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, 2001.
( ) 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 2001
29,933,230
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 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
(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,
------------------
2001 2000
-------- --------
Net Sales $ 325.1 $ 287.4
-------- --------
Costs and Expenses
Cost of products sold 259.2 232.4
Selling, general and administrative 39.2 35.8
Interest expense, net 1.9 4.6
Plant closure and relocation costs - .5
Merger termination fee, net of
related expenses - (4.2)
-------- --------
Total Costs and Expenses 300.3 269.1
-------- --------
Earnings before Income Taxes
and Equity Earnings 24.8 18.3
Income Taxes 8.9 6.9
-------- --------
Earnings before Equity Earnings 15.9 11.4
Equity in Loss of Vail Resorts, Inc.,
Net of Related Deferred Income Taxes (3.1) (2.7)
-------- --------
Net Earnings $ 12.8 $ 8.7
======== ========
Basic Earnings per Share $ 0.43 $ 0.29
======== ========
Diluted Earnings per Share $ 0.42 $ 0.29
======== ========
Weighted Average Shares for
Basic Earnings per Share 29,912 29,860
Dilutive effect of stock options 333 119
-------- --------
Weighted Average Shares for
Diluted Earnings per Share 30,245 29,979
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
Dec. 31, Sept. 30,
2001 2001
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 1.1 $ 3.9
Receivables, net 8.5 9.0
Investment in Ralcorp Receivables Corp. 35.1 41.0
Inventories 152.9 164.1
Deferred income taxes 3.4 3.7
Other current assets 4.2 3.0
-------- --------
Total Current Assets 205.2 224.7
Investment in Vail Resorts, Inc. 77.1 81.9
Property, Net 283.9 287.4
Goodwill 209.5 209.5
Other Intangible Assets, Net 7.2 8.1
Other Assets 8.1 6.3
-------- --------
Total Assets $ 791.0 $ 817.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 54.2 $ 86.2
Other current liabilities 48.5 39.0
-------- --------
Total Current Liabilities 102.7 125.2
Long-term Debt 204.0 223.1
Deferred Income Taxes 38.4 39.9
Other Liabilities 42.7 40.3
-------- --------
Total Liabilities 387.8 428.5
-------- --------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 109.9 109.9
Retained earnings 345.4 332.6
Common stock in treasury, at cost (51.7) (51.9)
Accumulated other comprehensive loss (.7) (1.5)
-------- --------
Total Shareholders' Equity 403.2 389.4
-------- --------
Total Liabilities and
Shareholders' Equity $ 791.0 $ 817.9
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended
December 31,
-------------------
2001 2000
-------- --------
Cash Flows from Operating Activities
Net earnings $ 12.8 $ 8.7
Adjustments to reconcile net earnings to net
Cash flow provided by operating activities:
Depreciation and amortization 8.2 9.8
Equity in loss of Vail Resorts, Inc. 4.8 4.1
Deferred income taxes (.8) (1.4)
Changes in operating assets and liabilities (5.3) 13.1
-------- --------
Net cash provided by operating activities 19.7 34.3
-------- --------
Cash Flows from Investing Activities
Business acquisitions, net of cash acquired - .6
Additions to property and intangible assets (5.2) (5.2)
Proceeds from sale of property 1.6 .5
-------- --------
Net cash used by investing activities (3.6) (4.1)
-------- --------
Cash Flows from Financing Activities
Net repayments under credit arrangements (19.1) (29.8)
Proceeds from exercise of stock options .2 -
-------- --------
Net cash used by financing activities (18.9) (29.8)
-------- --------
Net (Decrease) Increase in Cash and
Cash Equivalents (2.8) .4
Cash and Cash Equivalents, Beginning of Period 3.9 4.1
-------- --------
Cash and Cash Equivalents, End of Period $ 1.1 $ 4.5
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Unaudited)
(Dollars in millions)
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,
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. Both 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 first step of the Company's transitional
goodwill impairment test, which will indicate whether or not a potential
impairment exists, will be completed by the end of the second fiscal quarter.
