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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 DECEMBER 31, 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 February 12 2003
28,884,217
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
Condensed Consolidated Statement of Comprehensive Income 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
(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
December 31,
------------------
2002 2001
-------- --------
Net Sales $ 348.3 $ 325.1
-------- --------
Costs and Expenses
Cost of products sold 279.8 259.2
Selling, general and administrative 40.2 39.2
Interest expense, net 1.1 1.9
Restructuring and impairment charges 7.2 -
Litigation settlement income, net (5.7) -
-------- --------
Total Costs and Expenses 322.6 300.3
-------- --------
Earnings before Income Taxes
and Equity Earnings 25.7 24.8
Income Taxes 9.2 8.9
-------- --------
Earnings before Equity Earnings 16.5 15.9
Equity in Loss of Vail Resorts, Inc.,
Net of Related Deferred Income Taxes (3.2) (3.1)
-------- --------
Net Earnings $ 13.3 $ 12.8
======== ========
Basic Earnings per Share $ 0.45 $ 0.43
======== ========
Diluted Earnings per Share $ 0.44 $ 0.42
======== ========
Weighted Average Shares for
Basic Earnings per Share 29,833 29,912
Dilutive effect of assumed conversion:
Stock options 390 333
Restricted stock awards 1 -
Deferred compensation awards 96 -
-------- --------
Weighted Average Shares for
Diluted Earnings per Share 30,320 30,245
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
Dec. 31, Sept. 30,
2002 2002
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 6.8 $ 3.2
Investment in Ralcorp Receivables Corp. 19.9 29.7
Miscellaneous receivables 6.4 6.2
Inventories 145.1 161.6
Deferred income taxes 5.5 5.1
Other current assets 4.6 2.8
-------- --------
Total Current Assets 188.3 208.6
Investment in Vail Resorts, Inc. 75.9 80.8
Property, Net 272.4 282.6
Goodwill 238.0 238.0
Other Intangible Assets, Net 13.0 13.9
Other Assets 9.9 8.6
-------- --------
Total Assets $ 797.5 $ 832.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 64.7 $ 75.2
Other current liabilities 62.0 44.8
-------- --------
Total Current Liabilities 126.7 120.0
Long-term Debt 153.8 179.0
Deferred Income Taxes 31.9 36.3
Other Liabilities 61.9 61.1
-------- --------
Total Liabilities 374.3 396.4
-------- --------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 112.2 110.0
Retained earnings 399.7 386.4
Common stock in treasury, at cost (77.6) (49.9)
Unearned portion of restricted stock (.1) (.1)
Accumulated other comprehensive loss (11.3) (10.6)
-------- --------
Total Shareholders' Equity 423.2 436.1
-------- --------
Total Liabilities and
Shareholders' Equity $ 797.5 $ 832.5
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended
December 31,
-------------------
2002 2001
-------- --------
Cash Flows from Operating Activities
Net earnings $ 13.3 $ 12.8
Adjustments to reconcile net earnings to net
cash flow provided by operating activities:
Depreciation and amortization 10.9 8.2
Impairment charge 5.0 -
Equity in loss of Vail Resorts, Inc. 4.9 4.8
Deferred income taxes (4.8) (.8)
Sale of receivables, net 4.4 -
Changes in current assets and liabilities 26.6 (6.1)
Other, net - .8
-------- --------
Net cash provided by operating activities 60.3 19.7
-------- --------
Cash Flows from Investing Activities
Additions to property and intangible assets (6.2) (5.2)
Proceeds from sale of property 2.4 1.6
-------- --------
Net cash used by investing activities (3.8) (3.6)
-------- --------
Cash Flows from Financing Activities
Net repayments under credit arrangements (25.2) (19.1)
Proceeds from exercise of stock options .1 .2
Purchase of treasury stock (27.8) -
-------- --------
Net cash used by financing activities (52.9) (18.9)
-------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents 3.6 (2.8)
Cash and Cash Equivalents, Beginning of Period 3.2 3.9
-------- --------
Cash and Cash Equivalents, End of Period $ 6.8 $ 1.1
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
Three Months Ended
December 31,
-------------------
2002 2001
-------- --------
Net Earnings $ 13.3 $ 12.8
Other Comprehensive Income -
Deferred (loss) gain on cash flow
hedging instruments, net (.7) .8
-------- --------
Comprehensive Income $ 12.6 $ 13.6
======== ========
4
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(Unaudited)
(Dollars in millions except per share data)
NOTE 1 - PRESENTATION OF CONDENSED 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,
2002.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (FAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," was adopted by the Company for its
financial statements issued for fiscal year 2003, including interim periods.
