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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: July 4, 2003
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: 001-13403
American Italian Pasta Company
(Exact name of Registrant as specified in its charter)
Delaware 84-1032638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 584-5000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all
documents and 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 by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding as of August 15, 2003 of the
Registrant's Class A Convertible Common Stock was 17,903,723 and there were no
shares outstanding of the Class B Common Stock.
Page 1
American Italian Pasta Company
Form 10-Q
Quarter Ended June 30, 2003
Table of Contents
Part I - Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 2003 and
September 30, 2002. 3
Consolidated Statements of Income for the three
months ended June 30, 2003 and 2002. 4
Consolidated Statements of Income for the nine
months ended June 30, 2003 and 2002. 5
Consolidated Statement of Stockholders' Equity
for the nine months ended June 30, 2003. 6
Consolidated Statements of Comprehensive Income
for the three months ended June 30, 2003 and 2002. 7
Consolidated Statements of Comprehensive Income
for the nine months ended June 30, 2003 and 2002. 8
Consolidated Statements of Cash Flows for the nine
months ended June 30, 2003 and 2002. 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4. Controls and Procedures 22
Part II - Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature Page 23
Page 2
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements (Unaudited)
AMERICAN ITALIAN PASTA COMPANY
Consolidated Balance Sheets
June 30,2003 Sept. 30, 2002
------------ --------------
(In thousands)
Assets (Unaudited)
Current assets:
Cash and temporary investments $6,624 $8,247
Trade and other receivables 44,151 46,463
Prepaid expenses and deposits 11,159 11,282
Inventory 73,881 49,720
Deferred income taxes 2,420 2,420
----- -----
Total current assets 138,235 118,132
Property, plant and equipment:
Land and improvements 13,742 11,061
Buildings 131,809 111,041
Plant and mill equipment 354,426 312,092
Furniture, fixtures and equipment 24,963 15,509
------ ------
524,940 449,703
Accumulated depreciation (116,806) (99,607)
-------- -------
408,134 350,096
Construction in progress 16,330 45,844
------ ------
Property, plant and equipment, net 424,464 395,940
Intangible assets 179,420 119,360
Other assets 10,149 7,177
------ -----
Total assets 752,268 $640,609
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 38,092 $ 21,320
Accrued expenses 12,583 11,359
Income tax payable 1,050 1,585
Current maturities of long-term debt 4,897 4,279
----- -----
Total current liabilities 56,622 38,543
Long-term debt 314,387 258,193
Deferred income taxes 56,203 46,767
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 10,000,000 -- --
Issued and outstanding shares - none
Class A common stock, $.001 par value:
Authorized shares - 75,000,000 20 20
Issued and outstanding shares - 19,894,341 and
17,872,962 at June 30, 2003 and 19,676,857 and
18,021,876 at September 30, 2002
Class B common stock, $.001 par value:
Authorized shares - 25,000,000 -- --
Issued and outstanding shares - none
Additional paid-in capital 222,112 213,671
Treasury stock (46,513) (34,394)
Unearned compensation (618) (940)
Retained earnings 151,689 121,862
Accumulated other comprehensive loss (1,634) (3,113)
------ ------
Total stockholders' equity 325,056 297,106
------- -------
Total liabilities and stockholders' equity $752,268 $640,609
======== ========
See accompanying notes to consolidated financial statements.
Page 3
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Income
Three Months Ended
June 30,
2003 2002
---- ----
(In thousands,
except per share data)
(Unaudited)
Revenues $104,302 $ 91,773
Cost of goods sold 67,861 59,283
------ ------
Gross profit 36,441 32,490
Selling and marketing expense 12,217 10,841
General and administrative expense 3,484 2,811
----- -----
Operating profit 20,740 18,838
Interest expense, net 2,764 2,161
----- -----
Income before income tax expense 17,976 16,677
Income tax expense 5,942 5,670
----- -----
Net income $ 12,034 $ 11,007
======== ========
Earnings Per Common Share:
Net income per common share $ .67 $ .61
===== =====
Weighted-average common shares outstanding 17,838 17,969
====== ======
Earnings Per Common Share - Assuming Dilution:
Net income per common share assuming dilution $ .65 $ .59
===== =====
Weighted-average common shares outstanding 18,594 18,806
====== ======
See accompanying notes to consolidated financial statements.
Page 4
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Income
Nine Months Ended
June 30,
2003 2002
---- ----
(In thousands,
except per share data)
(Unaudited)
Revenues 321,990 $ 278,619
Cost of goods sold 216,691 179,568
------- -------
Gross profit 105,299 99,051
Selling and marketing expense 38,553 37,482
General and administrative expense 9,841 8,997
Provision for acquisition and plant start-up expenses 4,939 --
----- -----
Operating profit 51,966 52,572
Interest expense, net 7,440 7,139
----- -----
Income before income tax expense 44,526 45,433
Income tax expense 14,699 15,515
------ ------
Net income $29,827 $29,918
======= =======
Earnings Per Common Share:
Net income per common share $ 1.68 $ 1.68
====== ======
Weighted-average common shares outstanding 17,800 17,824
====== ======
Earnings Per Common Share - Assuming Dilution:
Net income per common share assuming dilution $ 1.61 $ 1.60
====== ======
Weighted-average common shares outstanding 18,474 18,671
====== ======
See accompanying notes to consolidated financial statements.
