<PAGE> 1
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UNITED STATES 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
AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] 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 001-12755
SUIZA FOODS CORPORATION
(Exact name of the registrant as specified in its charter)
[SUIZA FOODS CORPORATION LOGO]
---------------
DELAWARE 75-2559681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification no.)
2515 MCKINNEY AVENUE, SUITE 1200
DALLAS, TEXAS 75201
(214) 303-3400
(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
---------------
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 May 8, 2000 the number of shares outstanding of each class of
common stock was:
Common Stock, par value $.01 29,043,256
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements....................................................................... 3
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................................. 25
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........................................................... 27
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................................ $ 32,507 $ 25,155
Accounts receivable, net ......................................................... 484,674 379,070
Inventories ...................................................................... 190,419 182,321
Refundable income taxes .......................................................... 5,072 3,514
Deferred income taxes ............................................................ 24,419 27,005
Prepaid expenses and other current assets ........................................ 17,677 22,342
------------ ------------
Total current assets ............................................................. 754,768 639,407
Property, plant and equipment, net .................................................. 969,607 758,485
Intangible and other assets ......................................................... 1,903,924 1,261,030
------------ ------------
Total ............................................................................... $ 3,628,299 $ 2,658,922
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............................................ $ 571,717 $ 441,792
Income taxes payable ............................................................. 12,905 14,654
Current portion of long-term debt and subsidiary lines of credit ................. 24,277 22,671
------------ ------------
Total current liabilities ........................................................ 608,899 479,117
Long-term debt ...................................................................... 1,236,745 689,397
Other long-term liabilities ......................................................... 55,499 34,858
Deferred income taxes ............................................................... 50,965 46,323
Mandatorily redeemable convertible trust issued preferred securities ................ 583,650 683,505
Minority interest in subsidiaries ................................................... 491,750 141,750
Commitments and contingencies
Stockholders' equity:
Common stock, 29,015,339 and 29,287,558 shares issued and outstanding ............ 290 293
Additional paid-in capital ....................................................... 261,165 275,527
Retained earnings ................................................................ 340,152 314,590
Accumulated other comprehensive income ........................................... (816) (6,438)
------------ ------------
Total stockholders' equity ....................................................... 600,791 583,972
------------ ------------
Total ............................................................................... $ 3,628,299 $ 2,658,922
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Net sales ................................................................. $ 1,394,141 $ 1,153,186
Cost of sales ............................................................. 1,053,983 920,627
------------ ------------
Gross profit .............................................................. 340,158 232,559
Operating costs and expenses:
Selling and distribution ............................................... 200,124 121,855
General and administrative ............................................. 49,261 39,104
Amortization of intangibles ............................................ 12,688 9,924
Plant closing and other costs .......................................... 1,774 --
------------ ------------
Total operating costs and expenses ..................................... 263,847 170,883
------------ ------------
Operating income .......................................................... 76,311 61,676
Other (income) expense:
Interest expense, net .................................................. 27,221 15,943
Financing charges on trust issued preferred securities ................. 8,409 9,647
Equity in earnings of unconsolidated affiliates ........................ (1,869) (64)
Other income, net ...................................................... (547) (443)
------------ ------------
Total other (income) expense ........................................... 33,214 25,083
------------ ------------
Income before income taxes, minority interests and extraordinary gain ..... 43,097 36,593
Income taxes .............................................................. 16,179 14,012
Minority interest ......................................................... 6,324 1,708
------------ ------------
Income before extraordinary gain .......................................... 20,594 20,873
Extraordinary gain ........................................................ 4,968 --
------------ ------------
Net income ................................................................ $ 25,562 $ 20,873
============ ============
Average common shares: Basic .............................................. 29,071,467 33,642,148
Average common shares: Diluted ............................................ 37,611,472 36,206,652
Basic earnings per common share:
Income before extraordinary gain ...................................... $ 0.71 $ 0.62
Extraordinary gain ..................................................... 0.17 --
------------ ------------
Net income ............................................................. $ 0.88 $ 0.62
============ ============
Diluted earnings per common share:
Income before extraordinary gain ....................................... $ 0.69 $ 0.60
Extraordinary gain ..................................................... 0.13 --
------------ ------------
Net income ............................................................. $ 0.82 $ 0.60
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................................... $ 25,562 $ 20,873
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 37,348 30,683
Minority interest, before tax effects ............................................ 10,925 1,708
Equity in earnings of unconsolidated affiliates................................... (1,869) (64)
Extraordinary gain ............................................................... (4,968)
Deferred income taxes ............................................................ 7,204 7,389
Other, net ....................................................................... (295) 2,655
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ........................................................... 6,005 7,636
Inventories ................................................................... (9,511) (3,308)
Prepaid expenses and other assets ............................................. 7,066 32
Accounts payable and other accrued expenses ................................... (19,403) (13,196)
Income taxes .................................................................. (1,150) 8,725
------------ ------------
Net cash provided by operating activities ................................... 56,914 63,133
Cash flows from investing activities:
Net additions to property, plant and equipment ........................................ (23,924) (57,149)
Cash outflows for acquisitions ........................................................ (217,773) (48,052)
Net proceeds from divestitures ........................................................ 79,363
Other ................................................................................. 513 1,586
------------ ------------
Net cash used in investing activities ....................................... (161,821) (103,615)
Cash flows from financing activities:
Proceeds from the issuance of debt .................................................... 1,172,555 47,722
Repayment of debt ..................................................................... (932,443) (3,745)
Payment of deferred financing and debt restructuring .................................. (11,287)
Issuance of common stock, net of expenses.............................................. 10,597 774
Redemption of trust issued preferred securities ....................................... (100,000)
Redemption of common stock ............................................................ (27,163)
Distributions to minority interest .................................................... (1,204)
------------ ------------
Net cash provided by financing activities ................................... 112,259 43,547
------------ ------------
Increase in cash and cash equivalents..................................................... 7,352 3,065
Cash and cash equivalents, beginning of period............................................ 25,155 54,922
------------ ------------
Cash and cash equivalents, end of period.................................................. $ 32,507 $ 57,987
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. GENERAL
The unaudited condensed consolidated financial statements contained in
this report have been prepared on the same basis as the consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
1999. In our opinion, we have made all necessary adjustments (which include only
normal recurring adjustments) in order to present fairly, in all material
respects, our consolidated financial position, results of operations and cash
flows as of the dates and for the periods presented. Certain reclassifications
have been made to conform the previous year's consolidated financial statements
to the current year's classifications. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. Our results of
operations for the period ended March 31, 2000 may not be indicative of our
operating results for the full year. The consolidated financial statements
contained in this report should be read in conjunction with our 1999
consolidated financial statements contained in our Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on March 16, 2000.
