Peanut butter sales were lower because of reduced consumer confidence in products containing peanuts or peanut butter, even though products in this segment were not subject to the recall. The decline in salad dressings is partially attributable to business lost to a competitor due to pricing. The change in co-manufacturing activity reflects the end of a peanut butter contract partially offset by additional sales under other contracts.
Profit contribution was significantly higher than last year as a result of the higher sales, partially offset by higher input costs. The segment’s raw material costs were unfavorable by a total of $8.9 million in the second quarter and $22.1 million in the first half, driven by cost increases in soybean oil, corn sweeteners, fruits, and containers.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded operating needs by generating positive cash flows through operations. We expect to continue generating operating cash flows through our mix of businesses and expect that short-term and long-term liquidity requirements will be met through a combination of operating cash flows and strategic use of borrowings under committed and uncommitted credit arrangements. We believe we have sufficient liquidity despite the current disruption of the capital and credit markets. As the national and world-wide financial crisis has developed in recent months, we have continued to monitor closely events and the financial institutions associated with our credit facilities, including monitoring credit ratings and outlooks, capital raising and merger activity.
Capital resources remained strong at March 31, 2009, with total shareholders’ equity of $2,522.3 million and a long-term debt (including current maturities) to total capital (which is the total of long-term debt and total shareholders’ equity) ratio of 39%, compared with corresponding figures for September 30, 2008 of $2,411.5 million and 41%. Working capital, excluding cash and cash equivalents, decreased to $215.7 million at March 31, 2009, from $241.8 million at September 30, 2008, primarily as a result of a reclassification of $55 million of long-term debt to current liabilities, offset by a $20 million increase in working capital related to the Harvest Manor Farms business.
Cash provided by operating activities was $157.1 million through six months of fiscal 2009 compared to $63.3 million in last year’s first six months. This change was primarily due to cash flows from Post Foods, as well as improved profitability of our base businesses. In addition, a portion of the change is due to cash flows related to our receivables sale agreement, which now includes most of the receivables of the Frozen Bakery Products segment. During fiscal 2009, net proceeds received from the sale of beneficial interests in accounts receivable increased by $25.0 million, compared with a $5.0 million increase a year ago. See Note 8 under Item 1 for more information about the sale of receivables. Remaining changes are primarily due to fluctuations in other components of working capital and differences in the timing and amounts of hedge settlements.
As of March 31, 2009, Ralcorp had paid $59.0 million related to the acquisition of Harvest Manor Farms. In fiscal 2009, that outflow was partially offset by $4.3 million of acquisition settlements received related to Post Foods.
Capital expenditures for fiscal 2009 are expected to total approximately $100-$125 million (including approximately $50-$60 million of Post Foods asset decoupling and information systems expenditures) of which $46.6 million was spent during the first six months. As discussed below, we have adequate capacity under current financing arrangements to meet these cash needs.
During the first six months of fiscal 2009, $29.0 million of our Fixed Rate Senior Notes, Series B, $10.7 million of Series D, and $5.5 million of our Term Loan A-2 were repaid as scheduled. During the twelve months ending March 31, 2010, another $29.0 million of Series B, $10.7 million of Series D, $10.0 million of our Term Loan A-2, and the $5.6 million IRB are scheduled to be repaid. All of our notes provide that, if we elect to pay additional interest, our ratio of “Total Debt” to “Adjusted EBITDA” (each term as defined in the debt agreements) may exceed the 3.5 to 1.0 limit, but be no greater than 4.0 to 1.0, for a period not to exceed 12 consecutive months. As of March 31, 2009, that ratio was 2.8 to 1.0, and we were also in compliance with all other debt covenants. Total remaining availability under our $400 million revolving credit agreement was $270.4 million as of March 31, 2009. We currently have no uncommitted credit arrangements.
Cash needs in excess of our available borrowing capacity could be met through additional sales of our shares of Vail Resorts, Inc. Based on the market price of Vail stock at December 31, 2008, and excluding the 4.06 million shares subject to forward sale contracts (discussed in the following paragraph), we could realize approximately $30.0 million in cash through the sale of this investment, net of income taxes.
Between November 2005 and November 2006, we entered into three forward sale contracts relating to a maximum total of 4.95 million shares of our Vail common stock and received a total of $140 million under the discounted advance payment feature of the contracts. These contracts operate as a hedge of the cash flows expected
from the sale of Vail shares in the future. At the maturity dates in the contracts, we can deliver a variable number of shares of Vail stock to the counterparty or settle the contracts with cash. The number of shares (or amount of cash) to be delivered will depend upon the market price of Vail shares at the settlement dates. We delivered 890,000 shares in November 2008. The market price of Vail shares at March 31, 2009 was $20.43. A summary of contract terms follows:
| Maturity | Maximum | Minimum | Floor | Cap |
| Date | Shares | Shares | Price | Price |
| November 2008 | 890,000 | 727,157 | $ 34.59 | $ 42.33 |
| November 2009 | 985,050 | 783,028 | 38.34 | 48.23 |
| November 2010 | 890,000 | 632,551 | 34.59 | 48.67 |
| November 2011 | 985,050 | 681,695 | 38.34 | 55.40 |
| November 2013 | 1,200,000 | 570,825 | 35.29 | 74.19 |
During the first six months of fiscal 2009 approximately 330,000 shares of Ralcorp treasury stock were issued for stock options and stock appreciation rights exercised.