Page 5
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statement of Stockholders' Equity
Nine months ended
June 30, 2003
---------------------
(In thousands)
(unaudited)
Class A Common Shares
Balance, beginning of period 19,677
Issuance of shares of Class A Common stock to option holders & other issuances 217
---
Balance, end of period 19,894
======
Class A Common Stock
Balance, beginning and end of period $ 20
=====
Additional Paid-in Capital
Balance, beginning of period $213,671
Issuance of shares of Class A Common stock to option holders
& other issuances 7,654
Tax benefit from stock compensation 787
---------
Balance, end of period $ 222,112
=========
Treasury Stock
Balance, beginning of period $ (34,394)
Purchase of treasury stock (12,119)
---------
Balance, end of period $ (46,513)
=========
Unearned Compensation
Balance, beginning of period $ (940)
Cancellation of common stock 250
Issuance of common stock (142)
Earned compensation 214
------
Balance, end of period $ (618)
======
Other Comprehensive Income (Loss)
Foreign currency translation adjustment
Balance, beginning of period $(1,611)
Change during the period 3,923
-------
Balance, end of period $ 2,312
-------
Interest rate swaps fair value adjustment
Balance, beginning of period $(1,502)
Change during the period (2,444)
------
Balance, end of period $(3,946)
-------
Total accumulated other comprehensive loss $(1,634)
=======
Retained Earnings
Balance, beginning of period $ 121,862
Net income 29,827
---------
Balance, end of period $ 151,689
=========
Total Stockholders' Equity $ 325,056
=========
See accompanying notes to consolidated financial statements.
Page 6
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Comprehensive Income
Three months ended June 30,
2003 2002
---- ----
(In thousands)
(unaudited)
Net income $12,034 $11,007
Other comprehensive income
Net unrealized losses on qualifying cash flow hedges (net of
income tax benefit of $514 and $553, respectively) (1,043) (1,124)
Foreign currency translation adjustment (net of income tax
expense of $935 and $662, respectively) 1,900 1,345
----- -----
Total other comprehensive income 857 221
--- ----
Comprehensive income $ 12,891 $ 11,228
======== ========
See accompanying notes to consolidated financial statements.
Page 7
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Comprehensive Income
Nine months ended June 30,
2003 2002
---- ----
(In thousands)
(unaudited)
Net income 29,827 $ 29,918
Other comprehensive income
Net unrealized losses on qualifying cash flow hedges (net of
income tax benefit of $1,204 and $592, respectively) (2,444) (1,202)
Foreign currency translation adjustment (net of income tax
expense of $1,932 and $636, respectively) 3,923 1,292
----- -----
Total other comprehensive income 1,479 90
----- --
Comprehensive income $31,306 $30,008
======= =======
See accompanying notes to consolidated financial statements.
Page 8
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Cash Flows
Nine Months Ended
June 30,
2003 2002
---- ----
(In thousands)
(Unaudited)
Operating activities:
Net income $ 29,827 $ 29,918
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 18,164 15,156
Deferred income tax 12,885 10,073
Changes in operating assets and liabilities:
Trade and other receivables 2,670 (2,153)
Prepaid expenses and deposits (264) 1,977
Inventory (20,771) (12,634)
Accounts payable and accrued expenses 14,510 (7,936)
Income tax payable 3 4,951
Other (1,690) (869)
-------- --------
Net cash provided by operating activities 55,334 38,483
Investing activities:
Purchase of pasta brands (57,583) (1,366)
Additions to property, plant and equipment (35,752) (48,979)
Other -- (2,000)
-------- --------
Net cash used in investing activities (93,335) (52,345)
Financing activities:
Additions to deferred debt issuance costs (1,106) --
Proceeds from issuance of debt 78,968 39,473
Principal payments on debt and capital lease obligations (32,972) (27,537)
Proceeds from issuance of common stock, net of
issuance costs 2,756 5,628
Purchases of treasury stock (12,119) --
-------- --------
Net cash provided by financing activities 35,527 17,564
Effect of exchange rate changes on cash 851 29
-------- --------
Net (decrease) increase in cash and temporary investments (1,623) 3,731
Cash and temporary investments at beginning of period 8,247 5,284
-------- --------
Cash and temporary investments at end of period $ 6,624 $ 9,015
======== ========
See accompanying notes to consolidated financial statements.
Page 9
AMERICAN ITALIAN PASTA COMPANY
Notes to Consolidated Financial Statements
June 30, 2003
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine-month periods ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the year ended September 30, 2003. These
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto and management's discussion and
analysis thereof included in the Company's Annual Report on Form 10-K for the
year ended September 27, 2002 and management's discussion and analysis included
in Item 2 hereof.
American Italian Pasta Company (the "Company" or "AIPC") uses a 52/53-week
financial reporting cycle with a fiscal year which ends on the last Friday of
September or the first Friday of October. The Company's first three fiscal
quarters end on the Friday last preceding December 31, March 31, and June 30 or
the first Friday of the following month. For purposes of this Form 10-Q, the
first fiscal quarter of fiscal year 2003 included 14 weeks of activity and
fiscal 2002 included 13 weeks of activity and are included in the nine-month
periods ended June 30, 2003 and 2002. The actual period end date was July 4,
2003.
Reclassifications
Certain amounts within the prior period financial statements have been
reclassified to conform to the current period presentation.
Inventories
Inventories are stated using product specific standard costs which approximate
the lower of cost or market determined on a first-in, first-out (FIFO) basis.