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 adoption of FAS 144 did not have a material impact on the
Company's 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," was generally effective for the
Company for fiscal year 2003. The adoption of FAS 145 did not have a material
impact on the Company's financial position, earnings, or cash flows.
FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
addresses financial accounting and reporting 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. As
required, the Company will apply FAS 146 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, but it could affect the period in which certain future
restructuring expenses are recognized.
FAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
amends FAS 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The Company
currently has no plans to change to the fair value based method from the
intrinsic value method currently used. In addition, FAS 148 amends the
disclosure requirement of FAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. These amended disclosure requirements are effective for financial
statements for interim periods beginning after December 15, 2002, but the
5
Company adopted them for its financial statements for the three months ended
December 31, 2002. Accordingly, the following table shows the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions.
Three Months Ended
December 31,
-------------------
2002 2001
-------- --------
Net earnings, as reported $ 13.3 $ 12.8
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (.6) (.6)
-------- --------
Pro forma net earnings $ 12.7 $ 12.2
======== ========
Earnings per share:
Basic - as reported $ .45 $ .43
Basic - pro forma $ .43 $ .41
Diluted - as reported $ .44 $ .42
Diluted - pro forma $ .42 $ .40
FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that, in certain cases, a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements are effective for interim periods ending after December 15, 2002
and the provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. The Company currently has no obligations from guarantees which would
require disclosure or the recognition of a liability, except as disclosed in
Note 14 to its consolidated financial statements for the year ended September
30, 2002.
FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB
51," was issued January 13, 2003. The Company currently has no involvement with
variable interest entities as defined by FIN 46. FIN 46 specifically states
that qualifying special-purpose entities, such as Ralcorp Receivables
Corporation (RRC) discussed in Note 5, shall not be consolidated unless the
holder has the unilateral ability to cause the entity to liquidate or to change
the entity so that it no longer meets certain conditions described in Statement
140. Because RRC's Board of Directors must include an independent director, the
Company does not have such unilateral ability.
Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables," is effective for certain revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, but the Company does not
expect its adoption to have a material impact on its financial position,
earnings, or cash flows.
EITF Issue No. 02-16, "Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor" is generally effective for the second
quarter of the Company's fiscal year 2003, but the Company does not expect its
application to have a material impact on its financial position, earnings, or
cash flows.
6
EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination" clarifies certain recognition requirements
in FAS 141, "Business Combinations." The guidance in this Issue is to be
applied to business combinations consummated and goodwill impairment tests
performed after October 25, 2002. The Company does not expect its application
to have a material impact on its financial position, earnings, or cash flows.
NOTE 3 - RESTRUCTURING AND IMPAIRMENT CHARGES AND RESERVES
In the quarter ended December 31, 2002, the Company finalized its plans to
reduce operations at its Streator, IL facility and transfer production of all
product lines except peanut butter to other locations. By the end of the
quarter, termination benefits totaling $.3 had been paid (39 employees), and the
Company recorded a reserve for an additional $.6 to be paid in the quarter
ending March 31, 2003 (98 employees). All other costs associated with this
restructuring will be charged to expense as incurred.
Also in the quarter ended December 31, 2002, the Company sold its ketchup
business, including certain equipment and inventory, and recorded a net loss of
$1.3. That loss included writing off or reducing the valuation of related
inventories of packaging, ingredients, and finished products, as well as a $.4
reserve for exit costs expected to be incurred during the quarter ending March
31, 2003. Further, management determined that the resulting reduced cash flows
from its tomato paste business, which had supplied the Company's ketchup
production, was less than the carrying value of its paste production facility
located near Williams, CA. Accordingly, the fair value of the related fixed
assets as of December 31, 2002 was assessed based on a market quote, resulting
in an impairment charge of $5.0. See Note 12.
Exit costs related to these transactions were accounted for under EITF 94-3.
