form10q063009.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

                                          
 (Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009.
   
(  )
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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes (  )   No (  )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company..  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer (X)
Accelerated filer (  )
Non-accelerated filer (  )
Smaller reporting company (  )

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes (  )   No (X)

Number of shares of Common Stock, $.01 par value, outstanding as of August 5, 2009:  56,607,687
 
 

 
 

 
 

 

 

RALCORP HOLDINGS, INC.

INDEX

   
PAGE
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
1
     
 
Condensed Consolidated Statements of Earnings
1
     
 
Condensed Consolidated Statements of Comprehensive Income
1
     
 
Condensed Consolidated Balance Sheets
2
     
 
Condensed Consolidated Statements 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
14
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22
     
Item 4.
Controls and Procedures
22
     
PART II.
OTHER INFORMATION
 
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23
     
Item 6.
Exhibits
24
     
SIGNATURES
24












(i)

 

 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(Dollars in millions except per share data)

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net Sales
  $ 994.0     $ 658.6     $ 2,908.7     $ 1,950.9  
Cost of products sold
    (720.2 )     (543.7 )     (2,129.2 )     (1,620.0 )
Gross Profit
    273.8       114.9       779.5       330.9  
Selling, general and administrative expenses
    (148.5 )     (71.7 )     (452.6 )     (207.2 )
Interest expense, net
    (23.0 )     (11.1 )     (72.9 )     (33.6 )
(Loss) gain on forward sale contracts
    (24.5 )     21.7       17.6       84.0  
Gain on sale of securities
    28.0       -       43.8       -  
Restructuring charges
    (.1 )     (.3 )     (.4 )     (1.7 )
Earnings before Income Taxes
                               
     and Equity Earnings
    105.7       53.5       315.0       172.4  
Income taxes
    (37.8 )     (18.9 )     (114.3 )     (60.8 )
Earnings before Equity Earnings
    67.9       34.6       200.7       111.6  
Equity in earnings of Vail Resorts, Inc.,
                               
     net of related deferred income taxes
    6.9       11.2       9.8       15.1  
Net Earnings
  $ 74.8     $ 45.8     $ 210.5     $ 126.7  
                                 
Earnings per Share
                               
     Basic
  $ 1.33     $ 1.79     $ 3.74     $ 4.95  
     Diluted
  $ 1.31     $ 1.73     $ 3.69     $ 4.81  
 
See accompanying Notes to Condensed Consolidated Financial Statements.

RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in millions)
 
   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net Earnings
  $ 74.8     $ 45.8     $ 210.5     $ 126.7  
Other comprehensive income (loss)
    32.2       11.1       (9.1 )     (.6 )
Comprehensive Income
  $ 107.0     $ 56.9     $ 201.4     $ 126.1  

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 

 
1

 

RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in millions)
 
   
June 30,
   
Sept. 30,
 
   
2009
   
2008
 
             
Assets
           
Current Assets
           
     Cash and cash equivalents
  $ 131.7     $ 14.1  
     Marketable securities
    7.5       9.2  
     Investment in Ralcorp Receivables Corporation
    134.2       56.5  
     Receivables, net
    164.4       160.1  
     Due from Kraft Foods Inc.
    -       49.0  
     Inventories
    336.9       337.0  
     Deferred income taxes
    18.1       16.5  
     Prepaid expenses and other current assets
    7.2       5.4  
          Total Current Assets
    800.0       647.8  
Investment in Vail Resorts, Inc.
    69.8       126.0  
Property, Net
    889.1       903.1  
Goodwill
    2,461.9       2,454.3  
Other Intangible Assets, Net
    1,179.6       1,189.5  
Other Assets
    21.1       23.2  
          Total Assets
  $ 5,421.5     $ 5,343.9  
                 
Liabilities and Shareholders' Equity
               
Current Liabilities
               
     Accounts and notes payable
  $ 196.2     $ 204.7  
     Due to Kraft Foods Inc.
    11.6       -  
     Other current liabilities
    314.6       187.2  
          Total Current Liabilities
    522.4       391.9  
Long-term Debt
    1,544.0       1,668.8  
Deferred Income Taxes
    562.5       601.6  
Other Liabilities
    159.6       270.1  
          Total Liabilities
    2,788.5       2,932.4  
Shareholders' Equity
               
