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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: January 2, 2004
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
Kansas City, Missouri 64116
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 584-5000
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate 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 February 10, 2004 of the
Registrant's Class A Common Stock was 17,992,438 and there were no shares
outstanding of the Class B Common Stock.
Page 1
American Italian Pasta Company
Form 10-Q
Quarter Ended January 2, 2004
Table of Contents
Part I - Financial Information Page
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at January 2, 2004
and October 3, 2003. 3
Consolidated Statements of Income for the three
months ended January 2, 2004 and January 3, 2003. 4
Consolidated Statement of Stockholders' Equity
for the three months ended January 2, 2004. 5
Consolidated Statements of Comprehensive Income
for the three months ended January 2, 2004
and January 3, 2003. 6
Consolidated Statements of Cash Flows for the
three months ended January 2, 2004 and
January 3, 2003. 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of 10-16
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 16-17
Market Risk
Item 4. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
Page 2
AMERICAN ITALIAN PASTA COMPANY
Consolidated Balance Sheets
January 2, October 3,
2004 2003
(In thousands)
Assets (Unaudited)
Current assets:
Cash and temporary investments $5,315 $6,465
Trade and other receivables 47,851 51,730
Prepaid expenses and deposits 14,082 12,692
Inventory 82,970 78,760
Deferred income taxes 2,435 2,435
------- -------
Total current assets 152,653 152,082
Property, plant and equipment:
Land and improvements 15,062 14,867
Buildings 133,828 132,035
Plant and mill equipment 372,272 355,767
Furniture, fixtures and equipment 25,967 25,266
------- -------
547,129 527,935
Accumulated depreciation (129,168) (122,811)
-------- --------
417,961 405,124
Construction in progress 12,235 18,996
------- -------
Total property, plant and equipment 430,196 424,120
Brands and trademarks 186,767 186,147
Other assets 8,177 8,146
-------- --------
Total assets $777,793 $770,495
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $34,691 $42,416
Accrued expenses 18,880 18,480
Income tax payable 744 1,096
Current maturities of long-term debt 5,209 2,554
Total current liabilities 59,524 64,546
Long-term debt 297,365 300,778
Deferred income taxes 64,532 61,666
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 - 20,075,579 and
18,052,461 at January 2, 2004 and 20,063,827 and
18,040,709 at October 3, 2003
Class B common stock, $.001 par value:
Authorized shares - 25,000,000 -- --
Issued and outstanding shares - none
Additional paid-in capital 227,575 227,234
Treasury stock (46,585) (46,585)
Unearned compensation (795) (891)
Retained earnings 172,622 164,495
Accumulated other comprehensive gain/loss 3,535 (768)
-------- --------
Total stockholders' equity 356,372 343,505
-------- --------
Total liabilities and stockholders' equity $777,793 $770,495
======== ========
See accompanying notes to consolidated financial statements.
Page 3
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Income
Three Months Ended
January 2, January 3,
2004 2003
(In thousands)
(Unaudited)
Revenues $101,599 $107,036
Cost of goods sold 69,745 73,459
-------- --------
Gross profit 31,854 33,577
Selling and marketing expense 13,578 13,593
General and administrative expense 3,249 2,812
Provision for acquisition and start-up expenses -- 1,428
-------- --------
Operating profit 15,027 15,744
Interest expense, net 2,897 2,427
-------- --------
Income before income tax expense 12,130 13,317
Income tax expense 4,003 4,394
-------- --------
Net income $ 8,127 $ 8,923
======== ========
Earnings Per Common Share:
Net income per common share $ .45 $ .50
======== ========
Weighted-average common shares outstanding 18,046 17,831
======== ========
Earnings Per Common Share - Assuming Dilution:
Net income per common share assuming dilution $ .44 $ .49
======== ========
Weighted-average common shares outstanding 18,641 18,397
======== ========
See accompanying notes to consolidated financial statements.
