<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 JUNE 30, 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 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 August 7, 2000 the number of shares outstanding of each class of
common stock was:
Common Stock, par value $.01 27,847,234
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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................ 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk........................................... 25
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.................................................. 27
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>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................................... $ 69,304 $ 25,155
Accounts receivable, net .................................................... 476,353 379,070
Inventories ................................................................. 173,656 182,321
Refundable income taxes ..................................................... 5,072 3,514
Deferred income taxes ....................................................... 25,469 27,005
Prepaid expenses and other current assets ................................... 17,784 22,342
----------- -----------
Total current assets ........................................................ 767,638 639,407
Property, plant and equipment, net ............................................. 985,313 758,485
Intangible and other assets .................................................... 1,923,283 1,261,030
----------- -----------
Total .......................................................................... $ 3,676,234 $ 2,658,922
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 557,584 $ 441,792
Income taxes payable ........................................................ 1,209 14,654
Current portion of long-term debt and subsidiary lines of credit ............ 64,510 22,671
----------- -----------
Total current liabilities ................................................... 623,303 479,117
Long-term debt ................................................................. 1,279,860 689,397
Other long-term liabilities .................................................... 24,907 34,858
Deferred income taxes .......................................................... 63,112 46,323
Mandatorily redeemable convertible trust issued preferred securities ........... 583,796 683,505
Minority interest in subsidiaries .............................................. 497,824 141,750
Commitments and contingencies
Stockholders' equity:
Common stock, 28,503,142 and 29,287,558 shares issued and outstanding ....... 284 293
Additional paid-in capital .................................................. 230,556 275,527
Retained earnings ........................................................... 373,685 314,590
Accumulated other comprehensive income ...................................... (1,093) (6,438)
----------- -----------
Total stockholders' equity .................................................. 603,432 583,972
----------- -----------
Total .......................................................................... $ 3,676,234 $ 2,658,922
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ............................................................... $ 1,434,354 $ 1,118,844 $ 2,828,495 $ 2,272,030
Cost of sales ........................................................... 1,074,136 855,895 2,128,118 1,776,522
------------ ------------ ------------ -----------
Gross profit ............................................................ 360,218 262,949 700,377 495,508
Operating costs and expenses:
Selling and distribution ............................................. 199,803 124,332 399,927 246,188
General and administrative ........................................... 42,939 41,733 92,200 80,837
Amortization of intangibles .......................................... 12,970 10,054 25,658 19,977
Plant closing and other costs ........................................ 1,190 4,671 2,964 4,671
------------ ------------ ------------ -----------
Total operating costs and expenses ................................... 256,902 180,790 520,749 351,673
------------ ------------ ------------ -----------
Operating income ........................................................ 103,316 82,159 179,628 143,835
Other (income) expense:
Interest expense, net ................................................ 26,914 15,235 54,135 31,178
Financing charges on trust issued preferred securities ............... 8,395 9,646 16,805 19,293
Equity in earnings of unconsolidated affiliates ...................... (3,535) (92) (5,404) (156)
Other (income) expense, net .......................................... (528) 498 (1,075) 55
------------ ------------ ------------ -----------
Total other (income) expense ......................................... 31,246 25,287 64,461 50,370
------------ ------------ ------------ -----------
Income before income taxes, minority interests and extraordinary gain ... 72,070 56,872 115,167 93,465
Income taxes ............................................................ 27,700 22,092 43,879 36,103
Minority interest in earnings ........................................... 10,837 2,633 17,161 4,342
------------ ------------ ------------ -----------
Income before extraordinary gain ........................................ 33,533 32,147 54,127 53,020
Extraordinary gain ...................................................... -- -- 4,968 --
------------ ------------ ------------ -----------
Net income .............................................................. $ 33,533 $ 32,147 $ 59,095 $ 53,020
============ ============ ============ ===========
Average common shares: Basic ............................................ 28,896,573 33,730,348 28,984,020 33,686,492
Average common shares: Diluted .......................................... 37,322,452 43,805,753 37,470,275 43,845,578
Basic earnings per common share:
Income before extraordinary gain ..................................... $ 1.16 $ 0.95 $ 1.87 $ 1.57
Extraordinary gain ................................................... -- -- .17 --
------------ ------------ ------------ -----------
Net income ........................................................... $ 1.16 $ 0.95 $ 2.04 $ 1.57
============ ============ ============ ===========
