<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 SEPTEMBER 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 November 6, 2000 the number of shares outstanding of each class
of common stock was:
Common Stock, par value $.01 27,158,928
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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 1 - Legal Proceedings.................................................................................... 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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................................... $ 42,997 $ 25,155
Accounts receivable, net .................................................... 479,688 379,070
Inventories ................................................................. 181,484 182,321
Refundable income taxes ..................................................... 20,033 3,514
Deferred income taxes ....................................................... 33,047 27,005
Prepaid expenses and other current assets ................................... 23,006 22,342
------------ ------------
Total current assets ........................................................ 780,255 639,407
Property, plant and equipment, net ............................................. 975,627 758,485
Intangible and other assets .................................................... 1,927,873 1,261,030
------------ ------------
Total .......................................................................... $ 3,683,755 $ 2,658,922
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 525,647 $ 441,792
Income taxes payable ........................................................ 11,613 14,654
Current portion of long-term debt and subsidiary lines of credit ............ 91,494 22,671
------------ ------------
Total current liabilities ................................................... 628,754 479,117
Long-term debt ................................................................. 1,282,521 689,397
Other long-term liabilities .................................................... 28,188 34,858
Deferred income taxes .......................................................... 87,723 46,323
Mandatorily redeemable convertible trust issued preferred securities ........... 583,891 683,505
Minority interest in subsidiaries .............................................. 508,283 141,750
Commitments and contingencies
Stockholders' equity:
Common stock, 27,194,401 and 29,287,558 shares issued and outstanding ....... 272 293
Additional paid-in capital .................................................. 163,647 275,527
Retained earnings ........................................................... 404,874 314,590
Accumulated other comprehensive income ...................................... (4,398) (6,438)
------------ ------------
Total stockholders' equity .................................................. 564,395 583,972
------------ ------------
Total .......................................................................... $ 3,683,755 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ................................................................ $ 1,439,947 $ 1,082,060 $ 4,268,442 $ 3,354,090
Cost of sales ............................................................ 1,085,627 834,410 3,213,745 2,610,932
------------ ------------ ------------ ------------
Gross profit ............................................................. 354,320 247,650 1,054,697 743,158
Operating costs and expenses:
Selling and distribution .............................................. 202,371 134,257 602,297 380,445
General and administrative ............................................ 43,035 34,411 135,235 115,248
Amortization of intangibles ........................................... 13,495 8,732 39,153 28,709
Plant closing and other costs ......................................... 424 3,520 3,388 8,191
------------ ------------ ------------ ------------
Total operating costs and expenses .................................... 259,325 180,920 780,073 532,593
------------ ------------ ------------ ------------
Operating income ......................................................... 94,995 66,730 274,624 210,565
Other (income) expense:
Interest expense, net ................................................. 28,987 8,434 83,122 39,612
Financing charges on trust issued preferred securities ................ 8,395 9,645 25,200 28,939
Equity in earnings of unconsolidated affiliates ....................... (5,169) (4,692) (10,572) (4,692)
Other (income) expense, net ........................................... (594) 384 (1,670) 283
------------ ------------ ------------ ------------
Total other (income) expense .......................................... 31,619 13,771 96,080 64,142
------------ ------------ ------------ ------------
Income before income taxes, minority interests and extraordinary gain .... 63,376 52,959 178,544 146,423
Income taxes ............................................................. 24,021 20,359 67,901 56,462
Minority interest in earnings ............................................ 8,166 2,151 25,327 6,493
------------ ------------ ------------ ------------
Income before extraordinary gain ......................................... 31,189 30,449 85,316 83,468
Extraordinary gain ....................................................... -- -- 4,968 --
------------ ------------ ------------ ------------
Net income ............................................................... $ 31,189 $ 30,449 $ 90,284 $ 83,468
============ ============ ============ ============
Average common shares: Basic ............................................. 27,623,928 33,665,778 28,530,656 33,679,515
Average common shares: Diluted ........................................... 36,197,712 43,641,789 37,062,352 43,771,536
Basic earnings per common share:
Income before extraordinary gain ...................................... $ 1.13 0.90 2.99 $ 2.48
Extraordinary gain .................................................... -- -- 0.17 --
------------ ------------ ------------ ------------
Net income ............................................................ $ 1.13 $ 0.90 $ 3.16 $ 2.48
============ ============ ============ ============
Diluted earnings per common share:
Income before extraordinary gain ...................................... $ 1.01 $ 0.83 $ 2.73 $ 2.32
Extraordinary gain .................................................... -- -- 0.14 --
------------ ------------ ------------ ------------
Net income ............................................................ $ 1.01 $ 0.83 $ 2.87 $ 2.32
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2000 1999
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 90,284 $ 83,468
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................... 113,919 89,371