OUTLOOK
Within our Annual Report on Form 10-K for the year ended September 30, 2008, we provided a discussion of the outlook for the Company, including specific factors and trends affecting our businesses. We believe the outlook comments contained within that document are still appropriate, except as updated by the following paragraphs.
During the first two quarters of fiscal 2009, Post Foods’ operating results and progress on transition and integration met expectations. We expect sales and operating profits for the Post Foods business to be greater in our third and fourth fiscal quarters than in the first and second, largely based on the timing of advertising and promotion and the end of the transition services agreement.
Through the first two quarters of fiscal 2009, Post Foods was operating under a twelve-month transition services agreement (TSA) with Kraft Foods Inc. (the former owner) which covered many key business activities for Post Foods. On April 27, 2009, we transferred Post Foods to stand-alone information systems. At this time, we also commenced Post Foods sales, logistics and purchasing functions. Our objective for the remainder of the year is to continue the successful transition and integration of the Post Foods operations into Ralcorp. As planned, we have incurred significant costs and management effort related to transitioning Post Foods off the TSA and into our own operations, including decoupling the cereal assets of Post Foods from those of other operations of Kraft and other significant integration undertakings. While a portion of the costs associated with this effort are capitalized, the expense portion totaled $7.8 and $14.9 million in the three and six months ended March 31, 2009. We expect these transition and integration costs to continue through fiscal 2009, albeit at a reduced level from that incurred in the first two quarters.
As previously discussed, commodity costs in the first two quarters of fiscal 2009 were generally higher than those incurred in the same period in 2008. We have recently experienced declines in certain commodity costs; however, we expect these lower costs will lead to increased competitive pressures and potentially lower volumes.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued Statement of Financial Accounting Standards (FAS) No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement was effective for Ralcorp as of October 1, 2008; however, FASB Staff Position (FSP) FAS 157-2, issued in February 2008, permits a one-year deferral for non-financial assets and liabilities not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of FAS 157 for financial assets and liabilities did not have a material impact on the Company’s results of operations or financial position, and we do not believe the adoption of FAS 157 for non-financial assets and liabilities, effective October 1, 2009, will have a material impact on our consolidated financial statements. Required disclosures are included in Note 3 under Item 1.
In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement was effective as of the beginning of Ralcorp’s 2009 fiscal year, but it did not have an effect on our consolidated financial statements as we did not elect this fair value option for any items.
In December 2007, the FASB issued FAS 141(R), “Business Combinations,” which replaces FAS 141. This Statement establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of business combinations. This Statement is effective for acquisitions completed after the beginning of Ralcorp’s 2010 fiscal year. At this time, the Company has not completed its review and assessment of the impact of the adoption of this statement.
In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities.” This Statement changes the disclosure requirements for derivative instruments and hedging activities to include enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for Ralcorp beginning with its financial statements for March 31, 2009, which include the required disclosures.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” This FSP will be effective for financial statements issued for Ralcorp’s 2010 fiscal year. Early adoption is prohibited. The FSP’s guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date (October 1, 2009 for Ralcorp). The FSP’s disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
In May 2008, the FASB issued FAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. This standard did not have a material impact on the Company’s financial statements.
In April 2009, the FASB issued FSP 157-4, FSP FAS 107-1 and APB 28-1, and FSP FAS 115-2 and FAS 124-2, all of which will be effective for Ralcorp beginning in the third quarter of fiscal 2009. FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidelines for making fair value measurements more consistent with the principles presented in FAS 157. FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. Other than the inclusion of interim fair value disclosures, the Company does not expect the adoption of any of these FSPs to have a material impact on the Company’s financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates during the six months ended March 31, 2009.
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 “believe,” “should,” “expect,” “project,” “estimate,” “anticipate,” “intend,” “plan,” “will,” “can,” “may,” or similar expressions elsewhere in this Report. Our 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. The factors set forth below, cumulatively or individually, may have a impact on the Company’s expected results or financial condition.
• We recently acquired the Post Foods business from Kraft Foods Inc. During fiscal 2009, management is focused on transitioning Post Foods into Ralcorp operations, including decoupling the cereal assets of Post Foods from those of other Kraft operations, developing stand-alone Post Foods information systems, developing independent sales, logistics and purchasing functions for the Post Foods business, and other significant integration
undertakings. If the transition and integration are not successfully implemented as planned, the expected earnings impacts will not be realized or will be delayed.