     Common stock
    .6       .6  
     Additional paid-in capital
    1,928.0       1,919.6  
     Common stock in treasury, at cost
    (245.6 )     (257.3 )
     Retained earnings
    979.4       768.9  
     Accumulated other comprehensive income
    (29.4 )     (20.3 )
          Total Shareholders' Equity
    2,633.0       2,411.5  
          Total Liabilities and Shareholders' Equity
  $ 5,421.5     $ 5,343.9  

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 


 
2

 
 

RALCORP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in millions)

   
Nine Months Ended
 
   
June 30,
 
   
2009
   
2008
 
             
Cash Flows from Operating Activities
           
Net earnings
  $ 210.5     $ 126.7  
Adjustments to reconcile net earnings to net
               
     cash flow provided by operating activities:
               
     Depreciation and amortization
    106.7       67.3  
     Stock-based compensation expense
    10.0       8.3  
     Gain on forward sale contracts
    (17.6 )     (84.0 )
     Gain on sale of securities
    (43.8 )     -  
     Equity in earnings of Vail Resorts, Inc.
    (15.4 )     (23.4 )
     Deferred income taxes
    (35.8 )     33.3  
     Sale of receivables, net
    (50.0 )     2.5  
     Other, net
    137.7       2.5  
          Net Cash Provided by Operating Activities
    302.3       133.2  
                 
Cash Flows from Investing Activities
               
Business acquisitions, net of cash acquired
    (54.9 )     (4.8 )
Additions to property and intangible assets
    (74.9 )     (37.3 )
Proceeds from sale of property
    -       .1  
Purchases of securities
    (10.7 )     (20.7 )
Proceeds from sale or maturity of securities
    15.2       17.7  
          Net Cash Used by Investing Activities
    (125.3 )     (45.0 )
                 
Cash Flows from Financing Activities
               
Proceeds from issuance of long-term debt
    100.0       -  
Repayments of long-term debt
    (147.2 )     (39.7 )
Net repayments under credit arrangements
    (22.0 )     (30.9 )
Purchases of treasury stock
    (1.0 )     (5.6 )
Proceeds and tax benefits from exercise of stock awards
    13.3       1.8  
Changes in book cash overdrafts
    (2.4 )     (.5 )
Other, net
    (.3 )     .7  
          Net Cash Used by Financing Activities
    (59.6 )     (74.2 )
                 
Effect of Exchange Rate Changes on Cash
    .2       (.3 )
                 
Net Increase in Cash and Cash Equivalents
    117.6       13.7  
Cash and Cash Equivalents, Beginning of Period
    14.1       9.9  
Cash and Cash Equivalents, End of Period
  $ 131.7     $ 23.6  
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 

 
3

 

RALCORP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions except per share data)


NOTE 1 – PRESENTATION OF CONDENSED FINANCIAL STATEMENTS

The accompanying unaudited historical financial statements of Ralcorp Holdings, Inc. (“Ralcorp” or 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.  These interim financial statements reflect all adjustments which are, in the opinion of management, necessary to fairly state the results for the periods presented.  All such adjustments are of a normal recurring nature.  Certain amounts for prior periods have been reclassified to conform to the current period’s presentation, including segment information.  Operating results for the periods presented are not necessarily indicative of the results for the full year.  These statements should be read in conjunction with the financial statements and notes included in the Company's Amendment No. 1 to its Annual Report on Form 10-K for the year ended September 30, 2008, filed on December 11, 2008.  The significant accounting policies for the accompanying financial statements are the same as disclosed in that Annual Report, except that the Company adopted Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (FAS 161) as of January 1, 2009 and Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (FAS 157) as of October 1, 2008 to the extent required (see Notes 2 and 3).  In addition, the Company changed the method of accounting for its investment in Vail Resorts, Inc. as described in the following paragraph.  The financial statements are presented on a consolidated basis and include the accounts of Ralcorp and its majority-owned subsidiaries, except Ralcorp Receivables Corporation (see Note 8).  The Company has evaluated subsequent events through August 6, 2009, the date on which the financial statements presented herein were issued as part of its Quarterly Report on Form 10-Q for the period ended June 30, 2009.
 