Minority interest, before tax effects ....................................... 42,682 6,493
Equity in earnings of unconsolidated affiliates ............................. (10,572) (4,692)
Extraordinary gain .......................................................... (4,968) --
Deferred income taxes ....................................................... 35,334 15,220
Other, net .................................................................. 5,029 5,604
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ...................................................... (3,383) 8,423
Inventories .............................................................. (16,375) (3,709)
Prepaid expenses and other assets ........................................ (984) (13,885)
Accounts payable and other accrued expenses .............................. (48,682) 11,859
Income taxes ............................................................. (10,669) 40,203
------------ ------------
Net cash provided by operating activities .............................. 191,615 238,355
Cash flows from investing activities:
Additions to property, plant and equipment ....................................... (86,260) (143,208)
Cash outflows for acquisitions and investments ................................... (286,139) (226,405)
Net proceeds from divestitures ................................................... 89,037 373,768
Other ............................................................................ 2,568 (1,682)
------------ ------------
Net cash provided by (used in) investing activities .................... (280,794) 2,473
Cash flows from financing activities:
Proceeds from the issuance of debt ............................................... 1,299,909 35,767
Repayment of debt ................................................................ (946,558) (217,202)
Payment of deferred financing and debt restructuring ............................. (11,971) --
Issuance of common stock, net of expenses ........................................ 26,178 3,273
Redemption of trust issued preferred securities .................................. (100,050) --
Redemption of common stock ....................................................... (146,545) (69,680)
Proceeds from issuance of minority interest ...................................... 8,983
Distributions to minority interest ............................................... (13,942) (10,122)
------------ ------------
Net cash provided by (used in) financing activities .................... 107,021 (248,981)
------------ ------------
Increase (decrease) in cash and cash equivalents .................................... 17,842 (8,153)
Cash and cash equivalents, beginning of period ...................................... 25,155 54,922
------------ ------------
Cash and cash equivalents, end of period ............................................ $ 42,997 $ 46,769
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. GENERAL
Basis of Presentation - 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 September 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.
This Quarterly Report, including these notes, have been written in
accordance with the Securities and Exchange Commission's "Plain English"
guidelines. Unless otherwise indicated, references in this report to "we," "us"
or "our" refer to Suiza Foods Corporation and its subsidiaries, including Suiza
Dairy Group (our joint venture with Dairy Farmers of America described below in
Note 2), as a whole.
Recently Issued Accounting Standards - Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as extended by SFAS No. 137 (June 1999) and amended by
SFAS No. 138 (June 2000), will become effective for us beginning January 1,
2001. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires the recognition of
derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value.
Our internal process relating to implementation of SFAS No. 133 is
ongoing. We are in the process of designating, documenting and assessing hedging
relationships, the majority of which are expected to result in cash-flow hedges
which require us to record the derivative assets or liabilities at fair value on
our statement of financial position with an offset in Other Comprehensive Income
to the extent the hedge is effective. Hedge ineffectiveness will be recorded in
earnings.
We continue to evaluate the impact of SFAS No. 133 as well as the
ongoing implementation issues currently being addressed by the Derivatives
Implementation Group. As a result, the direct financial impact of the
application of hedge accounting and the transition adjustment on our financial
position and results of operations has yet to be determined.
SAB No. 101, "Revenue Recognition in Financial Statements," as extended
by SAB No. 101A (March 2000) and 101B (June 2000), became effective for us
beginning October 1, 2000. SAB No. 101 is a statement of the Securities and
Exchange Commission's views on applying generally accepted accounting principles
to selected revenue recognition issues. We believe our revenue recognition
practices are in compliance with SAB No. 101 and, therefore, we do not expect it
to have a material effect on our consolidated financial position, results of
operations or cash flows.
6
<PAGE> 7
2. ACQUISITIONS AND DIVESTITURES
Effective January 1, 2000 we entered into a joint venture with Dairy
Farmers of America in which we combined certain of our domestic fluid dairy
operations with certain of Dairy Farmers of America's operations into a newly
formed venture, Suiza Dairy Group, L.P. Dairy Farmers of America is a large
farmers' cooperative from which we purchase a significant portion of our raw
milk. In connection with this transaction, Suiza Dairy Group, L.P. issued
partnership interests to Dairy Farmers of America of approximately $326 million
and made a cash payment to Dairy Farmers of America's partner in the amount of
$100 million. Dairy Farmers of America received a 33.8% ownership interest in
Suiza Dairy Group, L.P., in exchange for the contribution of the operations of
Southern Foods Group, L.P. 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, L.P. 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 Dairy Farmers of
America's were determined by negotiation between the parties. This transaction
was accounted for as an acquisition by us of Southern Foods Group, L.P. 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 Cooperative Milk Producers
Association had net sales of $209 million during its fiscal year ended August
31, 1999. We funded the purchase price through borrowings under the new Suiza
Dairy Group, L.P. 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. We funded approximately $44.4 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 with a loan obtained from a
Spanish lender, as discussed in Note 4.