At both September 31 and December 31, 2001, the carrying amount of goodwill was
as follows: Cereals, Crackers & Cookies - $56.0; Dressings, Syrups, Jellies &
Sauces - $99.1; and Snack Nuts & Candy - $54.4. 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
loss of Vail (net of tax effects) to exclude Vail's goodwill amortization
expense.
Three Months Ended
December 31,
------------------
2001 2000
------ ------
Reported net earnings $ 12.8 $ 8.7
Add back: Goodwill amortization - 1.4
Adjust: Equity in loss of Vail - .2
------ ------
Adjusted net earnings $ 12.8 $ 10.3
====== ======
Basic earnings per share:
Reported net earnings $ .43 $ .29
Add back: Goodwill amortization - .05
Adjust: Equity in loss of Vail - .01
------ ------
Adjusted net earnings $ .43 $ .35
====== ======
Diluted earnings per share:
Reported net earnings $ .42 $ .29
Add back: Goodwill amortization - .05
Adjust: Equity in loss of Vail - .01
------ ------
Adjusted net earnings $ .42 $ .35
====== ======
4
NOTE 3 - 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. In the quarter ended December 31,
2000, costs related to the Baltimore closure totaling $.5 are included on the
Statement of Earnings as "Plant closure and relocation costs."
Other current liabilities include reserves as follows:
Sep. 30, Amount Dec. 31,
2001 Utilized 2001
-------- -------- --------
San Jose severance costs $ .2 $ .1 $ .1
Other San Jose closure and relocation costs .4 .4 -
------- ------- -------
$ .6 $ .5 $ .1
======= ======= =======
NOTE 4 - 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 5 - COMPREHENSIVE INCOME
Three Months Ended
December 31,
------------------
2001 2000
------ ------
Net earnings $ 12.8 $ 8.7
Other comprehensive income -
Deferred gain on cash flow
hedging instruments, net .8 .1
------ ------
Comprehensive income $ 13.6 $ 8.8
====== ======
NOTE 6 - 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. As of December 30, 2001, the outstanding balance of receivables (net
of an allowance for doubtful accounts) sold to RRC was $96.1 and proceeds
received were $61.0, resulting in a subordinated retained interest of $35.1
reflected on the Company's consolidated balance sheet as an "Investment in
Ralcorp Receivables Corp." Discounts related to the sale of receivables totaled
$.4 in the three months ended December 31, 2001 and are included on the
statement of earnings in "Selling, general and administrative" expenses.
5
NOTE 7 - INVENTORIES consisted of the following:
Dec. 31, Sep. 30,
2001 2001
--------- ---------
Raw materials and supplies $ 63.3 $ 63.6
Finished products 89.6 100.5
--------- ---------
$ 152.9 $ 164.1
========= =========
NOTE 8 - PROPERTY, NET consisted of the following:
Dec. 31, Sep. 30,
2001 2001
--------- ---------
Property at cost $ 453.5 $ 450.2
Accumulated depreciation (169.6) (162.8)
--------- ---------
$ 283.9 $ 287.4
========= =========
NOTE 9 - OTHER INTANGIBLE ASSETS, NET consisted of the following:
Dec. 31, Sep. 30,
2001 2001
--------- ---------
Software $ 21.4 $ 21.4
Accumulated amortization (14.2) (13.3)
--------- ---------
$ 7.2 $ 8.1
========= =========
Amortization expense related to these assets was $.9 and $1.1 during the three
months ended December 31, 2001 and 2000, respectively, with $3.5, $3.3, $1.2 and
$.1 scheduled for the years ended September 30, 2002, 2003, 2004, and 2005,
respectively.