Inventories consist of the following:
June 30, September 30,
2003 2002
---- ----
(In thousands)
Finished goods $60,192 $38,881
Raw materials, packaging materials and work-in-process 13,689 10,839
------- -------
$73,881 $49,720
======= =======
2. Stock Options/Earnings Per Share
A summary of the Company's stock option activity:
Number of Shares
----------------
Outstanding at September 30, 2002 2,665,821
Exercised (107,104)
Granted 397,500
Canceled/Expired (88,852)
--------
Outstanding at June 30, 2003 2,867,365
=========
Page 10
Dilutive securities, consisting of options to purchase the Company's Class A
common stock, included in the calculation of diluted weighted average common
shares were 756,000 and 674,000 shares for the three-month and nine-month
periods ended June 30, 2003, respectively, and 837,000 and 847,000 shares for
the three-month and nine-month periods ended June 30, 2002, respectively.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation".
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
Three months ended Nine months ended
June 30, June 30,
2003 2002 2003 2002
--------- ------- ------- ---------
Net income, as reported $ 12,034 $ 11,007 $ 29,827 $ 29,918
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (1,193) (751) (4,443) (2,136)
-------- -------- -------- ----------
Pro forma net income $ 10,841 $ 10,256 $ 25,384 $ 27,782
======== ======== ======== ==========
Earnings per share:
Basic - as reported $ .67 $ .61 $ 1.68 $ 1.68
======== ======== ======== ==========
Basic - pro forma $ .61 $ .57 $ 1.43 $ 1.56
======== ======== ======== ==========
Diluted - as reported $ .65 $ .59 $ 1.61 $ 1.60
======== ======== ======== ==========
Diluted - pro forma $ .58 $ .55 $ .37 $ 1.49
======== ======== ======== ==========
3. Continued Dumping and Subsidy Offset Act of 2000
On October 28, 2000, the U.S. government enacted the "Continued Dumping and
Subsidy Offset Act of 2000" (the "Act") which provides that assessed
anti-dumping and subsidy duties liquidated by the Department of Commerce after
October 1, 2000 will be distributed to affected domestic producers. Accordingly,
in December 2002 and 2001, AIPC received payments from the Department of
Commerce in the amounts of $2.4 million and $7.6 million, respectively, as the
Company's calculated share, based on tariffs liquidated by the government from
October 1, 2000 to September 30, 2002 on Italian and Turkish imported pasta.
According to Congressional documents, these payments to affected U.S. producers
are for the purpose of maintaining jobs and investments that might be affected
through unfair trade practices, and to offset revenues lost through foreign
companies' dumping practices and foreign governments' subsidy practices. There
are no specific requirements on how the funds are to be used by the Company
other than the funds are intended to benefit future periods. In 2002, the
Company used a significant portion to increase investment in brand building
activities (for example, slotting to expand or recapture distribution and
consumer promotion reinforcing the long-term quality tradition of the Company's
brands), and continued strengthening of the Company's organization.
Page 11
The Company recognizes the receipts from the Department of Commerce as revenue
ratably over the related fiscal year, which patterns the program year under
which the payments were received. Accordingly, the Company expects to recognize
an additional 25%, or $.6 million, in the next quarter of the current fiscal
year.
It is the Company's understanding that overpayments under this program may be
recovered by U.S. Customs for a number of reasons up to one year after payment
is made. For this reason and to match the revenue received with the incremental
expenditures made under the program in 2002, the Company recognizes the receipt
ratably over the current fiscal year. In July 2003, the Company repaid U.S.
Customs approximately $80,000 pursuant to a reclamation request.
The legislation creating the dumping and subsidy offset payment (referred to as
the Byrd Amendment) provides for annual payments from the U.S. government.
However, it is not possible to reasonably estimate the potential amount, if any,
to be received in future periods.
4. Brand Acquisitions
On October 2, 2002, the Company announced the purchase of the Martha Gooch and
LaRosa pasta brands from ADM in the United States and the Lensi pasta brand from
Pastificio Lensi of Vinci, Italy for an approximate total of $9.5 million,
including trade liabilities. The Pastificio Lensi transaction was completed
prior to the fiscal year ended September 27, 2002, and the Martha Gooch and
LaRosa transactions were completed in early October 2002. No manufacturing
assets were included in the transactions.
On January 31, 2003, the Company purchased the Golden Grain/Mission pasta brand
plus inventory from PepsiCo for approximately $46 million. No significant
manufacturing assets were included in the transaction. Additional costs
associated with this acquisition may be incurred.
On February 27, 2003, the Company purchased the Mrs. Leeper's specialty pasta
business for 100,000 shares of AIPC common stock plus a cash earn out tied to
sale and profit growth over the next three years.
5. Stock Repurchase Plan
In November 2002, the Company's Board of Directors authorized up to $20 million
to implement a common stock repurchase plan. The Company purchased 366,398
shares for $12,119,000, at prices ranging from $32.52 to $34.45 per share during
the nine months ended June 30, 2003.
6. Amendment to Credit Facility
On December 13, 2002, the Company completed an amendment to its revolving credit
facility. The amendment provides the Company with an additional $100 million
term loan capacity. The terms of the original credit facility provide commitment
reductions of $110 million between October 1, 2002 and October 1, 2005. The
additional term loan capacity is nearly sufficient to offset the cumulative
annual reductions in credit availability required by the original credit
facility. The original terms of the facility remain generally the same.