2. ACQUISITIONS AND DIVESTITURES
Effective January 1, 2000 we entered into a joint venture with Dairy
Farmers of America ("DFA") in which we combined certain of our domestic fluid
dairy operations with certain of DFA's operations into a newly formed venture,
Suiza Dairy Group. DFA is a large farmers cooperative from which we purchase a
significant portion of our raw milk. In connection with this transaction, we
issued interests in the joint venture to DFA of approximately $326 million and
made cash payments of $110 million, including $100 million to one of Southern
Foods' partners and $10 million for acquisition fees and expenses. DFA
received a 33.8% ownership interest in Suiza Dairy Group in exchange for the
contribution of the operations of Southern Foods Group, which had net sales of
approximately $1.3 billion in 1999, and for the contribution of its investments
in its other joint ventures with us: Suiza GTL, LLC and Suiza SoCal, LLC. We
received a 66.2% ownership interest in Suiza Dairy Group in exchange for the
contribution of our domestic fluid dairy operations (excluding our Puerto Rican
operations and our Morningstar subsidiary). Our ownership interests as well as
DFA's were determined by negotiation between the parties. This transaction was
accounted for as an acquisition of Southern Foods using the purchase method of
accounting.
On February 8, 2000 we completed the acquisition of Valley of Virginia
Cooperative Milk Producers Association, an agricultural marketing cooperative
with dairy processing plants in Springfield, Virginia and Mt. Crawford,
Virginia. Valley of Virginia, which had net sales of $209 million for its fiscal
year ended August 31, 1999, sells milk and ice cream products in Virginia,
Maryland, Pennsylvania, Delaware and the District of Columbia, and ultra-high
temperature dairy products across the eastern half of the United States,
primarily under the Shenandoah's Pride (R) brand. We funded the portion of the
purchase price paid at closing through borrowings under the new Suiza Dairy
Group credit facility, discussed in Note 4.
On February 18, 2000, we purchased a majority interest in Leche Celta,
S.A., a Spanish dairy processor with sales of approximately $150 million in
1999. Leche Celta produces primarily ultra-high temperature dairy products from
three plants located in northern Spain. We funded approximately $31.5 million of
our equity investment through borrowings under our new parent-level senior
credit facility discussed in Note 4. We financed the balance of the purchase
price paid at closing with a loan obtained from a Spanish lender.
We also made one other small acquisition of the assets of a water
business in January 2000.
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On March 3, 2000, we completed the sale of the stock of our European
metal packaging operations that we acquired as part of our acquisition of
Continental Can in May 1998. The proceeds of this sale were used to repay
borrowings made to fund our equity investment in Leche Celta and for other
corporate purposes.
Effective May 2, 2000, we sold Dixie Union GmbH & Co. KG, a European
packaging business that we acquired as part of our acquisition of Continental
Can. Our only remaining packaging investment is our approximately 43% minority
investment in Consolidated Container Company.
Our unaudited consolidated results of operations on a pro forma basis
for the three months ended March 31, 1999, as if the Southern Foods operations
had been acquired as of the beginning of 1999, are as follows:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net Sales ......................... $ 1,153,186 $ 1,483,790
Net Income ........................ 20,873 21,535
Earnings per share:
Basic .................... $ 0.62 $ 0.64
Diluted .................. 0.60 0.62
</TABLE>
On a pro forma basis, the other 1999 and 2000 acquisitions, net of the
sale in 1999 of a majority interest in our U.S. packaging operations and of the
sale in March 2000 of our European metal packaging operations, do not have a
material pro forma impact on net sales or net income for the three months ended
March 31, 1999.
The pro forma results of operations are presented for informational
purposes only and are not necessarily indicative of the results of operations
that would have occurred had the acquisition been completed as of the above
date, nor are they necessarily indicative of future results of operations.
3. INVENTORIES
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies................. $ 108,776 $ 100,044
Finished goods............................. 81,643 82,277
------------ ------------
Total................................. $ 190,419 $ 182,321
============ ============
</TABLE>
4. DEBT
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
2000 1999
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Senior credit facility ........................... $ -- $ 635,500
Subsidiary debt obligations:
Suiza Dairy Group credit facility ............ 1,155,000 --
Lines of credit .............................. 56,551 24,655
Industrial development revenue bonds ......... 9,330 9,330
Capital lease obligations and other .......... 40,141 42,583
------------ ------------
1,261,022 712,068
Less current portion ............................. (24,277) (22,671)
------------ ------------
Total ........................................ $ 1,236,745 $ 689,397
============ ============
</TABLE>
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Terminated Senior Credit Facility -- In connection with our acquisition
of Southern Foods effective January 1, 2000, we replaced our then existing
senior credit facility with two new facilities, as described under "Suiza Dairy
Group Credit Facility" and "New Parent Credit Facility" below.
Suiza Dairy Group Credit Facility -- Simultaneous with the closing of
the Southern Foods transaction, Suiza Dairy Group entered into a new $1.61
billion credit facility with a group of lenders which expires in January 2005.
The Suiza Dairy Group credit facility provides an $805 million revolving line of
credit, a $625 million term loan and a $180 million term loan. At closing, Suiza
Dairy Group borrowed approximately $1.1 billion under this facility and
distributed a portion of the borrowings to DFA and us. We used our portion of
the distribution to repay our then existing senior credit facility and certain
other obligations.
New Parent Credit Facility -- Effective January 1, 2000 we also entered
into a new parent credit facility, which replaced our then existing senior
credit facility. The new facility, which expires in January 2005, provides us
with a revolving line of credit of up to $300 million to be used for general
corporate and working capital purposes, including the financing of acquisitions.
As of March 31, 2000, no funds were borrowed under this facility.
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<PAGE> 9
Credit Facility Terms -- Amounts outstanding under the Suiza Dairy
Group credit facility and our new parent credit facility bear interest at a rate
per annum equal to one of the following rates, at our option:
o a base rate equal to the higher of the Federal Funds rate plus 50
basis points or the prime rate, plus a margin that varies from 25 to
125 basis points for the Suiza Dairy Group credit facility and 0 to 75
basis points on the new parent credit facility, depending on our ratio
of defined indebtedness to EBITDA or
o the London Interbank Offering Rate ("LIBOR") computed as LIBOR divided
by the product of one minus the Eurodollar Reserve Percentage, plus a
margin that varies from 125 to 225 basis points for the Suiza Dairy
Group credit facility and 75 to 175 basis points on the new parent
credit facility, depending on our ratio of indebtedness to EBITDA (as
defined in the agreement).
The interest rate in effect on the Suiza Dairy Group credit facility,
including the applicable interest rate margin, was 8.17% at March 31, 2000.
Interest is payable quarterly or at the end of the applicable interest period.
In consideration for the revolving commitments, we pay a commitment fee on
unused amounts of the Suiza Dairy Group credit facility and the new parent
credit facility that ranges from 25 to 50 basis points, based on our ratio of
indebtedness to EBITDA (as defined in the agreement).
