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 MARCH 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 May 13, 2002
29,953,589
RALCORP HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statement of Earnings 1
Consolidated Balance Sheet 2
Consolidated Statement of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 5. Other Information 15
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 Six Months Ended
March 31, March 31,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales $ 313.5 $ 286.8 $ 638.6 $ 574.2
-------- -------- -------- --------
Costs and Expenses
Cost of products sold 253.1 233.9 512.3 466.3
Selling, general and administrative 41.5 39.4 80.7 75.2
Interest expense, net 1.6 4.2 3.5 8.8
Plant closure and relocation costs - .9 - 1.4
Merger termination fee, net of
related expenses - - - (4.2)
-------- -------- -------- --------
Total Costs and Expenses 296.2 278.4 596.5 547.5
-------- -------- -------- --------
Earnings before Income Taxes
and Equity Earnings 17.3 8.4 42.1 26.7
Income Taxes 6.2 3.3 15.1 10.2
-------- -------- -------- --------
Earnings before Equity Earnings 11.1 5.1 27.0 16.5
Equity in Earnings (Loss) of
Vail Resorts, Inc., Net of
Related Deferred Income Taxes 3.5 2.6 .4 (.1)
-------- -------- -------- --------
Net Earnings $ 14.6 $ 7.7 $ 27.4 $ 16.4
======== ======== ======== ========
Basic Earnings per Share $ .49 $ .26 $ .91 $ .55
======== ======== ======== ========
Diluted Earnings per Share $ .48 $ .26 $ .90 $ .55
======== ======== ======== ========
Weighted Average Shares for Basic EPS 29,931 29,881 29,921 29,870
Dilutive effect of assumed conversions:
Stock options 509 276 421 198
Restricted stock awards 1 - 1 -
-------- -------- -------- --------
Weighted Average Shares for
Diluted Earnings per Share 30,441 30,157 30,343 30,068
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
March 31, Sept. 30,
2002 2001
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ .4 $ 3.9
Receivables, net 16.7 9.0
Investment in Ralcorp Receivables Corp. 23.6 41.0
Inventories 149.9 164.1
Deferred income taxes 3.2 3.7
Other current assets 3.7 3.0
-------- --------
Total Current Assets 197.5 224.7
Investment in Vail Resorts, Inc. 82.5 81.9
Property, Net 282.9 287.4
Goodwill 248.5 209.5
Other Intangible Assets, Net 6.5 8.1
Other Assets 8.6 6.3
-------- --------
Total Assets $ 826.5 $ 817.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 58.1 $ 86.2
Other current liabilities 41.7 39.0
-------- --------
Total Current Liabilities 99.8 125.2
Long-term Debt 223.4 223.1
Deferred Income Taxes 40.7 39.9
Other Liabilities 44.3 40.3
-------- --------
Total Liabilities 408.2 428.5
-------- --------
Shareholders' Equity
Common stock .3 .3
Capital in excess of par value 109.9 109.9
Retained earnings 360.0 332.6
Common stock in treasury, at cost (51.2) (51.9)
Unearned portion of restricted stock (.1) -
Accumulated other comprehensive loss (.6) (1.5)
-------- --------
Total Shareholders' Equity 418.3 389.4
-------- --------
Total Liabilities and
Shareholders' Equity $ 826.5 $ 817.9
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended
March 31,
-------------------
2002 2001
-------- --------
Cash Flows from Operations
Net earnings $ 27.4 $ 16.4
Adjustments to reconcile net earnings to net
Cash flow provided by operating activities:
Depreciation and amortization 16.8 20.1
Equity in (earnings) loss of Vail Resorts, Inc. (.6) .2
Deferred income taxes 1.7 .3
Sale of receivables, net (2.2) -
Changes in operating assets and liabilities 5.6 11.3
-------- --------
Net cash provided by operations 48.7 48.3
-------- --------
Cash Flows from Investing Activities
Business acquisitions, net of cash acquired (52.4) (55.6)
Additions to property and intangible assets (12.2) (11.4)
Proceeds from sale of property 11.6 .5
-------- --------
Net cash used by investing activities (53.0) (66.5)
-------- --------
Cash Flows from Financing Activities
Net borrowings under credit arrangements .3 17.3
Proceeds from the exercise of stock options .5 .7
-------- --------
Net cash provided by financing activities .8 18.0
-------- --------
Net Decrease in Cash and Cash Equivalents (3.5) (.2)
Cash and Cash Equivalents, Beginning of Period 3.9 4.1
-------- --------
Cash and Cash Equivalents, End of Period $ .4 $ 3.9
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
(Dollars in millions)
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 loss of Vail (net of tax effects) to exclude
Vail's goodwill amortization expense.
