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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________.
Commission file number: 1-12619
RALCORP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Missouri 43-1766315
(State of Incorporation) (I.R.S. Employer
Identification No.)
800 Market Street, Suite 2900
St. Louis, MO 63101
(Address of principal (Zip Code)
executive offices)
(314) 877-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at
par value $.01 per share August 12, 2002
30,026,251
RALCORP HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statement of Earnings 1
Condensed Consolidated Balance Sheet 2
Condensed Consolidated Statement of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
(i)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RALCORP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in millions except per share data, shares in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales $ 314.9 $ 289.9 $ 953.5 $ 864.1
-------- -------- -------- --------
Costs and Expenses
Cost of products sold 251.5 233.5 763.8 699.8
Selling, general and administrative 41.3 38.8 122.0 114.0
Interest expense, net 1.2 3.9 4.7 12.7
Plant closure and relocation costs - .2 - 1.6
Merger termination fee, net of
related expenses - - - (4.2)
-------- -------- -------- --------
Total Costs and Expenses 294.0 276.4 890.5 823.9
-------- -------- -------- --------
Earnings before Income Taxes
and Equity Earnings 20.9 13.5 63.0 40.2
Income Taxes 7.6 5.1 22.7 15.3
-------- -------- -------- --------
Earnings before Equity Earnings 13.3 8.4 40.3 24.9
Equity in earnings of
Vail Resorts, Inc., net of
Related Deferred Income Taxes 4.8 6.0 5.2 5.9
-------- -------- -------- --------
Net Earnings $ 18.1 $ 14.4 $ 45.5 $ 30.8
======== ======== ======== ========
Basic Earnings per Share $ .60 $ .48 $ 1.52 $ 1.03
======== ======== ======== ========
Diluted Earnings per Share $ .59 $ .48 $ 1.49 $ 1.03
======== ======== ======== ========
Weighted average shares for basic EPS 29,980 29,908 29,941 29,883
Dilutive effect of assumed conversions:
Stock options 600 153 480 183
Restricted stock awards 1 - 1 -
-------- -------- -------- --------
Weighted average shares for
diluted earnings per share 30,581 30,061 30,422 30,066
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
June 30, Sept. 30,
2002 2001
--------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 2.3 $ 3.9
Receivables, net 10.4 9.0
Investment in Ralcorp Receivables Corp. 23.0 41.0
Inventories 139.3 164.1
Deferred income taxes 3.3 3.7
Other current assets 3.0 3.0
--------- ---------
Total Current Assets 181.3 224.7
Investment in Vail Resorts, Inc. 89.8 81.9
Property, Net 284.0 287.4
Goodwill 246.5 209.5
Other Intangible Assets, Net 5.9 8.1
Other Assets 8.5 6.3
--------- ---------
Total Assets $ 816.0 $ 817.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 65.1 $ 86.2
Other current liabilities 43.8 39.0
--------- ---------
Total Current Liabilities 108.9 125.2
Long-term Debt 179.9 223.1
Deferred Income Taxes 43.3 39.9
Other Liabilities 46.2 40.3
--------- ---------
Total Liabilities 378.3 428.5
--------- ---------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 110.0 109.9
Retained earnings 378.1 332.6
Common stock in treasury, at cost (49.9) (51.9)
Unearned portion of restricted stock (.1) -
Accumulated other comprehensive loss (.7) (1.5)
--------- ---------
Total Shareholders' Equity 437.7 389.4
--------- ---------
Total Liabilities and Shareholders' Equity $ 816.0 $ 817.9
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Nine Months Ended
June 30,
-------------------
2002 2001
-------- --------
Cash Flows from Operations
Net earnings $ 45.5 $ 30.8
Adjustments to reconcile net earnings to net
cash flow provided by operating activities:
Depreciation and amortization 25.7 30.8
Equity in earnings of Vail Resorts, Inc. (8.0) (9.1)
Deferred income taxes 4.2 4.4
Sale of receivables, net (6.1) -
Changes in operating assets and liabilities 39.0 7.5
-------- --------
Net cash provided by operations 100.3 64.4
-------- --------
Cash Flows from Investing Activities
Business acquisitions, net of cash acquired (52.1) (55.6)
Additions to property and intangible assets (20.2) (25.2)
Proceeds from sale of property 12.0 .6
-------- --------
Net cash used by investing activities (60.3) (80.2)
-------- --------
Cash Flows from Financing Activities
Net borrowings under credit arrangements (43.2) 13.9
Proceeds from the exercise of stock options 1.6 .7
-------- --------
Net cash provided by financing activities (41.6) 14.6
-------- --------
Net Decrease in Cash and Cash Equivalents (1.6) (1.2)
Cash and Cash Equivalents, Beginning of Period 3.9 4.1
-------- --------
Cash and Cash Equivalents, End of Period $ 2.3 $ 2.9
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
(Dollars in millions except per share data)
NOTE 1 - PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited historical financial statements of the Company have
been prepared in accordance with the instructions for Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments
considered necessary for a fair presentation, have been included. Operating
results for any quarter are not necessarily indicative of the results for any
other quarter or for the full year. Certain prior year amounts have been
reclassified to conform with the current year's presentation. These statements
should be read in connection with the financial statements and notes included in
the Company's Annual Report to Shareholders for the year ended September 30,
2001.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
During the fourth quarter of fiscal 2001, the Company implemented accounting
reclassifications as a result of EITF 00-10, 00-14, and 00-25. These
reclassifications had no impact on net earnings or earnings per share but did
affect reported net sales, cost of products sold, and selling, general and
administrative expenses. All periods presented reflect these reclassifications.
