Table of Contents
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 October 28, 2007
OR
¨ | 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 001-14335
DEL MONTE FOODS COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 13-3542950 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
One Market @ The Landmark, San Francisco, California 94105
(Address of Principal Executive Offices including Zip Code)
(415) 247-3000
(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 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 ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 29, 2007, there were 200,647,300 shares of Del Monte Foods Company Common Stock, par value $0.01 per share, outstanding.
Table of Contents
PART I. | FINANCIAL INFORMATION | 3 | ||
ITEM 1. | FINANCIAL STATEMENTS | 3 | ||
CONDENSED CONSOLIDATED BALANCE SHEETS – October 28, 2007 (Unaudited) and April 29, 2007 | 3 | |||
4 | ||||
5 | ||||
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | 6 | |||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 | ||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 25 | ||
ITEM 4. | CONTROLS AND PROCEDURES | 27 | ||
PART II. | OTHER INFORMATION | 28 | ||
ITEM 1. | LEGAL PROCEEDINGS | 28 | ||
ITEM 1A. | RISK FACTORS | 29 | ||
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 30 | ||
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 31 | ||
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 31 | ||
ITEM 5. | OTHER INFORMATION | 31 | ||
ITEM 6. | EXHIBITS | 32 | ||
33 |
2
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS |
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
October 28, 2007 | April 29, 2007 | |||||||
(unaudited) | (derived from audited financial statements) | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 12.9 | $ | 13.0 | ||||
Trade accounts receivable, net of allowance | 240.9 | 261.1 | ||||||
Inventories | 1,188.1 | 809.9 | ||||||
Prepaid expenses and other current assets | 123.0 | 132.5 | ||||||
TOTAL CURRENT ASSETS | 1,564.9 | 1,216.5 | ||||||
Property, plant and equipment, net | 707.3 | 718.6 | ||||||
Goodwill | 1,381.4 | 1,389.3 | ||||||
Intangible assets, net | 1,195.2 | 1,198.6 | ||||||
Other assets, net | 34.0 | 38.5 | ||||||
TOTAL ASSETS | $ | 4,882.8 | $ | 4,561.5 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Accounts payable and accrued expenses | $ | 586.0 | $ | 508.7 | ||||
Short-term borrowings | 245.9 | 21.8 | ||||||
Current portion of long-term debt | 34.5 | 29.4 | ||||||
TOTAL CURRENT LIABILITIES | 866.4 | 559.9 | ||||||
Long-term debt | 1,932.1 | 1,951.9 | ||||||
Deferred tax liabilities | 375.3 | 368.0 | ||||||
Other non-current liabilities | 239.8 | 229.5 | ||||||
TOTAL LIABILITIES | 3,413.6 | 3,109.3 | ||||||
Stockholders’ equity: | ||||||||
Common stock ($0.01 par value per share, shares authorized: | ||||||||
500,000,000; 214,595,914 issued and 202,360,842 outstanding at October 28, 2007 and 214,208,733 issued and 202,211,661 outstanding at April 29, 2007) | $ | 2.1 | $ | 2.1 | ||||
Additional paid-in capital | 1,028.7 | 1,021.7 | ||||||
Treasury stock, at cost | (136.7 | ) | (133.1 | ) | ||||
Accumulated other comprehensive income | 24.5 | 24.4 | ||||||
Retained earnings | 550.6 | 537.1 | ||||||
TOTAL STOCKHOLDERS’ EQUITY | 1,469.2 | 1,452.2 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 4,882.8 | $ | 4,561.5 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | |||||||||||||
(unaudited) | ||||||||||||||||
Net sales | $ | 938.1 | $ | 893.5 | $ | 1,691.6 | $ | 1,567.6 | ||||||||
Cost of products sold | 704.4 | 649.0 | 1,272.6 | 1,158.7 | ||||||||||||
Gross profit | 233.7 | 244.5 | 419.0 | 408.9 | ||||||||||||
Selling, general and administrative expense | 152.0 | 162.6 | 293.2 | 286.1 | ||||||||||||
Operating income | 81.7 | 81.9 | 125.8 | 122.8 | ||||||||||||
Interest expense | 41.0 | 42.9 | 79.0 | 73.4 | ||||||||||||
Other (income) expense | (1.7 | ) | 0.1 | (1.1 | ) | 0.4 | ||||||||||
Income from continuing operations before income taxes | 42.4 | 38.9 | 47.9 | 49.0 | ||||||||||||
Provision for income taxes | 15.7 | 15.2 | 17.7 | 17.9 | ||||||||||||
Income from continuing operations | 26.7 | 23.7 | 30.2 | 31.1 | ||||||||||||
Loss from discontinued operations before income taxes | (1.4 | ) | (0.8 | ) | (1.4 | ) | (2.7 | ) | ||||||||
Benefit for income taxes | (0.6 | ) | (0.3 | ) | (0.6 | ) | (1.0 | ) | ||||||||
Loss from discontinued operations | (0.8 | ) | (0.5 | ) | (0.8 | ) | (1.7 | ) | ||||||||
Net income | $ | 25.9 | $ | 23.2 | $ | 29.4 | $ | 29.4 | ||||||||
Earnings per common share | ||||||||||||||||
Basic: | ||||||||||||||||
Continuing Operations | $ | 0.13 | $ | 0.12 | $ | 0.15 | $ | 0.16 | ||||||||
Discontinued Operations | (0.00 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||
Total | $ | 0.13 | $ | 0.11 | $ | 0.14 | $ | 0.15 | ||||||||
Diluted: | ||||||||||||||||
Continuing Operations | $ | 0.13 | $ | 0.12 | $ | 0.15 | $ | 0.15 | ||||||||
Discontinued Operations | (0.00 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||
Total | $ | 0.13 | $ | 0.11 | $ | 0.14 | $ | 0.14 | ||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended | ||||||||
October 28, 2007 | October 29, 2006 | |||||||
(unaudited) | ||||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 29.4 | $ | 29.4 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 51.9 | 49.2 | ||||||
Deferred taxes | 12.2 | 14.0 | ||||||
(Gain)/loss on asset disposals | 1.7 | (0.8 | ) | |||||
Stock compensation expense | 2.7 | 7.3 | ||||||
Other non-cash items, net | 0.5 | 3.0 | ||||||
Changes in operating assets and liabilities | (248.7 | ) | (210.0 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | (150.3 | ) | (107.9 | ) | ||||
INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (45.2 | ) | (34.1 | ) | ||||
Net proceeds from disposal of assets | 2.2 | 8.8 | ||||||
Net cash used in business acquisitions | — | (1,310.3 | ) | |||||
Decrease in restricted cash | — | 43.3 | ||||||
Other, net | (0.6 | ) | — | |||||
NET CASH USED IN INVESTING ACTIVITIES | (43.6 | ) | (1,292.3 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from short-term borrowings | 341.9 | 570.6 | ||||||
Payments on short-term borrowings | (117.8 | ) | (282.0 | ) | ||||
Proceeds from long-term debt | — | 745.0 | ||||||
Principal payments on long-term debt | (14.7 | ) | (55.2 | ) | ||||
Payments of debt-related costs | — | (10.0 | ) | |||||
Dividends paid | (16.2 | ) | (16.0 | ) | ||||
Issuance of common stock | 3.3 | 9.2 | ||||||
Purchase of treasury stock | (2.5 | ) | — | |||||
Excess tax benefits from stock-based compensation | 0.1 | 0.8 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 194.1 | 962.4 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (0.3 | ) | (0.1 | ) | ||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (0.1 | ) | (437.9 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 13.0 | 459.9 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 12.9 | $ | 22.0 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended October 28, 2007
(In millions, except share and per share data)
(Unaudited)
Note 1. Business and Basis of Presentation
Del Monte Foods Company and its consolidated subsidiaries (“Del Monte” or the “Company”) is one of the country’s largest producers, distributors and marketers of premium quality, branded food and pet products for the U.S. retail market, with leading food brands, such asDel Monte,StarKist,S&W, Contadina, College Inn and other brand names and premier foods and snacks for pets, with brands includingMeow Mix, Kibbles ‘n Bits,9Lives,Milk-Bone, Pup-Peroni,Meaty Bone, Snausages, Pounce and other brand names. The Company also produces private label food and pet products. The majority of its products are sold nationwide in all channels serving retail markets, mass merchandisers, the U.S. military, certain export markets, the foodservice industry and food processors.
On May 19, 2006, Del Monte Corporation, a direct, wholly-owned subsidiary of Del Monte Foods Company, completed the acquisition of Meow Mix Holdings, Inc. (“Meow Mix”), the maker ofMeow Mix brand cat food andAlley Cat brand cat food. Effective July 2, 2006, Del Monte Corporation completed the acquisition of certain pet product assets, including theMilk-Bonebrand (“Milk-Bone”), from Kraft Foods Global, Inc.
The Company has two reportable segments: Consumer Products and Pet Products. The Consumer Products reportable segment includes the Consumer Products operating segment, which manufactures, markets and sells branded and private label shelf-stable products, including fruit, vegetable, tomato, broth and tuna products. The Pet Products reportable segment includes the Pet Products operating segment, which manufactures, markets and sells branded and private label dry and wet pet food and pet snacks.
The Company operates on a 52 or 53-week fiscal year ending on the Sunday closest to April 30. The results of operations for the three months ended October 28, 2007 and October 29, 2006 each reflect periods that contain 13 weeks. The results of operations for the six months ended October 28, 2007 and October 29, 2006 each reflect periods that contain 26 weeks.
The accompanying unaudited condensed consolidated financial statements of Del Monte as of October 28, 2007 and for the three and six months ended October 28, 2007 and October 29, 2006 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements. Therefore, actual results could differ from those estimates. Furthermore, operating results for the three and six months ended October 28, 2007 are not necessarily indicative of the results expected for the year ending April 27, 2008. These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the financial statements contained in the Company’s annual report on Form 10-K for the year ended April 29, 2007 (“2007 Annual Report”). All significant intercompany balances and transactions have been eliminated.
Note 2. Employee Stock Plans
See Note 10 of the 2007 Annual Report for a description of the Company’s stock-based incentive plans. On August 3, 2007, the Board of Directors (the “Board”) adopted the Del Monte Foods Company 2002 Stock Incentive Plan, as amended and restated effective August 6, 2007, subject to stockholder approval (the “Amended Plan”). The Amended Plan was approved by the Company’s stockholders at its annual meeting held on September 27, 2007. Under the Amended Plan, the total number of shares authorized for grant was increased by 5,392,927 shares to 31,558,740 shares. In addition, shares of common stock issued pursuant to equity incentives granted under the Amended Plan on or after April 30, 2007 reduce the Amended Plan’s share reserve by one share in the case of options and stock appreciation rights with exercise prices at least equal to fair market value of the Company’s common stock on the grant date and by 2.79 shares in the case of all other equity incentives granted under the Amended Plan. However, for such other stock awards granted prior to April 30, 2007 but on or after May 2, 2005, the reduction is 1.94 shares instead of 2.79 shares. For all awards granted prior to May 2, 2005, the number of shares of common stock available for issuance under the Amended Plan is reduced by 1 share for each share of common stock issued.