Page 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth below, as well as other portions of this Quarterly
Report, contains statements concerning potential future events. Such
forward-looking statements are based upon assumptions by our management, as of
the date of this Quarterly Report, including assumptions about risks and
uncertainties faced by AIPC. Readers can identify these forward-looking
statements by their use of such verbs as expects, anticipates, believes or
similar verbs or conjugations of such verbs. If any of our assumptions prove
incorrect or should unanticipated circumstances arise, our actual results could
materially differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in our Annual Report on
Form 10-K filed on December 20, 2002. That report has been filed with the
Securities and Exchange Commission (the "SEC" or the "Commission") in
Washington, D.C. and can be obtained by contacting the SEC's public reference
operations or obtaining it through the SEC's web site on the World Wide Web at
http://www.sec.gov. Readers are strongly encouraged to consider those factors
when evaluating any such forward-looking statement. We will not update any
forward-looking statements in this Quarterly Report to reflect future events or
developments.
Results of Operations
Overview
We are the largest producer and one of the fastest-growing major marketers of
dry pasta in North America. We began operations in 1988 with the introduction of
new, highly efficient durum wheat milling and pasta production technology. We
believe our singular focus on pasta, our vertically-integrated facilities and
highly efficient production facilities focused primarily on specific market
segments, and our highly skilled workforce make us a more efficient company and
enable us to produce high-quality pasta at very competitive costs. We believe
that the combination of our low cost structure, the addition of several new
brands to our portfolio of brands, our scalable production facilities, and our
key customer relationships create significant opportunity for continued growth.
We generate revenues in two customer markets: retail and institutional. Retail
market revenues include the revenues from sales of our pasta products to
customers who resell the pasta in retail channels. These revenues represented
75% of our total revenue for the nine months ended June 30, 2003 and 2002, and
include sales to club stores and grocery retailers, and encompass sales of our
private label and branded products. Institutional market revenues include
revenues from product sales to customers who use our pasta as an ingredient in
food products or who resell our pasta in the foodservice market. It also
includes revenues from opportunistic sales to government agencies and other
customers that we pursue periodically when capacity is available to increase
production volumes and thereby lower average unit costs. The institutional
market represented 25% of our total revenue for the nine months ended June 30,
2003 and 2002. Average sales prices in the retail and institutional markets vary
depending on customer-specific packaging and raw material requirements, product
manufacturing complexity and other service requirements. Average retail and
institutional prices will also vary due to changes in the relative share of
customer revenues and item specific sales volumes (i.e., product sales mix).
Generally, average retail sales prices are higher than institutional sales
prices. Selling prices of our branded products are significantly higher than
selling prices in our other business units including private label. This results
in higher revenues, gross profits, and gross margin percentages than our
non-branded businesses. Revenues are reported net of cash discounts and product
returns.
Page 13
We seek to develop strategic customer relationships with food industry leaders
that have substantial pasta requirements. We have a supply agreement with Sysco
which was renewed for an additional three years in the third quarter of fiscal
2003, and other arrangements with food industry leaders, such as Sam's Club,
that provide for the "pass-through" of direct material cost changes as pricing
adjustments. The pass-throughs are generally limited to actual changes in cost
and, as a result, impact percentage profitability in periods of changing costs
and prices. The pass-throughs are generally effective 30 to 90 days following
such cost changes and thereby significantly reduce the long-term exposure of our
operating results to the volatility of raw material costs. These pass-through
arrangements also require us to pass on the benefits of any price decrease in
raw material costs.
Our cost of goods sold consists primarily of raw materials, packaging,
manufacturing (including depreciation) and distribution costs. A significant
portion of our cost of goods sold is durum wheat. We purchase durum wheat on the
open market and, consequently, those purchases are subject to fluctuations in
cost. We manage our durum wheat cost risk through durum wheat cost
"pass-through" agreements in long-term contracts and other noncontractual
arrangements with our customers and advance purchase contracts for durum wheat
which are generally less than twelve months' duration.
Our capital asset strategy is to achieve low-cost production through vertical
integration and investment in the most current pasta-making assets and
technologies. The manufacturing- and distribution-related capital assets that
have been or will be acquired to support this strategy are depreciated over
their respective economic lives. Because of the capital-intensive nature of our
business and our current and future facilities expansion plans, we believe our
depreciation expense for production and distribution assets may be higher than
that of many of our competitors. Depreciation expense is a component of
inventory cost and cost of goods sold. Plant expansion costs include incremental
direct and indirect manufacturing and distribution costs that are incurred as a
result of construction, commissioning and start-up of new manufacturing
capacity. These costs are expensed as incurred but are unrelated to current
production and, therefore, reported as a separate line item in the statement of
operations. By locating our newest facility in Arizona closer to our western
U.S. customers, we believe we will generate significant logistical savings and
provide superior service to our west coast customers, while creating additional
capacity to support the continued rapid growth of our business sourced from our
existing plants. We believe adding this strategic location will further enhance
our low-cost producer position in the industry.
Selling and marketing costs increased substantially in both fiscal years 2002
and 2001, in line with the significant expansion of our retail business through
branded acquisitions. These costs constituted 11.7% and 12.0% of revenues for
the three and nine months ended June 30, 2003, respectively. We do not expect
significant further growth in our selling and marketing expenditures as a
percent of revenue because we have substantially completed the development of
the selling and marketing infrastructure needed to support our branded
businesses.