The $.9 of costs recorded for the Streator restructuring, the $1.3 loss from the
exit of the ketchup business, and the $5.0 asset impairment total $7.2 shown as
"Restructuring and impairment charges" on the statement of earnings for the
quarter ended December 31, 2002. At December 31, 2002, "Other current
liabilities" on the balance sheet included reserves as follows:
Amounts Amounts Ending
Added Utilized Reserve
-------- -------- --------
Streator termination benefits $ .9 $ (.3) $ .6
Ketchup business exit costs .4 - .4
------- ------- -------
$ 1.3 $ (.3) $ 1.0
======= ======= =======
NOTE 4 - LITIGATION SETTLEMENT INCOME
During the three months ended December 31, 2002, the Company received payments
in partial settlement of its claims related to ongoing vitamin antitrust
litigation. These payments are shown net of related expenses as "Litigation
settlement income, net" on the statement of earnings.
NOTE 5 - SALE OF RECEIVABLES
On September 24, 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 named 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. As of December 31, 2002, the outstanding balance of receivables (net
of an allowance for doubtful accounts) sold to RRC was $80.9 and proceeds
received were $61.0, resulting in a subordinated retained interest of $19.9
reflected on the Company's consolidated balance sheet as an "Investment in
7
Ralcorp Receivables Corp." Discounts related to the sale of receivables totaled
$.2 and $.4 in the three months ended December 31, 2002 and 2001, respectively,
and are included on the statement of earnings in "Selling, general and
administrative" expenses.
NOTE 6 - INVENTORIES consisted of the following:
Dec. 31, Sep. 30,
2002 2002
--------- ---------
Raw materials and supplies $ 58.4 $ 59.3
Finished products 86.7 102.3
--------- ---------
$ 145.1 $ 161.6
========= =========
NOTE 7 - PROPERTY, NET consisted of the following:
Dec. 31, Sep. 30,
2002 2002
--------- ---------
Property at cost $ 470.4 $ 475.6
Accumulated depreciation (198.0) (193.0)
--------- ---------
$ 272.4 $ 282.6
========= =========
NOTE 8 - OTHER INTANGIBLE ASSETS, NET consisted of the following:
Dec. 31, Sep. 30,
2002 2002
--------- ---------
Computer software $ 21.5 $ 21.6
Trademark 9.0 9.0
Accumulated amortization (17.5) (16.7)
--------- ---------
$ 13.0 $ 13.9
========= =========
Amortization expense was $.8 and $.9 during the three months ended December 31,
2002 and 2001, respectively.
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of the following:
December 31, 2002 September 30, 2002
------------------ ------------------
Balance Rate Balance Rate
--------- ------- --------- -------
$275 Revolving Credit Agreement $ 135.0 2.535% $ 165.0 2.754%
Uncommitted credit arrangements 12.9 2.075% 8.0 2.700%
Industrial Development Revenue Bond 5.6 1.200% 5.6 1.540%
Other .3 Various .4 Various
--------- ---------
$ 153.8 $ 179.0
========= =========
8
NOTE 10 - TREASURY STOCK
On December 11, 2002, the Company purchased 1.15 million shares of its common
stock at a purchase price of $24.00 per share.
NOTE 11 - SEGMENT INFORMATION
The following tables present information about the Company's reportable
segments. Management evaluates each segment's performance based on its profit
contribution, which is profit or loss from operations before income taxes,
interest, costs related to restructuring activities, and unallocated corporate
income and expenses.
Three Months Ended
December 31,
-------------------
2002 2001
-------- --------
Net Sales
Cereals $ 83.9 $ 80.2
Crackers & Cookies 101.6 70.8
Dressings, Syrups, Jellies & Sauces 103.5 112.4
Snack Nuts & Candy 59.3 61.7
-------- --------
Total $ 348.3 $ 325.1
======== ========
Profit Contribution
Cereals, Crackers & Cookies $ 23.1 $ 19.0
Dressings, Syrups, Jellies & Sauces .9 3.4
Snack Nuts & Candy 9.6 7.8
-------- --------
Total segment profit contribution 33.6 30.2
Interest expense, net (1.1) (1.9)
Restructuring and impairment charges (7.2) -
Litigation settlement income, net 5.7 -
Other unallocated corporate expenses (5.3) (3.5)
-------- --------
Earnings before income taxes
and equity earnings $ 25.7 $ 24.8
======== ========
Dec. 31, Sep. 30,
2002 2002
-------- --------
Total Assets
Cereals, Crackers & Cookies $ 332.2 $ 337.1
Dressings, Syrups, Jellies & Sauces 243.5 261.2
Snack Nuts & Candy 95.0 98.1
Investment in Ralcorp Receivables
Corporation 19.9 29.7
Investment in Vail Resorts, Inc. 75.9 80.8
Other unallocated corporate assets 31.0 25.6
-------- --------
Total $ 797.5 $ 832.5
======== ========
9
NOTE 12 - SUBSEQUENT EVENTS
On February 4, 2003, the Company sold its industrial tomato paste processing
facility in Williams, CA, a component of the Dressings, Syrups, Jellies & Sauces
segment. Because of the $5.0 impairment charge recorded in the quarter ended
December 31, 2002, the residual loss on the sale is expected to be between $1.5
and $2.0 in the second fiscal quarter.
