10-Q 1 thirdquarter01.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001. ( ) 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: 1-12619 RALCORP HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Missouri 43-1766315 (State of Incorporation) (I.R.S. Employer Identification No.) 800 Market Street, Suite 2900 St. Louis, MO 63101 (Address of principal (Zip Code) executive offices) (314) 877-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding Shares at par value $.01 per share August 10, 2001 29,909,674 RALCORP HOLDINGS, INC. INDEX PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Consolidated Statement of Earnings 1 Condensed Consolidated Balance Sheet 2 Condensed Consolidated Statement of Cash Flows 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 (i) PART I. FINANCIAL INFORMATION Item 1. Financial Statements
RALCORP HOLDINGS, INC. CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Dollars in millions except per share data, shares in thousands) Three Months Ended Nine Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Net Sales $ 279.4 $ 172.1 $ 831.7 $ 550.2 -------- -------- -------- -------- Costs and Expenses Cost of products sold 217.8 131.4 650.9 417.8 Selling, general and administrative 36.1 22.9 107.8 69.5 Advertising and promotion 8.1 5.2 24.3 17.4 Interest expense, net 3.9 1.9 12.7 4.3 Merger termination fee, net of related expenses - - (4.2) - -------- -------- -------- -------- Total Costs and Expenses 265.9 161.4 791.5 509.0 -------- -------- -------- -------- Earnings before Income Taxes and Equity Earnings 13.5 10.7 40.2 41.2 Income Taxes 5.1 4.2 15.3 15.5 -------- -------- -------- -------- Earnings before Equity Earnings 8.4 6.5 24.9 25.7 Equity in earnings of Vail Resorts, Inc., net of Related Deferred Income Taxes 6.0 6.4 5.9 5.4 -------- -------- -------- -------- Net Earnings $ 14.4 $ 12.9 $ 30.8 $ 31.1 ======== ======== ======== ======== Basic Earnings per Share $ .48 $ .43 $ 1.03 $ 1.03 ======== ======== ======== ======== Diluted Earnings per Share $ .48 $ .43 $ 1.03 $ 1.01 ======== ======== ======== ======== Weighted average shares for basic earnings per share 29,908 29,875 29,883 30,247 Dilutive effect of: Stock options 153 78 183 256 Deferred compensation awards - 207 - 205 -------- -------- -------- -------- Weighted average shares for diluted earnings per share 30,061 30,160 30,066 30,708 ======== ======== ======== ======== See accompanying Notes to Condensed Consolidated Financial Statements.
1
RALCORP HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Dollars in millions) June 30, Sept. 30, 2001 2000 --------- --------- ASSETS Current Assets Cash and cash equivalents $ 2.9 $ 4.1 Receivables, net 95.5 102.4 Inventories - Raw materials and supplies 59.6 57.8 Finished products 81.3 92.3 Prepaid expenses 2.5 3.5 Other current assets 6.9 6.7 --------- --------- Total Current Assets 248.7 266.8 Investment in Vail Resorts, Inc. 85.0 75.9 Intangible Assets, Net 216.7 186.1 Property, Net 287.5 271.9 Other Assets 6.9 4.0 --------- --------- Total Assets $ 844.8 $ 804.7 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 66.5 $ 78.5 Other current liabilities 39.6 39.4 --------- --------- Total Current Liabilities 106.1 117.9 Long-term Debt 278.7 264.4 Deferred Income Taxes 41.0 36.6 Other Liabilities 37.4 35.5 Commitments and Contingencies - - --------- --------- Total Liabilities 463.2 454.4 --------- --------- Shareholders' Equity Common stock .3 .3 Capital in excess of par value 109.9 110.0 Retained earnings 323.5 292.7 Common stock in treasury, at cost (51.9) (52.7) Accumulated other comprehensive income (.2) - --------- --------- Total Shareholders' Equity 381.6 350.3 --------- --------- Total Liabilities and Shareholders' Equity $ 844.8 $ 804.7 ========= ========= See accompanying Notes to Condensed Consolidated Financial Statements.