We have also made two other small acquisitions to date in 2000,
including a dairy in Colorado during August and a water business in the
northeastern United States in January.
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 Holdings, LLC.
Our unaudited consolidated results of operations on a pro forma basis
for the three- and nine-month periods ended September 30, 1999, as if we had
acquired Southern Foods Group, L.P.'s operations as of the beginning of 1999,
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
-------------------------------- ---------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------- ---------------- -------------- -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales............... $1,082,060 $1,399,019 $3,354,090 $4,304,066
Net income.............. 30,449 31,094 83,468 85,094
Earnings per share:
Basic.............. 0.90 0.92 2.48 2.53
Diluted............ 0.83 0.88 2.32 2.43
</TABLE>
7
<PAGE> 8
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 nine-month periods
ended September 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 SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Raw materials and supplies ............. $ 95,368 $ 100,044
Finished goods ......................... 86,116 82,277
---------------- ----------------
Total ............................. $ 181,484 $ 182,321
================ ================
</TABLE>
4. DEBT
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Parent-level credit facility ................ $ -- $ 635,500
Subsidiary debt obligations:
Suiza Dairy Group credit facility ....... 1,125,800 --
Receivable-backed loan .................. 150,000 --
Foreign subsidiary term loan ............ 37,970 --
Other lines of credit ................... 5,597 24,655
Industrial development revenue bonds .... 9,330 9,330
Capital lease obligations and other ..... 45,318 42,583
---------------- ----------------
1,374,015 712,068
Less current portion ........................ (91,494) (22,671)
---------------- ----------------
Total ................................... $ 1,282,521 $ 689,397
================ ================
</TABLE>
Terminated Senior Credit Facility -- In connection with our acquisition
of Southern Foods Group, L.P. effective January 1, 2000, we replaced our then
existing senior credit facility with two new facilities, as described under
"Parent-Level Credit Facility" and "Suiza Dairy Group Credit Facility" below.
Parent-Level Credit Facility -- Effective January 1, 2000 we entered
into a new parent-level 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 September 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
our acquisition of Southern Foods Group, L.P., Suiza Dairy Group, L.P. 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, L.P. borrowed approximately $1.1 billion under
this facility and distributed a portion of the borrowings to us and Dairy
Farmers of America. 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,
L.P. credit facility.
8
<PAGE> 9
Credit Facility Terms -- Amounts outstanding under the Suiza Dairy
Group, L.P. credit facility and our parent-level 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, L.P.
credit facility and 0 to 75 basis points on the parent-level
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,
L.P. credit facility and 75 to 175 basis points on the
parent-level 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, L.P. credit
facility, including the applicable interest rate margin, was 8.62% at September
30, 2000. Interest is payable quarterly or at the end of the applicable interest
period. Scheduled principal payments on the $625 million term loan are due in
the following installments:
o $25.0 million quarterly from March 31, 2001 through December
31, 2001;
o $31.25 million quarterly from March 31, 2002 through December
31, 2002;
o $37.5 million quarterly from March 31, 2003 through December
31, 2003;
o 25% of the outstanding balance (up to $50 million) quarterly
on each of March 31, 2004, June 30, 2004 and September 30,
2004; and the
o Remaining balance on January 4, 2005.
No principal payments are due on the $805 million line of credit and the $180
million term loan until maturity on January 4, 2005. In consideration for the
revolving commitments, we pay a commitment fee on unused amounts of the Suiza
Dairy Group, L.P. credit facility and the parent-level 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, L.P. credit facility and our parent-level credit
facility, both of which mature on January 4, 2005, contain various financial and
other restrictive covenants and requirements that 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.
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. We used the
portion of the proceeds attributable to Suiza Dairy Group, L.P. and its
subsidiaries to pay down higher cost borrowings under the Suiza Dairy Group,
L.P. 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 September 30, 2000 was 7.09%.
9
<PAGE> 10
Foreign Subsidiary Term Loan -- In connection with our acquisition of
Leche Celta, S.A. in February 2000, our Spanish subsidiary obtained a 7 billion
peseta (as of November 6, 2000, approximately $36.1 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, S.A., will expire on February 21, 2007, bears interest at a
variable rate based on the ratio of Leche Celta, S.A.'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
September 30, 2000 was 6.75%.