Diluted earnings per common share:
Income before extraordinary gain ..................................... $ 1.04 $ 0.87 $ 1.73 $ 1.48
Extraordinary gain ................................................... -- -- .13 --
------------ ------------ ------------ -----------
Net income ........................................................... $ 1.04 $ 0.87 $ 1.86 $ 1.48
============ ============ ============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
2000 1999
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................................ $ 59,095 $ 53,020
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ......................................................... 76,061 63,202
Minority interest, before tax effects ................................................. 28,871 6,416
Equity in earnings of unconsolidated affiliates ....................................... (5,404) (156)
Extraordinary gain .................................................................... (4,968) --
Deferred income taxes ................................................................. 18,336 15,235
Other, net ............................................................................ (971) 5,902
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ................................................................ 528 38,792
Inventories ........................................................................ (8,545) (3,221)
Prepaid expenses and other assets .................................................. 10,169 (6,574)
Accounts payable and other accrued expenses ........................................ (42,225) (65,316)
Income taxes ....................................................................... (7,993) 17,547
----------- -----------
Net cash provided by operating activities ........................................ 122,954 124,847
Cash flows from investing activities:
Net additions to property, plant and equipment ............................................. (55,378) (104,758)
Cash outflows for acquisitions ............................................................. (270,131) (147,230)
Net proceeds from divestitures ............................................................. 89,037 6,795
Other ...................................................................................... 1,139 (2,051)
----------- -----------
Net cash used in investing activities ............................................ (235,333) (247,244)
Cash flows from financing activities:
Proceeds from the issuance of debt ......................................................... 1,265,908 105,787
Repayment of debt .......................................................................... (941,800) (5,107)
Payment of deferred financing and debt restructuring ....................................... (11,287) --
Issuance of common stock, net of expenses ................................................. 17,852 2,123
Redemption of trust issued preferred securities ............................................ (100,000) --
Redemption of common stock ................................................................. (69,386) (2,975)
Proceeds from issuance of minority interest ................................................ -- 8,983
Distributions to minority interest ......................................................... (4,759) (1,204)
----------- -----------
Net cash provided by financing activities ........................................ 156,528 107,607
----------- -----------
Increase (decrease) in cash and cash equivalents .............................................. 44,149 (14,790)
Cash and cash equivalents, beginning of period ................................................ 25,155 54,922
----------- -----------
Cash and cash equivalents, end of period ...................................................... $ 69,304 $ 40,132
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 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, L.P. 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 the dairy business 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, as discussed
in Note 4.
6
<PAGE> 7
We also made one other small acquisition of the assets of a water business
in January 2000.
On March 3, 2000 we completed the sale 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- and six-month periods ended June 30, 1999, as if the Southern Foods
operations had been acquired as of the beginning of 1999, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------------- --------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales ........ 1,118,844 1,421,257 2,272,030 2,905,047
Net Income ....... 32,147 32,465 53,020 54,000
Earnings per share
Basic ....... 0.95 0.96 1.57 1.60
Diluted ..... 0.87 0.89 1.48 1.52
</TABLE>
On a pro forma basis, our other 1999 and 2000 acquisitions, net of the sale
in 1999 of a majority interest in our U.S. packaging operations and the sale in
2000 of our European packaging operations, do not have a material pro forma
impact on net sales or net income for the three- or six-month periods ended June
30, 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 JUNE 30, AT DECEMBER 31,
2000 1999
----------- ---------------
(in thousands)
<S> <C> <C>
Raw materials and supplies ......... $ 96,173 $100,044
Finished goods ..................... 77,483 82,277
-------- --------
Total ......................... $173,656 $182,321
======== ========
</TABLE>
4. DEBT
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
2000 1999
----------- ---------------
(in thousands)
<S> <C> <C>
Parent senior credit facility .................... $ -- $ 635,500
Subsidiary debt obligations:
Suiza Dairy Group credit facility ............ 1,095,000 --
Receivable-backed loan ....................... 150,000 --
Foreign subsidiary term loan ................. 41,000 --
Other lines of credit ........................ 5,491 24,655
Industrial development revenue bonds ......... 9,330 9,330
Capital lease obligations and other .......... 43,549 42,583
----------- -----------
1,344,370 712,068
Less current portion ............................. (64,510) (22,671)
----------- -----------
Total ........................................ 1,279,860 $ 689,397
=========== ===========
</TABLE>
7
<PAGE> 8
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 "New
Parent Credit Facility" and "Suiza Dairy Group Credit Facility" below.