2
RALCORP HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in millions) Nine Months Ended June 30, ------------------- 2001 2000 -------- -------- Cash Flows from Operations Net earnings $ 30.8 $ 31.1 Non-cash items included in net earnings 26.1 20.9 Changes in current assets and liabilities, net of effects of acquisitions 8.0 (8.8) Other, net (.5) (1.0) -------- -------- Net cash provided by operations 64.4 42.2 -------- -------- Cash Flows from Investing Activities Business acquisitions, net of cash acquired (55.6) (91.8) Additions to property and intangible assets (25.2) (17.8) Proceeds from sale of property .6 .1 -------- -------- Net cash used by investing activities (80.2) (109.5) -------- -------- Cash Flows from Financing Activities Net borrowings under credit arrangements 13.9 76.5 Purchase of treasury stock - (10.6) Proceeds from the exercise of stock options .7 .4 -------- -------- Net cash provided by financing activities 14.6 66.3 -------- -------- Net Decrease in Cash and Cash Equivalents (1.2) (1.0) Cash and Cash Equivalents, Beginning of Period 4.1 1.9 -------- -------- Cash and Cash Equivalents, End of Period $ 2.9 $ .9 ======== ======== See accompanying Notes to Condensed Consolidated Financial Statements.
3 RALCORP HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (Unaudited) (Dollars in millions) NOTE 1 - PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited historical financial statements of the Company have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. Certain prior year amounts have been reclassified to conform with the current year's presentation. These statements should be read in connection with the financial statements and notes included in the Company's Annual Report to Shareholders for the year ended September 30, 2000. NOTE 2 - CURRENT AND PENDING ACCOUNTING CHANGES On October 1, 2000, the Company implemented, on a prospective basis, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, the "Statement"). This Statement requires all derivatives to be recognized in the balance sheet at fair value, with changes in that fair value to be recorded in current earnings or deferred in other comprehensive income, depending on whether the derivative instrument qualifies as a hedge and, if so, the nature of the hedging activity. The Company's transition adjustment upon adoption of the Statement was immaterial. In the ordinary course of business, the Company is exposed to commodity price risks relating to the acquisition of raw materials and supplies and interest rate risks relating to debt. Authorized individuals within the Company may utilize derivative financial instruments, including (but not limited to) futures contracts, option contracts, forward contracts and swaps, to manage certain of these exposures by hedging when it is practical to do so. The terms of these instruments generally do not exceed twelve months. The Company is not permitted to engage in speculative or leveraged transactions and will not hold or issue financial instruments for trading purposes. Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. Earnings impacts for all designated hedges are recorded in the Consolidated Statement of Earnings generally on the same line item as the gain or loss on the item being hedged. For a fair value hedge of a recognized asset or liability or unrecognized firm commitment, the entire change in fair value of the derivative is recorded in earnings as incurred. For a cash flow hedge of an anticipated transaction, the ineffective portion of the change in fair value of the derivative is recorded in earnings as incurred, whereas the effective portion is deferred in accumulated other comprehensive income in the Consolidated Balance Sheet until the transaction is realized, at which time any deferred hedging gains or losses are recorded in earnings. During the quarter and nine months ended June 30, 2001, hedging activities were immaterial, consisting only of cash flow hedges of ingredient purchases. See Note 5 for the related effect on comprehensive income. The Company adopted Emerging Issues Task Force (EITF) issue 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future," for the quarter ending March 31, 2001. The adoption had no impact on the Company's results and is not expected to have a material effect in future quarters. 