In November 2000, we purchased the Mueller's(R) pasta brand from Bestfoods. In
July 2001, we purchased seven pasta brands from Borden Foods. In September 2002,
we purchased the Lensi brand and in October 2002 we purchased the Martha
Gooch(R) and LaRosa(R) brands. In addition, we purchased the Golden
Grain/Mission pasta brand and Mrs. Leeper's pasta brand in January 2003 and
February 2003, respectively. As discussed below, the timing of these brand
acquisitions had an impact on the period-to-period comparisons.
Page 14
Critical Accounting Policies
This discussion and analysis discusses our results of operations and financial
condition as reflected in our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. As discussed in note 1 to our September 30, 2002 consolidated
financial statements, the preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting periods. On an ongoing basis, our management
evaluates its estimates and judgments, including those related to the impairment
of intangible assets, the method of accounting for stock options, the estimates
used to record product return reserves, accounts receivable and allowance for
doubtful accounts and derivatives. Our management bases its estimates and
judgments on its substantial historical experience and other relevant factors,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. See note 1 to our September 30, 2002 consolidated financial statements
for a complete listing of our significant accounting policies. Our most critical
accounting policies are described below.
Impairment Testing of Intangible Assets. In accordance with Statement of
Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible
Assets," we do not amortize the cost of intangible assets with indefinite lives.
SFAS No. 142 requires that we perform certain fair value based tests of the
carrying value of indefinite lived intangible assets at least annually and more
frequently should events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. These impairment tests are
impacted by judgments as to future cash flows and brand performance. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Future events could cause
our management to conclude that impairment indicators exist and that the value
of intangible assets is impaired.
Stock Options. We have elected to follow Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for our employee stock options and adopted the pro
forma disclosure requirements under SFAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, because the exercise price of our employee
stock options is equal to the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if we had accounted for our employee
stock options under the fair value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 2.0% for fiscal 2003; dividend yield of zero; a volatility
factor of the expected market price of our common stock of .408 for fiscal 2003;
and a weighted-average expected life of the options of one to five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Page 15
Because our employee stock options have characteristics significantly different
from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options.
Accounts Receivable - Significant Customers. We generate approximately 25% of
our revenues and corresponding accounts receivable from sales to two customers.
If our primary customers experience significant adverse conditions in their
industry or operations, our customers may not be able to meet their ongoing
financial obligations to us for prior sales or complete the purchase of
additional products from us under the terms of our existing purchase and sale
commitments.
Allowance for Doubtful Accounts - Methodology. We evaluate the collectibility of
our accounts receivable based on a combination of factors. In circumstances
where we are aware of a specific customer's inability to meet its financial
obligations to us (e.g. bankruptcy filings, substantial down-grading of credit
scores), we record a specific reserve for bad debts against amounts due to
reduce the net recognized receivable to the amount we reasonably believe will be
collected. For all other customers, we recognize reserves for bad debts based on
the length of time the receivables are past due, and our historical experience.
If circumstances change (i.e., higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet its financial
obligations to us), our estimates of the recoverability of amounts due us could
be reduced by a material amount.
Derivatives. We hold derivative financial instruments to hedge a variety of risk
exposures including interest rate risks associated with our long-term debt and
foreign currency fluctuations for transactions with our overseas subsidiary.
These derivatives qualify for hedge accounting as discussed in detail in note 1
to our September 30, 2002 consolidated financial statements. We do not
participate in speculative derivatives trading. Hedge accounting results when we
designate and document the hedging relationships involving these derivative
instruments. While we intend to continue to meet the conditions for hedge
accounting, if hedges did not qualify as highly effective or if we did not
believe that forecasted transactions would occur, the changes in the fair value
of the derivatives used as hedges would be reflected in earnings.
To hedge foreign currency risks, we use futures contracts. The fair values of
these instruments are determined from market quotes. In addition, we use some
over-the-counter forward contracts in hedging these risks. These forward
contracts are valued in a manner similar to that used by the market to value
exchange-traded contracts; that is, using standard valuation formulas with
assumptions about future foreign currency exchange rates derived from existing
exchange rates, and interest rates observed in the market. To hedge interest
rate risk, an interest rate swap is used in which we pay a variable rate and
receive a fixed rate. This instrument is valued using the market standard
methodology of netting the discounted future fixed cash receipts and the
discounted expected variable cash payments. The variable cash payments are based
on an expectation of future interest rates derived from observed market interest
rate curves. We have not changed our methods of calculating these fair values or
developing the underlying assumptions. The values of these derivatives will
change over time as cash receipts and payments are made and as market conditions
change. Our derivative instruments are not subject to multiples or leverage on
the underlying commodity or price index. Information about the fair values,
notional amounts, and contractual terms of these instruments can be found in
note 1 to our September 30, 2002 consolidated financial statements and the
section titled "Quantitative and Qualitative Disclosures About Market Risk."
Page 16
We consider our budgets and forecasts in determining the amounts of our foreign
currency denominated purchases to hedge. We combine the forecasts with
historical observations to establish the percentage of our forecast we are
assuming to be probable of occurring, and therefore eligible to be hedged. The
purchases are hedged for exposures to fluctuations in foreign currency exchange
rates.
We do not believe we are exposed to more than a nominal amount of credit risk in
our interest rate and foreign currency hedges as the counter parties are
established, well-capitalized financial institutions. Our exposure is in liquid
currency (Euros), so there is minimal risk that appropriate derivatives to
maintain our hedging program would not be available in the future.