The Suiza Dairy Group credit facility and our new parent credit
facility, both of which mature on January 4, 2005, contain various financial and
other restrictive covenants and requirements that Suiza Dairy Group and we
maintain certain financial ratios, including a leverage ratio (computed as the
ratio of the aggregate outstanding principal amount of defined indebtedness to
EBITDA, as defined separately by each agreement) and an interest coverage ratio
(computed as the ratio of EBITDA to interest expense as defined separately by
each agreement). In addition, both facilities require that we maintain a minimum
level of net worth as defined separately by each agreement. The facilities also
contain limitations on liens, investments, the incurrence of additional
indebtedness and acquisitions, and prohibit certain dispositions of property and
restrict certain payments, including dividends. The credit facilities are
secured by capital stock of certain of our subsidiaries.
Other Subsidiary Debt Obligations -- Other subsidiary debt obligations
during the quarter included lines of credit, industrial development revenue bond
obligations and other debt obligations of certain subsidiaries.
Only our foreign subsidiaries have lines of credit separate from the
credit facilities described above. We sold our French subsidiary in March of
this year and our German subsidiary in May of this year, and terminated the
lines of credit associated with these subsidiaries upon completion of the
respective sales. In February 2000, we purchased Leche Celta, our Spanish
subsidiary, which has an outstanding line of credit. Leche Celta is currently
our only foreign subsidiary. Borrowings under these subsidiary lines of credit
are generally subject to limitations based on a borrowing base, as defined in
the respective agreements, and bear interest generally at floating interest
rates determined for each subsidiary. The weighted average interest rate at
March 31, 2000 on our subsidiary lines of credit outstanding at the end of the
quarter was 5.45%.
Certain of our subsidiaries have revenue bonds outstanding which
require aggregate annual sinking fund redemptions aggregating $0.7 million and
are secured by irrevocable letters of credit issued by financial institutions,
along with first mortgages on certain real property and equipment. Interest on
these bonds is due semiannually at interest rates that vary based on market
conditions which, at March 31, 2000, ranged from 4.10% to 4.35%.
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Other subsidiary debt includes various promissory notes for the
purchase of property, plant and equipment and capital lease obligations. The
various promissory notes payable provide for interest at varying rates and are
payable in monthly installments of principal and interest until maturity, when
the remaining principal balances are due. Capital lease obligations represent
machinery and equipment financing obligations which are payable in monthly
installments of principal and interest and are collateralized by the related
assets financed.
In connection with our acquisition of Leche Celta in February 2000, our
Spanish subsidiary obtained a 7 billion peseta (as of May 8, 2000, approximately
$43 million) non-recourse term loan from a Spanish lender, all of which was
borrowed at closing and used to finance a portion of the purchase price. The new
facility, which is secured by the stock of our Spanish subsidiary, will expire
on February 21, 2007, bears interest at a variable rate based on the ratio of
Leche Celta's debt to EBITDA (as defined in the corresponding loan agreement),
and requires semi-annual principal payments beginning in August 2001. The
interest rate in effect on this loan at March 31, 2000 was 5.69%.
Southern Foods, which we acquired in January 2000, had $113.8 million
principal amount of 9 7/8% senior notes outstanding when we completed our
acquisition. As a result of the acquisition, we were required to offer to
repurchase these senior notes at 101% of face value. All senior notes were
tendered and were redeemed on March 24, 2000.
Interest Rate Agreements -- We have interest rate derivative agreements
in place, including swaps and collars that have been designated as hedges
against our variable interest rate exposure on our loans under the Suiza Dairy
Group credit facility.
The following table summarizes our various interest rate agreements as
of March 31, 2000:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Interest rate swaps with interest rates ranging from 6.03% to 6.14%
expiring between September 2000 and December 2002..................... $ 435,000
Interest rate collars with an interest rate range of 6.08% to 7.5%
expiring between December 2002 and June 2003.......................... 100,000
</TABLE>
These derivative agreements provide hedges for loans under Suiza Dairy
Group's credit facility by limiting or fixing the LIBOR interest rates specified
in the Suiza Dairy Group credit facility at the interest rates noted above until
the indicated expiration dates of these interest rate derivative agreements.
These derivative agreements were previously designated as hedges for
borrowings under our terminated senior credit facility. In connection with the
repayment of amounts owed under our terminated senior credit facility these
derivative agreements were marked to fair market value, which resulted in a gain
of $6.5 million, net of income taxes, which, along with a loss from the write
off of unamortized deferred loan costs related to this facility was reported as
an extraordinary gain from the extinguishment of debt during the first quarter
of 2000. These derivative agreements have been redesignated as hedges under the
Suiza Dairy Group credit facility and their recorded asset value is being
amortized on a straight-line basis over the remaining lives of the respective
agreements. The amortization is reported as a component of total consolidated
interest expense.
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We are exposed to market risk under these arrangements due to the
possibility of interest rates on the Suiza Dairy Group credit facility falling
below the rates on our interest rate derivative agreements. Credit risk under
these arrangements is remote since the counterparties to our interest rate
derivative agreements are major financial institutions.
5. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Prior to the third quarter of 1999, we had two reportable segments
including "dairy" and "packaging." As a result of the sale of our U.S. plastic
packaging operations effective July 2, 1999, we no longer have a reportable
packaging segment under current accounting rules.
In February 2000 we sold our French packaging subsidiary and in May
2000 we sold our German packaging subsidiary, which was our last remaining
packaging operation. In the table below, these two packaging operations are
included in "Other" along with our corporate expenses not allocated to a
specific segment; all periods presented have been reclassified to conform with
this change.
The accounting policies of our segments were the same as those
described in the summary of significant accounting policies set forth in Note 1
to our 1999 consolidated financial statements contained in our 1999 Annual
Report on Form 10-K.
The amounts in the following tables are derived from reports used by
our executive management team:
<TABLE>
<CAPTION>
DAIRY PACKAGING OTHER TOTAL
------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
FIRST QUARTER 2000 (in 000's)
- ------------------
Revenues from external customers.......... $ 1,356,033 $ 38,108 $ 1,394,141
Segment operating income.................. 79,715 (3,404) 76,311
Total segment assets...................... 3,480,327 147,972 3,628,299
FIRST QUARTER 1999 (in 000's)
- ------------------
Revenues from external customers.......... $ 977,665 $ 120,173 $ 55,348 $ 1,153,186
Intersegment revenues..................... 6,857 8,529 15,386
Segment operating income.................. 49,895 16,714 (4,933) 61,676
Total segment assets...................... 2,199,566 589,929 291,705 3,081,200
</TABLE>
Geographic information for the three months ended March 31 (in 000's):
<TABLE>
<CAPTION>
REVENUES LONG-LIVED ASSETS
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States ................ $1,281,209 $1,038,365 $2,625,149 $2,071,390
Puerto Rico .................. 57,859 59,793 122,802 122,573
Europe ....................... 55,073 55,028 125,079 85,428
---------- ---------- ---------- ----------
Total ........................ $1,394,141 $1,153,186 $2,873,030 $2,279,391
========== ========== ========== ==========
</TABLE>
We have no single customer which represents greater than ten percent of
our consolidated revenues.