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Reported net earnings $ 14.6 $ 7.7 $ 27.4 $ 16.4
Add back: Goodwill amortization - 1.6 - 3.0
Adjust: Equity in earnings of Vail - .1 - .3
-------- -------- -------- --------
Adjusted net earnings $ 14.6 $ 9.4 $ 27.4 $ 19.7
======== ======== ======== ========
Basic earnings per share:
Reported net earnings $ .49 $ .26 $ .91 $ .55
Add back: Goodwill amortization - .05 - .10
Adjust: Equity in earnings of Vail - - - .01
-------- -------- -------- --------
Adjusted net earnings $ .49 $ .31 $ .91 $ .66
======== ======== ======== ========
Diluted earnings per share:
Reported net earnings $ .48 $ .26 $ .90 $ .55
Add back: Goodwill amortization - .05 - .10
Adjust: Equity in earnings of Vail - - - .01
-------- -------- -------- --------
Adjusted net earnings $ .48 $ .31 $ .90 $ .66
======== ======== ======== ========
4
NOTE 3 - ACQUISITION
On January 30, 2002, the Company completed the purchase of 100% of the stock of
Lofthouse Foods Incorporated for approximately $53 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 appraisals of the acquired equipment and
the "Lofthouse" trade name. The total purchase price may also be adjusted
slightly due to a final net asset adjustment and a 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 periods being reported on. 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.
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 321.3 $ 311.8 $ 664.5 $ 635.1
Net earnings 15.4 7.9 27.6 15.4
Basic earnings per share .51 .26 .92 .52
Diluted earnings per share .51 .26 .91 .51
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 six months ended
March 31, 2001, costs related to the Baltimore closure totaling $.9 and $1.4 are
included on the Statement of Earnings as "Plant closure and relocation costs."
Other current liabilities included reserves as follows:
Sep. 30, Amount Mar. 31,
2001 Utilized 2002
-------- -------- --------
San Jose severance costs $ .2 $ .2 $ -
Other San Jose closure and relocation costs .4 .4 -
-------- -------- --------
$ .6 $ .6 $ -
======== ======== ========
5
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 - COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 14.6 $ 7.7 $ 27.4 $ 16.4
Other comprehensive income -
Deferred gain (loss) on cash flow
hedging instruments .1 (.2) .9 (.1)
-------- -------- -------- --------
Comprehensive income $ 14.7 $ 7.5 $ 28.3 $ 16.3
======== ======== ======== ========
NOTE 7 - 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 March 31, 2002, the outstanding balance of receivables (net of
an allowance for doubtful accounts) sold to RRC was $82.4 and net proceeds
received were $58.8, resulting in a subordinated retained interest of $23.6
reflected on the Company's consolidated balance sheet as an "Investment in
Ralcorp Receivables Corp." Discounts related to the sale of receivables totaled
$.3 and $.7 in the three and six months ended March 31, 2002 and are included on
the statement of earnings in "Selling, general and administrative" expenses.
NOTE 8 - INVENTORIES consisted of the following:
Mar. 31, Sep. 30,
2002 2001
-------- --------
Raw materials and supplies $ 60.4 $ 63.6
Finished products 89.5 100.5
-------- --------
$ 149.9 $ 164.1
======== ========
6
NOTE 9 - PROPERTY, NET consisted of the following:
Mar. 31, Sep. 30,
2002 2001
-------- --------
Property at cost $ 459.8 $ 450.2
Accumulated depreciation (176.9) (162.8)
-------- --------
$ 282.9 $ 287.4
======== ========
NOTE 10 - GOODWILL
The changes in the carrying amount of goodwill for the six months ended March
31, 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 38.9 - - 38.9
Adjustments - .1 - .1
---------- ---------- ---------- ----------
Balance, March 31, 2002 $ 94.9 $ 99.2 $ 54.4 $ 248.5
========== ========= ========== ==========
NOTE 11 - OTHER INTANGIBLE ASSETS, NET consisted of the following:
Mar. 31, Sep. 30,
2002 2001
-------- --------
Software $ 21.6 $ 21.4
Accumulated amortization (15.1) (13.3)
-------- --------
$ 6.5 $ 8.1
======== ========
Amortization expense related to these assets was $1.8 and $2.1 during the six
months ended March 31, 2002 and 2001, respectively, with $3.6, $3.4, $1.2 and
$.1 scheduled for the years ended September 30, 2002, 2003, 2004, and 2005,
respectively.