Third quarter fiscal 2003 compared to third quarter fiscal 2002.
Revenues. Total revenues increased $12.5 million, or 13.7%, to $104.3
million for the three-month period ended June 30, 2003, from $91.8 million for
the three-month period ended June 30, 2002. The increase for the three-month
period ended June 30, 2003 was primarily due to volume growth of 11.0% over the
prior year period. Revenue growth exceeded volume growth due primarily to higher
selling prices related to durum pass throughs and recent brand acquisitions,
offset by a reduction in the payments received from the U.S. government under
the Continued Dumping and Subsidy Offset Act of 2000, and changes in sales mix.
(See Note 3 to the Consolidated Financial Statements.)
Revenues for the Retail market increased $8.9 million, or 13.1%, to
$77.0 million in the current period, compared to $68.0 million for the
three-month period ended June 30, 2002. The increase primarily reflects volume
growth of 9.7%. Revenue growth exceeded volume growth due primarily to higher
selling prices related to durum pass throughs and recent brand acquisitions,
offset by changes in sales mix and a reduction in the payments received from the
U.S. government under the Continued Dumping and Subsidy Offset Act of 2000.
Revenues for the Institutional market increased $3.6 million, or 15.1%,
to $27.3 million for the three-month period ended June 30, 2003, from $23.7
million for the three-month period ended June 30, 2002. This increase was
primarily a result of volume growth of 13.6%. Revenue growth exceeded volume
growth due to higher selling prices related to durum pass throughs, offset by
changes in sales mix.
Gross Profit. Gross profit increased $4.0 million, or 12.2%, to $36.4
million for the three-month period ended June 30, 2003, from $32.5 million for
the three-month period ended June 30, 2002. This increase was primarily
attributable to revenue growth associated with increased volumes and higher
selling prices. These increases were partially offset by higher raw material
costs, principally durum wheat. Gross profit as a percentage of revenues
decreased to 34.9% for the three-month period ended June 30, 2003, from 35.4%
for the three-month period ended June 30, 2002. This change in gross margin
percentage is due to a number of offsetting factors. Factors putting downward
pressure on margins included sales mix changes; the inherent margin reduction
that mathematically occurs with the pass through of durum cost increases, and
lower revenues associated with the Department of Commerce payments. Factors
having a positive impact on gross margins included branded acquisitions, and
lower costs resulting from the Company's "Funding the Growth" cost reduction
initiative.
Selling and Marketing Expense. Selling and marketing expense increased
$1.4 million, or 12.7%, to $12.2 million for the three-month period ended June
30, 2003, from $10.8 million for the three-month period ended June 30, 2002. The
increase in selling and marketing expense is primarily attributable to increased
costs related to the branded acquisitions. Selling and marketing
Page 17
expense as a percentage of revenues decreased to 11.7% for the three-month
period ended June 30, 2003, from 11.8% for the comparable prior year period.
General and Administrative Expense. General and administrative expense
increased $0.7 million, or 23.9%, to $3.5 million for the three-month period
ended June 30, 2003, from $2.8 million for the comparable prior year period.
This increase in primarily attributable to management information system costs
and the costs associated with Sarbanes-Oxley compliance. General and
administrative expense as a percentage of revenues increased to 3.3% from 3.1%.
Operating Profit. Operating profit for the three-month period ended
June 30, 2003, was $20.7 million, an increase of $1.9 million or 10.1% over the
$18.8 million reported for the three-month period ended June 30, 2002. Operating
profit decreased as a percentage of revenues to 19.9% for the three-month period
ended June 30, 2003, from 20.5% for the three-month period ended June 30, 2002,
as a result of the factors discussed above.
Interest Expense. Interest expense for the three-month period ended
June 30, 2003 was $2.8 million, increasing $.6 million or 27.9% from the $2.2
million reported for the three-month period ended June 30, 2002. The effect of
higher borrowings and lower capitalized interest was partially offset by lower
interest rates in the current period.
Income Tax. Income tax expense for the three-month period ended June
30, 2003, was $5.9 million, increasing $.3 million from the $5.7 million
reported for the three-month period ended June 30, 2002, and reflects an
effective income tax rate of approximately 33.0% and 34.0%, respectively.
Net Income. Net income for the three-month period ended June 30, 2003,
was $12.0 million, increasing $1.0 million or 9.3% from the $11.0 million
reported for the three-month period ended June 30, 2002. Net income as a
percentage of revenues was 11.5% compared with 12.0% for the same period of
2002. Diluted earnings per share were $0.65 per share for the three-month period
ended June 30, 2003 compared to $0.59 per share in the comparable prior year
period, representing an increase of 10.2%.
Nine months fiscal 2003 compared to nine months fiscal 2002.
Revenues. Revenues increased $43.4 million, or 15.6%, to $322.0 million
for the nine-month period ended June 30, 2003, from $278.6 million for the
nine-month period ended June 30, 2002. The increase for the nine-month period
ended June 30, 2003 was primarily due to volume growth of 15.4% over the prior
year period. Revenue growth exceeded volume growth due primarily to higher
selling prices related to durum pass throughs and recent brand acquisitions,
offset by a reduction in the payments received from the U.S. government under
the Continued Dumping and Subsidy Offset Act of 2000, and changes in sales mix.
(See Note 3 to the Consolidated Financial Statements.)
