,400 0
<OTHER-SE> (184,500) 0
<TOTAL-LIABILITY-AND-EQUITY> 1,558,000 0
<SALES> 1,235,900 1,178,900
<TOTAL-REVENUES> 1,235,900 1,178,900
<CGS> 772,000 733,500
<TOTAL-COSTS> 1,072,900<F1> 1,036,200<F6>
<OTHER-EXPENSES> 12,100 14,700
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 26,900<F2> 32,300<F7>
<INCOME-PRETAX> 124,000 86,300
<INCOME-TAX> 56,800 41,400
<INCOME-CONTINUING> 50,700<F3> 31,100<F8>
<DISCONTINUED> (500) (15,700)
<EXTRAORDINARY> (18,300) 0
<CHANGES> 0 0
<NET-INCOME> 31,900 15,400
<EPS-PRIMARY> 0.32<F4> 0.15<F9>
<EPS-DILUTED> 0.31<F5> 0.15<F10>
<FN>
<F1>
TOTAL COSTS INCLUDE COSTS OF GOODS SOLD, S,G&A EXPENSES AND AMORTIZATION EXPENSE
OF $772,000, $289,100 AND $11,800.
<F2>
INTEREST EXPENSE, NET, INCLUDES INTEREST EXPENSE, INTEREST INCOME FROM HUSSMANN
INTERNATIONAL, INC. ("HUSSMANN") AND MIDAS, INC. ("MIDAS") AND OTHER INTEREST
INCOME OF $35,100, $1,600 AND $6,600, RESPECTIVELY. INTEREST INCOME FROM
HUSSMANN AND MIDAS RELATED TO INTERCOMPANY LOANS AND ADVANCES, WHICH WERE REPAID
PRIOR TO THE SPIN-OFFS. THE RELATED INTEREST EXPENSE RECORDED BY HUSSMANN AND
MIDAS IS INCLUDED IN THE LOSS FROM DISCONTINUED OPERATIONS AFTER TAXES.
<F3>
INCOME FROM CONTINUING OPERATIONS IS REDUCED BY MINORITY INTEREST OF $16,500.
<F4>
BASIC INCOME (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.50
EXTRAORDINARY LOSS (0.18)
NET INCOME $ 0.32
<F5>
DILUTED INCOME (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.49
EXTRAORDINARY LOSS (0.18)
NET INCOME $ 0.31
<F6>
TOTAL COSTS INCLUDE COSTS OF GOODS SOLD, S,G&A EXPENSES AND AMORTIZATION EXPENSE
OF $733,500, $291,000 AND $11,700, RESPECTIVELY.
<F7>
INTEREST EXPENSE, NET, INCLUDES INTEREST EXPENSE, INTEREST INCOME FROM HUSSMANN
AND MIDAS AND OTHER INTEREST INCOME OF $51,900, $17,900 AND $1,700,
RESPECTIVELY. INTEREST INCOME FROM HUSSMANN AND MIDAS RELATED TO INTERCOMPANY
LOANS AND ADVANCES. THE RELATED INTEREST EXPENSE RECORDED BY HUSSMANN AND MIDAS
IS INCLUDED IN INCOME FROM DISCONTINUED OPERATIONS AFTER TAXES.
<F8>
INCOME FROM CONTINUING OPERATIONS IS REDUCED BY MINORITY INTEREST OF $13,800.
<F9>
BASIC INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.31
DISCONTINUED OPERATIONS (0.16)
NET INCOME $ 0.15
<F10>
DILUTED INCOME PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.30
DISCONTINUED OPERATIONS (0.15)
NET INCOME $ 0.15
</FN>
</TABLE>