6
Table of Contents
The fair value for stock options granted was estimated at the date of grant using a Black-Scholes option-pricing model. The following table presents the weighted average assumptions for the six months ended October 28, 2007 and October 29, 2006:
Six Months Ended | ||||||
October 28, 2007 | October 29, 2006 | |||||
Dividend yield | 1.4 | % | 1.4 | % | ||
Expected volatility | 26.4 | % | 30.7 | % | ||
Risk-free interest rate | 4.4 | % | 4.7 | % | ||
Expected life (in years) | 7.0 | 7.0 |
Stock option activity and related information during the period indicated was as follows:
Options Outstanding | Outstanding Weighted Average Exercise Price | Options Exercisable | Exercisable Weighted Average Exercise Price | ||||||||
Balance at April 29, 2007 | 14,887,766 | $ | 9.61 | 8,918,675 | $ | 9.14 | |||||
Granted | 2,282,500 | 10.33 | |||||||||
Forfeited | (86,121 | ) | 10.68 | ||||||||
Exercised | (376,088 | ) | 8.65 | ||||||||
Balance at October 28, 2007 | 16,708,057 | $ | 9.73 | 10,888,467 | $ | 9.35 | |||||
As of October 28, 2007, the aggregate intrinsic values of options outstanding and options exercisable were $16.0 and $15.2, respectively.
At October 28, 2007, the range of exercise prices and weighted-average remaining contractual life of outstanding options was as follows:
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Price Per Share | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
$6.04 - 8.87 | 6,060,752 | 5.08 | $ | 8.06 | 6,060,752 | $ | 8.06 | |||||
$8.90 - 10.37 | 6,465,546 | 8.82 | 10.30 | 1,684,887 | 10.22 | |||||||
$10.42 - 15.85 | 4,181,759 | 5.53 | 11.26 | 3,142,828 | 11.38 | |||||||
$6.04 - 15.85 | 16,708,057 | 6.64 | $ | 9.73 | 10,888,467 | $ | 9.35 | |||||
7
Table of Contents
Other stock-based compensation activity and related information during the period indicated was as follows:
Performance Accelerated Restricted Stock Units | Deferred Stock Units | Board of Directors Restricted Stock Units | Performance Shares | ||||||||
Balance at April 29, 2007 | 880,795 | 277,949 | 54,033 | 1,340,400 | |||||||
Granted | 294,700 | 79,666 | 54,243 | — | |||||||
Forfeited | (4,906 | ) | — | — | (112,177 | ) | |||||
Issued as common stock | (4,918 | ) | — | (7,719 | ) | — | |||||
Transferred to deferred stock units | — | 10,292 | (10,292 | ) | — | ||||||
Balance at October 28, 2007 | 1,165,671 | 367,907 | 90,265 | 1,228,223 | |||||||
Note 3. Discontinued Operations
The pre-tax loss from discontinued operations of $1.4 for the three and six months ended October 28, 2007 primarily relates to state unemployment taxes related to the Company’s soup and infant feeding businesses that were sold in fiscal year 2006. In September 2007, the Company received a tax bill of approximately $3.1 for Pennsylvania unemployment compensation tax for the period January 1, 2003 through June 30, 2007, of which approximately $1.1 related to discontinued operations.
Note 4. Inventories
The Company’s inventories consist of the following:
October 28, 2007 | April 29, 2007 | ||||||
Inventories: | |||||||
Finished products | $ | 1,064.1 | $ | 618.0 | |||
Raw materials and in-process material | 57.2 | 56.0 | |||||
Packaging material and other | 69.0 | 130.3 | |||||
LIFO Reserve | (2.2 | ) | 5.6 | ||||
TOTAL INVENTORIES | $ | 1,188.1 | $ | 809.9 | |||
Note 5. Goodwill and Intangible Assets
The following table presents the Company’s goodwill and intangible assets:
October 28, 2007 | April 29, 2007 | |||||||
Goodwill | $ | 1,381.4 | $ | 1,389.3 | ||||
Non-amortizable intangible assets: | ||||||||
Trademarks | 1,071.8 | 1,071.2 | ||||||
Amortizable intangible assets: | ||||||||
Trademarks | 71.2 | 71.2 | ||||||
Customer relationships | 89.0 | 89.0 | ||||||
Other | 11.4 | 11.4 | ||||||
171.6 | 171.6 | |||||||
Accumulated amortization | (48.2 | ) | (44.2 | ) | ||||
Amortizable intangible assets, net | 123.4 | 127.4 | ||||||
Intangible assets, net | $ | 1,195.2 | $ | 1,198.6 | ||||
As of October 28, 2007, the Company’s goodwill was comprised of $193.1 related to the Consumer Products reportable segment and $1,188.3 related to the Pet Products reportable segment. As of April 29, 2007, the Company’s goodwill was comprised of $193.1 related to the Consumer Products reportable segment and $1,196.2 related to the Pet Products reportable segment.
8
Table of Contents
Amortization expense for the three and six months ended October 28, 2007 was $2.0 and $4.0, respectively, and $2.1 and $3.8 for the three and six months ended October 29, 2006, respectively. The Company expects to recognize $3.9 of amortization expense during the remainder of fiscal 2008. The following table presents expected amortization of intangible assets as of October 28, 2007, for each of the five succeeding fiscal years:
2009 | $ | 7.8 | |
2010 | 7.6 | ||
2011 | 7.4 | ||
2012 | 5.8 | ||
2013 | 5.7 |
Note 6. Assets Held For Sale
Included in prepaid expenses and other current assets are certain real properties that are classified as assets held for sale. Assets held for sale totaled $6.3 and $1.5 as of October 28, 2007 and April 29, 2007, respectively. During the three and six months ended October 28, 2007, the Company sold $2.1 of assets held for sale and recognized a gain of $0.8 on the sale. During the six months ended October 29, 2006, the Company sold $3.8 of assets held for sale and recognized a gain of $0.4 on the sale.