On October 1, 2001, the Company adopted FAS 142, "Goodwill and Other Intangible
Assets," which stops the amortization of goodwill and requires a goodwill
impairment test at least annually. The Company completed its transitional
goodwill impairment test in the second quarter. While this initial test resulted
in no impairment, the fair value of the Carriage House reporting unit only
slightly exceeded its carrying value. In accordance with the provisions of FAS
142, the Company will monitor this unit closely to determine whether
circumstances change that would reduce its fair value below its carrying amount.
The following schedules show net earnings and earnings per share adjusted to
exclude Ralcorp's goodwill amortization expense (net of tax effects) and to
adjust Ralcorp's equity in the earnings of Vail (net of tax effects) to exclude
Vail's goodwill amortization expense.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Reported net earnings $ 18.1 $ 14.4 $ 45.5 $ 30.8
Add back: Goodwill amortization - 1.6 - 4.6
Adjust: Equity in earnings of Vail - .1 - .4
-------- -------- -------- --------
Adjusted net earnings $ 18.1 $ 16.1 $ 45.5 $ 35.8
======== ======== ======== ========
Basic earnings per share:
Reported net earnings $ .60 $ .48 $ 1.52 $ 1.03
Add back: Goodwill amortization - .06 - .16
Adjust: Equity in earnings of Vail - - - .01
-------- -------- -------- --------
Adjusted net earnings $ .60 $ .54 $ 1.52 $ 1.20
======== ======== ======== ========
Diluted earnings per share:
Reported net earnings $ .59 $ .48 $ 1.49 $ 1.03
Add back: Goodwill amortization - .06 - .16
Adjust: Equity in earnings of Vail - - - .01
-------- -------- -------- --------
Adjusted net earnings $ .59 $ .54 $ 1.49 $ 1.20
======== ======== ======== ========
4
FAS 143, "Accounting for Asset Retirement Obligations," is effective for
financial statements issued for fiscal years beginning after June 15, 2002. FAS
143 addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Company does not currently have any obligations
falling under the scope of FAS 143, and therefore does not believe its adoption
will have a material impact on its financial position, earnings or cash flows.
FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those years. FAS 144 supersedes
FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," but retains the requirements to (a) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value of the asset. The
Company does not expect the adoption of FAS 144 to have a material impact on its
financial position, earnings or cash flows.
FAS 145, "Rescission of FASB Statements No. 4, 55, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," is generally effective for the
Company for fiscal year 2003. The Company does not expect the adoption of FAS
145 to have a material impact on its financial position, earnings or cash flows.
FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." FAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than at the date of an entity s commitment to an
exit plan. Costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. FAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not expect the adoption of FAS 146 to
have a material impact on its financial position, earnings or cash flows.
NOTE 3 - ACQUISITION
On January 30, 2002, the Company completed the purchase of 100% of the stock of
Lofthouse Foods Incorporated for $52.8 in cash obtained through borrowings from
the Company's revolving credit agreement. Headquartered in Clearfield, Utah
with plants in Clearfield and Ogden, Utah, Lofthouse is a producer of high
quality cookies that are sold to the in-store bakeries of major U.S. grocers and
mass merchandisers. The combination of Lofthouse with Cascade, acquired in
2000, gives Ralcorp a significant presence in this fast-growth, higher-margin
category. Post-acquisition results of the operations of Lofthouse are included
in Ralcorp's Consolidated Statement of Earnings. The acquired business, with
approximately $70 in annual sales, is reported in the Cereals, Crackers and
Cookies segment. The purchase price allocation has not been finalized, pending
the completion of an appraisal of the "Lofthouse" trade name. The total
purchase price will also be adjusted slightly due to an additional payment
related to the Company's election under code section 338(h)(10) to treat this
stock transaction as an asset purchase for tax purposes. Because of this
election, goodwill and other intangibles associated with this acquisition are
expected to be deductible for tax purposes.
On January 31, 2001, the Company purchased Torbitt & Castleman (T&C) and
post-acquisition results of the operations of T&C are included in
Ralcorp's Consolidated Statement of Earnings.