NOTE 10 - 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:
6
December 31, 2001 September 30, 2001
------------------ ------------------
Balance Rate Balance Rate
--------- ------- --------- -------
$275 Revolving Credit Agreement $ 190.0 2.987% $ - n/a
Credit Agreement A - n/a 40.0 3.531%
Credit Agreement B - n/a 160.0 4.611%
Uncommitted credit arrangements 7.8 2.450% 16.9 4.108%
Industrial Development Revenue Bond 5.6 1.560% 5.6 2.280%
Other .6 Various .6 Various
--------- ---------
$ 204.0 $ 223.1
========= =========
NOTE 11 - SEGMENT INFORMATION
The tables below present information about the Company's reportable segments:
Three Months Ended
December 31,
-------------------
2001 2000
-------- --------
Net Sales
Cereals $ 80.2 $ 76.2
Crackers & Cookies 70.8 66.0
Dressings, Syrups, Jellies & Sauces 112.4 84.8
Snack Nuts & Candy 61.7 60.4
-------- --------
Total $ 325.1 $ 287.4
======== ========
Profit Contribution
Cereals, Crackers & Cookies $ 19.0 $ 16.2
Dressings, Syrups, Jellies & Sauces 3.4 .3
Snack Nuts & Candy 7.8 5.6
-------- --------
Total segment profit contribution 30.2 22.1
Interest expense, net (1.9) (4.6)
Plant closure and relocation costs - (.5)
Merger termination fee, net of
related expenses - 4.2
Other unallocated corporate expenses (3.5) (2.9)
-------- --------
Earnings before income taxes
and equity earnings $ 24.8 $ 18.3
======== ========
Dec. 31, Sep. 30,
2001 2001
-------- --------
Total Assets
Cereals, Crackers & Cookies $ 290.1 $ 295.2
Dressings, Syrups, Jellies & Sauces 271.2 273.8
Snack Nuts & Candy 96.1 104.0
Investment in Ralcorp Receivables
Corporation 35.1 41.0
Investment in Vail Resorts, Inc. 77.1 81.9
Other unallocated corporate assets 21.4 22.0
-------- --------
Total $ 791.0 $ 817.9
======== ========
7
NOTE 12 - SUBSEQUENT EVENT
On January 30, 2002, the Company completed the purchase of Lofthouse Foods
Incorporated, 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
acquired business, with approximately $70 in annual sales, will be operated as
part of the Cereals, Crackers and Cookies segment.
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.
RESULTS OF OPERATIONS
CONSOLIDATED
NET SALES Net sales grew from $287.4 million in the first quarter of
fiscal 2001 to $325.1 million in the first quarter of fiscal 2002. A little
more than half of the 13 percent increase was due to The Torbitt & Castleman
Company, LLC acquisition on January 31, 2001, which contributes approximately
$80 million of sales annually. Refer to the segment discussions below for
specific factors affecting results.
OPERATING EXPENSES For the three months ended December 31, 2001 and 2000,
cost of products sold was 79.7% and 80.9% of net sales, respectively, while
selling, general, and administrative expenses were 12.1% and 12.5% of net sales,
respectively. These improvements are mainly attributable to certain favorable
raw material costs, cost reduction programs, and the adoption of FAS 142, as
noted in the segment discussions below.
INTEREST EXPENSE, NET Interest expense was $1.9 million for the three
months ended December 31, 2001, compared to $4.6 million in the first quarter of
the prior year. One cause of this decrease was lower interest rates. For the
first quarter of fiscal 2002, the weighted average interest rate on the
Company's debt, practically all of which incurs interest at variable rates, was
less than half of last year's first quarter average. Another reason for the
decreased interest expense was lower debt levels in the current year. Despite
additional borrowings to fund the Torbitt & Castleman acquisition in January
2001, Ralcorp reduced its outstanding debt from $234.6 million at December 31,
2000 to $204.0 million at December 31, 2001 with $61.0 million of proceeds from
the sale of its trade accounts receivable and with operating cash flows. On
September 24, 2001, the Company entered into a three-year agreement to sell its
trade accounts receivable on an ongoing basis. Discounts related to this
agreement totaled $.4 million in the first quarter of fiscal 2002 and are
included on the Consolidated Statement of Earnings in selling, general and
administrative expenses.