4 In the fourth quarter of fiscal year 2001, Ralcorp will adopt SAB 101 and several consensuses reached by the Emerging Issues Task Force (EITF). SAB 101 (SEC Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements") provides guidance on recognition, presentation and disclosure of revenue in financial statements and is not expected to have a material effect on the Company's revenue or results of operations. EITF 00-14, "Accounting for Certain Sales Incentives," and issue 00-25, "Accounting for Consideration for a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," address the classification of these incentives and payments in the statement of earnings, and will result in the reclassification of most of Ralcorp's promotional programs from advertising and promotion to a reduction of net sales. EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," states that amounts billed for shipping and handling should be included in revenue and amounts incurred for shipping and handling should not be netted against revenue. Ralcorp accounts for amounts billed as prescribed by the new rule but currently nets shipping costs against revenue in calculating net sales. When EITF 00-10 is adopted, Ralcorp will reclassify shipping costs to cost of products sold. Management is still evaluating the extent of necessary reclassifications resulting from these EITF consensuses but current estimates indicate that net sales will be about 4 percent higher, cost of products sold will be 7 to 10 percent higher, and advertising and promotion will be 70 to 80 percent lower. There will be no affect on earnings. In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that business combinations after June 30, 2001 be accounted for using the purchase method and prescribes procedures for allocating the purchase price to tangible and intangible assets acquired. SFAS 141 says that if the sum of the fair values of assets acquired and liabilities assumed exceeds the cost of an acquired enterprise, that excess (sometimes referred to as "negative goodwill") should be recognized immediately as an extraordinary gain, rather than as a deferred credit. This accounting also applies if the cost of an investment accounted for by the equity method is less than the investor's share in the underlying equity in net assets of the investee, as was the case when Ralcorp obtained its equity investment in Vail Resorts, Inc. Ralcorp currently recognizes $1.9 of "negative goodwill" amortization income annually in its equity earnings ($1.2 after taxes). In accordance with the transition provisions of SFAS 141, Ralcorp will recognize a net gain of $18.6, the after-tax effect of the unamortized deferred credit related to its ownership of Vail Resorts, as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2002. SFAS 142, which Ralcorp will adopt as of the beginning of fiscal 2002, stops the amortization of goodwill, requires a goodwill impairment test at least annually, and modifies the amortization guidelines for other intangible assets. Ralcorp's current annual goodwill amortization expense is about $5.2 after taxes, or about $.17 per diluted share. In addition, Vail's goodwill amortization currently reduces Ralcorp's annual after-tax equity earnings by about $.5 ($.02 per diluted share). Thus, based on current goodwill amortization expense amounts and including the effect of no longer amortizing the "negative goodwill" from the Vail transaction, SFAS 141 and 142 are expected to increase Ralcorp's annual net earnings by approximately $4.5 ($.15 per diluted share). NOTE 3 - ACQUISITION On January 31, 2001, the Company completed the purchase of the wet products portion of The Torbitt & Castleman Company, LLC, located in Buckner, Kentucky. Acquired product lines include private label syrups, Mexican sauces, jams and jellies, barbecue sauces, flavored syrups and other specialty sauces and are part of the Dressings, Syrups, Jellies & Sauces segment. The acquisition was accounted for using the purchase method of accounting, whereby the results of operations are included in the consolidated statement of earnings from the date of acquisition. The purchase price, including costs of acquisition, totaled $55.6 and has been allocated to acquired assets and liabilities based on their estimated fair values at the date of acquisition, and the excess of 5 approximately $39 has been allocated to goodwill. This allocation is subject to adjustment when additional analysis concerning asset and liability values is finalized, but generally no later than one year after the date of acquisition. Management does not expect the final allocations to differ materially from the preliminary allocation amounts included herein. Goodwill relating to the acquisition is being amortized on a straight-line basis over 25 years. On a pro forma basis, assuming this acquisition occurred at the beginning of fiscal 2000, Ralcorp's net sales would have been $861.1 and $610.8 for the nine months ended June 30, 2001 and 2000, respectively, while net earnings would not have been materially different from reported amounts. NOTE 4 - MERGER TERMINATION FEE Agribrands International, Inc. terminated a merger agreement with Ralcorp on December 1, 2000. In accordance with the agreement, Ralcorp received a payment of $5.0 as a termination fee, which was recorded in the first quarter of fiscal 2001 net of related expenses. The after-tax effect of this nonrecurring income item was $2.6, or $.09 per diluted share. NOTE 5 - COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Net Earnings $ 14.4 $ 12.9 $ 30.8 $ 31.1 Other comprehensive income - Deferred loss on cash flow hedging instruments (.1) - (.2) - -------- -------- -------- -------- Comprehensive income $ 14.3 $ 12.9 $ 30.6 $ 31.1 ======== ======== ======== ========