The following pro forma information presents the results of operations of the
Company as though the acquisitions discussed above had been completed as of the
beginning of each of the reported periods. Pro forma adjustments to earnings are
net of income taxes at Ralcorp's rates and include actual Lofthouse and T&C
earnings before taxes, additional interest expense and, in the 2001 periods,
amortization of related goodwill at approximately $.2 per month.
5
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 314.9 $ 306.7 $ 979.3 $ 942.0
Net earnings 18.1 14.4 45.7 29.7
Basic earnings per share .60 .48 1.53 .99
Diluted earnings per share .59 .48 1.50 .99
NOTE 4 - PLANT CLOSURE AND RELOCATION COSTS AND RESERVES
During fiscal 2001, the Company closed plants in Baltimore, MD and San Jose, CA,
moving production to its other facilities. For the three and nine months ended
June 30, 2001, costs related to these closures totaling $.2 and $1.6 are
included on the Statement of Earnings as "Plant closure and relocation costs."
On the Balance Sheet, "Other current liabilities" included reserves as follows:
Sep. 30, Amount June 30,
2001 Utilized 2002
-------- -------- --------
San Jose severance costs $ .2 $ .2 $ -
Other San Jose closure and relocation costs .4 .4 -
-------- -------- --------
$ .6 $ .6 $ -
======== ======== ========
NOTE 5 - MERGER TERMINATION FEE
Agribrands International, Inc. terminated a merger agreement with Ralcorp on
December 1, 2000. In accordance with the agreement, Ralcorp received a payment
of $5.0 as a termination fee, which was recorded in the first quarter of fiscal
2001 net of related expenses. The after-tax effect of this nonrecurring income
item was $2.6, or $.09 per diluted share.
NOTE 6 - EQUITY IN EARNINGS OF VAIL RESORTS, INC.
In June 2002, Vail Resorts changed its revenue recognition policy and is
restating Historical results to reflect the new policy. Based upon restatement
data Provided to Ralcorp by Vail Resorts, Ralcorp's share of the cumulative
effect of the Change through June 30, 2002, was a reduction of equity earnings
of $3.2 million ($2.1 million net of related deferred income taxes), or $.07 per
diluted share. Ralcorp adjusted its equity earnings and related investment and
deferred tax balances to reflect the full impact in the third quarter of fiscal
2002.
6
NOTE 7 - COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 18.1 $ 14.4 $ 45.5 $ 30.8
Other comprehensive income -
Deferred (loss) gain on cash flow
hedging instruments (.1) (.1) .8 (.2)
-------- -------- -------- --------
Comprehensive income $ 18.0 $ 14.3 $ 46.3 $ 30.6
======== ======== ======== ========
NOTE 8 - SALE OF RECEIVABLES
On September 23, 2001, the Company entered into a three-year agreement to sell,
on an ongoing basis, all of its trade accounts receivable to a wholly owned,
bankruptcy-remote subsidiary called Ralcorp Receivables Corporation (RRC), which
in turn sells the receivables to a bank commercial paper conduit. RRC is a
qualifying special purpose entity under FAS 140 and the sale of Ralcorp
receivables to RRC is considered a true sale for accounting, tax and legal
purposes. The receivables of newly-acquired Lofthouse are not included in the
agreement. As of June 30, 2002, the outstanding balance of receivables (net of
an allowance for doubtful accounts) sold to RRC was $77.9 and net proceeds
received were $54.9, resulting in a subordinated retained interest of $23.0
reflected on the Company's consolidated balance sheet as an "Investment in
Ralcorp Receivables Corp." Discounts related to the sale of receivables totaled
$.2 and $.9 in the three and nine months ended June 30, 2002 and are included on
the statement of earnings in "Selling, general and administrative" expenses.
NOTE 9 - INVENTORIES consisted of the following:
June 30, Sep. 30,
2002 2001
-------- --------
Raw materials and supplies $ 55.9 $ 63.6
Finished products 83.4 100.5
-------- --------
$ 139.3 $ 164.1
======== ========
NOTE 10 - PROPERTY, NET consisted of the following:
June 30, Sep. 30,
2002 2001
-------- --------
Property at cost $ 468.6 $ 450.2
Accumulated depreciation (184.6) (162.8)
-------- --------
$ 284.0 $ 287.4
======== ========
7
NOTE 11 - GOODWILL
The changes in the carrying amount of goodwill for the nine months ended
June 30, 2002 are as follows:
Dressings,
Cereals, Syrups,
Crackers Jellies Snack Nuts
& Cookies & Sauces & Candy Total
---------- ---------- ---------- ----------
Balance, September 30, 2001 $ 56.0 $ 99.1 $ 54.4 $ 209.5
Goodwill acquired 36.9 - - 36.9
Adjustments - .1 - .1
---------- ---------- ---------- ----------
Balance, June 30, 2002 $ 92.9 $ 99.2 $ 54.4 $ 246.5
========== ========== ========== ==========
NOTE 12 - OTHER INTANGIBLE ASSETS, NET consisted of the following:
June 30, Sep. 30,
2002 2001
-------- --------
Software $ 21.8 $ 21.4
Accumulated amortization (15.9) (13.3)
-------- --------
$ 5.9 $ 8.1
======== ========
Amortization expense related to these assets was $2.6 and $3.2 during the nine
months ended June 30, 2002 and 2001, respectively, with $3.6, $3.4, $1.2 and
$.3 scheduled for the years ended September 30, 2002, 2003, 2004, and 2005,
respectively.