On February 6, 2003, the Company received an additional partial settlement of
its claims related to ongoing vitamin antitrust litigation. This $8.9 payment
will be recorded as Litigation Settlement Income in the Company's second fiscal
quarter, net of related legal costs.
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. This discussion should be read in
conjunction with the financial statements under Item 1. The terms "our," "we,"
"Company," and "Ralcorp" as used herein refer to Ralcorp Holdings, Inc. and its
consolidated subsidiaries.
RESULTS OF OPERATIONS
CONSOLIDATED
NET SALES Net sales grew from $325.1 million in the first quarter of
fiscal 2002 to $348.3 million in the first quarter of fiscal 2003. This 7
percent increase is primarily attributable to incremental sales from the
Lofthouse cookie business acquired on January 30, 2002, since smaller increases
and decreases in our other businesses essentially offset one another. Refer to
the segment discussions below for specific factors affecting results.
OPERATING EXPENSES For the three months ended December 31, 2002 and 2001,
cost of products sold was 80.3% and 79.7% of net sales, respectively, while
selling, general, and administrative (SG&A) expenses were 11.5% and 12.1% of net
sales, respectively. Primarily, the relative increase in cost of products sold
was the result of $2.2 million of accelerated depreciation expense caused by
changes in the remaining useful life of certain Streator assets and ketchup
business assets (see below for a discussion of the restructuring activities
related to these assets). The favorable SG&A percentage is mainly attributable
to the $.8 gain on sale of some Keystone resort property and cost controls.
INTEREST EXPENSE, NET Interest expense was $1.1 million for the three
months ended December 31, 2002, compared to $1.9 million in the first quarter of
the prior year. The decrease is attributable to lower interest rates and lower
debt levels in the current year. For the first quarter of fiscal 2003, the
weighted average interest rate on our debt, practically all of which incurs
interest at variable rates, was 2.6 percent compared to 3.4 percent a year ago.
Despite additional borrowings to fund the Lofthouse acquisition in January 2002
and the repurchase of 1.15 million shares of Ralcorp common stock in December
2002, we reduced our outstanding long-term debt from $204.0 million at December
31, 2001 to $153.8 million at December 31, 2002 with operating cash flows.
On September 24, 2001, we entered into a three-year agreement to sell our
trade accounts receivable on an ongoing basis. Discounts related to this
agreement totaled $.2 million and $.4 million in the first quarter of fiscal
2003 and 2002, respectively, and are included on the statement of earnings in
selling, general and administrative expenses.
10
RESTRUCTURING AND IMPAIRMENT CHARGES In the quarter ended December 31,
2002, we finalized our plans to reduce operations at our Streator, IL facility
and transfer production of all product lines except peanut butter to other
locations. By the end of the quarter, termination benefits totaling $.3 had
been paid, and we recorded a reserve for an additional $.6 to be paid in the
quarter ending March 31, 2003. All other costs associated with this
restructuring will be charged to expense as incurred.
Also in the quarter ended December 31, 2002, we sold our ketchup business,
including certain equipment and inventory, and recorded a net loss of $1.3.
That loss included writing off or reducing the valuation of related inventories
of packaging, ingredients, and finished products, as well as a $.4 reserve for
exit costs expected to be incurred during the quarter ending March 31, 2003.
Further, we determined that the resulting reduced cash flows from our tomato
paste business, which had supplied our ketchup production, was less than the
carrying value of our paste production facility located near Williams, CA.
Accordingly, the fair value of the related fixed assets as of December 31, 2002
was assessed based on a market quote, resulting in an impairment charge of $5.0.
Subsequent to that date, the Board of Directors approved the sale of the paste
facility, and on February 4, 2003, it was sold (see Note 12, "Subsequent
Events," in Item 1).