NOTE 6 - RECEIVABLES, NET consisted of the following:
June 30, Sep. 30, 2001 2000 -------- -------- Receivables $ 97.5 $ 104.0 Allowance for doubtful accounts (2.0) (1.6) -------- -------- $ 95.5 $ 102.4 ======== ========
NOTE 7 - INTANGIBLE ASSETS, NET consisted of the following:
June 30, Sep. 30, 2001 2000 -------- -------- Goodwill $ 223.8 $ 184.5 Other intangible assets 21.6 21.3 Accumulated amortization (28.7) (19.7) -------- -------- $ 216.7 $ 186.1 ======== ========
6 NOTE 8 - PROPERTY, NET consisted of the following:
June 30, Sep. 30, 2001 2000 -------- -------- Property $ 444.3 $ 411.6 Accumulated depreciation (156.8) (139.7) -------- -------- $ 287.5 $ 271.9 ======== ========
NOTE 9 - RESTRUCTURING CHARGES Other current liabilities include restructuring reserves as follows:
Sep. 30, Amount June 30, 2000 Utilized 2001 -------- -------- -------- Severance, benefits and outplacement expenses $ 2.1 $ (1.9) $ .2 Asset write-down .6 (.2) .4 -------- -------- -------- $ 2.7 $ (2.1) $ .6 ======== ======== ========
NOTE 10 - LONG-TERM DEBT consisted of the following:
June 30, 2001 September 30, 2000 ------------------ ------------------ Balance Rate Balance Rate -------- -------- -------- -------- Credit Agreement A $ 40.0 4.719% $ 125.0 7.375% Credit Agreement B (term loan) 200.0 5.178% 100.0 7.625% Uncommitted credit arrangements 32.4 4.950% 33.3 7.474% Industrial Development Revenue Bond 5.6 2.680% 5.6 5.575% Other .7 Various .5 Various -------- -------- $ 278.7 $ 264.4 ======== ========
On April 10, 2001, Credit Agreement B was converted into a $200 term loan maturing January 10, 2002. This loan bears interest at the Company's choice of either (1) LIBOR plus the applicable margin rate (currently 1.25%) or (2) the maximum of the federal funds rate plus 0.50% or the prime rate. Generally, the rate on this debt is adjusted monthly. The loan is unsecured and the agreement contains certain representations, warranties, covenants and conditions customary to loans of this nature. Credit Agreement A, Credit Agreement B, and the uncommitted credit arrangements mature less than one year from the balance sheet date. The Company is currently in discussions with its bank group to refinance these agreements. Based upon management's intent and ability to refinance these agreements on a long-term basis, they were classified as long-term. 7 NOTE 11 - SEGMENT INFORMATION The tables below present information about the Company's reportable segments:
Three Months Ended Nine Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Net Sales Cereals $ 70.6 $ 66.5 $ 218.6 $ 210.3 Crackers & Cookies 57.3 53.4 177.9 169.7 Snack Nuts & Candy 39.3 35.5 132.5 121.5 Dressings, Syrups, Jellies & Sauces 112.2 16.7 302.7 48.7 -------- -------- -------- -------- Total $ 279.4 $ 172.1 $ 831.7 $ 550.2 ======== ======== ======== ======== Profit Contribution Cereals, Crackers & Cookies $ 13.1 $ 11.7 $ 43.4 $ 42.2 Snack Nuts & Candy 3.4 1.1 11.3 5.6 Dressings, Syrups, Jellies & Sauces 3.0 .8 3.5 1.7 -------- -------- -------- -------- Total segment profit contribution 19.5 13.6 58.2 49.5 Interest expense, net (3.9) (1.9) (12.7) (4.3) Merger termination fee, net of related expenses - - 4.2 - Unallocated corporate expenses (2.1) (1.0) (9.5) (4.0) -------- -------- -------- -------- Earnings before income taxes and equity earnings $ 13.5 $ 10.7 $ 40.2 $ 41.2 ======== ======== ======== ========
June 30, Sep. 30, 2001 2000 -------- -------- Total Assets Cereals, Crackers & Cookies $ 330.0 $ 348.1 Snack Nuts & Candy 117.5 132.0 Dressings, Syrups, Jellies & Sauces 285.9 225.8 Corporate 111.4 98.8 -------- -------- Total $ 844.8 $ 804.7 ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Ralcorp Holdings, Inc. (Company). This discussion should be read in conjunction with the financial statements under Item 1, especially Note 11 - Segment Information. 8 RESULTS OF OPERATIONS CEREALS, CRACKERS & COOKIES Third quarter net sales for the Cereals, Crackers & Cookies segment were up $8.0 million (7 percent) from last year, with the Ralston Foods cereal division and the Bremner cracker and cookie division reporting increases of $4.1 million and $3.9 million, respectively. Through nine months, the segment's sales were up $16.5 million (4 percent), as Ralston Foods and Bremner contributed increases of $8.3 million and $8.2 million, respectively. Most of the improvements at Ralston Foods were the result of increased distribution with several key customers and sales of new products. Despite an industry decline in the overall ready-to-eat (RTE) cereal category, Ralston Foods' base store brand RTE cereal volume increased 5 percent from last year's third quarter and more than 6 percent from last year's first nine months. Average