10-Q 1 d81719e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 1 ================================================================================ 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 ================================================================================ 2 TABLE OF CONTENTS
Page ---- 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
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SUIZA FOODS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------ ------------ (unaudited) 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 ============ ============
See notes to condensed consolidated financial statements. 3 4 SUIZA FOODS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (Dollars in thousands, except per share data) 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 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 4 5 SUIZA FOODS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2000 1999 ------------ ------------ (Dollars in thousands) 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 ============ ============
See notes to condensed consolidated financial statements. 5 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 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:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 -------------------------------- --------------------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA --------------- ---------------- -------------- ----------------- (in thousands, except per share data) 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
7 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
AT SEPTEMBER 30, AT DECEMBER 31, 2000 1999 ---------------- ---------------- (in thousands) Raw materials and supplies ............. $ 95,368 $ 100,044 Finished goods ......................... 86,116 82,277 ---------------- ---------------- Total ............................. $ 181,484 $ 182,321 ================ ================
4. DEBT
AT SEPTEMBER 30, AT DECEMBER 31, 2000 1999 ---------------- ---------------- (in thousands) 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 ================ ================
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 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 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:
NOTIONAL AMOUNT -------------- (in thousands) 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
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 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.
INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE -------------------- ---------------- --------------- 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
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:
EFFECTIVE DATE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE -------------- -------------------- ---------------- --------------- 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)
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 12 The following are reconciliations of reportable segment amounts to our consolidated totals:
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 2000 -------------------------------------------------- (in 000s) DAIRY PACKAGING OTHER TOTAL ---------- ---------- ---------- ---------- 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 THREE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 1999 -------------------------------------------------- (in 000s) DAIRY PACKAGING OTHER TOTAL ---------- ---------- ---------- ---------- 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
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 2000 -------------------------------------------------- (in 000s) DAIRY PACKAGING OTHER TOTAL ---------- ---------- ---------- ---------- Revenues from external customers ......................... $4,226,156 $ -- $ 42,286 $4,268,442 Intersegment revenues ............. -- -- -- -- Segment operating income (loss) ... 282,885 -- (8,261) 274,624 NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 1999 -------------------------------------------------- (in 000s) DAIRY PACKAGING OTHER TOTAL ---------- ---------- ---------- ---------- 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
Geographic information for the three- and nine-month periods ended September 30:
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 -------------- -------------- -------------- -------------- -------------- -------------- 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 ============== ============== ============== ============== ============== ==============
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.
PRE-TAX INCOME TAX BENEFIT (LOSS) (LOSS) NET AMOUNT ------------ ------------ ------------ 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) ============ ============ ============
12 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.
NUMBER OF SHARES PURCHASE PERIOD REPURCHASED PRICE ------------------------------- ----------------- ------------- (in millions) 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 ================= ===========
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 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:
(in 000s) FIRST SECOND THIRD QUARTER QUARTER QUARTER TOTAL -------- -------- -------- -------- 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 ======== ======== ======== ========
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:
NINE MONTHS ENDED ACCRUED CHARGES SEPTEMBER 30, 2000 ACCRUED CHARGES AT ----------------------------------- AT DECEMBER 31, 1999 CHARGES PAYMENTS SEPTEMBER 30, 2000 ----------------- ---------------- ---------------- ------------------ (in 000s) 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 ================ ================ ================ ================
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 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:
NINE MONTHS ENDED ACCRUED CHARGES SEPTEMBER 30, 2000 ACCRUED CHARGES AT ----------------------------------- AT DECEMBER 31, 1999 ACCRUALS PAYMENTS SEPTEMBER 30, 2000 ----------------- ---------------- ---------------- ------------------ (in 000s) 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 ================ ================ ================ ================
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 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):
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 2000 1999 ---------------------- ----------------------- % OF % OF DOLLARS NET SALES DOLLARS NET SALES ---------- ---------- ---------- ---------- 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% ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 2000 1999 ----------------------- ----------------------- % OF % OF DOLLARS NET SALES DOLLARS NET SALES ---------- ---------- ---------- ---------- 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% ========== ========== ========== ==========
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 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 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 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 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. 20 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 21 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. 22 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 23 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. 24 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:
TYPE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE ------------------------- ---------------------- ------------------------ -------------------------- 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
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.
INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE ------------------------- ---------------------- --------------------- 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
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:
EFFECTIVE DATE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE ------------------------- ----------------------- ----------------------------------- ---------------------- 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)
25 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. 26 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 27 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 29 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 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