6. COMPREHENSIVE INCOME
Comprehensive income comprises net income plus all other changes in
equity from non-owner sources. Consolidated comprehensive income was $31.2
million for the three-month period ending
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March 31, 2000. Activity in accumulated other comprehensive income and the
amount of income tax (expense) benefit allocated to each component of other
comprehensive income during the three months ended March 31, 2000 are included
below.
<TABLE>
<CAPTION>
PRE-TAX INCOME TAX BENEFIT
(LOSS) (EXPENSE) NET AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
Accumulated other comprehensive income,
December 31, 1999 ................................ $ (11,152) $ 4,714 $ (6,438)
Cumulative translation adjustments:
Cumulative translation
adjustment arising during period ........ (432) 169 (263)
Less: Reclassification
adjustment for loss realized
during period ........................... 9,674 (3,789) 5,885
---------- ---------- ----------
Accumulated other comprehensive income,
March 31, 2000 ................................... $ (1,910) $ 1,094 $ (816)
========== ========== ==========
</TABLE>
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7. STOCKHOLDERS' EQUITY
On September 15, 1998, our Board of Directors authorized an open market
share repurchase program of up to $100 million of our common stock. On September
28, 1999 the Board increased the program by $100 million to $200 million and on
November 17, 1999 authorized a further increase to $300 million. Set forth in
the chart below is a summary of the stock we repurchased pursuant to this
program through March 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF SHARES PURCHASE
PERIOD REPURCHASED PRICE
------ ----------- ------------
(in millions)
<S> <C> <C>
Third Quarter 1998 ................ 1,000,000 $ 30.4
Fourth Quarter 1998 ............... 510,400 15.6
Second Quarter 1999 ............... 79,700 3.0
Third Quarter 1999 ................ 1,850,515 66.7
Fourth Quarter 1999 ............... 3,486,508 128.4
First Quarter 2000 ................ 688,800 27.2
------------ ------------
Total ......................... 7,615,923 $ 271.3
============ ============
</TABLE>
These repurchased shares were treated as retired in the consolidated
financial statements.
8. PLANT CLOSING COSTS
Plant closing costs -- During the first quarter of 2000, as part of an
overall integration and cost reduction strategy, we recorded plant closing
expenses of $1.8 million related to our Hartford, Connecticut plant. These cash
charges relate to severance costs and plant shutdown expenses.
This strategy is a continuation of our integration and cost reduction
program implemented during 1999. The principal components of the plans approved
during 1999 and 2000 to date include the following:
o Workforce reduction as a result of plant closings, plant
rationalizations and consolidation of administrative functions. The
plans include an overall reduction of 324 people, primarily plant
employees associated with the plant closings and rationalization. The
costs related to each plan were charged to our earnings in the period
that the plan was established in detail and employee severance and
benefits were appropriately communicated. All except 15 employees had
been terminated as of March 31, 2000.
o Shutdown costs include those costs that are necessary to clean and
prepare the plant facilities for closure. Additional costs to be
incurred after shutdown included lease obligations or termination
costs, utilities and property taxes after shutdown of the plant.
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<PAGE> 14
o Write-downs of property, plant and equipment and other assets are
primarily for asset impairments as a result of facilities that are no
longer used in operations. The impairments relate primarily to owned
building, land and equipment at the facilities which are being sold and
were written down to their estimated fair value.
14
<PAGE> 15
Activity during the three months ended March 31, 2000 with respect
to the plant closing costs is summarized below:
<TABLE>
<CAPTION>
BEGINNING ENDING
RESERVE RESERVE
BALANCE CHARGES PAYMENTS BALANCE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash Charges:
Workforce reduction costs ............... $ 3,073 $ 1,025 $ (2,264) $ 1,834
Shutdown costs .......................... 468 564 (304) 728
Lease obligations after shutdown ........ 438 95 (100) 433
Other ................................... 40 90 (41) 89
-------- -------- -------- --------
Total ....................................... $ 4,019 $ 1,774 $ (2,709) $ 3,084
======== ======== ======== ========
</TABLE>
There have not been significant adjustments to the plan and the
majority of future cash requirements to reduce the liability are expected to be
completed in 2000. However, there are continuing cash payments under one
severance agreement that will be made into the first quarter of 2001.
Acquired facility closing costs -- As a part of our purchase price
allocations, we accrued costs in 1999 pursuant to plans to exit certain
activities and operations in order to rationalize production and reduce costs
and inefficiencies. Two plants were closed in connection with the acquisition of
Broughton Foods, and two plants in our northeastern U.S. region were also closed
in connection with our Nature's Best and New England Dairies acquisitions. The
production from these plants was moved to our other facilities. In connection
with our acquisition of Southern Foods, effective January 1, 2000, we approved a
plan to close one of Southern Foods' plants and to consolidate the plant's
production into another plant. As part of our purchase price allocation, an
acquisition accrual of $1.1 million was established for this plant closing.
The principal components of the plans included the following:
o Workforce reduction as a result of plant closings included an overall
reduction of 377 plant personnel. The costs incurred were charged
against our acquisition liabilities for these costs. All except 46
employees had been terminated as of March 31, 2000.
o Shutdown costs include those costs that are necessary to clean and
prepare the plant facilities for closure. Additional costs to be
incurred after shutdown included lease obligations or termination
costs, utilities and property taxes after shutdown of the plant.
Activity during the three months ended March 31, 2000 with respect to
these acquisition liabilities is summarized below:
<TABLE>
<CAPTION>
BEGINNING ENDING
RESERVE RESERVE
BALANCE CHARGES PAYMENTS BALANCE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash Charges:
Workforce reduction costs ..... $ 624 507 $ (258) $ 873
Shutdown costs ................ 332 641 (88) 885
-------- -------- -------- --------
Total ............................. $ 956 $ 1,148 $ (346) $ 1,758
======== ======== ======== ========
</TABLE>
15
<PAGE> 16
9. SUBSEQUENT EVENTS
During the second quarter of this year, through May 8, 2000, we have
repurchased 127,600 shares of our common stock for a total purchase price of
approximately $5.0 million pursuant to an open market share repurchase program
authorized by our Board of Directors. See Note 7 above. As of May 8, 2000, $23.7
million remains available for spending under this program.