Other Lines of Credit -- Leche Celta, S.A., our Spanish subsidiary, is
our only subsidiary with a currently outstanding line of credit separate from
the credit facilities described above. Leche Celta, S.A.'s existing line of
credit, which is in the principal amount of 2.5 billion pesetas (as of November
6, 2000, approximately $12.9 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.A.'s debt to EBITDA (as
defined in the corresponding loan agreement), is secured by our stock in Leche
Celta, S.A. and will expire in June 2007. The interest rate on this line of
credit was 5.0% at September 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 September 30,
2000, ranged from 5.75% to 5.90%.
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 Group, L.P., 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, L.P. credit facility.
The following table summarizes our various interest rate agreements as
of September 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 December 2000 and December 2003...................... $375,000
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 our Suiza
Dairy Group, L.P. credit facility by limiting or fixing the LIBOR interest rates
specified in the Suiza Dairy Group, L.P. credit
10
<PAGE> 11
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, L.P. 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.
The following table summarizes certain additional interest rate swap
agreements intended to provide hedges against variable interest rate exposure on
loans under Suiza Dairy Group, L.P.'s credit facility. These agreements will
become effective January 2, 2001.
<TABLE>
<CAPTION>
INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
-------------------- ---------------- ---------------
<S> <C> <C> <C>
6.45% $275.0 million December 2001
6.69% 100.0 million December 2004
6.69% to 6.74% 100.0 million December 2005
6.775% 75.0 million December 2006
</TABLE>
We have also entered into interest rate swap agreements that provide
hedges for loans under Leche Celta's term loan. See Note 4 - Foreign Subsidiary
Term Loan. The following table summarizes these agreements:
<TABLE>
<CAPTION>
EFFECTIVE DATE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
-------------- -------------------- ---------------- ---------------
<S> <C> <C> <C>
November 23, 2000 5.54% 1,500,000,000 pesetas November 2003
(approximately $7.7 million as of
November 6, 2000)
November 23, 2000 5.6% 2,000,000,000 pesetas November 2004
(approximately $10.3 million as
of November 6, 2000)
</TABLE>
We are exposed to market risk under these arrangements due to the
possibility of interest rates on the credit facilities 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 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. Our two remaining packaging
businesses were sold in March and May 2000.
The accounting policies of both 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.
11
<PAGE> 12
The following are reconciliations of reportable segment amounts to our
consolidated totals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
2000
--------------------------------------------------
(in 000s) DAIRY PACKAGING OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external
customers ......................... $1,439,947 $ -- $ -- $1,439,947
Intersegment revenues ............. -- -- -- --
Segment operating income (loss) ... 97,186 -- (2,191) 94,995
Total segment assets .............. 3,552,443 -- 131,312 3,683,755
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
1999
--------------------------------------------------
(in 000s) DAIRY PACKAGING OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external
customers ......................... $1,006,741 $ -- $ 75,319 $1,082,060
Intersegment revenues ............. -- -- -- --
Segment operating income (loss) ... 69,550 -- (2,820) 66,730
Total segment assets .............. 2,424,489 -- 341,754 2,766,243
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
2000
--------------------------------------------------
(in 000s) DAIRY PACKAGING OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external
customers ......................... $4,226,156 $ -- $ 42,286 $4,268,442
Intersegment revenues ............. -- -- -- --
Segment operating income (loss) ... 282,885 -- (8,261) 274,624
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
1999
--------------------------------------------------
(in 000s) DAIRY PACKAGING OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external
customers ......................... $2,919,200 $ 244,866 $ 190,024 $3,354,090
Intersegment revenues ............. 16,036 18,674 -- 34,710
Segment operating income (loss) ... 187,228 34,685 (11,348) 210,565
</TABLE>
Geographic information for the three- and nine-month periods ended
September 30:
<TABLE>
<CAPTION>
REVENUES LONG-LIVED ASSETS
----------------------------------------------------------------- -------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, AT SEPTEMBER 30,
------------------------------- ------------------------------- -------------------------------
(in 000s) 2000 1999 2000 1999 2000 1999
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
United States ...... $ 1,351,641 $ 946,990 $ 4,010,105 $ 2,984,250 $ 2,673,645 $ 1,817,400
Puerto Rico ........ 57,125 59,751 171,302 180,135 123,121 124,033
Europe ............. 31,181 75,319 87,035 189,705 106,734 89,870
-------------- -------------- -------------- -------------- -------------- --------------
Total .............. $ 1,439,947 $ 1,082,060 $ 4,268,442 $ 3,354,090 $ 2,903,500 $ 2,031,303
============== ============== ============== ============== ============== ==============
</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 $27.9
million and $92.3 million for the three-month and nine-month periods ending
September 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 nine-month periods ended September
30, 2000 are included below.