The $.9 of costs recorded for the Streator restructuring, the $1.3 loss
from the exit of the ketchup business, and the $5.0 asset impairment total $7.2
shown as "Restructuring and impairment charges" on the statement of earnings for
the quarter ended December 31, 2002. The after-tax effect of these charges was
$4.6 million, or $.15 per diluted share. No material restructuring charges were
incurred in fiscal 2002.
LITIGATION SETTLEMENT INCOME During the three months ended December 31,
2002, we received payments in partial settlement of our claims related to
ongoing vitamin antitrust litigation. These payments are shown net of related
expenses as "Litigation settlement income, net" on the statement of earnings.
The after-tax effect of this $5.7 million income item was $3.6 million, or $.12
per diluted share. Smaller payments had resulted in pre-tax income of $.5
million and $1.1 million recorded in the third and fourth quarters of fiscal
2002, respectively. On February 6, 2003, we received an additional $8.9 million
(net of related legal costs), which will be recorded in the second quarter of
fiscal 2003. While it is possible that we may receive further amounts related
to the vitamin antitrust litigation, we do not expect any such amounts to be
significant.
INCOME TAXES Income tax provisions for fiscal 2003 and 2002 generally
reflect statutory tax rates.
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, we report our
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 Ralcorp's second and third fiscal quarter. For
the first quarter ended December 31, 2002, this investment resulted in a
non-cash pre-tax loss of $4.9 million ($3.2 million after taxes), compared to a
$4.8 million loss ($3.1 million after taxes) for last year's first quarter.
CEREALS, CRACKERS & COOKIES
First quarter net sales for the Cereals, Crackers & Cookies segment were up
$34.5 million (23 percent) from last year, with the Ralston Foods cereal
division and the Bremner cracker and cookie division reporting increases of $3.7
million and $30.8 million, respectively. While approximately 75 percent of
Bremner's net sales growth came from the acquired Lofthouse business, its other
businesses continue to grow as well. Increased co-manufacturing business and
ongoing expansion with existing customers drove quarter-over-quarter cracker
volumes and cookie volumes up about 17 percent and 7 percent, respectively. At
11
Ralston Foods, increased co-manufacturing business was the key contributor to
the quarter-over-quarter gains made in fiscal 2003. Other factors included
growth in foodservice sales and incremental sales to existing customers, driven
by several recent product introductions and additional distribution of
established items. Store brand ready-to-eat cereal volume for the quarter was
up 1 percent from last year and hot cereal volume was up 5 percent.
The segment's profit contribution for the first quarter improved $4.1
million (22 percent) as a result of the increased sales, partially offset by
unfavorable ingredient costs such as wheat flour, soybean oil, cocoa, and sugar.
DRESSINGS, SYRUPS, JELLIES & SAUCES
Carriage House's net sales for the three months ended December 31, 2002
decreased nearly 8 percent compared to last year's first quarter sales. This
decline is attributable primarily to the loss of a co-manufacturing customer,
but also to the sale of the honey business in June of 2002 and continued pricing
pressures. These sales reductions were partially offset by increased business
with continuing customers.
The segment's first quarter profit decreased along with net sales, falling
to $.9 million in fiscal 2003 from $3.4 million in fiscal 2002. Commodity cost
increases in soy oil and other ingredients were partially offset by declines in
peanut costs. Production costs increased as a result of inefficiencies related
to the lower volumes, the Streator product relocation, and a short work stoppage
at two plants in New York.
SNACK NUTS & CANDY
First quarter net sales for the Snack Nuts & Candy segment, also known as
Nutcracker Brands, decreased 4 percent from last year as a result of the loss of
a few major customers in competitive bidding last year and a significant
reduction in holiday orders from a continuing major customer. These business
declines, which reduced net sales by nearly $8.0 million, were largely offset by
increased sales to other customers.
Despite lower sales, first quarter segment profit increased $1.8 million
(23 percent) from the corresponding period last year. This improvement was due
primarily to favorable ingredient costs, especially peanut costs, as well as
production efficiencies and cost containment.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded operating needs by generating positive cash
flows through operations. We expect to continue generating operating cash flows
through our mix of businesses and expect 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 December 31, 2002 with a net worth of
$423.2 million and a long-term debt to total capital ratio of 27 percent,
compared to corresponding figures for September 30, 2002 of $436.1 million and
29 percent. The unusual reduction in net worth was caused by our purchase of
treasury stock during the quarter, discussed further below. Working capital,
excluding cash and cash equivalents, was down to $54.8 million at December 31,
2002 from $85.4 million at September 30, 2002 as a result of seasonal changes as
well as continuing reduction efforts.