New Parent Credit Facility -- Effective January 1, 2000 we 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 June 30, 2000, no funds were borrowed under this facility. See "Credit
Facility Terms" below for a description of the terms of the new parent credit
facility.
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. See "Credit Facility Terms" below for a description of the
terms of the Suiza Dairy Group credit facility.
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 (as
defined in the agreement), 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 8.50% at June 30, 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 the capital stock of certain of our subsidiaries.
8
<PAGE> 9
Receivable-Backed Loan -- On June 30, 2000 we completed a securitization of
certain subsidiary accounts receivable for $150 million. Pursuant to this
transaction, we pledged receivables to a multi-seller asset-backed conduit
sponsored by a major financial institution. The $150 million in proceeds were
distributed to Suiza Dairy Group and our Morningstar subsidiary. Suiza Dairy
Group used their proceeds to pay down higher cost borrowings under their credit
facility. The loan bears interest at a variable rate based on the commercial
paper yield as defined in the agreement. The interest rate on the
receivable-backed loan at June 30, 2000 was 7.15%.
Foreign Subsidiary Term Loan -- In connection with our acquisition of Leche
Celta in February 2000, our Spanish subsidiary obtained a 7 billion peseta (as
of August 7, 2000, approximately $38.2 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 loan, which is secured by the stock of Leche
Celta, 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 June 30, 2000 was 6.75%.
Other Lines of Credit -- Leche Celta, our Spanish subsidiary, is our only
subsidiary with a currently outstanding line of credit separate from the credit
facilities described above. Leche Celta's existing line of credit, which is in
the principal amount of 2.5 billion pesetas (as of August 7, 2000, approximately
$13.6 million), was obtained on July 12, 2000 in replacement of a pre-existing
line of credit, bears interest at a variable interest rate based on the ratio of
Leche Celta's debt to EBITDA (as defined in the corresponding loan agreement),
is secured by the stock of Leche Celta and will expire in June 2007. The
interest rate on the pre-existing line of credit was 4.75% at June 30, 2000. Our
French and German subsidiaries, which we sold in March and May 2000,
respectively, also had lines of credit. Those lines of credit were terminated
upon completion of the divestitures.
Industrial Development Revenue Bonds -- 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 June 30, 2000,
ranged from 4.95% to 5.15%.
Other Subsidiary Debt -- 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.
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 interest rate 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.
9
<PAGE> 10
The following table summarizes our various interest rate agreements as of
June 30, 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 2003 ................. $435,000
Interest rate collars with an interest rate range of 6.08% to 7.50%
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.
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
10
<PAGE> 11
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 ceased to have a reportable
packaging segment under applicable accounting rules. Therefore, we shifted our
two remaining packaging operations into "Corporate/Other" for segment reporting
purposes beginning in the third quarter of 1999. All periods presented have been
reclassified to conform with these changes.