Note 7. Earnings Per Share
The following tables set forth the computation of basic and diluted earnings per share from continuing operations:
Three Months Ended | Six Months Ended | |||||||||||
October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | |||||||||
Basic earnings per common share: | ||||||||||||
Numerator: | ||||||||||||
Net income from continuing operations | $ | 26.7 | $ | 23.7 | $ | 30.2 | $ | 31.1 | ||||
Denominator: | ||||||||||||
Weighted average shares | 202,863,770 | 201,194,803 | 202,738,769 | 200,811,293 | ||||||||
Basic earnings per common share | $ | 0.13 | $ | 0.12 | $ | 0.15 | $ | 0.16 | ||||
Diluted earnings per common share: | ||||||||||||
Numerator: | ||||||||||||
Net income from continuing operations | $ | 26.7 | $ | 23.7 | $ | 30.2 | $ | 31.1 | ||||
Denominator: | ||||||||||||
Weighted average shares | 202,863,770 | 201,194,803 | 202,738,769 | 200,811,293 | ||||||||
Effect of dilutive securities | 2,511,903 | 2,340,704 | 2,758,517 | 2,536,801 | ||||||||
Weighted average shares and equivalents | 205,375,673 | 203,535,507 | 205,497,286 | 203,348,094 | ||||||||
Diluted earnings per common share | $ | 0.13 | $ | 0.12 | $ | 0.15 | $ | 0.15 | ||||
The computation of diluted earnings per share calculates the effect of dilutive securities on weighted average shares. Dilutive securities include stock options, restricted stock units and other deferred stock awards.
Options outstanding in the aggregate amounts of 7,061,955 and 4,519,331 were not included in the computation of diluted earnings per share for the three and six months ended October 28, 2007, respectively, because their inclusion would be antidilutive. Options outstanding in the aggregate amounts of 8,560,667 and 7,248,627 were not included in the computation of diluted earnings per share for the three and six months ended October 29, 2006, respectively, because their inclusion would be antidilutive.
9
Table of Contents
Note 8. Debt
The Company’s debt consists of the following, as of the dates indicated:
October 28, 2007 | April 29, 2007 | |||||
Short-term borrowings: | ||||||
Revolving credit facility | $ | 245.6 | $ | 21.0 | ||
Other | 0.3 | 0.8 | ||||
$ | 245.9 | $ | 21.8 | |||
Long-term debt: | ||||||
Term A Loan | $ | 388.8 | $ | 399.1 | ||
Term B Loan | 877.8 | 882.2 | ||||
Total Term Loans | 1,266.6 | 1,281.3 | ||||
8 5/8% senior subordinated notes | 450.0 | 450.0 | ||||
6 3/4% senior subordinated notes | 250.0 | 250.0 | ||||
1,966.6 | 1,981.3 | |||||
Less current portion | 34.5 | 29.4 | ||||
$ | 1,932.1 | $ | 1,951.9 | |||
The Company borrowed $226.3 from its revolving credit facility during the three months ended October 28, 2007. A total of $63.3 was repaid during the three months ended October 28, 2007. During the six months ended October 28, 2007, the Company borrowed $341.9 from the revolving credit facility and repaid $117.3. As of October 28, 2007, the net availability under the revolving credit facility, reflecting $40.0 of outstanding letters of credit, was $164.4. The blended interest rate on the revolving credit facility was approximately 6.82% on October 28, 2007. Additionally, to maintain availability of funds under the revolving credit facility, the Company pays a 0.375% commitment fee on the unused portion of the revolving credit facility.
The Company is scheduled to repay $14.7 of its long-term debt during the remainder of fiscal 2008. Scheduled maturities of long-term debt for each of the five succeeding fiscal years are as follows:
2009 | $ | 39.6 | |
2010 | 49.8 | ||
2011 | 494.1 | ||
2012 | 1,118.4 | ||
2013 | — |
Agreements relating to the Company’s long-term debt, including the credit agreement governing its senior credit facility (as amended through August 15, 2006, the “Amended Senior Credit Facility”) and the indentures governing the senior subordinated notes, contain covenants that restrict the ability of Del Monte Corporation and its subsidiaries, among other things, to incur or guarantee indebtedness, issue capital stock, pay dividends on and redeem capital stock, prepay certain indebtedness, enter into transactions with affiliates, make other restricted payments, including investments, incur liens, consummate asset sales and enter into consolidations or mergers. Certain of these covenants are also applicable to Del Monte Foods Company. Del Monte is required to meet a maximum leverage ratio and a minimum fixed charge coverage ratio under the Amended Senior Credit Facility. As of October 28, 2007, the Company believes that it is in compliance with all such financial covenants. Beginning in the fourth quarter of fiscal 2008, the maximum permitted leverage ratio decreases over time and the minimum fixed charge coverage ratio increases over time, as set forth in the Amended Senior Credit Facility.
Note 9. Employee Severance Costs
On June 22, 2006, the Company announced a transformation plan, which was approved by the Strategic Committee of the Company’s Board of Directors on June 20, 2006, pursuant to authority granted to such Strategic Committee by the Company’s Board of Directors. The transformation plan was intended to further the Company’s progress against its strategic goal of becoming a more value-added, consumer packaged food company. The plan’s initiatives are focused on strengthening systems and processes, streamlining the organization and leveraging the scale efficiencies from the acquisitions of Meow Mix and Milk-Bone. The Company communicated to affected employees that their employment would be terminated as part of the transformation plan during fiscal 2007 and the first quarter of fiscal 2008. Termination benefits and severance costs are expensed as part of selling, general and administrative expense and are recorded as corporate expenses, as it is the Company’s policy to record such restructuring expenses as corporate expenses.