Although net earnings for the three months ended December 31, 2002 were
only $.5 million higher than in the first quarter of the prior year, cash flows
from operating activities were considerably higher. The most significant
differences in reconciling items between the two periods were changes in
accounts payable, other current liabilities, and inventories. Accounts payable
12
dropped $32.0 million during the quarter ended December 31, 2001, from a
relatively high $86.2 million to an unusually low $54.2 million, but only fell
$10.5 million in the current year. Other current liabilities increased more in
fiscal 2003 ($17.2 million) than in fiscal 2002 ($9.5 million) as a result of
the timing of federal tax payments. Although a seasonal decrease in inventories
is normal during the first fiscal quarter, inventories decreased only $11.2
million in the prior year compared to $16.5 million in the current year as a
result of recent working capital reduction efforts. In addition, net proceeds
received from the sale of receivables increased $4.4 million, from $56.6 million
as of September 30, 2002 to $61.0 as of December 31, 2002. As noted earlier,
second quarter cash flows will include net litigation settlements totaling
approximately $8.9 million received on February 6, 2003.
Planned capital expenditures for fiscal 2003 will require approximately $45
million, of which $6.2 million was spent during the first quarter. In addition
to the amounts to be capitalized, a pilot project to upgrade our information
systems is expected to result in incremental SG&A expenses totaling between $3
and $4 million during the term of the project, which is scheduled to be
completed by the end of fiscal 2003. As discussed below, we have adequate
capacity under current borrowing arrangements to meet these cash needs.
On December 11, 2002, we purchased 1.15 million shares of treasury stock at
a purchase price of $24.00 per share through a modified "Dutch Auction" tender
offer. We made the offer to buy back our shares because we believed that our
shares were undervalued in the public market and that the offer was consistent
with our long-term goal of increasing shareholder value. We believe that this
purchase was a prudent use of our financial resources, given our ability to
generate reliable cash flow from operations and the market price of our common
stock. We also believe that investing in our own shares is an attractive use of
capital and an efficient means to provide value to our shareholders.
During the three months ended December 31, 2002, we used $25.2 million of
cash provided by operations to reduce our long-term debt. As of December 31,
2002, total remaining availability under our $275 million revolving credit
agreement and our $35 million uncommitted credit arrangements was $162.1
million.
OUTLOOK
We believe the opportunities in the private label and value brand areas are
favorable for long-term growth. In the past few years, we have taken
significant steps to reshape the Company, reducing our reliance on any one
business segment while achieving sufficient scale in the categories in which we
operate. We expect to continue to improve our business mix through volume and
profit growth of existing businesses, as well as through acquisitions or
alliances. We will continue to explore those acquisition opportunities that
strategically fit with our intention to be the premier provider of private
label, or value-oriented, food products.
The following sections contain discussions of the specific factors
affecting the outlook for each of our reportable segments.
CEREALS, CRACKERS & COOKIES
The level of competition in the cereal category continues to be intense for
our Ralston Foods division. Competition comes from branded box cereal
manufacturers, branded bagged cereal producers and other private label cereal
providers. On December 3, 2002, Quaker Foods & Beverages (Pepsico) sold its
U.S. bagged cereal business to the Malt-O-Meal Company, which may affect the
Competitive environment. For the last several years, category growth in ready
to eat and hot cereals has been minimal, which has exacerbated its competitive
nature. When branded competitors focus on price/promotion, the environment for
13
private label producers becomes more challenging. We must maintain an effective
price gap between our quality private label cereal products and those of branded
cereal producers, thereby providing the best value alternative for the consumer.
Importantly, pricing agreements with customers are generally determined by the
customers' periodic requests for competitive category reviews. Ralston Foods
anticipates a number of these category review requests to occur throughout the
remainder of fiscal 2003.
Cost increases, including recent increases in ingredient costs, contribute
to margin pressures. On an enterprise-wide basis, we manage these cost
increases by selected forward purchasing and hedging of certain ingredients.
Increased employee health care and other benefit costs are likely to continue
into the foreseeable future. Accordingly, aggressive cost containment remains
an important goal of the organization. In addition, increased distribution is
required to remain competitive whether through new and improved product
emulations or new co-manufacturing opportunities.
Our cracker and cookie operation, Bremner, also conducts business in a
highly competitive category and is affected by many of the same cost and pricing
challenges. 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 division continues its effort to maximize 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. Further, we will
consider implementing slight price increases to help mitigate the effects of
increased costs.
