Exhibit 99.1
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AMERICAN ITALIAN PASTA COMPANY -NEWS
-RELEASE
Contact:
George Shadid -
EVP & Chief Financial Officer
816-584-5621
gshadid@aipc.com
FOR IMMEDIATE RELEASE
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American Italian Pasta Company Delays
Third Quarter Earnings Release and Filing of Form 10-Q
Audit Committee Investigation Underway
Impairment Charges and Other
Financial Statement Adjustments Outlined
KANSAS CITY, MO, August 9, 2005 --- American Italian Pasta Company announced
today that it is delaying the release of its full financial results for the
third fiscal quarter ended July 1, 2005, and is also delaying the filing of its
third quarter Form 10-Q with the Securities and Exchange Commission (SEC). The
Company stated that its Audit Committee is conducting an internal investigation
of certain accounting procedures and practices and certain other matters. The
Company also outlined impairment charges and other financial statement
adjustments that will be recorded and provided an overview of its business
results for the third quarter.
EARNINGS RELEASE AND FILING OF FORM 10-Q
The Company's third quarter Form 10-Q, due on August 10, 2005, and the Company's
previously planned August 10, 2005 earnings release are being delayed until the
Audit Committee has completed its review of the matters that are the subject of
its internal investigation. The Company will file its Form 10-Q as soon as is
practicable but does not currently expect that it will be able to file within
the five day extension period provided for under SEC Rule 12b-25. The conference
call originally scheduled for August 10, 2005 has been cancelled.
While the Company's core operations (financial results exclusive of the charges
outlined below in "Financial Statement Adjustments") were profitable in the
third quarter, such operations did not meet internal expectations and were not
consistent with the third quarter results contemplated in the full-year earnings
guidance outlined earlier by the Company. Combined with the charges outlined
below, the Company expects to record a significant net loss for the third
quarter ended July 1, 2005, leading to a net loss for the 2005 fiscal year.
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AIPC
August 9, 2005
Page 2
While the Company expects to operate profitably in the fourth quarter and
generate positive free cash flow (operating cash flow less capital
expenditures), it will not achieve in fiscal year 2005 the expected range of
margin performance, overall profitability and free cash flow as set forth in the
Company's earnings release on April 27, 2005.
AUDIT COMMITTEE INTERNAL INVESTIGATION
The Company's Audit Committee has recently commenced an internal investigation,
undertaken at the Committee's own initiative, of certain matters including:
certain accounting procedures and practices including those relating to material
weaknesses in internal controls identified by the Company (as described below);
financial statement adjustments (as outlined later in this release) and the
circumstances surrounding such adjustments; and, certain transactions and
possible past accounting errors and their causes. The Audit Committee has
retained outside counsel to assist with its investigation and outside counsel
has engaged forensic accountants. The Company's external auditors, Ernst & Young
LLP, have been notified of the internal investigation. The Company indicated
that the investigation relates to transactions and other matters occurring as
early as the Company's 2000 fiscal year.
The internal investigation has not yet been completed and the Company indicated
that financial statement adjustments might be necessary in addition to those
outlined in this release. Until the internal investigation is completed by the
Audit Committee and any financial statement adjustments and their causes are
determined, the Company's third quarter results and any impact on prior period
results cannot be finalized.
The Company also stated that in late 2004 and early 2005, it received inquiries
from the Philadelphia and New York Stock Exchanges concerning trading activity
in the Company's stock, by persons outside of the Company, during time periods
surrounding certain of the Company's public announcements. As is the routine
practice of the exchanges, the staff of the SEC was advised of the inquiries. In
March 2005, the Company initiated contact with the SEC staff and began
discussions with the staff regarding information relating to the exchange
inquiries. The Company has had ongoing discussions with and has voluntarily been
providing relevant information to the SEC staff. These discussions and
disclosures are in keeping with the Company's policy to assist and cooperate
with inquiries by an exchange or government regulatory authority. Some of the
issues under discussion with the SEC staff relate to certain of the subjects
addressed below. The SEC staff's review is ongoing and the Company is continuing
to cooperate with the staff's efforts.