10
Table of Contents
The following table reconciles the beginning and ending accrued transformation-related termination and severance costs:
Accrued termination and severance costs - April 29, 2007 | $ | 2.0 | ||
Termination and severance costs incurred | 0.8 | |||
Amounts utilized | (1.4 | ) | ||
Accrued termination and severance costs - July 29, 2007 | 1.4 | |||
Termination and severance costs incurred | — | |||
Amounts utilized | — | |||
Accrued termination and severance costs - October 28, 2007 | $ | 1.4 | ||
Note 10. Comprehensive Income
The following table reconciles net income to comprehensive income:
Three Months Ended | Six Months Ended | |||||||||||||
October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | |||||||||||
Net income | $ | 25.9 | $ | 23.2 | $ | 29.4 | $ | 29.4 | ||||||
Other comprehensive income (loss): | ||||||||||||||
Foreign currency translation adjustments | 1.5 | 0.1 | 2.0 | — | ||||||||||
Income (loss) on cash flow hedging instruments, net of tax | (0.3 | ) | 1.1 | (1.9 | ) | 0.9 | ||||||||
Total other comprehensive income | 1.2 | 1.2 | 0.1 | 0.9 | ||||||||||
Comprehensive income | $ | 27.1 | $ | 24.4 | $ | 29.5 | $ | 30.3 | ||||||
Note 11. Retirement Benefits
Defined Benefit Plans.
Del Monte sponsors three defined benefit pension plans and several unfunded defined benefit postretirement plans providing certain medical, dental and life insurance benefits to eligible retired, salaried, non-union hourly and union employees. Refer to Note 12 of the 2007 Annual Report for a description of these plans. The components of net periodic benefit cost of such plans for the three and six months ended October 28, 2007 and October 29, 2006, respectively, are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||
October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | |||||||||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||||||||||
Service cost for benefits earned during the period | $ | 3.0 | $ | 2.9 | $ | 0.6 | $ | 0.4 | $ | 6.0 | $ | 5.7 | $ | 1.1 | $ | 0.8 | ||||||||||||||||
Interest cost on projected benefit obligation | 5.9 | 6.2 | 1.7 | 1.6 | 11.9 | 12.3 | 3.5 | 3.2 | ||||||||||||||||||||||||
Expected return on plan assets | (6.6 | ) | (6.4 | ) | — | — | (13.2 | ) | (12.7 | ) | — | — | ||||||||||||||||||||
Amortization of prior service cost/(credits) | 0.3 | 0.2 | (2.1 | ) | (2.1 | ) | 0.5 | 0.5 | (4.2 | ) | (4.2 | ) | ||||||||||||||||||||
Actuarial loss/(gain) | — | 0.2 | — | — | (0.1 | ) | 0.4 | — | — | |||||||||||||||||||||||
Total benefit cost (reduction of benefit cost) | $ | 2.6 | $ | 3.1 | $ | 0.2 | $ | (0.1 | ) | $ | 5.1 | $ | 6.2 | $ | 0.4 | $ | (0.2 | ) | ||||||||||||||
In August 2006, the Pension Protection Act of 2006 (the “Act”) was signed into law. In general, the Act encourages employers to fully fund their defined benefit pension plans. The effect of the Act on the Company is to encourage the Company to fully fund its defined benefit plans by 2011 and meet incremental plan funding thresholds applicable prior to 2011. The Act would impose certain consequences on the Company’s defined benefit plans beginning in calendar 2008 if they do not meet these threshold funding levels. Accordingly, this legislation has resulted in, and in the future may additionally result in, accelerated funding of the Company’s defined benefit pension plans. As of October 28, 2007, the Company had made contributions of $34.4 in fiscal 2008, which included a minimum contribution of approximately $16.0 and an incremental contribution of approximately $18.4, intended to achieve the applicable funding levels necessary to avoid consequences under the Act in calendar 2008. The Company does not expect to make further contributions during the remainder of fiscal 2008. In fiscal 2007, the Company made contributions of $16.9. The Company continues to analyze the full impact of this law on the Company’s financial position, results of operations and cash flows.
Note 12. Income Taxes
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” (“FIN 48”), which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation prescribes a comprehensive
11
Table of Contents
model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. An uncertain tax position is recognized if it is determined that it is more likely than not to be sustained upon examination. The tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The cumulative effect of applying the provisions of this interpretation is reported as a separate adjustment to the opening balance of retained earnings in the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company adopted the provisions of FIN 48 as of the first day of the first fiscal quarter, April 30, 2007. The adoption of FIN 48 resulted in a $0.3 decrease to the liability for unrecognized tax benefits and corresponding cumulative effect increase to retained earnings. Upon adoption, the Company had unrecognized tax benefits of $7.0 of which $6.3 would impact the effective income tax rate if recognized. The Company’s continuing practice is to recognize interest on uncertain tax positions in income tax expense and penalties in selling, general and administrative expense. As of October 28, 2007, the amount of accrued interest included in the non-current income tax liability account is $0.4, net of tax. No penalties are accrued in the unrecognized tax benefits.
There were no significant changes to the liability for unrecognized tax benefits or accrued interest and penalties in the three and six months ended October 28, 2007.
The Company files income tax returns in the U.S. Federal jurisdiction and in many foreign and state jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, is audited and finally resolved. Favorable resolution would be recognized in the period of resolution. The Company expects during the next 12 months to close a tax year to audit. Should this occur, the liability for unrecognized tax benefits would decrease by approximately $2.0.
The Company has open tax years from primarily 2001 to 2006 with various significant taxing jurisdictions including the United States, American Samoa and Canada. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses as determined by the various taxing jurisdictions.
Note 13. Legal Proceedings
Except as set forth below, there have been no material developments in the legal proceedings reported in the Company’s 2007 Annual Report:
As previously reported in the Company’s 2007 Annual Report, beginning with the pet food recall announced by Menu Foods, Inc. in March 2007, many major pet food manufacturers, including the Company, announced recalls of select products. The Company currently believes there are over 90 purported class actions relating to these pet food recalls. To date, the Company is a defendant in seven purported class actions related to its pet food and pet snack recall, which it initiated March 31, 2007. However, the Company may be named in additional cases.