<TABLE>
<CAPTION>
PRE-TAX INCOME TAX BENEFIT
(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 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 disposal during period .............. 1,465 (573) 892
------------ ------------ ------------
Accumulated other comprehensive income,
June 30, 2000 ............................... (2,365) 1,272 (1,093)
Cumulative translation adjustment
arising during period ................... (5,280) 1,975 (3,305)
------------ ------------ ------------
Accumulated other comprehensive income,
September 30, 2000 .......................... $ (7,645) $ 3,247 $ (4,398)
============ ============ ============
</TABLE>
12
<PAGE> 13
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 September 30, 2000. Purchase price amounts shown in the
table below do not include brokers' commissions. See Note 10 for a discussion of
activity under our share repurchase program after September 30, 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
Second Quarter 2000........... 966,065 42.2
Third Quarter 2000............ 1,587,000 77.0
----------------- -----------
Total..................... 10,168,988 $ 390.5
================= ===========
</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 - As part of an overall integration and cost
reduction strategy, we recorded costs during the third quarter of 2000 in the
amount of $424,000 and during the second quarter in the amount of $549,000
associated with restructuring our corporate office departments. Also during the
second quarter of 2000 we recorded costs in the amount of $641,000 associated
with eliminating certain activities in our Puerto Rico operation. Those costs
related primarily to severance and other expenses in connection with the
elimination of a production shift and certain maintenance activities.
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 205
people, primarily plant employees associated with the plant
closings and rationalization. The
13
<PAGE> 14
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 32 employees had been terminated as of September 30,
2000.
o Shutdown costs including those costs that are necessary to
prepare the plant facilities for closure.
o Additional costs to be incurred after shutdown including lease
obligations or termination costs, utilities and property
taxes.
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
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 three quarters of 2000 are summarized in the following chart:
<TABLE>
<CAPTION>
(in 000s) FIRST SECOND THIRD
QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash charges:
Workforce reduction costs ................... $ 1,025 $ 727 $ 424 $ 2,176
Shutdown costs .............................. 564 -- -- 564
Lease obligations after shutdown ............ 95 -- -- 95
Other ....................................... 90 69 -- 159
-------- -------- -------- --------
Total cash charges ............................... 1,774 796 424 2,994
Non-cash charges:
Write down of inventory and property,
plant and equipment ......................... -- 394 -- 394
-------- -------- -------- --------
Total ............................................ $ 1,774 $ 1,190 $ 424 $ 3,388
======== ======== ======== ========
</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>
NINE MONTHS ENDED
ACCRUED CHARGES SEPTEMBER 30, 2000 ACCRUED CHARGES
AT ----------------------------------- AT
DECEMBER 31, 1999 CHARGES PAYMENTS SEPTEMBER 30, 2000
----------------- ---------------- ---------------- ------------------
(in 000s)
<S> <C> <C> <C> <C>
Cash charges:
Workforce reduction costs .......... $ 3,073 $ 2,176 $ (3,319) $ 1,930
Shutdown costs ..................... 468 564 (605) 427
Lease obligations after shutdown ... 438 95 (287) 246
Other .............................. 40 159 (191) 8
---------------- ---------------- ---------------- ----------------
Total .................................. $ 4,019 $ 2,994 $ (4,402) $ 2,611
================ ================ ================ ================
</TABLE>
There have not been significant adjustments to any plan and the
majority of future cash requirements to reduce the liabilities under the plans
are expected to be completed within one 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 of acquired businesses in order to rationalize
production and reduce costs and inefficiencies. Several plants were closed in
connection with
14
<PAGE> 15
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 282 plant personnel. The costs incurred
to date have been charged against our acquisition liabilities
for these costs. All except 36 employees had been terminated
as of September 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.