The accounting policies of the 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 following are reconciliations of reportable segment amounts to our
consolidated totals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------
2000
--------------------------------------------------
(in 000s) Dairy Packaging Other Total
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers ... $1,430,176 $ 4,178 $1,434,354
Intersegment revenues .............. -- -- --
Segment operating income (loss) .... 105,983 (2,667) 103,316
Total segment assets ............... 3,544,482 131,752 3,676,234
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------
1999
--------------------------------------------------
(in 000s) Dairy Packaging Other Total
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers ... $ 934,794 $124,692 $ 59,358 $1,118,844
Intersegment revenues .............. 9,448 10,145 -- 19,593
Segment operating income (loss) .... 67,784 17,893 (3,518) 82,159
Total segment assets ............... 2,279,188 591,531 302,850 3,173,569
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
2000
------------------------------------------------
(in 000s) Dairy Packaging Other Total
---------- --------- ------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers ..... $2,786,209 $42,286 $2,828,495
Intersegment revenues ................ -- -- --
Segment operating income (loss) ...... 185,700 (6,072) 179,628
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------
1999
--------------------------------------------------
(in 000s) Dairy Packaging Other Total
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers ... $1,912,459 $244,866 $114,705 $2,272,030
Intersegment revenues .............. 16,036 18,674 -- 34,710
Segment operating income (loss) .... 117,678 34,607 (8,450) 143,835
</TABLE>
----------
11
<PAGE> 12
Geographic information for the three- and six-month periods ended June 30:
<TABLE>
<CAPTION>
REVENUES LONG-LIVED ASSETS
-------------------------------------------------------- -------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, AT JUNE 30,
--------------------------- ------------------------- -------------------------
(in 000s) 2000 1999 2000 1999 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States ...... $1,339,147 $ 998,895 $2,658,464 $2,037,260 $2,671,116 $2,177,650
Puerto Rico ........ 56,318 60,591 114,177 120,384 121,150 124,053
Europe ............. 38,889 59,358 55,854 114,386 116,330 83,579
---------- ---------- ---------- ---------- ---------- ----------
Total .............. $1,434,354 $1,118,844 $2,828,495 $2,272,030 $2,908,596 $2,385,282
========== ========== ========== ========== ========== ==========
</TABLE>
No single customer represents greater than ten percent of our consolidated
revenues.
6. COMPREHENSIVE INCOME
Comprehensive income consists of net income plus all other changes in
equity from non-owner sources. Consolidated comprehensive income was $33.3
million and $64.4 million for the three-month and six-month periods ending June
30, 2000. Differences between net income and consolidated comprehensive income
for these periods are due to foreign currency translation adjustments. 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- and six-month periods ended June 30, 2000 are included below.
<TABLE>
<CAPTION>
TAX BENEFIT
PRE-TAX INCOME (LOSS) (LOSS) 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)
Reclassification adjustment
for loss on disposal during period 9,674 (3,789) 5,885
-------- -------- --------
Accumulated other comprehensive income,
March 31, 2000 ......................... $ (1,910) $ 1,094 $ (816)
Cumulative translation adjustment
arising during period ............. (1,920) 751 (1,169)
Reclassification adjustment
for loss on disposal during period 1,465 (573) 892
-------- -------- --------
Accumulated other comprehensive income,
June 30, 2000 .......................... $ (2,365) $ 1,272 $ (1,093)
======== ======== ========
</TABLE>
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. The Board
increased the program on September 28, 1999 and again on November 17, 1999,
bringing the total authorized amount to $300 million. We fulfilled the $300
million authorization during the second quarter of 2000, and on May 19, 2000,
the Board again increased the program by $100 million to $400 million. Set forth
in the chart below is a summary of the stock we have repurchased pursuant to
this program through June 30, 2000.
12
<PAGE> 13
<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
Second Quarter 2000 .......... 966,065 42.2
--------- ---------
Total .................... 8,581,988 $ 313.5
========= =========
</TABLE>
Repurchased shares are treated as retired in our consolidated financial
statements.
8. CURTAILMENT OF BENEFIT PLANS
We recognized a pre-tax curtailment gain of $3.6 million during the second
quarter of 2000. This was primarily due to a reduction in the projected benefit
obligation under certain defined benefit plans which resulted from the
consolidation of the employees covered by those plans into our defined
contribution plan.