As previously reported in the Company’s quarterly report on Form 10-Q for the period ended July 29, 2007, the Company is currently a defendant in the following cases:
• | Blaszkowski v. Del Monte filed on May 9, 2007 in the U.S. District Court for the Southern District of Florida; |
• | Carver v. Del Monte filed on April 4, 2007 in the U.S. District Court for the Eastern District of California; |
• | Ford v. Del Monte filed on April 7, 2007 in the U.S. District Court for the Southern District of California; |
• | Hart v. Del Monte filed on April 10, 2007 in state court in Los Angeles, California (this case was previously reported in the Company’s quarterly report on Form 10-Q for the period ended July 29, 2007 as Wahl v. Del Monte; the name of the case has changed because the previously named plaintiffs have been replaced); |
• | Picus v. Del Monte filed on April 30, 2007 in state court in Las Vegas, Nevada; |
• | Schwinger v. Del Monte filed on May 15, 2007 in U.S. District Court for the Western District of Missouri; and |
• | Tompkins v. Del Monte filed on July 13, 2007 in U.S. District Court for the District of Colorado. |
By order dated June 28, 2007, the Carver, Ford, Hart, Schwinger, and Tompkins cases were transferred to the U.S. District Court for the District of New Jersey and consolidated with other pet food class actions under the federal rules for multi-district litigation. The Blaszkowski and Picus cases were not consolidated. On October 12, 2007, the Company filed a Motion to Dismiss in the Blaszkowski case. The court has not issued a ruling on this motion. On October 12, 2007, the Company filed a Motion to Dismiss in the Picus case. The state court granted the Company’s motion in part and denied the motion in part.
12
Table of Contents
The named plaintiffs allege that their pets suffered injury and/or death as a result of ingesting the Company’s and other defendants’ allegedly contaminated pet food and pet snack products. The Blaszkowski and Picus cases also contain allegations of false and misleading advertising by the Company. The plaintiffs are seeking certification of class actions in the respective jurisdictions as well as unspecified damages and injunctive relief against further distribution of the allegedly defective products. The Company plans to deny these allegations and vigorously defend itself. The Company believes it has adequate insurance to cover any material liability in these cases.
Del Monte is also involved from time to time in various legal proceedings incidental to its business, including proceedings involving product liability claims, worker’s compensation and other employee claims, tort claims and other general liability claims, for which the Company carries insurance, as well as trademark, copyright, patent infringement and related litigation. Additionally, Del Monte is involved from time to time in claims relating to environmental remediation and similar events. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that none of these legal proceedings will have a material adverse effect on its financial position.
Note 14. Segment Information
During the first quarter of fiscal 2008, the Company made changes in its internal reporting of certain product groupings. This event, combined with management changes and the relocation of certain business functions, led the Company to determine that these reporting and other changes resulted in a change to the Company’s operating segments. The former Del Monte Brands and StarKist Seafood operating segments have been combined into one operating segment: Consumer Products. As the former Del Monte Brands and StarKist Seafood operating segments were previously aggregated for segment reporting, this operating segment change did not affect the Company’s reportable segments.
The Company has the following reportable segments:
• | The Consumer Products reportable segment includes the Consumer Products operating segment, which manufactures, markets and sells branded and private label shelf-stable products, including fruit, vegetable, tomato, broth and tuna products. |
• | The Pet Products reportable segment includes the Pet Products operating segment, which manufactures, markets and sells branded and private label dry and wet pet food and pet snacks. |
The Company’s chief operating decision-maker, its Chief Executive Officer, reviews financial information presented on a consolidated basis accompanied by disaggregated information on net sales and operating income, by operating segment, for purposes of making decisions and assessing financial performance. The chief operating decision-maker reviews assets of the Company on a consolidated basis only. The accounting policies of the individual operating segments are the same as those of the Company.
The following table presents financial information about the Company’s reportable segments:
Three Months Ended | Six Months Ended | |||||||||||||||
October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | |||||||||||||
Net Sales: | ||||||||||||||||
Consumer Products | $ | 593.5 | $ | 566.5 | $ | 1,038.1 | $ | 987.1 | ||||||||
Pet Products | 344.6 | 327.0 | 653.5 | 580.5 | ||||||||||||
Total Company | $ | 938.1 | $ | 893.5 | $ | 1,691.6 | $ | 1,567.6 | ||||||||
Operating Income: | ||||||||||||||||
Consumer Products | $ | 45.7 | $ | 52.6 | $ | 59.6 | $ | 78.4 | ||||||||
Pet Products | 48.1 | 53.7 | 95.5 | 90.3 | ||||||||||||
Corporate (a) | (12.1 | ) | (24.4 | ) | (29.3 | ) | (45.9 | ) | ||||||||
Total Company | $ | 81.7 | $ | 81.9 | $ | 125.8 | $ | 122.8 | ||||||||
(a) | Corporate represents expenses not directly attributable to reportable segments. For the three months ended October 28, 2007 and October 29, 2006, Corporate includes $2.5 and $10.8 of transformation-related expenses, respectively, including all severance-related restructuring costs. For the six months ended October 28, 2007 and October 29, 2006, Corporate includes $7.7 and $20.0 of transformation-related expenses, respectively, including all severance-related restructuring costs. |
13
Table of Contents
Note 15. Share Repurchase
On September 27, 2007, the Board authorized the repurchase of up to $200 million of the Company’s common stock over the next 36 months. Under this authorization, repurchases may be made from time to time through a variety of methods, including open market purchases, privately negotiated transactions, and block transactions. As of October 28, 2007, Del Monte has repurchased 238,000 shares of its common stock for a total cash outlay of $2.5 and at an average price $10.49 per share.