NOTE 13 - LONG-TERM DEBT
On October 16, 2001, the Company entered into a $275 revolving credit agreement.
Borrowings under the credit agreement incur interest at the Company's choice of
either (1) LIBOR plus the applicable margin rate (currently 1.00%) or (2) the
maximum of the federal funds rate plus 0.50% or the prime rate. Such borrowings
are unsecured and mature on October 16, 2004 unless such date is extended. The
credit agreement calls for an unused fee of 0.225%, payable quarterly in
arrears, and contains certain representations, warranties, covenants and
conditions customary to credit facilities of this nature. Also on October 16,
2001, the Company repaid and terminated its $125 revolving credit agreement
(Credit Agreement A) and its term loan (Credit Agreement B), and the total
amount available under uncommitted credit arrangements was reduced from $50.5 to
$35.0. Outstanding long-term debt consisted of the following:
June 30, 2002 September 30, 2001
------------------ ------------------
Balance Rate Balance Rate
--------- ------- --------- -------
$275 Revolving Credit Agreement $ 165.0 2.972% $ - n/a
Credit Agreement A - n/a 40.0 3.531%
Credit Agreement B - n/a 160.0 4.611%
Uncommitted credit arrangements 8.9 2.700% 16.9 4.108%
Industrial Development Revenue Bond 5.6 1.370% 5.6 2.280%
Other .4 Various .6 Various
--------- ---------
$ 179.9 $ 223.1
========= =========
8
NOTE 14 - SEGMENT INFORMATION
The tables below present information about the Company's reportable segments:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales
Cereals $ 76.5 $ 74.2 $ 235.5 $ 229.7
Crackers & Cookies 87.2 61.6 244.3 191.5
Dressings, Syrups, Jellies & Sauces 114.4 113.4 343.3 305.3
Snack Nuts & Candy 36.8 40.7 130.4 137.6
-------- -------- -------- --------
Total $ 314.9 $ 289.9 $ 953.5 $ 864.1
======== ======== ======== ========
Profit Contribution
Cereals, Crackers & Cookies $ 17.5 $ 13.1 $ 54.2 $ 43.4
Dressings, Syrups, Jellies & Sauces 4.1 3.0 10.4 3.5
Snack Nuts & Candy 4.0 3.4 14.7 11.3
-------- -------- -------- --------
Total segment profit contribution 25.6 19.5 79.3 58.2
Interest expense, net (1.2) (3.9) (4.7) (12.7)
Merger termination fee, net of
related expenses - - - 4.2
Unallocated corporate expenses (3.5) (2.1) (11.6) (9.5)
-------- -------- -------- --------
Earnings before income taxes
and equity earnings $ 20.9 $ 13.5 $ 63.0 $ 40.2
======== ======== ======== ========
June 30, Sep. 30,
2002 2001
-------- --------
Total Assets
Cereals, Crackers & Cookies $ 335.7 $ 295.2
Dressings, Syrups, Jellies & Sauces 246.1 273.8
Snack Nuts & Candy 98.9 104.0
Investment in Ralcorp Receivables
Corporation 23.0 41.0
Investment in Vail Resorts, Inc. 89.8 81.9
Other unallocated corporate assets 22.5 22.0
-------- --------
Total $ 816.0 $ 817.9
======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion summarizes the significant factors affecting the
consolidated operating results, financial condition, liquidity and capital
resources of Ralcorp Holdings, Inc. (Company). This discussion should be read
in conjunction with the financial statements under Item 1.
9
RESULTS OF OPERATIONS
CONSOLIDATED
NET SALES Third quarter net sales grew 9 percent, from $289.9 million in
fiscal 2001 to $314.9 million in fiscal 2002. About 78 percent of the increase
was due to the acquisition of Lofthouse Foods Incorporated, acquired January 30,
2002. Net sales for the first nine months grew 10 percent from the prior year,
about two-thirds of which is attributable to the acquisitions of Lofthouse and,
on January 31, 2001, The Torbitt & Castleman Company. Refer to the segment
discussions below for specific factors affecting results.
OPERATING EXPENSES For the three months ended June 30, 2002 and 2001,
cost of products sold was 79.9% and 80.5% of net sales, respectively, while
selling, general, and administrative expenses were 13.1% and 13.4% of net sales,
respectively. The nine-month period of fiscal 2002 showed similar improvements
from the first nine months of fiscal 2001. These improvements are mainly
attributable to certain favorable raw material costs, cost reduction programs,
and the adoption of FAS 142, as further described in the segment discussions
below. Specifically, note that earnings for the nine months ended June 30, 2001
were reduced by $5.8 million ($4.7 million after taxes) of goodwill amortization
expense while this year had none.