FINANCIAL STATEMENT ADJUSTMENTS
The Company intends to record adjustments totaling $60.7 million in its
financial statements that are primarily non-cash charges (all but $3.7 million
are non-cash items). The adjustments, described below, are summarized as follows
(in millions):
Impairment charges $36.7
Low and reduced carb inventory write-downs 5.2
Other financial statement adjustments 18.8
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Total $60.7
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AIPC
August 9, 2005
Page 3
Impairment Charges
The Company expects impairment charges (non-cash) will be recorded in the third
quarter aggregating $36.7 million on a pre-tax basis. The charges include
impairments of intangible assets and property, plant and equipment as follows:
Intangibles - Brands and Trademarks: Certain of the Company's pasta brands have
experienced declines in sales volume and related revenues over recent months
resulting in corresponding declines in market share and profitability (primarily
the Golden Grain-Mission and R&F brands). The recent operating trends and the
currently forecasted future performance for these brands differ significantly
from the Company's earlier expectations. In accordance with SFAS No. 142 -
"Goodwill and Other Intangible Assets", the recoverability of these intangible
assets has been evaluated and the Company has determined that impairments now
exist. Accordingly, pre-tax impairment charges of $35.1 million will be recorded
in the third quarter.
Long Lived Assets - Property, Plant and Equipment: During the third quarter, the
Company identified certain manufacturing equipment that will not be utilized in
the Company's future operations. In accordance with SFAS No. 144 - "Accounting
for the Impairment or Disposal of Long Lived Assets", the Company will record in
the third quarter a write-down of the asset-carrying values to estimated net
realizable value, that will result in a pre-tax impairment charge of $1.6
million.
Low and Reduced Carb Inventory Write-downs
Sales trends of the Company's low and reduced carb products have declined in
recent months and the sales outlook has continued to diminish. The Company now
expects that certain inventories related to these product lines are in excess of
levels that will ultimately be sold and the carrying value will not otherwise be
recovered. Accordingly, third quarter results will include non-cash inventory
write-downs of $5.2 million on a pre-tax basis.
Material Weaknesses in Internal Controls
As previously disclosed in the Company's second quarter 10-Q, the Company
identified certain material weaknesses in internal controls in conjunction with
its preparation to fulfill the requirements of Section 404 of the Sarbanes-Oxley
Act. During the third quarter the Company identified additional material
weaknesses in internal controls relating to certain fixed asset accounting. The
Company has commenced the development and implementation of procedures designed
to remediate the identified weaknesses. The Company's Audit Committee will
oversee the remediation efforts.
Other Financial Statement Adjustments
Related to the material weaknesses identified, as well as other market and
business conditions, it is expected that the financial statements will be
adjusted by recording charges aggregating $18.8 million. These financial
statement adjustments are comprised primarily of the following:
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AIPC
August 9, 2005
Page 4
Promotional allowances and related customer deduction receivables - $6.6
million of additional expense will be recorded and is comprised of
increases in accrued promotional liabilities of $3.7 million (resulting
from updated estimates of prior periods promotional expenses incurred but
not yet paid) and write-downs of $2.9 million related to customer
receivables determined to be uncollectible.
Spare parts inventory - Write-downs totaling $5.4 million will be recorded
related to physical inventory shortages, valuation adjustments and the
adjustment of obsolescence reserves for spare parts to reflect the
Company's anticipated recoverability on the disposition of certain excess
or obsolete parts.
Inventory valuation - The Company's reserves for slow moving, damaged and
discontinued inventories will be increased by $4.1 million (exclusive of
the write-downs related to low and reduced carb inventories, as noted
above) to reflect the anticipated recoverability of certain inventories in
excess of identified requirements. In addition, the carrying value of
inventory will be reduced by $600,000, consisting of adjustments to the
allocation of overhead expenses relating to production costs.
Dispositions of fixed assets - It was determined that certain fixed asset
retirements occurring in prior periods were not recorded by the Company.
Accordingly, losses on dispositions of fixed assets totaling $1.9 million
will be recorded in the financial statements.