DRESSINGS, SYRUPS, JELLIES & SAUCES
Carriage House's competitors, both large and small, continue to be
aggressive on pricing. In addition, the division continues to be negatively
affected by certain ingredient cost increases as well as increased employee
health care and benefit costs. Wherever possible, we will consider implementing
slight price increases to help offset these rising costs. Encouragingly, the
cost of peanuts, a major ingredient for Carriage House (peanut butter), has been
favorably impacted by the farm bill which was signed into law in May 2002.
Although we expect the segment to benefit from lower peanut costs in fiscal
2003, such benefit will likely be more than offset by the aforementioned cost
increases.
Carriage House sold product to a branded company under several
co-manufacturing agreements, the last of which expired in November 2002. These
contracts accounted for approximately 5 percent of the segment's fiscal 2002 net
sales and a greater percentage of its operating profit. However, we expect that
the effect of these lost sales on net earnings will not be material to Ralcorp
as a whole.
We have undertaken an aggressive plan to improve performance by selling
unprofitable businesses and continuing to rationalize production capacity. In
June 2002, we sold our honey operations. In September, we announced our
intention to significantly reduce operations at the Streator, IL facility and
transfer production of all product lines except peanut butter to other
facilities. That transition is scheduled to be completed by the end of the
second fiscal quarter with additional costs in that quarter expected to total
14
$.8 million. As a result of this restructuring, we expect to realize annual
savings in cost of products sold of $2.5 million to $3.0 million (approximately
$1.0 million of which is non-cash) beginning in the third fiscal quarter of
fiscal 2003. In November, we sold our ketchup operations, although production
continued through the end of the quarter, and on February 4, 2003, we sold our
industrial tomato paste processing facility (see Note 12 in Item 1). While net
sales from these two businesses totaled approximately $26 million in fiscal
2002, related operating profit was immaterial, so we were able to reduce our
capital investment without reducing returns.
While we expect that the restructuring and investment reduction efforts
described above will improve Carriage House's fair value relative to its
carrying amount, we will continue to monitor this reporting unit closely to
determine whether circumstances change that would reduce its fair value below
its carry amount. For example, fair value would be diminished if the forecasted
benefits are not realized, or are negated by lost customers or pricing
pressures, and the unit is not able to achieve its planned results. If the fair
value drops below the carrying value of the unit, Carriage House goodwill (which
is $99.2 million at December 31, 2002) would likely be impaired and an
impairment loss would be recorded immediately as a charge against earnings.
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. During fiscal 2002, competitive
bids for store brand customer business resulted in either loss of margins or
loss of customers to competitors. We expect this margin pressure to continue
into the foreseeable future. The segment will continue to focus on maintaining
its customer base and the high quality of its products and on developing new
products.
The segment has recently benefited from lower raw material costs on some
ingredients. 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, 2002 legislation has resulted in lower peanut costs and may
have a favorable effect on profitability. While some benefits of reduced peanut
costs were realized in the first quarter of fiscal 2003, the future effect
cannot be quantified at this time and is expected to be somewhat offset by
continued pricing pressures and increasing costs of other ingredients,
healthcare, and other employee benefits.
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," "expects," "anticipates," "intends," "plans,"
"will," "should," "may" or similar expressions. Our results of operations and
financial condition may differ materially from those in the forward-looking
statements. Such statements are based on our 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 we are unable to maintain a meaningful price gap between our private
label products and the branded products of our competitors, successfully
introduce new products, or successfully manage costs across all parts of the
Company, our private label businesses could incur operating losses;
15
(ii) Consolidation among members of the grocery trade may lead to increased
wholesale price pressure from larger grocery trade customers and could result in
significant profit pressure, or in some cases, the loss of key accounts, if the
surviving entities are not our customers;
(iii) Significant increases in the cost of certain raw materials (e.g., wheat,
soybean oil, various nuts, corn syrup, cocoa) or energy used to manufacture our
products, to the extent not reflected in the price of our products, could
adversely impact our results;
(iv) In light of our significant ownership in Vail Resorts, Inc., our non-cash
earnings can be adversely affected by unfavorable results from Vail Resorts;
(v) We are currently generating profit from certain co-manufacturing contract
arrangements with other manufacturers within our competitive categories - the
termination or expiration of these contracts and our potential inability to
replace this level of business could negatively affect our operating results;
(vi) Our businesses compete in mature segments with competitors having large
percentages of segment sales;
(vii) We have realized increases to sales and earnings through the acquisitions
of businesses, but the ability to undertake future acquisitions depends on many
factors that we do 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 our indebtedness is set on a
short-term basis, such that increases in interest rates will increase our
interest expense;
(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;
(x) We may not be able to achieve anticipated cost savings from the transfer of
production between Carriage House facilities; and
(xi) Other uncertainties, all of which are difficult to predict and many of
which are beyond our control, may impact our financial position, including those
risks detailed from time to time in its publicly filed documents. These and
other factors are discussed in our Securities and Exchange Commission filings.