9. PLANT CLOSING COSTS
Plant Closing Costs - During the second quarter of 2000, as part of an
overall integration and cost reduction strategy, we recorded costs in the amount
of $641,000 associated with eliminating certain activities in our Puerto Rico
operation and additional costs in the amount of $549,000 associated with
restructuring our corporate office departments. These costs relate primarily to
severance and other expenses in connection with the elimination of a production
shift and certain maintenance activities in Puerto Rico.
During the first quarter of 2000, 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 204 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 37 employees had been terminated as of
June 30, 2000.
o Shutdown costs including those costs that are necessary to clean
and prepare the plant facilities for closure.
o Additional costs to be incurred after shutdown including lease
obligations or termination costs, utilities and property taxes
after shutdown of the plant.
o Write-downs of property, plant and equipment and other assets
primarily related to asset impairments as a result of facilities
that are no longer used in operations. The
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<PAGE> 14
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.
Plant closing and other nonrecurring costs charged to operations during the
first and second quarters of 2000 are summarized in the following chart:
<TABLE>
<CAPTION>
(in 000s) FIRST QUARTER SECOND QUARTER TOTAL
------------- -------------- ------
<S> <C> <C> <C>
Cash charges:
Workforce reduction costs ........... $1,025 $ 727 $1,752
Shutdown costs ...................... 564 -- 564
Lease obligations after shutdown .... 95 -- 95
Other ............................... 90 69 159
------ ------ ------
Total cash charges ....................... $1,774 $ 796 $2,570
Non-cash charges:
Write down of inventory and property,
plant and equipment ................. -- 394 394
------ ------ ------
Total .................................... $1,774 $1,190 $2,964
====== ====== ======
</TABLE>
Set forth in the following chart are the types and amounts of charges that
were recognized as accrued expenses, along with cash payments made against such
accruals during 2000:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
---------------------
ACCRUED CHARGES AT ACCRUED CHARGES AT
DECEMBER 31, 1999 CHARGES PAYMENTS JUNE 30, 2000
------------------- ------- -------- ------------------
(in 000s)
<S> <C> <C> <C> <C>
Cash charges:
Workforce reduction costs ................ $ 3,073 $ 1,752 $(2,869) $ 1,956
Shutdown costs ........................... 468 564 (463) 569
Lease obligations after shutdown ......... 438 95 (193) 340
Other .................................... 40 159 (167) 32
------- ------- ------- -------
Total ........................................ $ 4,019 $ 2,570 $(3,692) $ 2,897
======= ======= ======= =======
</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
within a year.
Acquired Facility Closing Costs -- As part of our purchase price
allocations, we accrued costs in 1999 and 2000 pursuant to plans to exit certain
activities and operations in order to rationalize production and reduce costs
and inefficiencies. Several plants were closed in connection with our
acquisitions of Broughton Foods, Nature's Best, New England Dairies and Southern
Foods. Production from these plants was moved to our other facilities.
The principal components of the plans include the following:
o Workforce reduction as a result of plant closings including an overall
reduction of 286 plant personnel. The costs incurred to date have been
charged against our acquisition liabilities for these costs. All
except 45 employees had been terminated as of June 30, 2000.
o Shutdown costs including those costs that are necessary to clean and
prepare the plant facilities for closure. Additional costs to be
incurred after shutdown include lease obligations or termination
costs, utilities and property taxes after shutdown of the plant.
14
<PAGE> 15
Set forth in the following chart are the types and amounts of costs that
were recognized as accrued expenses, along with cash payments made against such
accruals during 2000:
<TABLE>
<CAPTION>
ACCRUED SIX MONTHS ENDED
CHARGES AT June 30, 2000
DECEMBER 31, -------------------------- ACCRUED CHARGES AT
1999 ACCRUALS PAYMENTS JUNE 30, 2000
------------ ----------- ---------- ------------------
(in 000s)
<S> <C> <C> <C> <C>
Cash charges:
Workforce reduction costs .......... $ 624 $ 1,007 $ (492) $ 1,139
Shutdown costs ..................... 332 1,641 (249) 1,724
---------- ---------- ---------- ----------
Total .................................. $ 956 $ 2,648 $ (741) $ 2,863
========== ========== ========== ==========
</TABLE>
10. SUBSEQUENT EVENTS
During the third quarter of this year, through August 7, 2000, we have
repurchased 677,600 shares of our common stock for a total purchase price of
approximately $32.0 million pursuant to an open market share repurchase program
authorized by our Board of Directors. See Note 7 above. As of August 7, 2000,
$54.6 million was available for spending under this program.