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 ended December 31, 2000, costs related to the
Baltimore closure totaling $.5 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 3 to the financial statements in Item 1 herein.
8
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.
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 quarter. For
the first quarter ended December 31, 2001, this investment resulted in a
non-cash pre-tax loss of $4.8 million ($3.1 million after taxes), compared to a
$4.1 million loss ($2.7 million after taxes) for last year's first quarter.
CEREALS, CRACKERS & COOKIES
First quarter net sales for the Cereals, Crackers & Cookies segment were up
$8.8 million (6 percent) from last year, with the Ralston Foods cereal division
and the Bremner cracker and cookie division reporting increases of $4.0 million
and $4.8 million, respectively. Ralston Foods' ready-to-eat and hot cereal
volume each improved 4 percent, outperforming overall category trends, through
incremental sales to continuing customers driven by several recent product
introductions and additional distribution of established items. In addition,
net sales in the cereal division benefited from a favorable product mix.
Bremner's cookie volumes for the quarter were 33 percent higher than last year's
first quarter, boosted by sales to new customers. Cracker volumes were off 6
percent, primarily because of lower demand for saltines.
The segment's first quarter profit improved $2.8 million (17 percent) as a
result of the increased sales and a favorable product mix. In addition, last
year's first quarter profit was reduced by $.6 million of goodwill amortization
expense. Since the Company adopted FAS 142, "Goodwill and Other Intangible
Assets," on October 1, 2001, no goodwill amortization expense has been recorded
in fiscal 2002.
DRESSINGS, SYRUPS, JELLIES & SAUCES
Net sales of the Company's Dressings, Syrups, Jellies & Sauces segment,
also known as Carriage House, increased by $27.6 million, or nearly a third of
last year's first quarter sales. This year's results include sales from The
Torbitt & Castleman Company, LLC, acquired January 31, 2001, which are about $80
million annually. The addition of new customers and increased business with
major continuing customers also contributed to the significant sales growth.
The segment's first quarter profit also increased significantly from the
prior year, improving from $.3 million to $3.4 million. While Torbitt &
Castleman contributed to profit in the current year, more than half of the
improvement was the result of the continuing cost reduction efforts begun during
fiscal 2001, including two plant closures. In addition, last year's first
quarter profit was reduced by $.5 million of goodwill amortization expense.
9
SNACK NUTS & CANDY
First quarter net sales for the Snack Nuts & Candy segment, also known as
Nutcracker Brands, increased 2 percent from last year. The $1.3 million
improvement in net sales is attributable to additional snack nut sales to
customers acquired during the past year, partially offset by lower candy sales.
Largely due to the timing of orders from a major customer, candy sales in the
first quarter of fiscal 2002 were less than in the prior year's first quarter.
First quarter segment profit increased $2.2 million from the corresponding
period last year. This improvement was due primarily to favorable raw material
costs, which have continued to fall throughout the past year. In addition, last
year's first quarter profit was reduced by $.6 million of goodwill amortization
expense.
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 December 31, 2001 with a net
worth of $403.2 million and a long-term debt to total capital ratio of 34
percent, compared to corresponding figures for September 30, 2001 of $389.4
million and 36 percent. Working capital, excluding cash and cash equivalents,
was up to $101.4 million at December 31, 2001 from $95.6 million at September
30, 2001.
Although net earnings for the three months ended December 31, 2001 were
$4.1 million higher than in the first quarter of the prior year, cash flows from
operating activities were lower. The most significant differences in
reconciling items between the two periods were noncash goodwill amortization and
changes in accounts payable. As noted previously, the quarter ended December
31, 2000 included $1.7 million of goodwill amortization expense while this
year's first quarter had none. Accounts payable dropped $32.0 million in the
current year quarter, from a relatively high $86.2 million to an unusually low
$54.2 million, but only fell $12.5 million in the comparative quarter.