Effective May 2, 2000, we sold Dixie Union GmbH & Co. KG, a European
packaging business that we acquired as part of our acquisition of Continental
Can in May 1998. Our only remaining packaging investment is our approximately
43% minority investment in Consolidated Container Company.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are the nation's leading dairy processor and distributor, producing
a full line of company-branded and customer-branded dairy products such as fluid
milk, ice cream and novelties, coffee creamers, half-and-half, whipping cream,
sour cream, cottage cheese and yogurt. We also manufacture and distribute fruit
juices and other flavored drinks, bottled water and coffee, and have a 43.1%
interest in Consolidated Container Company, one of the largest rigid plastic
container manufacturers in the United States.
RESULTS OF OPERATIONS
The following table presents certain information concerning our results
of operations, including information presented as a percentage of net sales
(dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------
2000 1999
-------------------------- --------------------------
% OF % OF
DOLLARS NET SALES DOLLARS NET SALES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ................................... $1,394,141 100.0% $1,153,186 100.0%
Cost of sales ............................... 1,053,983 75.6 920,627 79.8
---------- ---------- ---------- ----------
Gross profit ................................ 340,158 24.4 232,559 20.2
Operating expenses:
Selling and distribution ............... 200,124 14.4 121,855 10.6
General and administrative ............. 49,261 3.5 39,104 3.4
Amortization of intangibles ............ 12,688 0.9 9,924 0.9
Plant closing and other costs .......... 1,774 0.1 0.0
---------- ---------- ---------- ----------
Total operating expenses .................... 263,847 18.9 170,883 14.9
---------- ---------- ---------- ----------
Total operating income ...................... $ 76,311 5.5% $ 61,676 5.3%
========== ========== ========== ==========
</TABLE>
On July 2, 1999 we sold our U.S. packaging operations to Consolidated
Container Company, in exchange for cash and a 43.1% interest in Consolidated
Container. We account for our investment in Consolidated Container under the
equity method of accounting. As a result, the sales and operating expenses of
Consolidated Container for the three months ended March 31, 2000 are no longer
included in the table presented above, but are instead condensed onto a single
line below operating income (see discussion below under "Other (Income)
Expense").
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
Net Sales -- Net sales increased by $241 million or 20.9% to $1.39
billion in the first quarter of 2000 from $1.15 billion in the first quarter of
1999. Excluding $120 million in revenues recorded by our U.S. packaging
operations in the first quarter of 1999, sales increased $361 million or 35.0%.
Acquisitions completed in 1999 and 2000 contributed an additional $438 million
in sales, while a significant reduction in raw milk costs lowered per gallon
revenues, resulting in a decrease in total revenues of approximately $80
million.
Cost of Sales -- Our cost of sales ratio was 75.6% in the first quarter
of 2000 compared to 79.8% in the same period in 1999. If U.S. packaging
operations are excluded, the cost of sales ratio was 80.5% in the first quarter
of 1999. This ratio improved during the first quarter of 2000 due to lower raw
material costs and lower cost of sales ratios at newly acquired companies.
17
<PAGE> 18
Operating Costs and Expenses -- Our operating expense ratio was 18.9%
in the first quarter of 2000 compared to 14.9% in the first quarter of 1999.
This ratio increased due to
o higher distribution costs in newly acquired businesses having
extensive direct store delivery routes in rural areas,
o marketing expenses for new products introduced in the first part
of 2000,
o increased distribution costs because of higher fuel costs, and
o plant closing costs incurred in the first quarter of 2000.
Operating Income -- Operating income in the first quarter of 2000 was
$76.3 million, an increase of 23.7% from first quarter 1999 operating income of
$61.7 million. Our operating income margin increased to 5.5% in the first
quarter of 2000 from 5.3% in the comparable period of 1999. Excluding operating
income of $16.7 million generated by our U.S. packaging operations in the first
quarter 1999, our operating income in 2000 increased $31.3 million or 69.7%.
This increase is due to a significant reduction in raw milk costs and to higher
margins at companies acquired in 2000, partly offset by higher operating
expenses.
Other (Income) Expense -- Interest expense increased to $27.2 million
in the first quarter of 2000 from $15.9 million in 1999 due to increased levels
of debt used to finance acquisitions and to higher interest rates. Financing
charges on preferred securities decreased to $8.4 million in the first quarter
of 2000 from $9.6 million in 1999, reflecting the redemption of $100 million of
5.0% preferred securities held by Dairy Farmers of America in connection with
the Southern Foods transaction.
Income from investments in unconsolidated affiliates, which is
primarily related to our minority interest in Consolidated Container Company,
amounted to $1.9 million in the first quarter of 2000.
Income Taxes -- Income tax expense was recorded at an effective rate of
37.5% in the first quarter of 2000 compared to 38.3% during the first quarter of
1999. This decrease was a result of the sale of our U.S. packaging operations,
which had a higher effective tax rate than our dairy operations, and of certain
tax saving initiatives implemented during the fourth quarter of 1999 and the
first quarter of 2000.
Minority Interest -- Minority interest expense increased to $6.3
million in the first quarter of 2000 from $1.7 million in 1999. Effective
January 1, 2000 we entered into a joint venture with DFA into which we
contributed our domestic fluid dairy operations and DFA contributed the
operations of Southern Foods Group. DFA received a 33.8% ownership interest
which is shown as a minority interest on our consolidated financial statements.
For more information, please see Note 2 to the Consolidated Financial
Statements. In the first quarter of 1999, minority interest expense consisted
primarily of DFA's ownership interests in two smaller joint ventures: Suiza GTL
LLC and Land-O-Sun LLC.
Extraordinary Gain -- During the first quarter of 2000 we recognized a
$5.0 million extraordinary gain, net of income tax expense of $2.8 million,
which included the following items related to the early extinguishment of our
previous senior credit facility:
o A $6.5 million gain, net of income tax expense of $3.6 million,
for interest rate derivatives which became unhedged and were
marked to market, and
o A $1.5 million loss, net of an income tax benefit of $0.8 million,
for the write-off of deferred finance costs.
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<PAGE> 19
RECENT DEVELOPMENTS
Completed Acquisitions
We have completed four acquisitions since January 1, 2000, including:
o Southern Foods (January 2000). Southern Foods Group, the third
largest dairy processor in the United States, had 30 plants in 12
states at the time of our acquisition and net sales of
approximately $1.3 billion in 1999. We acquired Southern Foods
Group pursuant to a joint venture with Dairy Farmers of America.
o Valley of Virginia (February 2000). Valley of Virginia Cooperative
Milk Producers Association, an agricultural marketing cooperative
with dairy processing plants in Springfield and Mr. Crawford,
Virginia, had net sales of approximately $209 million in 1999.
o Leche Celta (February 2000). Leche Celta, the fourth largest dairy
processor in Spain, had net sales of approximately $150 million in
1999. Leche Celta has three plants located in the Galicia and
Cantabria regions of Spain, and produces primarily ultra-high
temperature dairy products. We acquired a majority interest in
this business.