Page 4
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statement of Stockholders' Equity
Three months ended
January 2, 2004
--------------------
(In thousands)
(unaudited)
Class A Common Shares
Balance, beginning of period 20,064
Issuance of shares of Class A Common stock through option
exercises & other issuances 12
--------
Balance, end of period 20,076
========
Class A Common Stock
Balance, beginning and end of period $ 20
========
Additional Paid-in Capital
Balance, beginning of period $227,234
Issuance of shares of Class A Common stock through option
exercises & other issuances 276
Tax benefit from stock compensation 65
--------
Balance, end of period $227,575
========
Treasury Stock
Balance, beginning and end of period $(46,585)
========
Unearned Compensation
Balance, beginning of period $ (891)
Earned compensation 96
--------
Balance, end of period $ (795)
========
Other Comprehensive Income
Foreign currency translation adjustment
Balance, beginning of period $ 1,751
Change during the period 3,303
--------
Balance, end of period 5,054
--------
Interest rate swaps fair value adjustment
Balance, beginning of period (2,519)
Change during the period 1,000
--------
Balance, end of period (1,519)
--------
Total accumulated other comprehensive gain $ 3,535
========
Retained Earnings
Balance, beginning of period $164,495
Net income 8,127
--------
Balance, end of period 172,622
--------
Total Stockholders' Equity $356,372
========
See accompanying notes to consolidated financial statements.
Page 5
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Comprehensive Income
Three months ended
January 2, January 3,
2004 2003
(In thousands)
(unaudited)
Net income $ 8,127 $ 8,923
Other comprehensive income
Net unrealized gains (losses) on
qualifying cash flow hedges (net of
income tax benefit (expense) of ($493)
and $356, respectively) 1,000 (726)
Foreign currency translation adjustment
(net of income tax benefit (expense) of
($1,626) and ($667), respectively) 3,303 1,355
------- -------
Total other comprehensive income 4,303 629
------- -------
Comprehensive income $12,430 $ 9,552
======= =======
See accompanying notes to consolidated financial statements.
Page 6
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Cash Flows
Three Months Ended
January 2, January 3,
2004 2003
(In thousands)
(Unaudited)
Operating activities:
Net income $ 8,127 $ 8,923
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 6,471 5,781
Deferred income tax expense 4,675 3,423
Changes in operating assets and liabilities:
Trade and other receivables 4,313 3,104
Prepaid expenses and deposits (1,764) (1,615)
Inventory (3,894) (3,370)
Accounts payable and accrued expenses (5,951) 11,654
Income tax payable (1,070) (737)
Other 278 (1,448)
------- -------
Net cash provided by operating activities 11,185 25,715
Investing activities:
Purchase of pasta brands (992) (6,877)
Additions to property, plant and equipment (8,703) (15,368)
------- -------
Net cash used in investing activities (9,695) (22,245)
Financing activities:
Additions to deferred debt issuance costs (50) (1,106)
Proceeds from issuance of debt -- 8,020
Principal payments on debt and capital lease
obligations (2,781) (4,485)
Proceeds from issuance of common stock, net of
issuance costs 276 122
Purchase of treasury stock -- (10,633)
------- -------
Net cash used in financing activities (2,555) (8,082)
Effect of exchange rate changes on cash (85) 354
------- -------
Net decrease in cash and temporary investments (1,150) (4,258)
Cash and temporary investments at beginning of period 6,465 8,247
------- -------
Cash and temporary investments at end of period $ 5,315 $ 3,989
======= =======
See accompanying notes to consolidated financial statements.
Page 7
AMERICAN ITALIAN PASTA COMPANY
Notes to Consolidated Financial Statements
January 2, 2004
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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-month period ended January 2,
2004 are not necessarily indicative of the results that may be expected for the
year ended October 1, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended October 3, 2003.
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 2004 included thirteen weeks of activity and
fiscal year 2003 included fourteen weeks of activity.
Inventories
Inventories are stated using product specific standard costs which approximate
the lower of cost, determined on a first-in, first-out (FIFO) basis, or market.
Inventories consist of the following:
January 2, October 3,
2004 2003
(In thousands)
Finished goods $70,015 $65,024
Raw materials, packaging materials and
work-in-process 12,955 13,736
------ ------
$82,970 $78,760
======= =======
2. Stock Options/Earnings Per Share
A summary of the Company's stock option activity:
Number of Shares
Outstanding at October 3, 2003 2,793,593
Exercised (9,351)
Granted 1,500
Canceled/Expired (82,340)
-------
Outstanding at January 2, 2004 2,703,402
=========
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 595,000 shares for the three-month period ended January 2, 2004 and
566,000 shares for the three-month period ended January 3, 2003.
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 SFAS No. 123, "Accounting for Stock-Based
Compensation".