NOTE 12 - 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
7
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:
March 31, 2002 September 30, 2001
------------------ ------------------
Balance Rate Balance Rate
--------- --------- --------- ---------
$275 Revolving Credit Agreement $ 200.0 2.984% $ - n/a
Credit Agreement A - n/a 40.0 3.531%
Credit Agreement B - n/a 160.0 4.611%
Uncommitted credit arrangements 17.3 2.450% 16.9 4.108%
Industrial Development Revenue Bond 5.6 1.480% 5.6 2.280%
Other .5 Various .6 Various
-------- --------
$ 223.4 $ 223.1
======== ========
NOTE 13 - SEGMENT INFORMATION
The tables below present information about the Company's reportable segments:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales
Cereals $ 78.8 $ 79.3 $ 159.0 $ 155.5
Crackers & Cookies 86.3 63.9 157.1 129.9
Dressings, Syrups, Jellies & Sauces 116.5 107.1 228.9 191.9
Snack Nuts & Candy 31.9 36.5 93.6 96.9
-------- -------- -------- --------
Total $ 313.5 $ 286.8 $ 638.6 $ 574.2
======== ======== ======== ========
Profit Contribution
Cereals, Crackers & Cookies $ 17.7 $ 14.1 $ 36.7 $ 30.3
Snack Nuts & Candy 2.9 2.3 10.7 7.9
Dressings, Syrups, Jellies & Sauces 2.9 .2 6.3 .5
-------- -------- -------- --------
Total segment profit contribution 23.5 16.6 53.7 38.7
Interest expense, net (1.6) (4.2) (3.5) (8.8)
Merger termination fee, net of
related expenses - - - 4.2
Unallocated corporate expenses (4.6) (4.0) (8.1) (7.4)
-------- -------- -------- --------
Earnings before income taxes
and equity earnings $ 17.3 $ 8.4 $ 42.1 $ 26.7
======== ======== ======== ========
8
Mar. 31, Sep. 30,
2002 2001
-------- --------
Total Assets
Cereals, Crackers & Cookies $ 342.4 $ 295.2
Dressings, Syrups, Jellies & Sauces 253.5 273.8
Snack Nuts & Candy 99.1 104.0
Investment in Ralcorp Receivables
Corporation 23.6 41.0
Investment in Vail Resorts, Inc. 82.5 81.9
Other unallocated corporate assets 25.4 22.0
-------- --------
Total $ 826.5 $ 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.
RESULTS OF OPERATIONS
CONSOLIDATED
NET SALES Second quarter net sales grew 9 percent, from $286.8 million in
fiscal 2001 to $313.5 million in fiscal 2002. About 80 percent of the increase
was due to the acquisitions of The Torbitt & Castleman Company, LLC and
Lofthouse Foods Incorporated, acquired at the end of January, 2001 and 2002,
respectively. Net sales for the first half grew 11 percent from the prior year,
about two-thirds of which was due to the acquisitions. Refer to the segment
discussions below for specific factors affecting results.
OPERATING EXPENSES For the three months ended March 31, 2002 and 2001,
cost of products sold was 80.7% and 81.6% of net sales, respectively, while
selling, general, and administrative expenses were 13.2% and 13.7% of net sales,
respectively. The six-month period of fiscal 2002 showed similar improvements
from the first half of fiscal 2001. 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 dropped to $1.6 million and $3.5
million for the three and six months ended March 31, 2002, respectively, from
$4.2 million and $8.8 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
less than half of last year's average rates. Another reason for the decreased
interest expense was lower debt levels in the current year, despite additional
borrowings to fund the Torbitt & Castleman and Lofthouse acquisitions in January
2001 and 2002, respectively. 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 $.3
and $.7 million in the second quarter and first half 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.
9
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 six months ended March 31, 2001, costs related
to the Baltimore closure totaling $.9 and $1.4, 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.
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 second quarter ended March 31, 2002, this investment resulted in non-cash
pre-tax earnings of $5.4 million ($3.5 million after taxes), compared to $4.0
million ($2.6 million after taxes) for last year's second quarter. Through six
months, the after-tax equity impact was $.4 million earnings and $.1 million
loss for fiscal 2002 and 2001, respectively.
CEREALS, CRACKERS & COOKIES
Second quarter net sales for the Cereals, Crackers & Cookies segment were
up $21.9 million from last year due to additional sales from the Bremner cracker
and cookie division. Through six months, the segment's sales were up $30.7
million, as the Ralston Foods cereal division and Bremner contributed increases
of $3.5 million and $27.2 million, respectively. While Bremner benefited from
the acquired Lofthouse business, second quarter and first half sales volumes at
its continuing cookie businesses also grew significantly from last year due to
continued 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 continuing customers, driven by several recent product introductions and
additional distribution of established items, have been offset by price
concessions and volume declines in some lower margin products. Ready-to-eat
cereal volume was down 2 percent from last year's second quarter but up 1
percent through the first six months. Hot cereal volume was up 1 percent for
the second quarter and 3 percent for the first half.