15
<PAGE> 16
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 JUNE 30,
--------------------------------------------------------
2000 1999
------------------------- -------------------------
% OF % OF
DOLLARS NET SALES DOLLARS NET SALES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ............................ $1,434,354 100.0% $1,118,844 100.0%
Cost of sales ........................ 1,074,136 74.9 $ 855,895 76.5%
---------- ---------- ---------- ----------
Gross profit ......................... 360,218 25.1 262,949 23.5
Operating expenses:
Selling and distribution ........ 199,803 13.9 124,332 11.1
General administrative .......... 42,939 3.0 41,733 3.8
Amortization of
intangibles.................... 12,970 0.9 10,054 0.9
Plant closing and other costs ... 1,190 0.1 4,671 0.4
---------- ---------- ---------- ----------
Total operating expenses ... 256,902 17.9 180,790 16.2
---------- ---------- ---------- ----------
Operating income ..................... $ 103,316 7.2% $ 82,159 7.3%
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
2000 1999
------------------------- -------------------------
% OF % OF
DOLLARS NET SALES DOLLARS NET SALES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ............................ $2,828,495 100.0% $2,272,030 100.0%
Cost of sales ........................ 2,128,118 75.2 1,776,522 78.2
---------- ---------- ---------- ----------
Gross profit ......................... 700,377 24.8 495,508 21.8
Operating expenses:
Selling and distribution ........ 399,927 14.1 246,188 10.8
General administrative .......... 92,200 3.3 80,837 3.6
Amortization of
intangibles.................... 25,658 0.9 19,977 0.9
Plant closing and other costs ... 2,964 0.1 4,671 0.2
---------- ---------- ---------- ----------
Total operating expenses ... 520,749 18.4 351,673 15.5
---------- ---------- ---------- ----------
Operating income ..................... $ 179,628 6.4% $ 143,835 6.3%
========== ========== ========== ==========
</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-and six-month periods ended June 30, 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").
Second Quarter and Year-to-Date 2000 Compared to Second Quarter and
Year-to-Date 1999
Net Sales -- Net sales increased 28.2% to $1.43 billion in the second
quarter of 2000 from $1.12 billion in the second quarter of 1999. For the six
month period ending June 30, net sales increased 24.5% to $2.83 billion in 2000
from $2.27 billion in 1999. Excluding $125 million in revenues recorded by our
U.S. packaging operations in the second quarter of 1999 and $245 million
recorded in the first six months of 1999, sales increased $440 million or 44.3%
in the second quarter of 2000 and increased $801 million or 39.5% in the first
six months of 2000. This increase was primarily due to acquisitions.
Cost of Sales -- Our cost of sales ratio was 74.9% in the second quarter of
2000 compared to 76.5% in the same period in 1999, and 75.2% for the first six
months of 2000 compared to 78.2% for the same period of 1999. This ratio
improved during the second quarter of 2000 due to improved performance at
dairies owned more than twelve months, and because Southern Foods, acquired
effective January 1, 2000, has a lower cost of sales ratio than our existing
dairies. For the first six months of 2000, the cost of sales ratio improved for
the same reasons, in addition to lower raw material costs in the first quarter.
Operating Costs and Expenses -- Our operating expense ratio was 17.9% in
the second quarter of 2000 compared to 16.2% in the second quarter of 1999, and
18.4% in the first six months of 2000 compared to 15.5% in the same period of
1999.
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<PAGE> 17
This ratio increased due to
o higher distribution costs at Southern Foods as a result of their
extensive direct store delivery routes in rural areas,
o higher marketing expenses in 2000 related to new products introduced
in the first part of 2000,
o increased distribution costs in 2000 because of higher fuel costs.