INTEREST EXPENSE, NET Interest expense dropped to $1.2 million and $4.7
million for the three and nine months ended June 30, 2002, respectively, from
$3.9 million and $12.7 million in the corresponding periods of the prior year.
For the fiscal 2002 periods, the weighted average interest rates on the
Company's debt, practically all of which incurs interest at variable rates, were
about half of last year's average rates. In addition, Ralcorp has been able to
reduce its debt levels during the past year as cash from operations has exceeded
cash needs for business acquisitions and capital expenditures. Further, on
September 24, 2001 the Company entered into a three-year agreement to sell its
trade accounts receivable on an ongoing basis, and Ralcorp reduced its
outstanding debt with approximately $60 million of proceeds from this agreement.
Discounts related to this agreement totaled $.2 million and $.9 million in the
third quarter and first nine months of fiscal 2002, respectively, and are
included on the Consolidated Statement of Earnings in selling, general and
administrative expenses. If this transaction had not met the criteria for a sale
as specified in FAS 140, Ralcorp would have accounted for the transfer as a
secured borrowing with pledge of collateral, wherein the discount amounts would
have been classified as interest expense, the proceeds received would have been
recorded as short-term debt and the receivables would have remained on the
Company's balance sheet.
PLANT CLOSURE AND RELOCATION COSTS During fiscal 2001, the Company closed
plants in Baltimore, MD and San Jose, CA, moving production to its other
facilities. For the quarter and nine months ended June 30, 2001, costs related
to the Baltimore closure totaling $.2 million and $1.6 million, respectively,
are included on the Statement of Earnings as "Plant closure and relocation
costs." No material plant closure charges have been incurred in fiscal 2002. For
information about reserves relating to the San Jose closure, see Note 4 to the
financial statements in Item 1 herein.
MERGER TERMINATION FEE Earnings of the previous year's first quarter were
favorably impacted when Agribrands International, Inc. terminated a merger
agreement with Ralcorp on December 1, 2000. In accordance with the agreement,
Ralcorp received a payment of $5.0 million as a termination fee, which was
recorded in the first quarter of fiscal 2001 net of $.8 million of related
expenses. The after-tax effect of this $4.2 million nonrecurring income item
was $2.6 million, or $.09 per diluted share.
INCOME TAXES Income tax provisions generally reflect statutory tax rates,
adjusted by the effects of non-deductible goodwill amortization expense. The
effective rate for fiscal 2002 is lower because the Company has not recorded
goodwill amortization expense since its adoption of FAS 142 on October 1, 2001.
10
EQUITY IN EARNINGS OF VAIL RESORTS, INC. Ralcorp continues to hold an
approximate 21.5 percent equity ownership interest in Vail Resorts, Inc. Vail
Resorts operates on a fiscal year ending July 31; therefore, Ralcorp reports its
portion of Vail Resorts' operating results on a two-month time lag. Vail
Resorts' operations are highly seasonal, typically yielding more than the entire
year's equity income during the Company's second and third fiscal quarters. For
the third quarter ended June 30, 2002, this investment resulted in non-cash
pre-tax earnings of $7.4 million ($4.8 million after taxes), compared to $9.3
million ($6.0 million after taxes) for last year's third quarter. Through nine
months, after-tax equity earnings were $5.2 million for fiscal 2002 and $5.9
million for fiscal 2001. These reported results include a cumulative adjustment
in the third quarter of fiscal 2002 to reflect a restatement of Vail Resorts'
net income due to a change in its revenue recognition policy. Based upon
restatement data provided to Ralcorp by Vail Resorts, Ralcorp's share of the
cumulative effect of the change from January 1997 through June 30, 2002 was a
reduction of equity earnings of $3.2 million ($2.1 million net of related
deferred income taxes), or $.07 per diluted share. Because the amounts were
immaterial to any single reporting period and in total, the Company chose to
reflect the entire impact in the third quarter of fiscal 2002 rather than
restate its historical financial statements.
CEREALS, CRACKERS & COOKIES
Third quarter net sales for the Cereals, Crackers & Cookies segment were up
$27.9 million from last year, primarily due to additional sales from the Bremner
cracker and cookie division. Through nine months, the segment's sales were up
$58.6 million, as the Ralston Foods cereal division and Bremner contributed
increases of $5.8 million and $52.8 million, respectively. While Bremner
benefited from the acquired Lofthouse business, third quarter and first nine
months sales volumes and net sales at its other cookie businesses also grew
about 25 percent from last year as a result of ongoing expansion with existing
customers and additional short-term and long-term co-manufacturing business.