Page 8
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
January 2, January 3,
2004 2003
Net income, as reported $8,127 $8,923
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (991) (1,453)
------ ------
Pro forma net income $7,136 $7,470
====== ======
Earnings per share:
Basic - as reported $ .45 $ .50
====== ======
Basic - pro forma $ .40 $ .42
====== ======
Diluted - as reported $ .44 $ .49
====== ======
Diluted - pro forma $ .38 $ .41
====== ======
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. In December
2002, AIPC received payment from the Department of Commerce in the amount of
$2.4 million, as the Company's calculated share, based on tariffs liquidated by
the government from October 1, 2001 to September 30, 2002 on Italian and Turkish
imported pasta. The Company did not receive a refund in the first quarter of
fiscal year 2004.
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.
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. In fiscal 2003, the Company recognized the receipts ratably over the
year. In fiscal 2004, the Company will recognize the revenue in the period
received.
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. Subsequent Events
On January 5, 2004, the Company repurchased the shares issued pursuant to the
Mrs. Leeper's Specialty Pasta acquisition and agreed to pay an amount in lieu of
the scheduled cash earn out tied to sales and profit growth over the next two
years.
On January 12, 2004, the Company announced that the Board of Directors
authorized the payment of a quarterly dividend of 18.75 cents per share, payable
to shareholders of record as of March 19, 2004, to be paid on April 5, 2004.
Page 9
On January 16, 2004, the Company completed an amendment to its revolving credit
facility. The amendment increases the permitted restricted payments in the
agreement to $40 million plus 25% of consolidated net income, and allows the
Company to pay dividends as announced. In addition, the amendment revised the
maximum leverage ratios allowable under the original credit agreement. The
original terms of the facility, other than those addressed above, remain
generally the same.
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 dated December 30, 2003. 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 believe we are the largest producer and one of the fastest-growing major
marketers of dry pasta in North America. We began operations in 1988. 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 makes us a more efficient company and enables
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 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
73.8% and 75.9% of our total revenue for the three months ended January 2, 2004
and January 3, 2003, respectively, 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 26.2% and 24.1% of our total
revenue for the three months ended January 2, 2004 and January 3, 2003,
respectively.
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
Page 10
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.
We seek to develop strategic customer relationships with food industry leaders
that have substantial pasta requirements. We have a long-term supply agreement
through December 31, 2006 with Sysco, and other similar 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 as mentioned above 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 and/or plant start-up
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 when incurred. 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 leadership 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. These
costs constituted 13.4% and 12.7% of revenues for the three months ended January
2, 2004 and January 3, 2003.
In November 2000, we purchased the Mueller's(R) pasta brand and 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 and LaRosa
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.
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
Page 11
United States. As discussed in Note 1 to our October 3, 2003 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, and the
estimates used to record 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 October 3, 2003
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 (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 have 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 1.33% for fiscal 2003 and 2004; dividend yield of zero for
fiscal 2003 and 2% for fiscal 2004; a volatility factor of the expected market
price of our common stock of .354 for fiscal 2003 and fiscal 2004; and a
weighted-average expected life of the options of 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. 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
multi-national customers. If our primary customers experience significant
adverse conditions in their industry or operations, our customers may not be
able to meet their ongoing
Page 12
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 variable rate long-term
debt and foreign currency risks associated with our Italy operations. These
derivatives qualify for hedge accounting as discussed in detail in Note 1 to our
October 3, 2003 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. 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 risks, an interest
rate swap is used to effectively convert a portion of variable rate debt to
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 October 3, 2003 consolidated financial statements and the section titled
"Quantitative and Qualitative Disclosures About Market Risk."
We consider our budgets and forecasts in determining the amounts of our foreign
currency 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.
QUARTER ENDED JANUARY 2, 2004, COMPARED TO QUARTER ENDED JANUARY 3, 2003
Revenues. Total revenues decreased $5.4 million, or 5.1%, to $101.6 million for
the three-month period ended January 2, 2004, from $107.0 million for the
three-
Page 13
month period ended January 3, 2003. Revenues decreased $11.0 million, or 10.3%,
due to volume shortfalls and increased $6.2 million, or 5.8%, due to higher
average selling prices. The majority of the volume decrease is due to a
thirteen-week quarter in fiscal 2004 versus a fourteen-week quarter in fiscal
2003. In addition, the continued grocery retailer labor strikes, primarily
affecting high margin branded sales in California, reduced revenue versus the
prior quarter by an estimated $1.0 - $1.5 million. Also impacting the
comparability of revenue is the $0.6 million recognized in the quarter ended
January 3, 2003 related to the payment received from the U.S. government under
the Continued Dumping and Subsidy Offset Act of 2000 (CDO), while no such amount
was received or recognized in the quarter ended January 2, 2004. (See note 3 to
the consolidated financial statements.) Finally, revenues were affected by
declining category sales due in part to current reduced carbohydrate awareness
trends in the American diet.