Revenues for the Retail market increased $31.4 million, or 15.0%, to
$241.2 million for the nine-month period ended June 30, 2003, from $209.8
million for the nine-month period ended June 30, 2002. The increase primarily
reflects volume growth of 14.4%, higher selling prices related to durum pass
throughs and the impact of recent brand acquisitions, offset by changes in sales
mix and a reduction in the payments received from the U.S. government under the
Continued Dumping and Subsidy Offset Act of 2000.
Revenues for the Institutional market increased $12.0 million, or
17.4%, to $80.8 million for the nine-month period ended June 30, 2003, from
$68.8 million for the nine-month period ended June 30, 2002. This increase was
primarily due to volume growth of 17.5%, and higher selling prices related to
durum pass throughs, offset by changes in sales mix.
Page 18
Gross Profit. Gross profit increased $6.2 million, or 6.3%, to $105.3
million for the nine-month period ended June 30, 2003, from $99.1 million for
the nine-month period ended June 30, 2002. This increase was primarily due to
revenue growth associated with increased volumes and higher selling prices.
These increases were partially offset by higher raw material costs, principally
durum wheat. Gross profit as a percentage of revenues decreased to 32.7% for the
nine-month period ended June 30, 2003 from 35.6% for the nine-month period ended
June 30, 2002. This change in gross margin percentage is due to a number of
offsetting factors. Factors putting downward pressure on margins included sales
mix changes, the inherent margin reduction that mathematically occurs with the
pass through of durum cost increases, and lower net revenues associated with the
Department of Commerce payments. Factors having a positive impact on gross
margins included branded acquisitions, and lower costs resulting from the
Company's "Funding the Growth" cost reduction initiative.
Selling and Marketing Expense. Selling and marketing expense increased
$1.1 million, or 2.9%, to $38.6 million for the nine-month period ended June 30,
2003, from $37.5 million for the nine-month period ended June 30, 2002. Selling
and marketing expense as a percentage of revenues was 12.0% for the nine-month
period ended June 30, 2003, down from 13.5% for the comparable prior year
period. The lower selling and marketing expense as a percentage of revenue is
attributable primarily to higher rates of revenue growth in the businesses which
require less selling and marketing support, and the leverage benefits of
controlling our overhead costs.
General and Administrative Expense. General and administrative expense
increased $0.8 million, or 9.4%, to $9.8 million for the nine-month period ended
June 30, 2003, from $9.0 million for the comparable prior year period. General
and administrative expense as a percentage of revenues was 3.1% for the
nine-month period ended June 30, 2003, down from 3.2% for the comparable prior
year period.
Provision for Acquisition and Plant Start-up Expenses. The provision
for acquisition and plant start-up expenses of $4.9 million for the nine-month
period ended June 30, 2003 consisted of incremental costs associated with the
brand acquisitions and plant start-up costs related to the Arizona facility.
Operating Profit. Operating profit for the nine-month period ended June
30, 2003, was $52.0 million, a decrease of $0.6 million or 1.2% from the $52.6
million reported for the nine-month period ended June 30, 2002. Included in
operating profit is the impact of the $4.9 million charge for incremental costs
associated with the acquisitions and plant start-up expenses. Operating profit
decreased as a percentage of revenues to 16.1% for the nine-month period ended
June 30, 2003, from 18.9% for the nine-month period ended June 30, 2002 as a
result of the factors discussed above.
Interest Expense. Interest expense for the nine-month period ended June
30, 2003, was $7.4 million, increasing $0.3 million from the $7.1 million
reported for the nine-month period ended June 30, 2002. The effect of higher
borrowings and lower capitalized interest was partially offset by lower interest
rates in the current period.
Income Tax. Income tax expense for the nine-month period ended June 30,
2003, was $14.7 million, decreasing $0.8 million from the $15.5 million reported
for the nine-month period ended June 30, 2002, and reflects an effective income
tax rate of approximately 33.0% and 34.1%, respectively.
Net Income. Net income for the nine-month period ended June 30, 2003,
was $29.8 million, decreasing $0.1 million or 0.3% from the $29.9 million
reported for the nine-month period ended June 30, 2002. Included in net income
is the impact of the $4.9 million ($3.3 million after tax) charge for
incremental costs associated with the acquisitions and plant start-up costs.
Page 19
Diluted earnings per common share were $1.61 per share for the nine-month period
ended June 30, 2003 compared to $1.60 per share for the nine-month period ended
June 30, 2002. Included in the diluted earnings per share is the ($0.18) per
share effect of costs related to acquisitions and plant start-up costs. Net
income as a percentage of net revenues was 9.3% versus 10.7% in the prior year.
Financial Condition and Liquidity
Our primary sources of liquidity are cash provided by operations and borrowings
under our credit facility. Cash and temporary investments totaled $6.6 million,
and net working capital totaled $81.6 million at June 30, 2003.
Our net cash provided by operating activities totaled $55.3 million for the
nine-month period ended June 30, 2003 compared to $38.5 million for the
nine-month period ended June 30, 2002. Improved operating results were offset by
increased working capital requirements, primarily related to an increase in
inventory.
Cash used in investing activities principally relates to the purchase of pasta
brands and investments in manufacturing, distribution, milling and management
information system assets. Capital expenditures were $35.8 million for the
nine-month period ended June 30, 2003 compared to $49.0 million in the
comparable prior year period. We plan to spend approximately $5.0 million in the
remainder of fiscal year 2003.