• General economic conditions or disruptions in the banking and lending sectors, particularly in the United States, could have an effect on our business including the inability to borrow money to fund acquisition and capital expenditure, higher interest rates we pay on our indebtedness and consumer demand for our various branded and private label products.
• If we are unable to maintain a meaningful price gap between our products and those of our competitors, successfully introduce new products or successfully manage costs across all parts of the Company, our businesses could incur operating losses.
• Significant increases in the cost of certain commodities (e.g., wheat, peanuts, soybean oil, eggs, various tree nuts, corn syrup and other sweeteners, cocoa, fruits), packaging or energy (e.g., natural gas) used to manufacture our products, to the extent not reflected in the price of our products, could adversely impact our results.
• We are currently generating profit from certain co-manufacturing contract arrangements with other manufacturers within our competitive categories. The termination or expiration of these contracts and our inability to replace this level of business could negatively affect our operating results.
• Our businesses compete in mature segments with competitors having large percentages of segment sales. If such competitors are able to obtain larger percentages of their respective segment sales, we could lose our market position.
• We have realized increases in sales and earnings through the acquisitions of businesses, but the ability to undertake future acquisitions depends on many factors, such as identifying available acquisition candidates and negotiating satisfactory terms to purchase such candidates, which we do not control unilaterally.
• In light of our ownership in Vail Resorts, Inc. (approximately 17%), our non-cash earnings can be adversely affected by unfavorable results from Vail Resorts or the inability to recognize earnings under the equity method of accounting in the future.
• Presently, a portion of the interest on our indebtedness is set on a short-term basis. Consequently, increases in interest rates will increase our interest expense.
• If actual or forecasted cash flows of any reporting unit deteriorate such that its fair value falls below its carrying value, goodwill will likely be impaired and an impairment loss would be recorded immediately as a charge against earnings.
• Periodically, we experience increases in the cost to transport finished goods to customers. Our costs have risen due to the increased cost of fuel and a limited supply of freight carriers. In the event this situation worsens, transportation costs will increase significantly and we will experience service problems and reduced customer sales.
• Fluctuations in the Canadian Dollar exchange rate could result in losses in value of our net foreign currency investment in our Canadian operations.
• Some of our employees are represented by labor unions. Labor strikes, work stoppages or other such interruptions or difficulties in the employment of labor could negatively impact our manufacturing capabilities.
• Consolidation among members of the grocery trade may lead to increased wholesale price pressure from larger grocery trade customers and could result in significant profit pressure, or in some cases, the loss of key accounts if the surviving entities are not customers of the Company.
• Other uncertainties, all of which are difficult to predict and many of which are beyond our control, may impact our financial position, including those risks detailed from time to time in our publicly filed documents. These and other factors are discussed in our Securities and Exchange Commission filings.
The factors set forth above are illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Except as discussed in the following paragraphs, we believe there have been no material changes in the reported market risks faced by the Company during the six months ended March 31, 2009. For additional information, refer to Item 7A of our Annual Report on Form 10-K for the year ended September 30, 2008.
As of March 31, 2009, a hypothetical 10% adverse change in relevant market prices would have decreased the fair value of our commodity-related derivatives portfolio, which includes futures, options, and swaps, by approximately $6.4 million. This volatility analysis ignores changes in the exposures inherent in the related hedged transactions. Because the Company does not hold or trade derivatives for speculation or profit, all changes in derivative values are effectively offset by corresponding changes in the hedged exposures.
As of March 31, 2009, the fair value of the Company’s fixed rate debt was approximately $1,184.0 million, based on the discounted amount of future cash flows using Ralcorp’s incremental rate of borrowing for similar debt. A hypothetical 10% decrease in interest rates would increase the fair value of the fixed rate debt by approximately $50.2 million.
The fair value of the interest rate swap contract was negative $2.1 million at March 31, 2009. A hypothetical 10% decrease in expected future interest rates would reduce that fair value by $.1 million.
As of March 31, 2009, we held foreign currency forward contracts with a total notional amount of $72.0 million and fair value of negative $3.8 million. A hypothetical 10% increase in the expected CAD-USD exchange rates would have decreased that fair value by $6.1 million.
As of March 31, 2009, the fair value of the total liability associated with our Vail forward sale contracts was $72.9 million (see Note 13 to the financial statements included under Item 1). A hypothetical 10% increase in the Vail stock price would have increased the fair value of that liability by approximately $6.6 million.
Item 4. Controls and Procedures.
The Company’s management, with the participation of the Company’s Co-Chief Executive Officers and its Controller and Chief Accounting Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2009. Based upon that evaluation, the Co-Chief Executive Officers and the Controller and Chief Accounting Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information that is required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to the Company’s management, including its Co-Chief Executive Officers and its Controller and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes to our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the period covered by this report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