Cracker volumes were down slightly in both periods due to lower demand for
saltines. At Ralston Foods, incremental sales to existing customers, driven by
several recent product introductions and additional distribution of established
items, have been offset partially by price concessions and less co-manufacturing
business. Ready-to-eat cereal volume was up 3 percent from last year's third
quarter and up 2 percent through the first nine months. Hot cereal volume was
up 10 percent for the third quarter and 4 percent for the first nine months.
Profit contribution for the Cereals, Crackers & Cookies segment improved
more than 33 percent for the third quarter and 24 percent through nine months,
primarily as a result of the incremental profit from Lofthouse and improved
cereal profits. The segment benefited from favorable volumes, plant
efficiencies, and lower freight and energy costs, offset partially by price
concessions and lower co-manufacturing margins. In addition, last year's profit
for the third quarter and first nine months was reduced by $.6 million and $1.9
million of goodwill amortization expense, respectively.
DRESSINGS, SYRUPS, JELLIES & SAUCES
Third quarter and nine-month net sales for the Company's Dressings, Syrups,
Jellies & Sauces segment, also known as Carriage House, increased $1.0 million
and $38.0 million, respectively. As noted previously, last year's nine-month
results include only five months of sales from Torbitt & Castleman, acquired
January 31, 2001. The addition of new customers and increased business with
major existing customers also contributed to this segment's sales growth but was
partially offset by a reduction of volume with a co-manufacturing customer.
The segment's profit also increased from the comparable prior year periods,
improving $1.1 million for the quarter and $6.9 million for the nine months
ended June 30. Approximately one fourth of the nine-month increase is
attributable to the additional four months of results from Torbitt & Castleman
in the current year. The segment also benefited from the continuing cost
reduction efforts begun during fiscal 2001, including two plant closures. In
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addition, last year's profit for the third quarter and first nine months was
reduced by $.9 million and $2.1 million of goodwill amortization expense,
respectively. These benefits were offset partially by ingredient cost increases
and continued pricing pressures in the current year.
SNACK NUTS & CANDY
Third quarter and nine-month net sales for the Snack Nuts & Candy segment,
also known as Nutcracker, declined 10 percent and 5 percent, respectively. The
third quarter drop was primarily the result of the loss of several major
customers in competitive bidding.
Despite lower sales, third quarter and nine-month segment profit
contribution increased $.6 million and $3.4 million, respectively, from the
corresponding periods last year. This is attributable primarily to favorable
ingredient costs, which have continued to fall throughout the past year. In
addition, last year's profit for the third quarter and first nine months was
reduced by $.6 million and $1.8 million of goodwill amortization expense,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company focuses on generating positive cash flows through operations.
Management believes the Company will continue to generate operating cash flows
through its mix of businesses and expects that short-term and long-term
liquidity requirements will be met through a combination of operating cash flows
and strategic use of borrowings under committed and uncommitted credit
arrangements. Capital resources remained strong at June 30, 2002 with a net
worth of $437.7 million and a long-term debt to total capital ratio of 29
percent, compared to corresponding figures for September 30, 2001 of $389.4
million and 36 percent. Working capital, excluding cash and cash equivalents,
was reduced to $70.1 million at June 30, 2002 from $95.6 million at September
30, 2001.
Cash flows from operating activities were up significantly in fiscal 2002,
primarily as a result of the increase in earnings and the relative change in
receivables outstanding and inventories on hand. Cash earnings (i.e., net
earnings adjusted for non-cash items such as depreciation and amortization,
equity earnings, and deferred income taxes) were up $10.5 million. Receivables
outstanding and inventories were at higher levels at the beginning of fiscal
2002 than at the beginning of fiscal 2001, but June 30 levels of the two years
were similar.
Payments for Lofthouse Foods, acquired January 30, 2002, were similar to
the amount paid for Torbitt & Castleman in January 2001. The amount of capital
spending this year is lagging the prior year-to-date period but is still
expected to total nearly $35 million by the end of fiscal 2002. During the
second quarter of 2002, Ralcorp received over $10 million of proceeds from the
sale of its San Jose facility with no material gain or loss. Despite the
acquisition of Lofthouse, the strong operating cash flows enabled the Company to
decrease its total outstanding long-term debt by $43.2 million from September
30, 2001 to June 30, 2002. On October 16, 2001, the Company entered into a $275
million revolving credit agreement. Concurrently, the Company repaid and
terminated its $125 million revolving credit agreement (Credit Agreement A) and
its term loan (Credit Agreement B), and the total amount available under
uncommitted credit arrangements was reduced from $50.5 million to $35.0 million.
Total remaining availability at June 30, 2002 was $136.1 million.
OUTLOOK
CEREALS, CRACKERS & COOKIES
The level of competition in the cereal category continues to be intense.
Competition comes from branded box cereal manufacturers, branded bagged cereal
producers and other private label cereal providers. For the last several years,
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the overall category has not grown, which has added to its competitive nature.