Net cash provided by financing activities was $35.5 million for the nine-month
period ended June 30, 2003 compared to $17.6 million for the nine-month period
ended June 30, 2002. The net borrowings of $46.0 million in fiscal 2003 relates
primarily to the purchase of the Golden Grain/Mission pasta brand and the
purchase of treasury stock. We have purchased 346,398 shares of company stock
for $12.1 million in the nine months ended June 30, 2003. We continue to use our
available credit facility, as well as cash from operations, to fund capital
expansion programs as necessary.
We currently use cash to fund capital expenditures, repayments of debt, working
capital requirements and acquisitions. We expect that future cash requirements
will principally be for capital expenditures, repayments of indebtedness,
working capital requirements and acquisitions.
On December 13, 2002, we completed a $100 million term loan facility as an
amendment to our existing revolving credit agreement. The terms of the original
revolving credit facility provide for commitment reductions of $110 million
between October 1, 2002 and October 1, 2005. The additional term loan capacity
is nearly sufficient to offset the cumulative annual reductions in credit
availability required by the original credit facility. The original terms of the
credit agreement remain generally the same.
Page 20
Selected Contractual
Obligations at
June 30, 2003 Payments Due by Period
- -----------------------------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
- -----------------------------------------------------------------------------------------
(in thousands)
Long term debt $318,288 $4,467 $123,821 $190,000 $--
Capital lease obligations 996 430 566 -- --
Unconditional durum
purchase obligations 29,909 16,576 13,333 -- --
------ ------ --------- -------- --
Total selected contractual
cash obligations $349,193 $21,473 $137,720 $190,000 $--
======== ======= ======== ======== ===
We have current commitments for $29.0 million in durum purchases for fiscal
years 2003 and 2004. Additionally, we have approximately $11.0 million in
expenditures remaining under the previously referenced capital programs. We
anticipate approximately $5.0 million of these current capital programs will be
spent by the end of fiscal year 2003 and the remainder in fiscal year 2004. We
expect to fund these commitments from operations. At this time, the current and
projected borrowings under the credit facility do not exceed the facility's
available commitment. The facility matures on October 2, 2006. We anticipate
that any borrowing outstanding at that time will be satisfied with funds from
operations or will be refinanced. We currently have no other material
commitments.
We believe that net cash provided by operating and financing activities will be
sufficient to meet our expected capital and liquidity needs for the foreseeable
future.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk associated with financial instruments
relates to interest rate risk associated with variable rate borrowings and
foreign currency exchange rate risk associated with borrowings denominated in
foreign currency. We occasionally utilize simple derivative instruments such as
interest rate swaps to manage our mix of fixed and floating rate debt. We had
various fixed interest rate swap agreements with notional amounts of $150
million outstanding at June 30, 2003. The estimated fair value of the interest
rate swap agreements of ($5.9 million) is the amount we would be required to pay
to terminate the swap agreements at June 30, 2003. If interest rates for our
long-term debt under our credit facility had averaged 10% more and the full
amount available under our credit facility had been outstanding for the entire
year, our interest expense would have increased, and income before taxes would
have decreased by $0.6 million for the quarter ended June 30, 2003. We hedge our
net investment in our foreign subsidiaries with euro borrowings under our credit
facility. Changes in the U.S. dollar equivalent of euro-based borrowings are
recorded as a component of the net translation adjustment in the consolidated
statement of stockholders' equity.
Page 21
The functional currency for our Italy operation is the Euro. At June 30, 2003,
long-term debt includes obligations of 37.5 million Euros ($43.1 million) under
a credit facility which bears interest at a variable rate based upon the Euribor
rate.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period, Mr. Webster, our CEO, and Mr. Schmidgall, our CFO,
evaluated our disclosure controls and procedures and, based on this evaluation,
concluded that the Company's disclosure controls and procedures were appropriate
and effective in causing information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934 to be recorded, processed,
summarized and reported within the required time periods. There have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls as of the end of the period.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------------------
Not applicable
Item 2. Changes in Securities
- ---------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
- --------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------
Not applicable
Item 5. Other Information
- --------------------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------
(a) Exhibits.
10. Second Amended and Restated Supply Agreement by and
between AIPC Sales Co. and Sysco Corporation dated July
1, 2003. (We have omitted certain information from the
Agreement and filed it separately with the Securities
and Exchange Commission pursuant to our request for
confidential treatment under Rule 24b-2. We have
identified the omitted confidential information by the
following statement, "Confidential portions of material
have been omitted and filed separately with the
Securities and Exchange Commission," as indicated
throughout the document with an asterisk in brackets
([*])).
31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32. Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We furnished a report on Form 8-K on May 5, 2003 announcing
second quarter earnings.
Page 22
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.
American Italian Pasta Company
August 15, 2003 /s/ Timothy S. Webster
- ----------------------- --------------------------------------------
Date Timothy S. Webster
President and Chief Executive Officer
(Principal Executive Officer)
August 15, 2003 /s/ Warren B. Schmidgall
- ----------------------- --------------------------------------------
Date Warren B. Schmidgall
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------
10. Second Amended and Restated Supply Agreement by and between AIPC
Sales Co. and Sysco Corporation dated July 1, 2003. (We have
omitted certain information from the Agreement and filed it
separately with the Securities and Exchange Commission pursuant
to our request for confidential treatment under Rule 24b-2. We
have identified the omitted confidential information by the
following statement, "Confidential portions of material have been
omitted and filed separately with the Securities and Exchange
Commission," as indicated throughout the document with an
asterisk in brackets ([*])).
31.1 Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32. Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002