During the third quarter ended June 30, 2009, the Company settled its remaining forward sale contracts related to Vail common stock (see Note 13).  Because of its reduced ownership, in June the Company ceased using the equity method of accounting for its investment in Vail.  Ralcorp now carries its investment at fair value, with adjustments recorded to shareholders’ equity through other comprehensive income.  The Company will not recognize any equity method earnings or losses on this investment in the future.

NOTE 2 – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

In the ordinary course of business, the Company is exposed to commodity price risks relating to the acquisition of raw materials and supplies, interest rate risks relating to debt, and foreign currency exchange rate risks relating to our Canadian subsidiaries.  Authorized individuals within the Company may utilize derivative financial instruments, including (but not limited to) futures contracts, option contracts, forward contracts and swaps, to manage certain of these exposures by hedging when it is practical to do so.  The terms of these instruments generally do not exceed eighteen months for commodities, five years for interest rates, and two years for foreign currency.  The Company is not permitted to engage in speculative or leveraged transactions and will not hold or issue financial instruments for trading purposes.
 
As of June 30, 2009, the Company’s derivative instruments consisted of cash flow hedges on ingredient and fuel purchases (options, futures, and swaps); variable interest payments (interest rate swap); and receipts of foreign currency-denominated accounts receivable (foreign exchange forward contracts).  The Company hedges approximately 65% to 90% of our needs related to oats, wheat, corn, soy oil, natural gas, and diesel fuel and 20% to 30% of our corrugate packaging needs over a six to twelve month period.  Floating rate notes totaling $100.0 are swapped to fixed at 4.76% through December 2009.  At June 30, 2009, the Company held foreign exchange forward contracts with a total notional amount of $60.0.  During the past several years, the Company was party to forward sale contracts relating to some of its shares of Vail Resorts, Inc. common stock which were not designated as hedging instruments and which were settled in June 2009 (see Note 13).
 
 
 
 
 

 
4

 

The following table shows the fair value and Balance Sheet location of the Company’s derivative instruments as of June 30, 2009, all of which were designated as hedging instruments under Statement 133.
 
     
Fair
 
 
Balance Sheet Location
 
Value
 
Liability Derivatives:
       
Commodity contracts
Other current liabilities
  $ 10.0  
Interest rate contracts
Other current liabilities
    1.6  
      11.6  
Asset Derivatives:
         
Commodity contracts
Prepaid expenses and other current assets
 
$
.3  
Foreign exchange contracts
Prepaid expenses and other current assets
    2.8  
      $ 3.1  
 
The following tables illustrate the effect of the Company’s derivative instruments on the Statement of Earnings for the three and nine months ended June 30, 2009.
 
Derivatives in Statement 133
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Cash Flow Hedging
 
Three
   
Six
     
Three
   
Six
     
Three
   
Six
 
Relationships
 
Months
   
Months
 
Location
 
Months
   
Months
 
Location
 
Months
   
Months
 
Commodity contracts
  $ (9.9)     $
(45.6)
 
Cost of products sold
  $ (18.0 )   $ (37.6 )
Cost of products sold
  $ (1.2)   $ (.1)  
Foreign exchange contracts
    6.0       (.5)  
SG&A
    (.8 )     (4.7 )
SG&A
    -       -  
Interest rate contracts
    (.2)       (2.1)  
Interest expense, net
    (.6 )     (1.4 )
Interest expense, net
    -       .1  
    $ (4.1)     $ (48.2)       $ (19.4 )   $ (43.7 )     $ (1.2)     $ -  

       
Amount of Gain or (Loss) Recognized
       
in Income on Derivative
Derivatives Not Designated
 
Location of Gain or (Loss)
 
Three Months
 
Nine Months
as Hedging Instruments
 
Recognized in Income
 
Ended
 
Ended
Under Statement 133
 
on Derivative
 
June 30, 2009
 
June 30, 2009
Equity contracts
 
(Loss) gain on forward sale contracts
 
 $             (24.5)
 
 $               17.6
 
Certain of the Company’s derivative instruments contain provisions that require the Company to post collateral when the derivatives in liability positions exceed a specified threshold.  The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on June 30, 2009 was $6.2, and the related collateral required was zero.