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>
NINE MONTHS ENDED
ACCRUED CHARGES SEPTEMBER 30, 2000 ACCRUED CHARGES
AT ----------------------------------- AT
DECEMBER 31, 1999 ACCRUALS PAYMENTS SEPTEMBER 30, 2000
----------------- ---------------- ---------------- ------------------
(in 000s)
<S> <C> <C> <C> <C>
Cash charges:
Workforce reduction costs ..... $ 624 $ 1,268 $ (641) $ 1,251
Shutdown costs ................ 332 9,735 (498) 9,659
---------------- ---------------- ---------------- ----------------
Total ............................. $ 956 $ 11,103 $ (1,139) $ 10,820
================ ================ ================ ================
</TABLE>
10. SUBSEQUENT EVENTS
On November 2, 2000, our Board of Directors increased the authorized
amount of our open market share repurchase program by $100 million, increasing
the total to $500 million. During the fourth quarter of this year, through
November 6, 2000, we have repurchased 40,000 shares of our common stock for a
total purchase price of approximately $2.0 million pursuant to our open market
share repurchase program. As of November 6, 2000, $107.5 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 Holdings, LLC, 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 SEPTEMBER 30,
--------------------------------------------------
2000 1999
---------------------- -----------------------
% OF % OF
DOLLARS NET SALES DOLLARS NET SALES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ............................ $1,439,947 100.0% $1,082,060 100.0%
Cost of sales ........................ 1,085,627 75.4 834,410 77.1%
---------- ---------- ---------- ----------
Gross profit ......................... 354,320 24.6 247,650 22.9
Operating expenses:
Selling and distribution ........ 202,371 14.1 134,257 12.4
General administrative .......... 43,035 3.0 34,411 3.2
Amortization of intangibles ..... 13,495 0.9 8,732 0.8
Plant closing and other costs ... 424 0.0 3,520 0.3
---------- ---------- ---------- ----------
Total operating expenses ...... 259,325 18.0 180,920 16.7
---------- ---------- ---------- ----------
Operating income ..................... $ 94,995 6.6% $ 66,730 6.2%
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
2000 1999
----------------------- -----------------------
% OF % OF
DOLLARS NET SALES DOLLARS NET SALES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ............................ $4,268,442 100.0% $3,354,090 100.0%
Cost of sales ........................ 3,213,745 75.3 2,610,932 77.8
---------- ---------- ---------- ----------
Gross profit ......................... 1,054,697 24.7 743,158 22.2
Operating expenses:
Selling and distribution ........ 602,297 14.1 380,445 11.4
General administrative .......... 135,235 3.2 115,248 3.4
Amortization of intangibles ..... 39,153 0.9 28,709 0.9
Plant closing and other costs ... 3,388 0.1 8,191 0.2
---------- ---------- ---------- ----------
Total operating expenses ...... 780,073 18.3 532,593 15.9
---------- ---------- ---------- ----------
Operating income ..................... $ 274,624 6.4% $ 210,565 6.3%
========== ========== ========== ==========
</TABLE>
On July 2, 1999 we sold our U.S. packaging operations to Consolidated
Container Holdings LLC, in exchange for cash and a 43.1% interest in
Consolidated Container Holdings LLC. We account for our investment in
Consolidated Container Holdings, LLC under the equity method of accounting. As a
result, for periods subsequent to July 2, 1999, the sales and operating expenses
of Consolidated Container Holdings, LLC 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").
Third Quarter and Year-to-Date 2000 Compared to Third Quarter and
Year-to-Date 1999
Net Sales -- Net sales increased 33.1% to $1.44 billion in the third
quarter of 2000 from $1.08 billion in the third quarter of 1999. For the nine
month period ending September 30, net sales increased 27.3% to $4.27 billion in
2000 from $3.35 billion in 1999. Excluding $245 million in revenues recorded by
our U.S. packaging operations in 1999, sales increased $1.16 billion or 37.3% in
the first nine months of 2000. This increase was primarily due to acquisitions.
Cost of Sales -- Our cost of sales ratio was 75.4% in the third quarter
of 2000 compared to 77.1% in the same period in 1999, and 75.3% for the first
nine months of 2000 compared to 77.8% for the same period of 1999. This ratio
improved during the third quarter of 2000 due to improved performance at dairies
owned more than twelve months, especially at our Morningstar subsidiary, and
because Southern Foods Group, L.P., acquired effective January 1, 2000, has a
lower cost of sales ratio than our existing dairies. For the first nine months
of 2000, the cost of sales ratio improved for the same reasons, in addition to
lower raw material costs in the first quarter of 2000.
Operating Costs and Expenses -- Our operating expense ratio was 18.0%
in the third quarter of 2000 compared to 16.7% in the third quarter of 1999, and
18.3% in the first nine months of 2000 compared to 15.9% in the same period of
1999.
16
<PAGE> 17
This ratio increased due to
o higher distribution costs at Southern Foods Group, L.P. as a
result of their extensive direct store delivery routes in
rural areas,
o higher marketing expenses in 2000 related to new products, and
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 third quarter of 2000 was
$95.0 million, an increase of 42.4% from third quarter 1999 operating income of
$66.7 million. For the nine month period ended September 30, operating income
increased 30.4% to $274.6 million in 2000 from $210.6 million in 1999. Excluding
operating income of $34.7 million generated by our U.S. packaging operations in
1999, our operating income in the first nine months of 2000 increased $98.7
million or 56.1%. Our operating income margin increased to 6.6% in the third
quarter of 2000 compared to 6.2% in 1999. Excluding the contribution of our U.S.
packaging operations in 1999, our operating margin increased to 6.4% in the
first nine months of 2000 compared to 5.7% in 1999. This increase is due to
o a significant reduction in raw milk costs during the first
quarter of 2000,
o improved performance at dairies owned more than twelve months,
and
o higher margins at Southern Foods Group, L.P., partly offset by
higher operating expenses.