There were no business acquisitions in the first quarter of fiscal 2002.
Cash flows for the second quarter will reflect payment for Lofthouse Foods,
acquired January 30, 2002 (see Note 12 in Item 1). Capital expenditures for
fiscal 2002 are still expected to total approximately $35 million. As discussed
below, Ralcorp has adequate capacity under current borrowing arrangements to
meet these cash needs.
During the three months ended December 31, 2001, the Company used $19.1
million of cash provided by operations to reduce its long-term debt. 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 December
31, 2001 was $112.2 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,
the overall category has not grown, which has added to its competitive nature.
When the competition focuses on price/promotion, the environment for private
10
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 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. To a lesser extent, 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 private label emulations and its
ability to realize improved operating efficiencies from recent acquisitions will
be important to its results of operations. 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 recently completed and all related production has been moved to other
Carriage House facilities. As evidenced by first quarter results, the Company
expects that these measures will improve the profit contribution of Carriage
House, with estimated annual cost savings of $5 million to $6 million, of which
$.8 million is noncash savings. 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 plans to improve
performance by continuing to increase 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 the
capturing of additional synergies of the organizations 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 recently notified
Carriage House that it does not intend to renew these contracts upon their
expiration. Although the loss of this business, if not replaced, will have a
sizable impact on reported net sales, the impact upon operating profit is not
expected to be material.
SNACK NUTS & CANDY
The outlook for the Snack Nuts & Candy segment remains favorable, as the
snack nut category continues to grow. Cashew costs have trended down from the
significant highs in fiscal 2000 and the Company completed its consolidation of
three snack nut operations down to two plants, which has improved the segment's
profitability. The addition of chocolate candy capability through the
acquisition of Linette in fiscal 2000 has increased the scope of products
offered by the segment. Presently, the segment faces significant competition
from branded manufacturers as well as smaller private label and regional
producers. From an operational perspective, the segment will continue to focus
on fully leveraging the combined strengths of all of its operations, growing its
customer base and maintaining the quality of its products.
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
11
it operates. Management expects to continue to improve its business mix through
volume and profit growth of existing businesses, as well as through key
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.
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;
(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; and
(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.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 in Item 1 for a discussion regarding recently issued accounting
standards, including FAS 142 and EITF 00-10, 00-14, and 00-25.
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 three months ended December 31,
2001. For additional information, refer to Item 7A of the Company's Annual
Report on Form 10-K for the year ended September 30, 2001.
12
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 31, 2002, the Registrant held its Annual Meeting of Shareholders at
which the following three directors were elected Directors of the Registrant,
for a term of three years expiring at the Annual Meeting of Shareholders to be
held in 2005, or when their successors are elected:
Votes For Votes Against/Withheld
---------- -----------------------
David R. Banks 26,199,581 536,921
M. Darrell Ingram 26,189,606 546,896
David W. Kemper 25,879,441 857,061
In addition, the following Directors continued in their terms of office after
the meeting: Jack W. Goodall; Richard A. Liddy; Joe R. Micheletto; and William
P. Stiritz
At the same Annual Meeting two other items were voted upon:
1. A proposal to approve the Registrant's 2002 Incentive Stock Plan passed with
the following votes:
Votes For Votes Against Votes Abstaining Non-Votes
---------- -------------- ----------------- --------------
22,506,541 2,066,650 113,821 2,049,490
2. A Stockholder proposal regarding classification of the Registrant's Board of
Directors was not approved. The Proposal received the following votes:
Votes For Votes Against Votes Abstaining Non-Votes
---------- -------------- ----------------- --------------
12,338,791 12,130,613 217,608 2,049,490
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
On October 17, 2001, the Registrant announced it entered into a new $275 million
three-year Credit Agreement.
On November 1, 2001, the Registrant announced its fourth quarter and fiscal year
2001 earnings.
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, 2002 Chief Accounting Officer
13