Revenues for the Retail market decreased $6.3 million, or 7.7%, to $75.0 million
for the three-month period ended January 2, 2004, from $81.3 million for the
three-month period ended January 3, 2003. Revenues decreased $13.5 million, or
16.6%, due to volume shortfall and increased $7.8 million, or 9.6%, due to
higher average selling prices. Additionally, as indicated above, revenue
declined by $0.6 million or 0.7% due to a reduction in the revenue recognized on
payments received from the U.S. government under the CDO.
Revenues for the Institutional market increased $0.8 million, or 3.3%, to $26.6
million for the three-month period ended January 2, 2004, from $25.8 million for
the three-month period ended January 3, 2003. Revenues increased $1.0 million,
or 3.7%, due to volume growth, and decreased $0.2 million, or 0.4% due to lower
average selling prices and changes in sales mix.
Gross Profit. Gross profit decreased $1.7 million, or 5.1%, to $31.9 million for
the three-month period ended January 2, 2004, from $33.6 million for the
three-month period ended January 3, 2003. Gross profit was impacted by a number
of factors compared to the prior year's first quarter; primarily volume
challenges, delay of the antidumping payment from the Department of Commerce,
and higher durum costs along with certain inflationary cost factors, and were
offset by higher average selling prices.
Gross profit as a percentage of revenues stayed the same at 31.4% for both
periods.
Selling and Marketing Expense. Selling and marketing expense was $13.6 million
for both periods. Selling and marketing expense as a percentage of revenue
increased to 13.4% for the three-month period ended January 2, 2004, from 12.7%
for the comparable prior year period.
General and Administrative Expense. General and administrative expenses
increased $0.4 million, or 15.5% to $3.2 million for the three-month period
ended January 2, 2004 from $2.8 million for the three-month period ended January
3, 2003. This is attributable primarily to increased MIS and organization
related costs, and the costs associated with Sarbanes-Oxley compliance,
including legal and insurance costs. General and administrative expense as a
percentage of revenues increased to 3.2% for the three-month period ended
January 2, 2004, from 2.6% for the comparable prior year period.
Provision for Acquisition and Plant Start-up Expenses. The provision for
acquisition and plant start-up expenses of $1.4 million for the quarter ended
January 3, 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 three-month period ended January 2,
2004, was $15.0 million, decreasing $0.7 million or 4.6% from the $15.7 million
reported for the three-month period ended January 3, 2003. Operating profit
increased as a percentage of revenues to 14.8% for the quarter ended January 2,
2004, from 14.7% for the quarter ended January 3, 2003, as a result of the
factors discussed above. Included in operating profit for the quarter ended
Page 14
January 3, 2003 is the impact of the $1.4 million charge for incremental costs
associated with the acquisitions and plant start-up expenses discussed above.
Interest Expense. Interest expense for the three-month period ended January 2,
2004, was $2.9 million, increasing $.5 million from the $2.4 million reported
for the three-month period ended January 3, 2003. The increase in interest is
attributable to higher average debt and lower capitalized interest compared to a
year ago when we were finishing our Tolleson facility.
Income Tax. Income tax expense for the three-month period ended January 2, 2004,
was $4.0 million, decreasing $0.4 million from the $4.4 million reported for the
three-month period ended January 3, 2003, reflecting effective tax rates of 33%
in both periods.
Net Income. Net income decreased $0.8 million, or 8.9%, to $8.1 million for the
three-month period ended January 2, 2004 from $8.9 million for the three-month
period ended January 3, 2003. Included in net income for the quarter ended
January 3, 2003 is the impact of the $1.4 million ($956,000 after tax) charge
for incremental costs associated with the acquisitions and plant start-up costs.
Diluted earnings per common share were $0.44 per share for the three-month
period ended January 2, 2004 compared to $0.49 per share for the three-month
period ended January 3, 2003. Included in the diluted earnings per share for the
quarter ended January 3, 2003 is the ($0.05 after tax) per share effect of
incremental costs related to acquisitions and plant start-up costs. Net income
as a percentage of net revenues was 8.0% versus 8.3% 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 $5.3 million,
and working capital totaled $93.1 million on January 2, 2004.