The list of factors above is illustrative and by no means exhaustive. All
forward-looking statements should be evaluated with the understanding of their
inherent uncertainty.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 in Item 1 for a discussion regarding recently issued accounting
standards, including FAS 144, 145, 146, and 148; FIN 45 and 46; and EITF 00-21,
02-16, and 02-17.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We believe there have been no material changes in the reported market risks
faced by the Company during the three months ended December 31, 2002. For
additional information, refer to Item 7A of our Annual Report on Form 10-K for
the year ended September 30, 2002.
16
Item 4. Controls and Procedures.
We maintain systems of internal controls with respect to gathering,
analyzing and disclosing all information required to be disclosed in this
report. Within the ninety days preceding the filing of this report, we
completed an evaluation, under the supervision and with the participation of our
Chief Executive Officer and President and Corporate Vice President and
Controller of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon the review, such officers concluded that
the design and operation of disclosure controls effectively alerted management
to material information regarding the Company and required to be filed in this
report. There have been no significant changes in our internal controls or
other factors that could significantly affect those controls since their review
of our disclosure controls was completed.
PART II. OTHER INFORMATION
There is no information required to be reported under any items except those
indicated below.
Item 4. Submission of Matters to a Vote of Security Holders.
On January 30, 2003, the Registrant held its Annual Meeting of Shareholders at
which the following two directors were elected Directors of the Registrant, for
a term of three years expiring at the Annual Meeting of Shareholders to be held
in 2006, or when their successors are elected:
Votes For Votes Against/Withheld
---------- -----------------------
Jack W. Goodall 25,987,995 217,679
Joe R. Micheletto 26,031,966 173,708
In addition, the following Directors continued in their terms of office after
the meeting: David R. Banks; M. Darrell Ingram, David W. Kemper, Richard A.
Liddy; and William P. Stiritz
At the same Annual Meeting no other items were voted upon.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.1 Corrected Agreement between Ralcorp Holdings, Inc. and
J. R. Micheletto dated May 23, 2002.
(Management Compensation Agreement)
(b) Reports on Form 8-K
On October 31, 2002, the Registrant announced its fourth quarter and year end
2002 earnings.
On November 11, 2002, the Registrant announced a Dutch Auction Self-Tender Offer
for up to 4,000,000 shares of our common stock at a price not greater than
$24.00 nor less than $21.00 per share net to the seller in cash, without
interest.
On November 20, 2002, the Registrant announced that (i) employees of the
Carriage House Companies, Inc. at the Fredonia and Dunkirk, New York facilities
had gone on strike and (ii) Carriage House's earnings for the first quarter of
fiscal year 2003 were expected to be significantly below those reported for the
same period last fiscal year.
17
On November 25, 2002, the Registrant announced that it reached an accord with
striking employees of The Carriage House Companies, Inc. at the Fredonia and
Dunkirk, New York facilities.
On December 12, 2002, the Registrant announced the results of the Company's
modified Dutch Auction Self-Tender Offer.
On December 19, 2002, the Registrant attached certifications of Joe R.
Micheletto and Thomas G. Granneman to its Form 10-K.
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
February 14, 2003 Chief Accounting Officer
18
CERTIFICATIONS
--------------
I, Joe R. Micheletto, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ralcorp Holdings,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ J. R. Micheletto
------------------------- ---------------------------
J. R. Micheletto
Chief Executive Officer
and President
CERTIFICATIONS
--------------
I, Thomas G. Granneman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ralcorp Holdings,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ T. G. Granneman
------------------- --------------------------------
T. G. Granneman
Corporate Vice President
and Controller
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Corrected agreement between Ralcorp Holdings, Inc. and J. R. Micheletto
dated May 23, 2002. (Management Compensation Agreement)