When the competition focuses on price/promotion, the environment for private
label producers becomes more challenging. Ralston Foods must maintain an
effective price gap between its quality private label cereal products and those
of branded cereal producers, thereby providing the best value alternative for
the consumer. Increased distribution, including new co-manufacturing
opportunities, new and improved product emulations and aggressive cost
containment remain important goals of the organization.
The Company's cracker and cookie operation, Bremner, also conducts business
in a highly competitive category. Major branded competitors continue to market
and promote their offerings aggressively and many smaller, regional branded and
private label manufacturers provide additional competitive pressures. Bremner's
ability to maintain a sufficient price gap between products of branded producers
and Bremner's quality private label emulations and its ability to realize
improved operating efficiencies from recent acquisitions will be important to
its results of operations. The Company is working to realize synergies through
the combination of Lofthouse with Cascade, which has given Bremner a significant
presence in the in-store bakery cookie category. In addition, Bremner will
continue to focus on cost containment, new products and volume growth of
existing products in order to improve operating results.
DRESSINGS, SYRUPS, JELLIES & SAUCES
The Dressings, Syrups, Jellies & Sauces operation started fiscal 2002 in
transition. The consolidation of its Baltimore operation into the Dunkirk
facility was completed in January 2001. A second plant closure, in San Jose,
CA, was completed in January 2002 and all related production has been moved to
other Carriage House facilities. As evidenced by current year results, these
measures have improved the profit contribution of Carriage House. The
acquisition of the wet products portion of Torbitt & Castleman on January 31,
2001 has provided Carriage House with additional scale and manufacturing
flexibility.
Carriage House's competitors, both large and small, continue to be very
aggressive on pricing. The division plans to improve performance by further
increasing sales to new and existing customers by integrating product offerings
and sales efforts of the combined organization. In addition, capacity
rationalization, further cost reductions, and capture of additional synergies
will continue to be critical objectives.
Carriage House currently sells product to a branded company under several
co-manufacturing agreements, the last of which expires in November 2002. This
customer plans to self-manufacture in the future and has notified Carriage House
that it does not intend to renew these contracts upon their expiration. These
contracts account for approximately 5 percent of the segment's projected fiscal
2002 net sales and a greater percentage of its operating profit. However, the
Company expects that the effect of these lost sales on net earnings will not be
material to Ralcorp.
The cost of peanuts, a major ingredient for Carriage House (peanut butter),
could be favorably impacted by the farm bill which was signed into law in May
2002. The benefit to the Company, if any, cannot be determined at this time.
As discussed in Note 2 to the financial statements in Item 1, the fair
value of the Carriage House reporting unit only slightly exceeded its carrying
value as of October 1, 2001. In accordance with the provisions of FAS 142, the
Company will monitor this unit closely to determine whether circumstances change
that would reduce its fair value below its carrying amount. For example, fair
value would be diminished if the forecasted benefits of the cost reduction plans
discussed above are not realized, or are negated by lost customers or pricing
pressures, and the unit is not able to achieve its planned results. Other
critical factors are listed below in the "Cautionary Statement on
Forward-Looking Statements." If the fair value drops below the carrying value,
Carriage House goodwill would likely be impaired and an impairment loss would be
recorded immediately as a charge against earnings.
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SNACK NUTS & CANDY
Snack nuts and candy continue to be very competitive categories. This
segment of Ralcorp faces significant competition from branded manufacturers as
well as private label and regional producers. Recently, competitive bids for
store brand customer business have resulted in either loss of margins or loss of
customers to competitors. Management expects this margin pressure to continue
into the foreseeable future. The segment will continue to focus on maintaining
its customer base and the quality of its products.
The segment has recently benefited from lower raw material costs. The cost
of cashews, a major ingredient, has trended down from significant highs in
fiscal 2000 but now appears to have stabilized. As discussed above, the 2002
farm bill could also have a favorable impact on this segment's peanut costs and
profitability.
OVERALL
The Company's management believes that the opportunities in the private
label and value brand areas are favorable for long-term growth. The Company has
taken significant steps to reshape the Company and lessen its reliance on any
one business segment and to achieve sufficient scale in the categories in which
it operates. Management expects to continue to improve its business mix through
volume and profit growth of existing businesses, as well as through acquisitions
or alliances. Management will continue to explore those acquisition
opportunities that strategically fit with the Company's intentions of being the
premier provider of private label, or value-oriented, food products.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 in Item 1 for a discussion regarding recently issued accounting
standards, including EITF 00-10, 00-14, and 00-25, and FAS 142, 143, 144, 145,
and 146.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion is presented pursuant to the United States
Securities and Exchange Commission's Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies."
The policies below are both important to the representation of the Company's
financial condition and results and require management's most difficult,
subjective or complex judgments.
Under generally accepted accounting principles in the United States,
Ralcorp makes estimates and assumptions that impact the reported amounts of
assets, liabilities, revenues, and expenses as well as the disclosure of
contingent liabilities. The Company bases estimates on past experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Those estimates form the basis for making judgments about
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Ralcorp records estimated reductions to revenue for customer incentive
offerings. Should a greater proportion of customers redeem incentives than
estimated by the Company, additional reductions to revenue may be required.