CONTINUING FINANCIAL REVIEW
The Company and the Audit Committee are currently assessing the extent to which
the above adjustments discussed in "Other Financial Statement Adjustments"
correct errors in prior reporting periods or are changes in estimates. In
addition, the Company is evaluating certain other financial statement
adjustments, aggregating up to approximately $4.2 million, that may be recorded
to correct errors in the prior reporting periods of fiscal years 2000 through
2004 and that were considered immaterial at the time. The Audit Committee is
also investigating certain transactions unrelated to the adjustments otherwise
discussed above that are currently estimated to total less than $1.0 million.
Accordingly, the impact these financial statement adjustments will have on the
third quarter results or on prior period financial statements, if any, has not
yet been determined. The Company's and the Audit Committee's reviews are ongoing
and could result in additional or revised adjustments.
THIRD QUARTER BUSINESS OVERVIEW
An overview of the significant items affecting the third quarter results for the
Company's core operations (financial results exclusive of the charges outlined
above in "Financial Statement Adjustments") and the Company's bank credit
agreement follows:
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AIPC
August 9, 2005
Page 5
Core Operations Performance
The third quarter contribution to consolidated operating profit by the Company's
core operations is expected to be as follows (in millions):
Revenues $ 90.2
Operating profit $ 7.1
as a percentage of revenues 7.9%
Revenues: Revenues were lower than the prior year, in part, as contemplated in
the Company's business plan for 2005 that targets a smaller base of more
profitable volume. As expected, significant price increases implemented
throughout the year and the elimination of certain branded promotional events
resulted in lower sales volume. In the third quarter, however, revenues were
lower than expected primarily due to negative sales mix, lower volume and
incremental branded trade promotion spending.
The Company's third quarter revenues from core operations were $90.2 million,
down 13% from the prior year's quarter as follows:
Retail revenues: In the quarter, the Company's retail revenues from core
operations were $64.1 million, a decrease of $9.7 million or 13% as
compared to the prior year's quarter. The decrease resulted primarily from
lower branded sales and $3.9 million less in sales of low and reduced carb
products. These revenue decreases were offset, in part, by slightly higher
private label revenues during the third quarter resulting from recent price
increases.
During the third quarter, the Company's retail volume declined by
approximately 13% as compared to the prior year's quarter (including a 21%
reduction in branded volume and a 7% decrease in private label/club
volume). Branded volume reductions were driven primarily by Golden
Grain-Mission brand declines of 55%, a reduction in unprofitable
promotional events and lower reduced carb sales. Industry-wide retail
consumption of dry pasta (as measured by ACNielsen) increased in volume by
1.6% for the 13-week period ended July 9, 2005 as compared to a year ago.
Private label volume decreased, as anticipated, due to the loss of certain
lower margin volume resulting from recent price increases.
Institutional revenues: In the third quarter, the Company's institutional
revenues were $26.1 million, a decrease of $3.2 million or 11% as compared
to the prior year's quarter. Volume declined during the quarter by 16% in
certain high volume, low margin ingredient business, due in part to planned
reductions.
Cost of goods sold: Product costs were higher than expected during the third
quarter due to continued unfavorable trends in transportation costs,
energy-related expenses, by-product sales prices and production volume, all of
which contributed to an increase in per unit costs.
General and administrative costs: G&A costs were significantly higher than
expected and increased from last year's quarter primarily due to expenses
associated with Sarbanes-Oxley Section 404 compliance and higher professional
fees.
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AIPC
August 9, 2005
Page 6
Kenosha plant operations: The Kenosha plant has been operating in a limited mode
over the last nine months in response to industrial customer demand and to
re-balance production, inventory and the supply chain. Consistent with the
Company's original restructuring strategy, the Kenosha facility was recently
placed back into idle mode. The Company will continue to evaluate the future
strategy for the facility and, in the meantime, it will be available as needed
to meet future production requirements.
Bank Credit Agreement
On July 19, 2005, the Company received a waiver from its bank group for
non-compliance with certain covenants contained in its bank credit agreement for
the third quarter of fiscal year 2005. During the waiver period, which expires
on September 16, 2005, the Company will continue discussions with the bank group
regarding an amendment to certain financial covenants and other terms for the
third quarter and the remaining term of the credit agreement, which expires on
October 2, 2006. If the amendment is not completed by the end of the initial
waiver period, the Company will seek a waiver allowing for additional time to
complete an amendment to the bank credit agreement.