Note 16. Subsequent Events
On November 21, 2007, the Company entered into an Asset Sale Agreement with S&W Foods International Limited (“S&W International”), an affiliate of Del Monte Philippines, Inc., both unrelated companies to Del Monte, to sell the S&W brand for all markets outside of North and South America, Australia and New Zealand and certain related assets. As part of the transaction, S&W International granted the Company a perpetual royalty-free license for canned fruits, canned vegetables, canned tomato products and dry soaked beans in certain specified countries in Western Europe. Under the terms of the Asset Sale Agreement, S&W International assumed certain customer-related liabilities and paid a purchase price of $10.0 plus the value of salable inventory, as defined in the Asset Sale Agreement.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion is intended to further the reader’s understanding of the consolidated financial condition and results of operations of our company. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended April 29, 2007 (the “2007 Annual Report”). These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A. “Risk Factors” in our 2007 Annual Report and in Part II, Item 1A of this quarterly report on Form 10-Q.
Corporate Overview
Our Business. Del Monte Foods Company and its consolidated subsidiaries (“Del Monte” or the “Company”) is one of the country’s largest producers, distributors and marketers of premium quality, branded food and pet products for the U.S. retail market, with leading food brands such asDel Monte,StarKist,S&W,Contadina andCollege Inn, and food and snack brands for dogs and cats such asMeow Mix, Kibbles ‘n Bits, 9Lives, Milk-Bone, Pup-Peroni, Meaty Bone, Snausages andPounce.
On May 19, 2006, we completed the acquisition of Meow Mix Holdings, Inc. (“Meow Mix”), the maker ofMeow Mix brand cat food andAlley Cat brand cat food. Effective July 2, 2006, we completed the acquisition of certain pet product assets, including theMilk-Bonebrand (“Milk-Bone”), from Kraft Foods Global, Inc.
We have two reportable segments: Consumer Products and Pet Products. During the first quarter of fiscal 2008, we made changes in our internal reporting of certain product groupings. This event, combined with management changes and the relocation of certain business functions, led us to determine that these reporting and other changes resulted in a change to our operating segments. The former Del Monte Brands and StarKist Seafood operating segments have been combined into one operating segment: Consumer Products. As the former Del Monte Brands and StarKist Seafood operating segments were previously aggregated for segment reporting, this operating segment change did not affect our reportable segments. The Consumer Products reportable segment includes the Consumer Products operating segment, which manufactures, markets and sells branded and private label shelf-stable products, including fruit, vegetable, tomato, broth and tuna products. The Pet Products reportable segment includes the Pet Products operating segment, which manufactures, markets and sells branded and private label dry and wet pet food and pet snacks.
14
Table of Contents
Key Performance Indicators
The following is a summary of some of our key performance indicators that we utilize to assess results of operations:
Three Months Ended | |||||||||||||||||||||
October 28, 2007 | October 29, 2006 | Change | % Change | Volume (a) | Rate (b) | ||||||||||||||||
(in millions, except percentages) | |||||||||||||||||||||
Net Sales | $ | 938.1 | $ | 893.5 | $ | 44.6 | 5.0 | % | 3.5 | % | 1.5 | % | |||||||||
Cost of Products Sold | 704.4 | 649.0 | 55.4 | 8.5 | % | 4.5 | % | 4.0 | % | ||||||||||||
Gross Profit | 233.7 | 244.5 | (10.8 | ) | (4.4 | %) | |||||||||||||||
Selling, General and Administrative Expense | 152.0 | 162.6 | (10.6 | ) | (6.5 | %) | |||||||||||||||
Operating Income | $ | 81.7 | $ | 81.9 | $ | (0.2 | ) | (0.2 | %) | ||||||||||||
Gross Margin | 24.9 | % | 27.4 | % | |||||||||||||||||
Selling, General and Administrative Expense as a % of net sales | 16.2 | % | 18.2 | % | |||||||||||||||||
Operating Income Margin | 8.7 | % | 9.2 | % | |||||||||||||||||
Six Months Ended | |||||||||||||||||||||
October 28, 2007 | October 29, 2006 | Change | % Change | Volume (a) | Rate (b) | ||||||||||||||||
(in millions, except percentages) | |||||||||||||||||||||
Net Sales | $ | 1,691.6 | $ | 1,567.6 | $ | 124.0 | 7.9 | % | 6.6 | % | 1.3 | % | |||||||||
Cost of Products Sold | 1,272.6 | 1,158.7 | 113.9 | 9.8 | % | 6.8 | % | 3.0 | % | ||||||||||||
Gross Profit | 419.0 | 408.9 | 10.1 | 2.5 | % | ||||||||||||||||
Selling, General and Administrative Expense | 293.2 | 286.1 | 7.1 | 2.5 | % | ||||||||||||||||
Operating Income | $ | 125.8 | $ | 122.8 | $ | 3.0 | 2.4 | % | |||||||||||||
Gross Margin | 24.8 | % | 26.1 | % | |||||||||||||||||
Selling, General and Administrative Expense as a % of net sales | 17.3 | % | 18.3 | % | |||||||||||||||||
Operating Income Margin | 7.4 | % | 7.8 | % |
(a) | This column represents the change, as compared to the prior year period, due to volume and mix. Volume represents the change resulting from the number of units sold, exclusive of any change in price. Mix represents the change attributable to shifts in volume across products or channels. |
(b) | This column represents the change, as compared to the prior year period, attributable to per unit changes in net sales or cost of products sold. |
Executive Overview
Our second quarter results include net sales of $938.1 million, which represent growth of 5.0% over the second quarter of fiscal 2007. Volume growth from new products and from certain existing products was the primary driver of the growth in net sales. In addition, pricing contributed 1.5% to sales growth, partially offset by volume loss or “elasticity.”