NOTE 3 – FAIR VALUE MEASUREMENTS

The Company adopted FAS 157 on October 1, 2008, which among other things, requires enhanced disclosures about assets and liabilities measured at fair value.  This adoption was limited to financial assets and liabilities.
 
FAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures.  The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable.  Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.

The fair value hierarchy consists of the following three levels:
Level 1 –
Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 –
Inputs are quoted prices of similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 –
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
 
 
5

 

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 and the basis for that measurement:
 
   
Total
   
Level 1
   
Level 2
 
Assets
                 
Marketable securities
  $ 7.5     $ 7.5     $ -  
Derivative assets
    3.1       -       3.1  
Deferred compensation investment
    17.4       17.4       -  
Investment in Vail Resorts, Inc.
    69.8       69.8       -  
    $ 97.8     $ 94.7     $ 3.1  
Liabilities
                       
Derivative liabilities
  $ 11.6     $ -     $ 11.6  
Deferred compensation liabilities
    27.0       -       27.0  
    $ 38.6     $ -     $ 38.6  

The Company’s marketable securities consist of U.S. Treasury Bills.  Fair value for both marketable securities and the Investment in Vail Resorts, Inc. is measured using the market approach based on quoted prices.  The Company utilizes the income approach to measure fair value for its derivative assets and liabilities (which include commodity options and swaps, an interest rate swap, and foreign currency forward contracts).  The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates, and forward prices.  The fair value of the deferred compensation investment is invested primarily in mutual funds and is measured using the market approach.  This investment is in the same funds and purchased in substantially the same amounts as the participants’ selected investment options (excluding Ralcorp common stock equivalents), which represent the underlying liabilities to participants in the Company’s deferred compensation plans.  Deferred compensation liabilities are recorded at amounts due to participants in cash, based on the fair value of participants’ selected investment options (excluding certain Ralcorp common stock equivalents to be distributed in shares) using the market approach.

The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents, receivables and accounts payable approximate fair value because of the short maturities of these financial instruments.  The carrying amount of the Company’s variable rate long-term debt (Note 12) approximates fair value because the interest rates are adjusted to market frequently.  Based on the discounted amount of future cash flows, using Ralcorp’s incremental rate of borrowing for similar debt, the Company’s fixed rate debt (which had a carrying amount of $1,281.1 as of June 30, 2009 and $1,220.8 as of September 30, 2008) had an estimated fair value of $1,333.8 as of June 30, 2009 and $1,122.6 as of September 30, 2008.  The Company’s derivative financial instruments, which are used for the purpose of hedging commodity, interest rate, and foreign currency exposures in the normal course of business (Note 2) are carried on the consolidated balance sheets at their estimated fair values.

NOTE 4 – ACQUISITIONS

On March 20, 2009, the Company acquired Harvest Manor Farms, LLC, a leading manufacturer of high quality private label and Hoody's branded snack nuts with annual net sales of approximately $180 million.  Harvest Manor Farms operates a manufacturing facility in El Paso, TX and is now part of Ralcorp’s Snacks segment.  Based on a preliminary allocation of the total acquisition cost (approximately $59.2) to assets acquired and liabilities assumed, including $16.5 of customer relationships and trademarks with a weighted average life of approximately 16 years, the Company recorded $14.5 of goodwill as of June 30, 2009.  The allocation is subject to change pending the completion of analyses necessary to determine the fair values of certain assets and liabilities (including property, intangible assets, and deferred tax items).

On August 4, 2008, the Company acquired Post Foods from Kraft Foods Inc.  Post Foods, which is included in the Cereals segment, is the third-largest branded ready-to-eat cereal manufacturer in the U.S.