RTE prices declined slightly due to competitive pricing pressures. Ralston Foods' hot cereal sales were up 5.5 percent and flat for the third quarter and nine months, respectively, as a favorable product mix offset slightly lower volume. Bremner cracker volumes improved 6 percent for the third quarter but were flat year-to-date. Cookie volumes were up about 25 percent for the third quarter and 16 percent year-to-date, primarily as a result of new customer sales. Bremner benefited from incremental revenue from Cascade Cookie Company, acquired on January 28, 2000, while net sales in the pre-existing cracker and cookie businesses were flat for the nine months ended June 30, 2001. Profit for the Cereals, Crackers & Cookies segment was up 12 percent and 3 percent for the quarter and nine-month periods, respectively. Such improvements were achieved despite reduced margins caused by competitive pricing pressures and higher energy and packaging costs. These negative effects were more than offset by lower ingredient costs, improved production efficiencies due to increased volumes, and the continued focus on aggressive cost containment. Finally, current year co-manufacturing business in both RTE and hot cereals offset effects of the December 31, 1999 termination of a large RTE cereal co-manufacturing agreement. SNACK NUTS & CANDY Third quarter and nine-month net sales for the Snack Nuts & Candy segment (also known as Nutcracker) increased 11 percent and 9 percent, respectively, reflecting the benefit of a full quarter of the Linette candy business, as well as higher volumes and net sales from the snack nut businesses. Linette, a chocolate candy manufacturer, was acquired on May 1, 2000. The increase in snack nut sales was primarily due to volume growth with existing customers. Third quarter and nine-month segment profit increased $2.3 million and $5.7 million, respectively, from the corresponding periods last year. This improvement was due not only to the addition of Linette, but also to efficiencies and more favorable raw material costs, primarily cashews, in the pre-existing snack nut businesses. DRESSINGS, SYRUPS, JELLIES & SAUCES The Company's Dressings, Syrups, Jellies & Sauces segment (also known as Carriage House) comprises the operations of Martin Gillet & Co., Inc., acquired in 1999, The Red Wing Company, Inc., acquired on July 14, 2000 and the wet products portion of The Torbitt & Castleman Company, LLC (Torbitt), acquired on January 31, 2001. As previously disclosed, the Company has undertaken a major cost reduction effort within Carriage House, including two plant closures. The closing of the Baltimore facility and the moving of production and equipment to other facilities were completed in January 2001. The Company recorded a $2.5 million pre-tax restructuring charge related to this move in the fourth quarter of fiscal 2000 and additional charges totaling $1.4 million before taxes during 9 fiscal 2001. The second plant closure, in San Jose, CA, is underway, and all related production is being transferred to other Carriage House facilities. Most of the associated costs will be recorded as an adjustment to the fair value of property acquired or a liability assumed during the purchase of Red Wing; accordingly, Ralcorp expects that these costs will not have a significant impact on the reported earnings of the Company. The closure of the Baltimore and San Jose plants are part of the ongoing effort to rationalize the segment's production capacity and improve operating efficiencies. The segment's net sales for the quarter and nine months ended June 30, 2001 reflect significant increases from the corresponding periods last year due to the timing of the Red Wing and Torbitt acquisitions. In a comparison of actual fiscal 2001 period results to pro forma fiscal 2000 period results (including actual Red Wing results and actual Torbitt results for February through June), sales volumes for the third quarter were up 5 percent, while nine-month sales volumes were down 1 percent due to weak first quarter sales. Corresponding net sales dollars, which were negatively affected by competitive pricing pressures and product mix in the first half of the year, were up 5 percent for the quarter and down 4 percent through nine months. Although the segment benefited from savings of about $.5 million in the third quarter (over $1 million year-to-date) from the closure of the Baltimore plant, profits were hurt by competitive pricing pressures and higher manufacturing costs, particularly energy costs. CONSOLIDATED NET SALES Net sales grew from $172.1 million in the third quarter of fiscal 2000 to $279.4 million in the third quarter of fiscal 2001. The 62 percent increase was due primarily to business acquisitions. Refer to the segment discussions above for specific factors affecting these historical results. OPERATING EXPENSES The following table shows operating expenses as a percentage of net sales.