We also made one other small acquisition of the assets of a water
business in January 2000.
Sale of Our European Packaging Operations
On March 3, 2000, we sold Ferembal S.A., our French packaging
subsidiary, and effective May 2, 2000, we sold Dixie Union GmbH & Co. KG, our
German packaging subsidiary. Our only remaining packaging investment is our
approximately 43% minority investment in Consolidated Container Company.
Other Events
Our Board of Directors has authorized an open market share repurchase
program of up to $300 million of our common stock. Between January 1, 2000 and
May 8, 2000 we repurchased 816,400 shares of our common stock for a total
purchase price of $32.2 million. For more information about our stock repurchase
program, please see Note 7 to our Consolidated Financial Statements contained in
this report.
In February of this year, we entered into a long-term supply agreement
to provide The Stop & Shop Supermarket Company, one of the largest grocery store
operators in New England, with all of its private-label milk and related dairy
products in New England and parts of New York. We expect this agreement to
become effective during the second quarter of this year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had total stockholders' equity of $600.8
million, total indebtedness of $1,261.0 million (including long-term debt and
the current portion of long-term debt) and $583.7 million of mandatorily
redeemable convertible trust issued preferred securities. We are currently in
compliance with all covenants and financial ratios contained in our debt
agreements.
19
<PAGE> 20
Cash Flow
Net cash provided by operating activities was $56.9 million for the
first quarter of 2000 as contrasted to $63.1 million for the first quarter of
1999. This decrease was primarily due to the use of cash to fund a change in
working capital. Investing activities in the first quarter of 2000 included
approximately $23.9 million in capital expenditures and $217.8 million of cash
paid for acquisitions, partly offset by $79.4 million in net proceeds from
divestitures.
Current Debt Obligations
In connection with our acquisition of Southern Foods effective January
1, 2000, we replaced our then existing senior credit facility with two new
facilities. For more information about this transaction, please see Note 4 to
our Consolidated Financial Statements contained in this report.
At March 31, 2000 the Suiza Dairy Group had outstanding borrowings of
$1.155 billion under its credit facility. In addition, $19.2 million of letters
of credit secured by the Suiza Dairy Group credit facility were issued but
undrawn. As of March 31, 2000, up to $435.8 million was available for future
borrowings under Suiza Dairy Group's senior credit facility, subject to
satisfaction of certain conditions contained in the loan agreement.
At March 31, 2000 we had no debt outstanding under our parent-level
senior credit facility; however $14.6 million of letters of credit secured by
that facility were issued but undrawn. At March 31, 2000 approximately $285.4
million was available for future borrowing under the parent-level senior credit
facility.
As of May 5, 2000 the outstanding balance on Suiza Dairy Group's senior
credit facility was approximately $1.165 billion, and $20.9 million of letters
of credit secured by this senior credit facility were issued but undrawn. On the
same date, there was no debt outstanding under our parent-level senior credit
facility, and $14.6 million of letters of credit secured by that facility were
issued but undrawn.
Future Capital Requirements
We intend to spend a total of approximately $140 million in capital
expenditures for our existing manufacturing facilities and distribution
capabilities during 2000, of which $24 million has been spent to date. We expect
to fund these capital expenditures using cash flow from operations. Upon closing
of our long-term supply agreement with The Stop & Shop Supermarket Company and
related transactions, which we expect to be during the second quarter of this
year, we will be required to make payments to Stop & Shop totaling approximately
$50 million. We expect to fund these payments out of cash flow from operations
and borrowings under our Suiza Dairy Group credit facility.
We expect that cash flow from operations will be sufficient to meet our
ordinary requirements for our existing businesses for the remainder of 2000 and
for the foreseeable future. In the future, we may pursue additional acquisitions
that are compatible with our core business strategy. Pursuant to our agreement
with Dairy Farmers of America, any acquisitions of fluid dairy businesses in the
United States (excluding territories) will be purchased through Suiza Dairy
Group except in certain unusual circumstances. Therefore, any such acquisitions
will be funded under the Suiza Dairy Group senior credit facility or through
other types of debt and/or equity financing. Working capital requirements for
Suiza Dairy Group and its subsidiaries not satisfied by cash flow from
operations will also be funded through this facility. Any international
acquisitions, or domestic acquisitions of non-fluid dairy businesses, as well as
all stock repurchases, will be funded through the parent senior credit facility
or through other types of debt and/or equity financing. We believe that we have
the ability to secure adequate financing for all of our future capital
requirements.
20
<PAGE> 21
KNOWN TRENDS AND UNCERTAINTIES
Trends in Tax Rates
Our 1999 tax rate was approximately 39.1%. We believe that our
effective tax rate will range from 37% to 40% for the next several years. Our
effective tax rate is affected by various tax advantages applicable to our
Puerto Rico based operations, which will phase out over the next few years. Any
additional acquisitions could change this effective tax rate.
Rationalization Activities
As a result of our rapid growth in recent years, we have many
opportunities to lower costs and become more efficient in our operations by
rationalizing our assets and work force. As we continue to pursue these
opportunities, we may incur costs or other charges related to these
rationalization activities. Although we cannot estimate the amount of these
costs or other charges at this time, we do not expect that these costs will have
a material adverse impact on our earnings or results of operations.
RISK FACTORS
This report contains certain statements about our future that are not
statements of historical fact. These statements are found in the portions of
this report entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Known Trends and Uncertainties" and "Quantitative and Qualitative
Disclosures About Market Risk." In some cases, you can identify these statements
by terminology such as "may," "will," "should," "expects," "seek to,"
"anticipates," "plans," "believes," "estimates," "intends," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These statements are only predictions, and in evaluating those
statements, you should carefully consider the risks outlined below. Actual
performance or results may differ materially and adversely.
We May Have Difficulties Managing Our Growth
We have expanded our operations rapidly in recent years. This rapid
growth places a significant demand on our management and our financial and
operational resources, which subjects us to various risks, including
o inability on our part to successfully integrate or operate
acquired businesses,
o inability to retain key customers of acquired businesses, and
o inability to realize or delays in realizing expected benefits from
our increased size.
The integration of businesses we have acquired or may acquire in the future may
also require us to invest more capital than we expected or require more time and
effort by management than we expected. If we fail to effectively manage the
integration of the businesses we have acquired, our operations and financial
results could be affected, both materially and adversely.
Our Failure to Successfully Compete Could Adversely Affect Our
Prospects and Financial Results
Our business is subject to significant competition. If we fail to
successfully compete against our competitors, our business will be adversely
affected.