 

 
6

 

Ralcorp’s consolidated financial statements include the results of operations for these acquisitions since their respective acquisition dates.  The following pro forma information discloses Ralcorp’s results of operations as though these business combinations had been completed as of October 1, 2007, and as though all purchase price adjustments had been finalized on that date.  These pro forma results do not necessarily reflect the actual results

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net sales
  $ 994.0     $ 996.8     $ 2,995.4     $ 2,893.8  
Net earnings
    74.8       80.0       213.5       202.5  
Basic earnings per share
    1.33       1.42       3.80       3.60  
Diluted earnings per share
    1.31       1.40       3.74       3.55  
 
NOTE 5 – RESTRUCTURING CHARGES

In October 2007, the Company announced plans to close its plant in Billerica, MA, and transfer the production to other facilities within the Snack Nuts & Candy segment.  The closure was substantially completed during fiscal 2008.  For the quarter and nine months ended June 30, 2008, restructuring charges for this project consisted of $.2 and $1.1, respectively, which included employee termination benefits for approximately 90 employees and a write-off of abandoned property.

Restructuring charges for the three months ended June 30, 2009 and 2008 also included residual costs totaling $.1 and $.1, respectively ($.4 and $.6 for the corresponding nine month periods), related to the closure of the Frozen Bakery Products plant in Blue Island, IL, which was substantially completed in fiscal 2007.

NOTE 6 – PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors qualified and supplemental noncontributory defined benefit pension plans and other postretirement benefit plans for certain of its employees.  The following table provides the components of net periodic benefit cost for the plans.

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Pension Benefits
                       
     Service cost
  $ 1.2     $ .6     $ 3.6     $ 1.7  
     Interest cost
    3.1       2.8       9.3       8.4  
     Expected return on plan assets
    (3.8 )     (3.7 )     (11.4 )     (11.2 )
     Amortization of net loss
    .1       .6       .2       1.9  
     Amortization of unrecognized prior service cost
    -       -       .2       -  
     Net periodic benefit cost
  $ .6     $ .3     $ 1.9     $ .8  
                                 
Other Benefits
                               
     Service cost
  $ .7     $ -     $ 2.2     $ -  
     Interest cost
    1.4       .3       4.3       1.0  
     Amortization of unrecognized net loss
    -       .1       -       .2  
     Net periodic benefit cost
  $ 2.1     $ .4     $ 6.5     $ 1.2  

 

 
7

 

NOTE 7 – EARNINGS PER SHARE

The weighted-average shares outstanding for basic and diluted earnings per share were as follows (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Weighted Average Shares
                       
     for Basic Earnings per Share
    56,140       25,498       56,099       25,478  
     Dilutive effect of:
                               
          Stock options
    406       561       455       560  
          Stock appreciation rights
    136       104       141       81  
          Restricted stock awards
    262       104       225       93  
Weighted Average Shares
                               
     for Diluted Earnings per Share
    56,944       26,267       56,920       26,212  
 
During the three and nine months ended June 30, 2009, 405,000 stock appreciation rights (SARs) at $56.56 per share, 508,000 SARs at $66.07 per share, 25,000 SARs at $65.45 per share, and 8,000 SARs at $58.79 per share were outstanding and could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share for those periods because they were antidilutive.