These cost increases were partly offset by a $3.6 million pre-tax gain
in the second quarter of 2000 related to the curtailment of certain defined
benefit plans.
Operating Income -- Operating income in the second quarter of 2000 was
$103.3 million, an increase of 25.8% from second quarter 1999 operating income
of $82.2 million. For the six month period ended June 30, operating income
increased 24.9% to $179.6 million in 2000 from $143.8 million in 1999. Excluding
operating income of $17.9 million generated by our U.S. packaging operations in
the second quarter of 1999, our operating income in 2000 increased $39.1 million
or 60.8%. Likewise, omitting $34.6 million of operating income at our U.S.
packaging operations in the first six months of 1999, our operating income in
2000 increased $70.4 million or 64.5%. Excluding the contribution of our U.S.
packaging operations in 1999, our operating income margin increased to 7.2% in
the second quarter of 2000 compared to 6.5% in 1999, and increased to 6.4% in
the first six months of 2000 compared to 5.4% in 1999. This increase is due to a
significant reduction in raw milk costs during the first quarter and to higher
margins at Southern Foods, partly offset by higher operating expenses.
Other (Income) Expense -- Interest expense increased to $26.9 million in
the second quarter of 2000 from $15.2 million in 1999, and increased to $54.1
million in the first six months of 2000 from $31.2 million in the same period of
1999. These increases are due to additional debt used to finance acquisitions
and to higher interest rates. Financing charges on preferred securities
decreased to $8.4 million in the second quarter of 2000 from $9.6 million in
1999, and decreased to $16.8 million in the first six months of 2000 from $19.3
million in 1999. This reflects the redemption of $100.0 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 in 2000 is
primarily related to our minority interest in Consolidated Container Company,
amounted to $3.5 million in the second quarter of 2000 and $5.4 million in the
first six months of 2000. During 1999, we reported $0.1 million in the second
quarter and $0.2 million for the first six months related to our investment in
Horizon Organic.
Income Taxes -- Income tax expense was recorded at an effective rate of
38.4% in the second quarter of 2000 compared to 38.8% during the second quarter
of 1999, and at an effective rate of 38.1% in the first six months of 2000
compared to 38.6% during the same period 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 in earnings increased to $10.8
million in the second quarter of 2000 from $2.6 million in 1999, and increased
to $17.2 million in the first six months of 2000 compared to $4.3 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
17
<PAGE> 18
on our consolidated financial statements. During 1999, minority interest in
earnings 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
fair market value, 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.
RECENT DEVELOPMENTS
Securitization of Receivables
On June 30, 2000, we completed the securitization of $150 million of
receivables. Pursuant to this transaction, we have pledged these receivables to
a multi-seller asset-backed conduit sponsored by a major financial institution.
In return, we obtained $150 million in proceeds which we distributed to Suiza
Dairy Group and Morningstar. Suiza Dairy Group used their proceeds to pay down
higher cost borrowings under their credit facility.
Investment in Dairy.com
On July 28, 2000, we announced our investment in Dairy.com, the first
business-to-business online vertical exchange focused specifically on serving
the dairy industry.
Stock Repurchase Program
Our Board of Directors has authorized an open market share repurchase
program of our common stock. Our Board of Directors increased the authorized
amount of the program by $100 million to $400 million on May 19, 2000. Between
January 1, 2000 and August 7, 2000 we repurchased 2,332,465 shares of our common
stock for a total purchase price of $101.4 million. For more information about
our stock repurchase program, please see Notes 7 and 10 to our Consolidated
Financial Statements contained in this report.
New Supply Agreement
Effective June 3, 2000, Suiza Dairy Group and Morningstar began
supplying The Stop & Shop Supermarket Company with private label and branded
milks and creams, private label juices and certain cultured products under a
long-term supply agreement.
Completed Acquisitions
We have completed four acquisitions during 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.
18
<PAGE> 19
o Valley of Virginia (February 2000). Valley of Virginia
Cooperative Milk Producers Association, an agricultural marketing
cooperative with dairy processing plants in Springfield and Mt.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had total stockholders' equity of $603.4
million, total indebtedness of $1.34 billion (including long-term debt and the
current portion of long-term debt) and $583.8 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.