Other (Income) Expense -- Interest expense increased to $29.0 million
in the third quarter of 2000 from $8.4 million in 1999, and increased to $83.1
million in the first nine months of 2000 from $39.6 million in the same period
of 1999. These increases are due to additional debt used to finance acquisitions
and stock repurchases, and higher interest rates. Financing charges on preferred
securities decreased to $8.4 million in the third quarter of 2000 from $9.6
million in 1999, and decreased to $25.2 million in the first nine months of 2000
from $28.9 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
our acquisition of Southern Foods Group, L.P.
Income from investments in unconsolidated affiliates, which is
primarily related to our minority interest in Consolidated Container Company,
LLC, amounted to $5.2 million in the third quarter of 2000 and $10.6 million in
the first nine months of 2000. During the third quarter of 1999 we reported $4.7
million from our investment in Consolidated Container Company, LLC.
Income Taxes -- Income tax expense was recorded at an effective rate of
37.9% in the third quarter of 2000 compared to 38.4% during the third quarter of
1999, and at an effective rate of 38.0% in the first nine 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 $8.2
million in the third quarter of 2000 from $2.2 million in 1999, and increased to
$25.3 million in the first nine months of 2000 compared
17
<PAGE> 18
to $6.5 million in 1999. Effective January 1, 2000 we entered into a joint
venture with Dairy Farmers of America into which we contributed our domestic
fluid dairy operations and DFA contributed the operations of Southern Foods
Group, L.P. Dairy Farmers of America received a 33.8% ownership interest which
is shown as a minority interest 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
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 $500 million on November 2, 2000.
Between January 1, 2000 and November 7, 2000 we repurchased 3,281,865 shares of
our common stock for a total purchase price of $148.4 million. For more
information about our stock repurchase program, please see Notes 7 and 10 to our
Condensed Consolidated Financial Statements contained in this report.
Investment in Dairy.com
On July 28, 2000, we announced our investment in Dairy.com, a
business-to-business online vertical exchange focused specifically on serving
the dairy industry.
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 our
subsidiaries, Suiza Dairy Group, L.P. and Morningstar Foods, Inc. Suiza Dairy
Group, L.P. used its proceeds to pay down higher cost borrowings under its
credit facility.
Completed Acquisitions
We have completed five acquisitions during 2000, including:
o Southern Foods (January 2000). Southern Foods Group, L.P., 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, L.P. 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
18
<PAGE> 19
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 have also made two other small acquisitions to date in 2000,
including a dairy in Colorado during August and a water business in the
northeastern United States during January.
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 Holdings, LLC.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had total stockholders' equity of $564.4
million, total indebtedness of $1.37 billion (including long-term debt and the
current portion of long-term debt) and $583.9 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 $191.6 million for the
first nine months of 2000 as contrasted to $238.4 million for the first nine
months of 1999. This decrease was primarily due to the use of cash to fund a
change in working capital. Investing activities in the first nine months of 2000
included approximately $86.3 million in capital expenditures and $286.1 million
of cash paid for acquisitions and investments, partly offset by $89.0 million in
net proceeds from divestitures.
Current Debt Obligations
In connection with our acquisition of Southern Foods Group, L.P.
effective January 1, 2000, we replaced our then existing senior credit facility
with two new facilities. For more information about this transaction and about
the terms of these facilities, including scheduled principal payments, please
see Note 4 to our Condensed Consolidated Financial Statements contained in this
report.
At September 30, 2000 Suiza Dairy Group, L.P. had outstanding
borrowings of $1.13 billion under its credit facility. In addition, $21.6
million of letters of credit secured by the Suiza Dairy Group, L.P. credit
facility were issued but undrawn. As of September 30, 2000, up to $462.6 million
was available for future borrowings under Suiza Dairy Group, L.P.'s credit
facility, subject to satisfaction of certain conditions contained in the loan
agreement.
At September 30, 2000 we had no funds outstanding under our new
parent-level senior credit facility; however $4.0 million of letters of credit
secured by that facility were issued but undrawn. At September 30, 2000
approximately $296.0 million was available for future borrowing under our new
parent-level senior credit facility.