NOTE 8 – SALE OF RECEIVABLES

The Company has an agreement to sell, on an ongoing basis, all of the trade accounts receivable of certain of its subsidiaries to a wholly owned, bankruptcy-remote subsidiary named Ralcorp Receivables Corporation (RRC).  The accounts receivable of the Post Foods, Western Waffles, Cottage Bakery, Medallion and Bloomfield businesses have not been incorporated into the agreement and are not currently being sold to RRC.  RRC can in turn sell up to $75.0 of ownership interests in qualifying 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 June 30, 2009 and September 30, 2008, the outstanding balance of receivables sold to RRC (net of an allowance for doubtful accounts based on historical losses and the economic status of customers) was $134.2 and $106.5, respectively, and proceeds received from the conduit were zero and $50.0, respectively, resulting in a subordinated retained interest of $134.2 and $56.5, respectively, reflected on the Company’s consolidated balance sheet as an “Investment in Ralcorp Receivables Corporation.”  The Company continues to service the receivables (with no significant servicing assets or liabilities) and remits collections to RRC, who remits the appropriate portion to the conduit, as part of a monthly net settlement including the sale of an additional month of receivables.  Cash received from or paid to the conduit is included in net cash flows from operating activities.  RRC maintains the risk of credit losses up to the amount of its subordinated retained interest.  The investment in RRC is stated at carrying value, which approximates fair value.  Discounts related to the sale of receivables (based on contractual rates) totaled $.1 and $.4 in the three months ended June 30, 2009 and 2008, respectively ($.6 and $1.6 for the corresponding nine month periods), and are included on the statement of earnings in selling, general and administrative expenses.

NOTE 9 – INVENTORIES consisted of:
 
   
June 30,
   
Sept. 30,
 
   
2009
   
2008
 
Raw materials and supplies
  $ 133.9     $ 135.2  
Finished products
    210.5       204.4  
      344.4       339.6  
Allowance for obsolete inventory
    (7.5 )     (2.6 )
    $ 336.9     $ 337.0  
 
 
 
 
 
 
8

 

NOTE 10 – PROPERTY, NET consisted of:
 
   
June 30,
   
Sept. 30,
 
   
2009
   
2008
 
Property at cost
  $ 1,408.9     $ 1,350.3  
Accumulated depreciation
    (519.8 )     (447.2 )
    $ 889.1     $ 903.1  
 
NOTE 11 – OTHER INTANGIBLE ASSETS, NET consisted of:

   
June 30,
   
Sept. 30,
 
   
2009
   
2008
 
Computer software
  $ 50.8     $ 34.7  
Customer relationships
    419.1       422.2  
Trademarks
    816.0       808.4  
Other
    13.1       13.1  
      1,299.0       1,278.4  
Accumulated amortization
    (119.4 )     (88.9 )
    $ 1,179.6     $ 1,189.5  

Amortization expense related to intangible assets was:

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Computer software
  $ 1.7     $ 1.0     $ 3.9     $ 3.0  
Customer relationships
    5.6       5.0       16.1       14.3  
Trademarks
    3.2       .3       9.5       1.0  
Other
    .4       .6       1.3       1.7  
    $ 10.9     $ 6.9     $ 30.8     $ 20.0  
 
 
For the intangible assets recorded as of June 30, 2009, total amortization expense of $41.0, $39.6, $37.2, $36.9, and $35.8 is scheduled for fiscal 2009, 2010, 2011, 2012, and 2013, respectively.
 
 
 
 
 
 
9

 
NOTE 12 – LONG-TERM DEBT consisted of:

   
June 30, 2009
   
September 30, 2008
 
   
Balance
   
Rate
   
Balance
   
Rate
 
Fixed Rate Senior Notes, Series B
  $ 58.0      
4.24%
    $ 87.0       4.24%  
Fixed Rate Senior Notes, Series C
    50.0      
5.43%
      50.0       5.43%  
Fixed Rate Senior Notes, Series D
    53.6      
4.76%
      64.3       4.76%  
Fixed Rate Senior Notes, Series E
    100.0      
5.57%
      100.0       5.57%  
Fixed Rate Senior Notes, Series F
    75.0       5.43%       75.0       5.43%  
Floating Rate Senior Notes, Series G
    50.0       1.17%       50.0       3.26%  
Floating Rate Senior Notes, Series H
    50.0       1.17%       50.0       3.26%  
Fixed Rate Senior Notes, Series I-1
    75.0       5.56%       75.0       5.56%  
Fixed Rate Senior Notes, Series I-2
    25.0       5.58%       25.0       5.58%  
Fixed Rate Senior Notes, Series J
    100.0       5.93%       100.0       5.93%  
Fixed Rate Notes maturing 2018
    577.5       7.29%       577.5       7.29%  
Floating Rate Notes maturing 2018
    20.0       3.42%       20.0       5.33%  
Fixed Rate Notes maturing 2020
    67.0       7.39%       67.0       7.39%  
Fixed Rate Notes 2009A
    50.0       7.45%       -       n/a  
Fixed Rate Notes 2009B
    50.0       7.60%       -       n/a  
Term Loan A-1
    -       n/a       100.0       4.19%  
Term Loan A-2
    192.5       1.56%       200.0       4.16%  
Industrial Development Revenue Bond
    5.6       1.05%       5.6       6.80%  
$400 Revolving Credit Agreement
    -       n/a       7.0       4.50%  
Uncommitted credit arrangements
    -       n/a       15.0       8.25%  
Other
    .1    
Various
      .4    
Various
 