Cash Flow
Net cash provided by operating activities was $123.0 million for the
first six months of 2000 as contrasted to $124.8 million for the first six
months of 1999. Investing activities in the first six months of 2000 included
approximately $55.4 million in capital expenditures and $270.1 million of cash
paid for acquisitions, partly offset by $89.0 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 June 30, 2000 the Suiza Dairy Group had outstanding borrowings of
$1.10 billion under its credit facility. In addition, $20.6 million of letters
of credit secured by the Suiza Dairy Group credit facility were issued but
undrawn. As of June 30, 2000, up to $494.4 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 June 30, 2000 we had no debt outstanding under our parent-level
senior credit facility; however $4.0 million of letters of credit secured by
that facility were issued but undrawn. At June 30, 2000 approximately $296.0
million was available for future borrowing under the parent-level senior credit
facility.
As of August 7, 2000 the outstanding balance on Suiza Dairy Group's
senior credit facility was approximately $1.08 billion, and $21.6 million of
letters of credit secured by this senior credit facility
19
<PAGE> 20
were issued but undrawn. On the same date, there was no debt outstanding under
our parent-level senior credit facility, and $4.0 million of letters of credit
secured by that facility were issued but undrawn. .
Future Capital Requirements
We intend to spend a total of approximately $140.0 million in capital
expenditures for our existing manufacturing facilities and distribution
capabilities during 2000, of which $55.4 million has been spent to date. We
expect to fund these capital expenditures using cash flow from operations.
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, 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.
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
21
<PAGE> 22
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.
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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 June 30, 2000, we had outstanding debt and other financial
obligations of approximately $1.3 billion compared to our stockholders' equity
of $603.4 million.
As of June 30, 2000, up to $494.4 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 $296.0 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,
o impose on us additional financial and operational restrictions, and
o expose us to interest rate risk since a majority of our debt obligations
are at variable rates.
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.
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,
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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 prior 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. 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.
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
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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 interest
rate 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
June 30, 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.
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 June 30, 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.
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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. We do not expect any potential losses due to foreign currency fluctuations
to have a material impact on our consolidated financial position, results of
operations or operating cash flow.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2000, we held our annual meeting of stockholders. At the
annual meeting, we submitted the following matters to a vote of our
stockholders:
o the re-elections of Hector M. Nevares, Pete Schenkel and Jim L. Turner
as members of our Board of Directors,
o an increase in the number of shares of our common stock reserved for
issuance under our 1997 Stock Option and Restricted Stock Plan from
5.5 million shares to 7.5 million shares, and
o the ratification of our Board of Directors' selection of Deloitte &
Touche LLP as our independent auditor for fiscal year 2000.
At the annual meeting, the stockholders re-elected the directors named
above, approved the proposed increase in the number of shares reserved for
issuance under our 1997 Stock Option and Restricted Stock Plan and ratified the
selection of Deloitte & Touche LLP as our independent auditor.
The vote of the stockholders with respect to each such matter was as
follows:
o Re-election of directors:
<TABLE>
<S> <C>
Hector M. Nevares 25,921,976 votes for; 336,760 votes withheld
Pete Schenkel 25,922,096 votes for; 336,640 votes withheld
Jim L. Turner 25,917,737 votes for, 340,999 votes withheld
</TABLE>
o Approval of the proposed increase in the number of shares reserved for
issuance under our 1997 Stock Option and Restricted Stock Plan:
17,007,233 votes for; 4,303,713 against; 53,467 abstentions;
4,894,323 broker non-votes
o Ratification of our selection of Deloitte & Touche LLP as our
independent auditor:
26,210,363 votes for; 16,144 against; 32,229 abstentions
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
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUIZA FOODS CORPORATION
/s/ Barry A. Fromberg
--------------------------------------------
Barry A. Fromberg
Executive Vice President and Chief Financial
Officer (Principal Accounting Officer)
Date: August 11, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Statement re computation of per share earnings
27 Financial Data Schedules
</TABLE>