19
<PAGE> 20
At September 30, 2000, we had $150 million of outstanding borrowings
secured by our receivables.
As of November 6, 2000 the outstanding balance on our Suiza Dairy Group
credit facility was approximately $1.07 billion, and $17.8 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 $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 $86.3 million has been spent to date. All
capital expenditures to date this year have been funded using cash flow from
operations. We expect to fund any remaining 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, L.P. except in certain unusual circumstances. Therefore, any such
acquisitions will be funded under the Suiza Dairy Group, L.P. senior credit
facility or through other types of debt and/or equity financing. Working capital
requirements for Suiza Dairy Group, L.P. 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.
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.
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<PAGE> 21
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." 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 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
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<PAGE> 22
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 some 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
considered 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.
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 September 30, 2000, we had outstanding debt and other financial
obligations of approximately $1.96 billion compared to our stockholders' equity
of $564.4 million.
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<PAGE> 23
As of September 30, 2000, up to $462.6 million was available for future
borrowings under Suiza Dairy Group, L.P.'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,
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
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<PAGE> 24
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 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.
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<PAGE> 25
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, L.P.
credit facility.
The following table summarizes our various interest rate agreements as
of September 30, 2000:
<TABLE>
<CAPTION>
TYPE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
------------------------- ---------------------- ------------------------ --------------------------
<S> <C> <C> <C>
Swaps................... 6.03% to 6.14% $ 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, L.P.'s credit facility by limiting or fixing the LIBOR interest rates
specified in the Suiza Dairy Group, L.P. 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, L.P. 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.
The following table summarizes certain additional interest rate swap
agreements intended to provide hedges against variable interest rate exposure on
loans under Suiza Dairy Group, L.P.'s credit facility. These agreements will
become effective January 2, 2001.
<TABLE>
<CAPTION>
INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
------------------------- ---------------------- ---------------------
<S> <C> <C>
6.45% $275.0 million December 2001
6.69% 100.0 million December 2004
6.69% to 6.74% 100.0 million December 2005
6.775% 75.0 million December 2006
</TABLE>
We have also entered into interest rate swap agreements that provide
hedges for loans under Leche Celta's term loan. See Note 4 - Foreign
Subsidiary Term Loan. The following table summarizes these agreements:
<TABLE>
<CAPTION>
EFFECTIVE DATE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
------------------------- ----------------------- ----------------------------------- ----------------------
<S> <C> <C> <C>
November 23, 2000 5.54% 1,500,000,000 pesetas November 2003
(approximately $7.7 million as of
November 6, 2000)
November 23, 2000 5.6% 2,000,000,000 pesetas November 2004
(approximately $10.3 million as
of November 6, 2000)
</TABLE>
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<PAGE> 26
We are exposed to market risk under these arrangements due to the
possibility of interest rates on our credit facilities 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 September 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.
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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<PAGE> 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Prior to our acquisition of West Lynn Creamery in June 1998, West Lynn
Creamery had paid rebates to certain of its customers pursuant to a rebate
program established many years ago (the "Rebate Program"). The United States
Department of Justice (the "DOJ"), through the U.S. attorney for Boston, is
investigating this Rebate Program. The investigation was initiated by the DOJ
because of allegations made by one or more of West Lynn's customers that West
Lynn conspired with or aided these customers in evading payment of their federal
income taxes through the use of the Rebate Program. We are fully cooperating
with the DOJ's investigation of the Rebate Program. If the DOJ finally concludes
that West Lynn Creamery failed to comply with any federal statute, it could
bring criminal charges against West Lynn Creamery or one of our other
subsidiaries. Alternatively, West Lynn Creamery or one of our other subsidiaries
may enter into a criminal or a civil agreement with the DOJ in order to resolve
this matter. In either event, we could be required to pay fines and/or penalties
which could be material. At this time, we do not know when or how this
investigation ultimately will be resolved or the amount of any potential
liability, nor do we know whether any potential liability can be recovered from
the former owners or agents of West Lynn Creamery.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1 to Credit Agreement between Suiza Foods
Corporation and certain lenders party thereto
10.2 First Amendment to Credit Agreement between Suiza Dairy Group,
L.P. and certain lenders party thereto
10.3 Amended and Restated Employee Stock Purchase Plan
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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<PAGE> 28
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: November 10, 2000
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Amendment No. 1 to Credit Agreement between Suiza Foods
Corporation and certain lenders party thereto
10.2 First Amendment to Credit Agreement between Suiza Dairy
Group, L.P. and certain lenders party thereto
10.3 Amended and Restated Employee Stock Purchase Plan
11 Statement re computation of per share earnings
27 Financial Data Schedules
</TABLE>