      1,599.3               1,668.8          
Less: Current portion
    (55.3 )             -          
    $ 1,544.0             $ 1,668.8          

Approximately $164.7 of the debt outstanding at September 30, 2008 was required to be repaid in fiscal 2009 but was classified as long-term based upon management’s intent and ability to refinance it on a long-term basis.  As of June 30, 2009, management expects to reduce debt as scheduled over the next twelve months, so the current portion has been classified in “Other current liabilities” on the consolidated balance sheet.
 
 
 
 
 
 
 

 
10

 

NOTE 13 – FORWARD SALE CONTRACTS

Between December 31, 2005 and December 31, 2006, Ralcorp entered into three forward sale contracts relating to 4.95 million shares of its Vail common stock.  Under the contracts, at the maturity dates the Company could deliver a variable number of shares of Vail stock (or cash) to the counterparty.  The calculation of the number of shares ultimately delivered depended on the price of Vail shares at settlement and included a price collar.  Ralcorp received cash under the discounted advance payment feature of the contracts, and amortization of the discounts (which totaled  $1.2 and $2.2 for the quarters ended June 30, 2009 and 2008, respectively, and $5.1 and $6.5 for the 9 months ended June 30, 2009 and 2008, respectively) was included in “Interest expense, net” on the statement of earnings.  On November 21, 2008, the first tranche of the initial contract was settled and Ralcorp delivered 890,000 shares, and on June 4, 2009, all remaining contracts were settled and Ralcorp delivered 3,503,263 shares.   The components of the total liability are shown in the following table.
 
   
Value of
   
Accumulated
   
Total
 
   
Advance
   
Gain on
   
Contract
 
   
Proceeds
   
Derivative
   
Liability
 
Advance proceeds received
  $ 140.0     $ -     $ 140.0  
Amortization of discount
    20.7       -       20.7  
Gain on derivative component
    -       (15.7 )     (15.7 )
Balance at September 30, 2008
  $ 160.7     $ (15.7 )   $ 145.0  
Amortization of discount
    5.1       -       5.1  
Gain on derivative component
    -       (20.6 )     (20.6 )
Contract settlement
    (165.8 )     36.3       (129.5 )
Balance at June 30, 2009
  $ -     $ -     $ -  

The forward sale agreements had a dual nature and purpose.  The advance proceeds component acted as a financing arrangement collateralized by the underlying Vail shares.  The derivative component, which was based on a price collar on Vail shares, acted as a hedge of the future sale of the underlying shares.  Because Ralcorp accounted for its investment in Vail using the equity method, these contracts were not eligible for hedge accounting.  Therefore, any gains or losses on the contracts, whether realized or unrealized, were immediately recognized in earnings.  In addition to the unrealized non-cash gains or losses, the reported gains or losses on these contracts included charges (paid monthly) for any related stock borrow costs incurred by the counterparty in excess of a contractual limit.  During the three months ended June 30, 2009 and 2008, excess stock borrow costs (and payments) totaled negative $.1 and zero, respectively ($3.0 and zero for the corresponding nine month periods).

NOTE 14 – SHAREHOLDERS’ EQUITY

As of June 30, 2009, there were 6,866,448 shares in treasury and 56,610,187 shares outstanding.  As of September 30, 2008, there were 7,195,555 shares in treasury and 56,281,080 shares outstanding.