21
<PAGE> 22
Significant consolidation is currently underway in the supermarket
industry. As our customer base continues to consolidate, we expect competition
among us and our competitors to intensify as we compete for the business of
fewer customers. Competition in the dairy industry is based on a number of
factors and, as the consolidation of the grocery industry continues, there can
be no assurance that we will be able to keep our existing customers, or to gain
new customers. Winning new customers is particularly important to our future
growth, as demand tends to be relatively flat in our industry. Moreover, as our
customers become larger, they will have significantly greater purchasing
leverage, and may force dairy prices and margins significantly lower than
current levels.
We could also be adversely affected by any expansion of capacity by our
existing competitors or by new entrants in our markets.
Our Innovation Efforts May Not Succeed
We have invested, or intend to invest, significant resources in product
innovation in an effort to increase our sales and profit margins as well as the
overall consumption of dairy products. We believe that sales and profit growth
through innovation may be the only source of significant growth for our business
because demand tends to be relatively flat, and we expect margins on non
value-added dairy products to be compressed as our customer base consolidates.
The success of our innovation initiatives will depend on customer and consumer
acceptance of our products, of which there can be no assurance. If our
innovation efforts do not succeed, we may not be able to continue to increase
sales or profit margins.
Our Raw Material and Supply Costs Could Increase
The most important raw materials that we use in our operations are raw
milk, cream (including butterfat) and high density polyethylene resin. The
prices of these materials increase and decrease depending on supply and demand
and, in some cases, governmental regulation. Prices of raw milk and cream can
fluctuate widely over short periods of time. In many cases, we are not able to
pass on the increased price of raw materials to our customers due primarily to
timing problems. Therefore, volatility in the cost of our raw materials can
adversely affect our performance.
We Could Be Adversely Affected by Changes in Regulations
Under the Federal Milk Marketing Order program, the federal government
and several state agencies establish minimum regional prices paid to producers
for raw milk. These prices, which are calculated by economic formula based on
supply and demand, vary depending on the type of product manufactured using the
raw milk. In New England, the Northeast Dairy Compact Commission sets a minimum
price for milk independent of the price set by the federal milk marketing
orders. The price we pay for raw milk in New England currently exceeds the price
we pay for raw milk in other parts of the country. Several other states have
adopted or are considering adopting compacts among milk producers which would
establish minimum prices paid by milk processors, including us, to raw milk
producers in those states. We do not know whether new compacts will be
authorized by Congress or, if authorized, the extent to which these compacts
would increase the prices we pay for raw milk.
As a manufacturer and distributor of food products, we are also subject
to federal, state and local laws and regulations relating to
o food quality,
o manufacturing standards,
o labeling, and
o packaging.
22
<PAGE> 23
Our operations are subject to other federal, foreign, state and local
governmental regulation, including laws and regulations relating to occupational
health and safety, labor, discrimination and other matters.
While we believe that we are in compliance with all material
governmental regulations, we cannot be certain what effect any future material
noncompliance, or any material changes in these laws and regulations, including
changes in the laws regulating minimum prices for raw milk, could have on our
business. Material changes in these laws and regulations could have positive or
adverse effects on our business.
We Have Substantial Debt and Other Financial Obligations and We May
Incur Additional Debt
As of March 31, 2000, we had substantial debt and other financial
obligations, including
o $1.155 billion of borrowings under the Suiza Dairy Group credit
facility, and
o $583.7 million of 5.5% preferred securities.
Those amounts compare to our stockholders' equity of $600.8 million as
of March 31, 2000.
As of March 31, 2000, up to $435.8 million was available for future
borrowings under Suiza Dairy Group's senior credit facility, subject to
satisfaction of certain conditions contained in the loan agreement, and a total
of $285.4 million was available for borrowing under the parent level credit
facility. We have pledged the stock of some of our subsidiaries to secure these
facilities and the assets of other subsidiaries to secure other indebtedness.
Our credit facilities and related debt service obligations
o limit our ability to obtain additional financing in the future
without obtaining prior consent,
o require us to dedicate a significant portion of our cash flow to
the payment of principal and interest on our debt, which reduces
the funds we have available for other purposes,
o may limit our flexibility in planning for, or reacting to, changes
in our business and market conditions, and
o impose on us additional financial and operational restrictions.
Our ability to make scheduled payments on our debt and other financial
obligations depends on our financial and operating performance. Our financial
and operating performance is subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond our control. If
we do not comply with the financial and other restrictive covenants under our
credit facilities, we may default under these facilities. Upon default, our
lenders could accelerate the indebtedness under the facilities, foreclose
against their collateral or seek other remedies.
We May Be Subject to Product Liability Claims
We sell food products for human consumption, which involves risks such
as
o product contamination or spoilage,
o product tampering, and
o other adulteration of food products.
Consumption of an adulterated, contaminated or spoiled product may
result in personal illness or injury. We could be subject to claims or lawsuits
relating to an actual or alleged illness or injury, and we could incur
liabilities that are not insured or that exceed our insurance coverages.
23
<PAGE> 24
Although we maintain quality control programs designed to address food
quality and safety issues, an actual or alleged problem with the quality, safety
or integrity of our products at any of our facilities could result in
o product withdrawals,
o product recalls,
o remediation expenses,
o negative publicity,
o temporary plant closings, and
o substantial costs of compliance.
Any of these events could have a material and adverse effect on our
financial condition.
Our Foreign Operations Bring Added Risk
In February of this year, we purchased a majority interest in a Spanish
dairy processor. We have little experience in managing businesses in Europe, and
no experience with managing a European dairy operation. There can be no
assurance that we will be able to effectively manage a dairy operation in
Europe. Moreover, conducting operations in Europe involves risks and
uncertainties not present in the U.S. as a result of governmental and economic
conditions being generally less stable than in the United States. Also, we are
exposed to foreign currency risk due to certain operating cash flows and various
financial instruments being denominated in foreign currencies. Currently, our
most significant foreign currency exposure relates to the Spanish peseta and the
euro. Any substantial devaluation of any of these currencies could have a
material adverse effect on our financial condition and results of operations.
Loss of or Inability to Attract Key Personnel Could Adversely Affect
Our Business
Our success depends to a large extent on the skills, experience and
performance of our key management. The loss of one or more of these persons
could hurt our business. We do not maintain key man life insurance on any of our
executive officers or directors. Also, we have experienced, and could continue
to experience, some difficulty in attracting management personnel due to the
currently low unemployment rates in the United States. If we are unable to
attract and retain key management personnel, our business will be adversely
affected.