Three Months Ended Nine Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Products Sold 78.0% 76.4% 78.3% 75.9% Selling, General and Administrative (SG&A) 12.9% 13.3% 13.0% 12.6% Advertising and Promotion (A&P) 2.9% 3.0% 2.9% 3.2% -------- -------- -------- -------- Earnings before Interest, Termination Fee, Income Taxes and Equity Earnings 6.2% 7.3% 5.8% 8.3% ======== ======== ======== ========
The acquisition of Red Wing in July 2000 significantly changed the Company's business mix. Consequently, the cost of products sold percentage has changed, reflecting the lower gross margin of the Dressings, Syrups, Jellies & Sauces business. In addition, competitive pricing pressures resulted in reduced margins in some of the Company's other businesses compared to the prior year. SG&A percentages were reduced by the change in business mix, but were increased by relocation charges and mark-to-market adjustments on deferred compensation. The Red Wing and Torbitt acquisitions operate on a lower administrative cost base, which pulled the overall SG&A percentage down. Relocation charges related to the closure of the Baltimore and San Jose facilities and the moving of production to other facilities totaled $.2 million 10 and $1.6 million in the third quarter and first nine months of fiscal 2001, respectively. Changes in Ralcorp's stock price resulted in mark-to-market adjustments to the Company's deferred compensation liability, yielding pre-tax expense of $.3 million and $1.7 million for the quarter and nine months ended June 30, 2001, respectively, compared to pre-tax income of $.6 million and $1.6 million for the corresponding periods last year. The decrease in the A&P percentage reflects a trend away from promotional allowance programs toward pricing adjustments, as well as the change in the Company's mix of businesses. Refer to the segment discussions above for other factors affecting operating expenses. INTEREST EXPENSE, NET Interest expense increased to $3.9 million for the three months ended June 30, 2001, compared to $1.9 million in the third quarter of the prior year, primarily due to higher debt levels resulting from the Red Wing and Torbitt acquisitions. Since nearly all of the Company's debt incurs interest at floating rates, changes in short-term interest rates impact interest expense. On a weighted-average basis, interest rates on the Company's debt during the third quarter of fiscal 2001 were lower than in last year's third quarter but were similar for the nine-month periods. Management expects rates to be favorable for the fourth quarter as well. MERGER TERMINATION FEE Agribrands International, Inc. terminated a merger agreement with Ralcorp on December 1, 2000. In accordance with the agreement, Ralcorp received a payment of $5.0 million as a termination fee, which was recorded in the first quarter of fiscal 2001 net of $.8 million of related expenses. The after-tax effect of this $4.2 million nonrecurring income item was $2.6 million, or $.09 per diluted share. INCOME TAXES Income tax provisions generally reflect statutory tax rates for each of the fiscal years. The effective rate was affected by recent acquisitions, whose higher state tax rates and nondeductible goodwill amortization increased the Company's overall tax rate. EQUITY IN EARNINGS OF VAIL RESORTS, INC. Ralcorp continues to hold an approximate 21.6 percent equity ownership interest in Vail Resorts, Inc. Vail Resorts operates on a fiscal year ending July 31; therefore, Ralcorp reports its portion of Vail Resorts' operating results on a two-month time lag. Vail Resorts' operations are highly seasonal, typically yielding more than the entire year's equity income during the Company's second and third fiscal quarters. For the third quarter ended June 30, 2001, this investment resulted in non-cash pre-tax earnings of $9.3 million ($6.0 million after taxes), compared to $9.8 million ($6.4 million after taxes) for last year's third quarter. Through nine months, the equity earnings, net of taxes, were $5.9 million and $5.4 million for fiscal 2001 and 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's businesses focus on generating positive cash flows through operations. Management believes the Company will continue to generate positive operating cash flows through its mix of businesses and expects that short-term and long-term liquidity requirements will be met through a combination of operating cash flows and strategic use of borrowings under committed and uncommitted credit arrangements. Capital resources remained strong at June 30, 2001 with a net worth of $381.6 million and a long-term debt to total capital ratio of 42.2 percent, compared to corresponding figures for September 30, 2000 of $350.3 million and 43 percent. Cash flows from operations improved from $42.2 million for the nine months ended June 30, 2000 to $64.4 million through nine months of fiscal 2001. This increase is primarily due to a $8.0 million decrease in working capital during this year's first nine months compared to a $9.3 million increase in working 11 capital during the corresponding period last year, excluding the effects of acquisitions during those periods. Working capital, excluding cash and cash equivalents, was $139.7 million at June 30, 2001 compared to $144.8 million at September 30, 2000. Much of