Accumulated other comprehensive income decreased $9.1 during the nine months ended June 30, 2009 as a result of a $16.9 decrease in the foreign currency translation adjustment, a $16.7 unrealized net gain on the Investment in Vail Resorts, Inc., a $4.5 net loss from cash flow hedging activities, and $4.4 of related income tax adjustments.

NOTE 15 – CONTINGENCIES

In May 2009, the Company was notified by one of its contract customers that they were seeking mediation to recover actual losses associated with the recall of peanut-butter-based products and associated damages.  Presently, Ralcorp management believes the likelihood of loss resulting from this action is remote.  The loss, if any, cannot be determined at this time but is not expected to be material to the earnings, financial position, or cash flows of Ralcorp.
 
 
 
 
 
 

 
11

 

NOTE 16 – SEGMENT INFORMATION

Effective October 1, 2008, the Company reorganized its management reporting and realigned its reportable segments in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Historically, the Company was comprised of the following reportable business segments:
Cereals, Crackers & Cookies (including branded and store brand cereals, nutritional bars, crackers, cookies, and chips);
Frozen Bakery Products (including frozen griddle products, frozen bread products, frozen dessert products, and frozen dough and dry mixes for bakery foods);
Dressings, Syrups, Jellies & Sauces (including store brand shelf-stable dressings, syrups, peanut butter, jellies, salsas and various sauces, and branded non-alcoholic drink mixes); and
Snack Nuts & Candy (including nuts and chocolate candy).

Effective as of the beginning of fiscal 2009, the reportable segments were changed as follows:
the cracker, cookie and chip business has been aggregated with the nuts and candy business in a segment renamed Snacks;
  
the branded ready-to-eat cereal business and the store brand ready-to-eat and hot cereal and nutritional bar business continue to be aggregated in a segment renamed Cereals;
the name of the Dressings, Syrups, Jellies & Sauces segment was changed to Sauces and Spreads; and
there was no change to Frozen Bakery Products.
    
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 other unallocated corporate income and expenses.  The following tables present information about the Company’s reportable segments, including corresponding amounts for the prior year.



 
12

 
 

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net Sales
                       
     Cereals
  $ 476.1     $ 194.4     $ 1,399.2     $ 556.1  
     Frozen Bakery Products
    162.1       174.1       530.0       533.1  
     Snacks
    219.1       166.0       583.3       508.1  
     Sauces and Spreads
    136.7       124.1       396.2       353.6  
          Total
  $ 994.0     $ 658.6     $ 2,908.7     $ 1,950.9  
                                 
Profit Contribution
                               
     Cereals
  $ 95.9     $ 20.4     $ 248.1     $ 60.5  
     Frozen Bakery Products
    18.7       15.1       49.1       47.9  
     Snacks
    27.4       11.7       62.9       32.1  
     Sauces and Spreads
    8.2       4.2       26.7       9.1  
          Total segment profit contribution
    150.2       51.4       386.8       149.6  
     Interest expense, net
    (23.0 )     (11.1 )     (72.9 )     (33.6 )
     (Loss) gain on forward sale contracts
    (24.5 )     21.7       17.6       84.0  
     Gain on sale of securities
    28.0       -       43.8       -  
     Restructuring charges
    (.1 )     (.3 )     (.4 )     (1.7 )
     Acquired inventory valuation adjustment
    (.4 )     -       (.4 )     -  
     Stock-based compensation expense
    (3.0 )     (2.3 )     (10.0 )     (8.3 )
     Post Foods transition and integration costs
    (13.2 )     (1.6 )     (28.1 )     (1.6 )
     Other unallocated corporate expenses
    (8.3 )     (4.3 )     (21.4 )     (16.0 )
          Earnings before income taxes
                               
               and equity earnings
  $ 105.7     $ 53.5     $ 315.0     $ 172.4  
                                 
Depreciation and Amortization
                               
     Cereals
  $ 13.2     $ 5.1     $ 52.5     $ 14.5  
     Frozen Bakery Products
    9.0       8.9       26.6       27.3  
     Snacks
    6.1       5.1       16.4       15.4  
     Sauces and Spreads
    2.2       2.0       6.4       6.1  
     Corporate
    2.1