Certain Provisions of Our Certificate of Incorporation, Bylaws and
Delaware Law Could Deter Takeover Attempts
Some provisions in our certificate of incorporation and bylaws could
delay, prevent or make more difficult a merger, tender offer, proxy contest or
change of control. Our stockholders might view any such transaction as being in
their best interests since the transaction could result in a higher stock price
than the current market price for our common stock. Among other things, our
certificate of incorporation and bylaws
o authorize our board of directors to issue preferred stock in
series with the terms of each series to be fixed by our board of
directors,
o divide our board of directors into three classes so that only
approximately one-third of the total number of directors is
elected each year,
o permit directors to be removed only for cause, and
o specify advance notice requirements for stockholder proposals and
director nominations.
24
<PAGE> 25
In addition, with some exceptions, the Delaware General Corporation Law
restricts mergers and other business combinations between us and any stockholder
that acquires 15% or more of our voting stock.
We also have a stockholder rights plan. Under this plan, after the
occurrence of specified events, our stockholders will be able to buy stock from
us or our successor at reduced prices. These rights do not extend, however, to
persons participating in takeover attempts without the consent of our board of
directors. Accordingly, this plan could delay, defer, make more difficult or
prevent a change of control.
Environmental Regulations Could Result in Charges or Increase Our Costs
of Doing Business
We, like others in similar businesses, are subject to a variety of
federal, foreign, state and local environmental laws and regulations including,
but not limited to, those regulating waste water and stormwater, air emissions,
storage tanks and hazardous materials. We believe that we are in material
compliance with these laws and regulations. Future developments, including
increasingly stringent regulations, could require us to make currently
unforeseen environmental expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE AGREEMENTS
We have interest rate derivative agreements in place, including swaps
and collars that have been designated as hedges against our variable interest
rate exposure on our loans under the Suiza Dairy Group credit facility.
The following table summarizes our various interest rate agreements as
of March 31, 2000:
<TABLE>
<CAPTION>
TYPE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
---- -------------------- ---------------- ---------------
<S> <C> <C> <C>
Swaps ........... 6.03% to 6.14% $ 60.0 million September 2000
100.0 million December 2000
250.0 million December 2002
25.0 million December 2003
Collars ......... 6.08% and 7.50% 100.0 million December 2002
To June 2003
</TABLE>
These derivative agreements provide hedges for loans under Suiza Dairy
Group's credit facility by limiting or fixing the LIBOR interest rates specified
in the Suiza Dairy Group credit facility at the interest rates noted above until
the indicated expiration dates of these interest rate derivative agreements.
These derivative agreements were previously designated as hedges for
borrowings under our terminated senior credit facility. In connection with the
repayment of amounts owed under our terminated senior credit facility these
derivative agreements were marked to fair market value, which resulted in a gain
of $6.5 million, net of income taxes, which, along with a loss from the write
off of unamortized deferred loan costs related to this facility was reported as
an extraordinary gain from the extinguishment of debt during the first quarter
of 2000. These derivative agreements have been redesignated as hedges under the
Suiza Dairy Group credit facility and their recorded asset value is being
amortized on a straight-line basis over the remaining lives of the respective
agreements. The amortization is reported as a component of total consolidated
interest expense.
25
<PAGE> 26
We are exposed to market risk under these arrangements due to the
possibility of interest rates on the Suiza Dairy Group credit facility falling
below the rates on our interest rate derivative agreements. Credit risk under
these arrangements is remote since the counterparties to our interest rate
derivative agreements are major financial institutions.
A majority of our debt obligations are at variable rates. We have
performed a sensitivity analysis assuming a hypothetical 10% adverse movement in
interest rates. As of March 31, 2000, the analysis indicated that such interest
rate movement would not have a material effect on our financial position,
results of operations or cash flows. However, actual gains and losses in the
future may differ materially from that analysis based on changes in the timing
and amount of interest rate movement and our actual exposure and hedges.
FOREIGN CURRENCY
We are exposed to foreign currency risk due to operating cash flows and
various financial instruments that are denominated in foreign currencies. Our
most significant foreign currency exposures relate to the Spanish peseta and the
euro. Potential losses due to foreign currency fluctuations would not have a
material impact on our consolidated financial position, results of operations or
operating cash flow.
26
<PAGE> 27
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re computation of per share earnings.
27 Financial Data Schedules
(b) Reports on Form 8-K and 8-K/A
o We filed a Current Report on Form 8-K on January 11, 2000, as
amended by Forms 8-K/A on March 20 and March 22, 2000, in
connection with the completion of our acquisition of Southern
Foods Group, L.P.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirement 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.
SUIZA FOODS CORPORATION
/s/ Barry A. Fromberg
-------------------------------------
Barry A. Fromberg Executive Vice
President, Chief Financial Officer
(Principal Accounting Officer)
Date: May 11, 2000
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
11 Statement re computation of per share earnings
27 Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT 11 - Statement re computation of per share earnings
SUIZA FOODS CORPORATION
(In thousands, except share and per-share amounts)
<TABLE>
<CAPTION>
Three Months ended
March 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Basic EPS computation:
Numerator:
Income before extraordinary gain $ 20,594 $ 20,873
------------ ------------
Income applicable to common stock $ 20,594 $ 20,873
============ ============
Denominator:
Average common shares 29,071,467 33,642,148
============ ============
Basic EPS before extraordinary gain $ 0.71 $ 0.62
============ ============
Diluted EPS calculation:
Numerator:
Income before extraordinary gain $ 20,594 $ 20,873
Net effect on earnings from conversion of mandatorily
redeemable convertible preferred securities 5,340 775
------------ ------------
Income applicable to common stock $ 25,934 $ 21,648
============ ============
Denominator:
Average common shares - basic 29,071,467 33,642,148
Stock option conversion 809,677 1,135,933
Dilutive effect of conversion of manditorily
redeemable convertible preferred securities 7,730,328 1,428,571
------------ ------------
Average common shares - diluted 37,611,472 36,206,652
============ ============
Diluted EPS before extraordinary gain $ 0.69 $ 0.60
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
FINANCIAL STATEMENTS FOR THE 3-MONTH PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 32,507
<SECURITIES> 0
<RECEIVABLES> 484,674
<ALLOWANCES> 0
<INVENTORY> 190,419
<CURRENT-ASSETS> 754,768
<PP&E> 969,607
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,628,299
<CURRENT-LIABILITIES> 608,899
<BONDS> 1,236,745
583,650
0
<COMMON> 290
<OTHER-SE> 600,501
<TOTAL-LIABILITY-AND-EQUITY> 3,628,299
<SALES> 1,394,141
<TOTAL-REVENUES> 1,394,141
<CGS> 1,053,983
<TOTAL-COSTS> 263,847
<OTHER-EXPENSES> (547)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,630
<INCOME-PRETAX> 43,097
<INCOME-TAX> 16,179
<INCOME-CONTINUING> 20,594
<DISCONTINUED> 0
<EXTRAORDINARY> 4,968
<CHANGES> 0
<NET-INCOME> 25,562
<EPS-BASIC> 0.88
<EPS-DILUTED> 0.82
</TABLE>