As part of the waiver agreement, the Company agreed to accelerate by
approximately 2 1/2- months the annual reduction in the revolving credit
facility set forth in the credit agreement. The $30 million reduction,
originally scheduled for October 1, 2005, results in the Company's credit
facility becoming $290 million (comprised of a $190 million revolving credit
facility and a $100 million term loan). In addition, the Company has informed
its lenders that it does not intend to declare or pay dividends during the
waiver period. The Company will evaluate its future dividend policy in
connection with future borrowing arrangements.
Until the Company's amendment process is completed and the covenants are revised
going-forward, generally accepted accounting principles require that the Company
reclassify its bank debt from long-term to a short-term liability on its balance
sheet. Accordingly, if the July 1, 2005 balance sheet is issued before an
amendment to the credit facility is finalized, long-term debt related to the
credit facility of $276.8 million will be classified as a current liability. The
Company believes that net cash flow expected to be generated from operations,
combined with available borrowings under its credit facilities and current cash
on hand will be sufficient to fully meet its expected capital and liquidity
needs for the foreseeable future, assuming the Company obtains an amended credit
agreement not requiring significant principal reduction in the coming year. At
the end of the third quarter, the Company had cash balances of $13.7 million and
$12.3 million was available under its revolving credit facility (as adjusted by
the waiver agreement discussed above).
Founded in 1988 and based in Kansas City, Missouri, American Italian Pasta
Company is the largest producer and marketer of dry pasta in North America. The
Company has five plants that are located in Excelsior Springs, Missouri;
Columbia, South Carolina; Tolleson, Arizona; Kenosha, Wisconsin and Verolanuova,
Italy. The Company has approximately 600 employees located in the United States
and Italy.
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AIPC
August 9, 2005
Page 7
In this press release, the Company has provided information about the Company's
"core operations". Revenues from core operations is a non-GAAP financial measure
which is useful to investors to understand, in part, the Company's sales levels
and performance. The amount shown is greater than the total reported revenues
under GAAP because of the impact of certain adjustments discussed in this
release totaling $3.8 million. Operating profit from core operations is also a
non-GAAP financial measure which is useful to investors to understand, in part,
the Company's profitability and operating performance. The amount shown differs
from the total operating profit under GAAP because of the impact of certain
adjustments discussed in this release (the amounts of which are not yet
finalized). The Company has provided information about the Company's "free cash
flow" which management believes provides useful information about the Company's
cash generation. Also, these measures are used internally by management and the
Board of Directors to evaluate business performance. These measures may not be
comparable to a similarly titled measure of another company.
When used in this release and documents referenced, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions, as they relate to
the Company or its management are intended to identify forward-looking
statements, but are not the exclusive means of identifying these statements. The
statements by the Company regarding the expected third quarter, fourth quarter
and full fiscal year 2005 financial results, the adjustments expected to be made
to the Company's financial statements, the expected level of adjustments
resulting from the internal investigation by the Audit Committee, the SEC staff
review and the timing of the finalization of the Company's bank credit agreement
amendment are all forward-looking and based on current expectations. Actual
future results or events could differ materially from those anticipated by such
forward-looking statements. The differences could be caused by a number of
factors, including, but not limited to, the completion and findings of the Audit
Committee internal investigation, the SEC staff review, and the timing of the
finalization of financial statement adjustments and the conclusions reached
regarding financial reporting and the willingness of the Company's lenders to
amend the terms of the credit agreement. In addition, future operating results
are impacted by a number of factors, including but not limited to, our
dependence on a limited number of customers for a substantial portion of our
revenue, our ability to fully implement our restructuring program, our ability
to obtain necessary raw materials and minimize fluctuations in raw material
prices, the impact of the highly competitive environment in which we operate,
our reliance exclusively on a single product category, our ability to attract
and retain key personnel, and our ability to cost-effectively transport our
products. For additional discussion of the principal factors that could cause
actual results to be materially different, refer to our report on Form 10-K
dated December 10, 2004 filed by the Company with the Securities and Exchange
Commission. The Company will not update any forward-looking statements in this
press release to reflect future events.
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