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for obsolete product and packaging materials. The
estimated allowance is based on management's review of inventories on hand
compared to estimated future usage and sales. If market conditions and actual
demands are less favorable than those projected by management, additional
inventory write-downs may be required.
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Management reviews long-lived assets, including leasehold improvements and
property and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. Long-lived assets to be disposed of are reported at the lower of
the carrying amount or fair value less the cost to sell.
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their identifiable net assets. In the first quarter of
fiscal 2002, Ralcorp adopted FAS 142, which requires that the Company no longer
amortize goodwill but review for impairment on a regular basis. During the
second quarter of fiscal 2002, Ralcorp completed its transitional impairment
tests which resulted in no impairment. The goodwill impairment test requires
the Company to estimate the fair value of its businesses, for which Ralcorp
utilizes discounted cash flow analyses based on projected cash flows.
Pension assets and liabilities are determined on an actuarial basis and are
affected by the estimated market-related value of plan assets, estimates of the
expected return on plan assets, discount rates and other assumptions inherent in
these valuations. The Company reviews annually the assumptions underlying the
actuarial calculations and makes changes to these assumptions, based on current
market conditions, as necessary. Actual changes in the fair market value of
plan assets and differences between the actual return on plan assets and the
expected return on plan assets will affect the amount of pension expense
(income) ultimately recognized. The other postretirement benefits liability is
also determined on an actuarial basis and is affected by assumptions including
the discount rate and expected trends in healthcare costs. Changes in the
discount rate and differences between actual and expected healthcare costs will
affect the recorded amount of other postretirement benefits expense.
Liabilities for workers' compensation and accrued health care costs are
estimated based on historical experience and expected trends.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Report. These
forward-looking statements are sometimes identified by their use of terms and
phrases such as "believes," "should," "expects," "anticipates," "intends,"
"plans," "will" or similar expressions elsewhere in this Report. The Company's
results of operations and financial condition may differ materially from those
in the forward-looking statements. Such statements are based on management's
current views and assumptions, and involve risks and uncertainties that could
affect expected results. For example, any of the following factors cumulatively
or individually may impact expected results:
(i) If the Company is unable to maintain a meaningful price gap between its
private label products and the branded products of its competitors, successfully
introduce new products or successfully manage costs across all parts of the
Company, the Company's private label businesses could incur operating losses;
(ii) Consolidation among members of the grocery trade may lead to increased
wholesale price pressure from larger grocery trade customers and could result in
the loss of key accounts if the surviving entities are not customers of the
Company;
(iii) Significant increases in the cost of certain raw materials (e.g., wheat,
soybean oil, various nuts, corn syrup) or energy used to manufacture the
Company's products, to the extent not reflected in the price of the Company's
products, could adversely impact the Company's results;
(iv) In light of its significant ownership in Vail Resorts, Inc., the Company's
non-cash earnings can be adversely affected by Vail Resorts' unfavorable
performance;
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(v) The Company is currently generating profit from certain co-manufacturing
contract arrangements with other manufacturers within its competitive
categories. The termination or expiration of these contracts and the inability
of the Company to replace this level of business could negatively affect the
Company's operating results;
(vi) The Company's businesses compete in mature segments with competitors
having large percentages of segment sales;
(vii) The Company has realized increases to sales and earnings through the
acquisitions of businesses, but the ability to undertake future acquisitions
depends on many factors that the Company does not control, such as identifying
available acquisition candidates and negotiating satisfactory terms upon which
to purchase such candidates;
(viii) Presently, all of the interest on the Company's indebtedness is set on a
short-term basis. Consequently, increases in interest rates will increase the
Company's interest expense; and
(ix) If actual or forecasted cash flows of any reporting unit deteriorate such
that its fair value falls below its carrying value, goodwill would likely be
impaired and an impairment loss would be recorded immediately as a charge
against earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Management believes there have been no material changes in the reported
market risks faced by the Company during the nine months ended June 30, 2002.
For additional information, refer to Item 7A of the Company's Annual Report on
Form 10-K for the year ended September 30, 2001.
PART II. OTHER INFORMATION
There is no information required to be reported under any items except those
indicated below.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Agreement between Ralcorp Holdings, Inc. and J. R. Micheletto dated
May 23, 2002.
(b) Reports on Form 8-K
On April 30, 2002, the Registrant announced earnings for the second quarter
ended March 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RALCORP HOLDINGS, INC.
By: /s/ T. G. Granneman
--------------------------------
T. G. Granneman
Duly Authorized Signatory and
Chief Accounting Officer
August 14, 2002
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Exhibit Index
Exhibit Description
- ------- -----------
10.1 Agreement between Ralcorp Holdings, Inc. and J. R. Micheletto dated
May 23, 2002.
17