Our net cash provided by operating activities totaled $11.2 million for the
three-month period ended January 2, 2004 compared to $25.7 million for the
three-month period ended January 3, 2003. This decrease of $14.5 million was
primarily due to higher working capital requirements. Cash provided by operating
activities for the quarter was reduced by an increase in inventory of $3.9
million and a reduction in accounts payable of $6.0 million. The reduction in
payables is related to cost reduction programs and related supplier agreements.
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 $8.7 million for the
three-month period ended January 2, 2004 compared to $15.4 million in the
comparable prior year period. The majority of these expenditures relate to our
new Arizona manufacturing facility. Additionally, we plan to spend $11-$16
million in the remainder of fiscal year 2004, primarily for cost saving,
maintenance, and capacity expansion projects.
Net cash used in financing activities was $2.6 million for the three-month
period ended January 2, 2004 compared to net cash used in financing activities
of $8.1 million for the three-month period ended January 3, 2003. The $8.0
million borrowing in fiscal 2003 relates to the purchase of treasury stock. We
purchased 323,398 shares of Company stock for $10.6 million in the three months
ended January 3, 2003. We made principal payments on our long-term debt and
capital lease obligations of $2.8 million in the three-month period ended
January 2, 2004 compared to $4.5 million in the comparable prior year period.
We continue to use our available credit facility as well as cash from operations
to fund capital expenditures, repayments of debt, and working capital
requirements. On January 12, 2004, the Company announced that the Board of
Directors authorized the payment of a quarterly dividend of 18.75 cents per
share, payable to shareholders of record as of March 19, 2004, to be paid on
Page 15
April 5, 2004. Thus, we expect that future cash provided by operating activities
will principally be for capital expenditures, repayments of indebtedness,
working capital requirements and dividends.
Selected Contractual
Obligations at
January 2, 2004 Payments Due by Period
-----------------------------------------------------------
Total Less than After
1 year 1-3 years 4-5 years 5 years
-----------------------------------------------------------
Long term debt $302,461 $5,170 $297,291 $ -- $ --
Capital lease
obligations 113 39 74 -- --
Unconditional durum
purchase obligations 17,100 17,100
------ ------ -------- -------- --------
Total contractual
cash obligations $319,674 $22,309 $297,365 $ -- $ --
======== ======= ======== ======== ========
We have current commitments for $17.1 million in raw material purchases for
fiscal year 2004. Additionally, we have $11-16 million in expenditures remaining
under the previously referenced capital programs. We expect to fund these
commitments from operations and borrowing capacity under our credit facility. 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 $110
million outstanding at January 2, 2004. The estimated fair value of the interest
rate swap agreements of ($2.3 million) is the amount we would be required to pay
to terminate the swap agreements at January 2, 2004. 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 January 2, 2004.
At January 2, 2004 we had a net investment in our Italy operations of (euro)43.7
million ($54.4 million). We hedge our net investment in our foreign subsidiaries
with euro borrowings under our credit facility in the U.S. At October 3, 2003,
long-term debt includes obligations of (euro)37.5 million ($47.0 million).
Interest on our Euro debt is at variable rates and based on Euribor market
rates. 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 stockholder's equity.
Page 16
The functional currency for our Italy operations is the Euro. We have
transactional exposure to various other European currencies, primarily the
British pound. Our net exposure is approximately (euro)14.0 million ($17.6
million). We occasionally use forward purchase contracts to hedge this exposure.
At January 2, 2004, we have outstanding forward contracts of (euro)6.0 million
and (pound)1.2 million.
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 changes in our internal control over financial reporting that has
materially affected or is reasonably likely to materially affect our internal
control over financial reporting.
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
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Item 6. Exhibits and Reports on Form 8-K
- -------------------------------
(a) Exhibits.
10.1 Amendment to the 2000 Equity Incentive Plan.
10.2 Consulting Agreement dated January 1, 2004 between the
Company and David E. Watson.
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 November 7, 2003 announcing
fourth quarter earnings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Italian Pasta Company
February 10, 2004 /s/ Timothy S. Webster
- ---------------------------- ------------------------------------------
Date Timothy S. Webster
President and Chief Executive Officer
(Principal Executive Officer)
February 10, 2004 /s/ Warren B. Schmidgall
- ---------------------------- ------------------------------------------
Date Warren B. Schmidgall
Executive Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Page 19