this decrease was due to the timing of a normal seasonal inventory build up during the quarter ended September 30 at Red Wing's tomato paste production facility, acquired in July 2000. In addition, the Snack Nuts & Candy segment built additional inventory in September 2000 in anticipation of increased holiday sales during this year's first quarter. Cash flows from operations for fiscal 2001 includes the $5 million merger termination fee received from Agribrands in the first quarter. Cash flows related to business acquisitions resulted in a $55.6 million outflow during the first nine months of fiscal 2001 and a $91.3 million outflow during the corresponding period of the prior year. Last year's outflow related to the acquisition of Ripon Foods on October 4, 1999, Cascade Cookie Company on January 28, 2000, and Linette on May 1, 2000. This year's outflow was primarily due to the purchase of Torbitt on January 31, 2001. Capital expenditures were $25.2 million and $17.8 million in the nine months ended June 30, 2001 and 2000, respectively. Capital expenditures for fiscal 2001 are expected to total approximately $35 million. During the nine months ended June 30, 2000, long-term debt increased $76.5 million as a result of borrowings to fund the acquisitions of Ripon Foods, Cascade Cookie Company, and Linette. During the first nine months of fiscal 2001, net borrowings were only $13.9 million as the substantial cash provided by operations greatly offset the effects of the Torbitt acquisition. On April 10, 2001, one of the Company's credit agreements was converted into a $200 million term loan maturing January 10, 2002 (see Note 10 in Item 1). Its other credit agreement matures on April 28, 2002. Management is currently exploring several long-term financing options and believes that it has the ability to refinance the entire current debt balance on a long-term basis. OUTLOOK CEREALS, CRACKERS & COOKIES The level of competition in the cereal category continues to be intense. Competition comes from branded box cereal manufacturers, branded bagged cereal producers and other private label cereal providers. For the last several years, the overall category has not recorded any meaningful growth, which has only added to the competitive nature. All major branded cereal manufacturers have announced price increases during fiscal 2001. While such increases would seem to be good for store brands, it appears that much of the increase is being dealt back in the form of heightened branded promotional activity. Mergers involving large branded competitors could also affect the future of the cereal category, with Kellogg's acquisition of Keebler and Pepsico's purchase of Quaker Oats approved during the past nine months, and General Mills' planned acquisition of Pillsbury pending final approvals. Other trends in the category include niche products with a specific target audience in mind, such as women, and convenience foods such as cereal bars and dry breakfast mixes. As always, Ralston Foods' management is monitoring these trends to evaluate opportunities in these areas. Increased distribution, including new co-manufacturing opportunities, new product emulations and aggressive cost containment remain important goals of the organization. The Company's cracker and cookie operation, Bremner, also conducts business in a highly competitive category. Major branded competitors continue to aggressively market and promote their offerings and many smaller, regional participants provide additional competitive pressures. Recently, two large branded competitors were acquired by even larger organizations, which may add to the competitive environment. Bremner's ability to successfully respond to 12 changing market conditions and to realize improved operating efficiencies from recent acquisitions will be important to its results of operations. In addition, Bremner will continue to focus on cost containment, new products and volume growth of existing products in order to improve operating results. SNACK NUTS & CANDY The outlook for the Snack Nuts & Candy segment remains favorable. Cashew costs are trending down from significant highs and the Company has completed its consolidation of three snack nut operations down to two plants, which has improved the segment's profitability. The addition of chocolate candy capability through the acquisition of Linette has increased the scope of products offered by the segment. From an operational perspective, the segment will continue to focus on fully leveraging the combined strengths of all of its operations, growing its customer base and maintaining the quality of its products. DRESSINGS, SYRUPS, JELLIES & SAUCES The Dressings, Syrups, Jellies & Sauces segment is undergoing major operational changes in fiscal 2001 with the integration of recent acquisitions and the closure of two production facilities. The closure of the Baltimore and San Jose plants are part of the ongoing effort to rationalize the segment's production capacity and improve operating efficiencies. The Company expects that these cost reduction efforts will improve the profit contribution of Carriage House when fully implemented, with estimated annual cost savings of $5 million to $6 million, of which $.8 million is noncash savings. In addition, Carriage House plans to improve performance