Profit contribution for the Cereals, Crackers & Cookies segment improved 26
percent for the second quarter and 21 percent through six months, primarily as a
result of the incremental profit from Lofthouse and improved cereal profits.
The segment benefited from favorable cookie volumes, product mix, cereal plant
efficiencies, and lower freight and energy costs, substantially offset by price
concessions and unfavorable ingredient costs. In addition, last year's profit
for the second quarter and first six months was reduced by $.7 million and $1.3
million of goodwill amortization expense, respectively. 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.
10
DRESSINGS, SYRUPS, JELLIES & SAUCES
Second quarter and six-month net sales for the Company's Dressings, Syrups,
Jellies & Sauces segment, also known as Carriage House, increased $9.4 million
and $37.0 million, respectively. As noted previously, last year's comparative
results include only two months of sales from The Torbitt & Castleman Company,
LLC, acquired January 31, 2001. While nearly all of this segment's sales growth
is the result of incremental sales from Torbitt & Castleman, minor improvements
came from the addition of new customers and increased business with major
continuing customers.
The segment's profit also increased from the comparable prior year periods,
improving $2.7 million for the quarter and $5.8 million for the six months ended
March 31. While benefiting from the results of Torbitt & Castleman for the full
periods in the current year, more than half of the improvements were the result
of the continuing cost reduction efforts begun during fiscal 2001, including two
plant closures. In addition, last year's profit for the second quarter and
first six months was reduced by $.7 million and $1.2 million of goodwill
amortization expense, respectively. These benefits were partially offset by raw
material and packing supply cost increases, lower sales to a co-manufacturing
customer, and continued pricing pressures in the current year.
SNACK NUTS & CANDY
Second quarter and six-month net sales for the Snack Nuts & Candy segment,
also known as Nutcracker, declined 13 percent and 3 percent, respectively. The
second quarter drop was primarily the result of lower nut volumes to existing
customers, as well as continued pricing pressures from the market.
Despite lower sales, second quarter and six-month segment profit
contribution increased $.6 million and $2.8 million, respectively, from the
corresponding periods last year. This improvement was primarily due to
favorable ingredient costs, which have continued to fall throughout the past
year. In addition, last year's profit for the second quarter and first six
months was reduced by $.6 million and $1.2 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 March 31, 2002 with a net
worth of $418.3 million and a long-term debt to total capital ratio of 35
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 $97.3 million at March 31, 2002 from $95.6 million at September 30,
2001.
Although net earnings for the first half of fiscal 2002 were $11.0 million
higher than in the first half of the prior year, cash flows from operating
activities were up only slightly. The most significant differences in
reconciling items between the two periods were noncash goodwill amortization and
changes in accounts payable. As noted previously, earnings for the six months
ended March 31, 2001 were reduced by $3.7 million ($3.0 million after taxes) of
goodwill amortization expense while this year's first half had none. Accounts
payable dropped $31.9 million in the first six months of fiscal 2002 from a
relatively high $86.2 million at September 30, 2001, but only fell $18.2 million
in the comparative period. Other factors include an increase in deferred income
taxes, a decrease in inventories, and increases in other liabilities.
11
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 is also similar to the prior year-to-date period and is still expected
to total approximately $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, total outstanding long-term debt
increased only $.3 million from September 30, 2001 to March 31, 2002, since cash
flows from operations during the period nearly offset the purchase price. 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 March 31, 2002 was $92.7 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
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 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, 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'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 the capturing of additional
synergies of the component businesses will continue to be critical objectives.
12
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.
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.
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 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.
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 FAS 142 and EITF 00-10, 00-14, and 00-25.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion in new to Ralcorp's financial reporting and 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 presentation of the Company's financial condition and results and require
management's most difficult, subjective or complex judgments.
13
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.
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;
14
(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;
(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 six months ended March 31, 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 5. Other Information
None
15
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 2002 Restricted Stock Award Agreement with William P. Stiritz
Granted January 2, 2002
10.2 Form of 2002 Non-Qualified Stock Option Agreement
(b) Reports on Form 8-K
On January 3, 2002 the Company announced it had entered into an agreement to
purchase Lofthouse Foods Incorporated.
On January 30, 2002 the Registrant announced the completion of its purchase of
Lofthouse Foods Incorporated.
On January 31, 2002 the Registrant announced its 2002 first quarter earnings.
On January 31, 2002 the Registrant announced the results of its shareholders
meeting.
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
May 15, 2002
16
Exhibit Index
Exhibit Description
------- -----------
10.1 2002 Restricted Stock Award Agreement with William P. Stiritz
Granted January 2, 2002
10.2 Form of 2002 Non-Qualified Stock Option Agreement