by increasing sales to new and existing customers by expanding product offerings and further integrating the sales efforts of the former Martin Gillet, Red Wing and Torbitt businesses. As competitive pricing pressures continue to affect margins, cost containment and the capturing of additional synergies of the three organizations will also be critical objectives in improving the profitability of the segment. OVERALL The Company's management believes that the opportunities in the private label and value brand areas are favorable for long-term growth. The Company has taken significant steps to reshape the Company and lessen its reliance on any one business segment and to achieve sufficient scale in the categories in which it operates. Management expects to continue to improve its business mix through volume and profit growth of existing businesses, as well as through key acquisitions or alliances. Management will continue to explore those acquisition opportunities that strategically fit with the Company's intentions of being the premier provider of private label, or value-oriented, food products. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Report. These forward-looking statements are sometimes identified by their use of terms and phrases such as "believes," "should," "expects," "anticipates," "intends," "plans," "will" or similar expressions elsewhere in this Report. The Company's results of operations and financial condition may differ materially from those in the forward-looking statements. Such statements are based on management's current views and assumptions, and involve risks and uncertainties that could affect expected results. For example, any of the following factors cumulatively or individually may impact expected results: (i) If the Company is unable to maintain a meaningful price gap between its private label products and the branded products of its competitors, successfully introduce new products or successfully manage costs across all parts of the Company, the Company's private label businesses could incur operating losses; 13 (ii) Consolidation among members of the grocery trade may lead to increased wholesale price pressure from larger grocery trade customers and could result in the loss of key accounts if the surviving entities are not customers of the Company; (iii) Significant increases in the cost of certain raw materials (e.g., various nuts, sweeteners, wheat flour, soybean oil) or energy used to manufacture the Company's products, to the extent not reflected in the price of the Company's products, could adversely impact the Company's results; (iv) In light of its significant ownership in Vail Resorts, Inc., the Company's non-cash earnings can be adversely affected by Vail Resorts' unfavorable performance; (v) The Company is currently generating profit from certain co-manufacturing contract arrangements with other manufacturers within its competitive categories. The termination or expiration of these contracts, and the inability of the Company to replace this level of business could negatively affect the Company's operating results; (vi) The Company's businesses compete in mature segments with competitors having large percentages of segment sales; (vii) The Company has realized increases to sales and earnings through the acquisitions of businesses, but the ability to undertake future acquisitions depends on many factors that the Company does not control, such as identifying acquisition candidates and negotiating satisfactory terms upon which to purchase such candidates; and (viii) Several of the Company's key competitors have been or are being merged with other large corporations. Such changes could lead to the competitors adopting different marketing and sales strategies that could negatively impact the Company. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 2 in Item 1 for a discussion regarding recently issued accounting standards, including SFAS 133, 141, and 142; SAB 101; and EITF 00-10, 00-14, 00-22, and 00-25. Item 3. Quantitative and Qualitative Disclosures About Market Risk. In the ordinary course of business, the Company is exposed to commodity price risks relating to the acquisition of raw materials. The Company utilizes derivative financial instruments, including futures contracts and options, to manage certain of these exposures when it is practical to do so. Management believes there have been no material changes in the Company's commodity price risk during the nine months ended June 30, 2001. For additional information, refer to Item 7(A) of the Company's Annual Report on Form 10-K for the year ended September 30, 2000. As a result of its floating rate debt, the Company is exposed to interest rate risk. Refer to Note 10 under Item 1 herein. 14 PART II. OTHER INFORMATION There is no information required to be reported under any items except those indicated below. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K On May 1, 2001, the Registrant announced earnings for the second quarter ended March 31, 2001. On May 25, 2001, the Registrant announced the appointment of two new directors. 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. RALCORP HOLDINGS, INC. By: /s/ T. G. Granneman ------------------------ T. G. Granneman Duly Authorized Signatory and Chief Accounting Officer August 14, 2001 15