During the second quarter of fiscal 2008, as in fiscal 2007 and the first quarter of fiscal 2008, we continued to see cost escalation. This cost escalation negatively impacted our results of operations despite the cost savings realized from our transformation plan and other cost saving initiatives. Cost increases were driven by higher ingredient, commodity and raw product costs. In particular, in our Pet Products segment, the price of grains, fats and oils has increased related to the demand for alternative fuels and in our Consumer Products segment, skipjack (a type of tuna) costs are near 10-year highs due to low catch rates. While fishing conditions have improved in some regions, challenging fishing conditions in other regions continue to negatively impact global fish prices. During the second quarter of fiscal 2008, pricing actions, combined with our cost saving efforts, only partially offset inflationary and other cost increases. For the remainder of fiscal 2008, we expect that ingredient, commodity, and raw product costs, particularly for grains, fats and oils, as well as fish, will continue to be higher than the prior year. In addition, diesel costs are also expected to continue to be higher than the prior year. As a result of cost increases, we have announced pricing actions for certain vegetable and tomato products in the second half of the fiscal year.
Our operating income for the three months ended October 28, 2007 was $81.7 million, which represented a decrease of $0.2 million or 0.2% compared to the three months ended October 29, 2006. In addition, we incurred $3.2 million in expenses during the second quarter of fiscal 2008 related to the transformation plan described below, as compared to $11.4 million of transformation expense for three months ended October 29, 2006. There were no integration costs for the three months ended October 28, 2007, compared to $6.2 million for the three months ended October 27, 2006. Operating margin decreased by 50 basis points to 8.7% for the second quarter of fiscal 2008 primarily as a result of increased costs.
15
Table of Contents
Transformation Plan
On June 22, 2006, we announced a transformation plan to further our progress against our strategic goal of becoming a more value-added consumer packaged food company. The plan’s initiatives, which are focused on strengthening systems and processes, streamlining the organization and leveraging the scale efficiencies expected from the pet acquisitions noted above, are anticipated to improve our competitiveness and enhance our overall performance.
As part of our plan, we are focusing on the following initiatives:
• | Implementing supply chain efficiencies to improve order management, supply chain planning, execution and inventory reduction capabilities. |
• | Optimizing our dry pet manufacturing matrix to fully leverage our larger, post-acquisition scale to lower delivered costs. |
• | Streamlining the organization by eliminating management layers in order to shorten lines of communication and accelerate decision-making, as well as to broaden responsibilities and expand opportunities so we can retain and attract top talent. |
• | Implementing enhanced trade fund management capabilities by increasing and upgrading systems and processes used to fund and track promotions. |
We expect to incur total costs associated with these initiatives from inception through the end of fiscal 2008 of approximately $110 million, including $46 million of pre-tax cash expenses, $54 million in anticipated capital expenditures and $10 million of pre-tax non-cash expenses. As of October 28, 2007, we have incurred approximately $82.8 million of these expected total costs, including approximately $37.6 million of pre-tax cash expenses, approximately $37.9 million of capital expenditures and approximately $7.3 million of pre-tax non-cash expenses. Cash and non-cash transformation plan expenses are recorded as selling, general and administrative expense. We began to generate savings in fiscal 2007, and expect to capture annualized pre-tax savings of approximately $40 million by the end of fiscal 2008 and approximately $50 million by the end of fiscal 2009, primarily impacting cost of products sold.
Critical Accounting Policies and Estimates
Our discussion and analysis of the financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we reevaluate our estimates, including those related to trade promotions, retirement benefits, goodwill and intangibles, and retained-insurance liabilities. Estimates in the assumptions used in the valuation of our stock option expense are updated periodically and reflect conditions that existed at the time of each new issuance of stock options. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and therefore, these estimates routinely require adjustment.
Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this quarterly report on Form 10-Q. Our significant accounting policies are more fully described in Note 2 to our Consolidated Financial Statements included in our 2007 Annual Report. The following is a summary of the more significant judgments and estimates used in the preparation of our consolidated financial statements:
Trade Promotions
Trade promotions are an important component of the sales and marketing of our products, and are critical to the support of our business. Trade promotion costs include amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, to advertise our products in their circulars, to obtain favorable display positions in their stores, and to obtain shelf space. We accrue for trade promotions, primarily at the time products are sold to customers, by reducing sales and recording a corresponding accrued liability. The amount we accrue is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer and consumer participation, and sales and payment trends with similar previously offered programs. Our original estimated costs of trade promotions are reasonably likely to change in the future as a result of changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. We perform monthly evaluations of our outstanding trade promotions; making adjustments, where appropriate, to reflect changes in our estimates. The ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by our customers for amounts they consider due to
16
Table of Contents
them. Final determination of the permissible trade promotion amounts due to a customer may take up to 18 months from the product shipment date. Our evaluations during the three and six months ended October 28, 2007 and October 29, 2006 resulted in no significant adjustments to our estimates relating to the trade promotion liability.
Retirement Benefits
We sponsor non-contributory defined benefit pension plans (“DB plans”), defined contribution plans, multi-employer plans and certain other unfunded retirement benefit plans for our eligible employees. The amount of DB plans benefits eligible retirees receive is based on their earnings and age. Retirees may also be eligible for medical, dental and life insurance benefits (“other benefits”) if they meet certain age and service requirements at retirement. Generally, other benefit costs are subject to plan maximums, such that the Company and retiree both share in the cost of these benefits.
Our Assumptions. We utilize independent third-party actuaries to calculate the expense and liabilities related to the DB plans benefits and other benefits. DB plans benefits or other benefits which are expected to be paid are expensed over the employees’ expected service period. The actuaries measure our annual DB plans benefits and other benefits expense by relying on certain assumptions made by us. Such assumptions include:
• | The discount rate used to determine projected benefit obligation and net periodic benefit cost (DB plans benefits and other benefits); |
• | The expected long-term rate of return on assets (DB plans benefits); |
• | The rate of increase in compensation levels (DB plans benefits); and |
• | Other factors including employee turnover, retirement age, mortality and health care cost trend rates. |
These assumptions reflect our historical experience and our best judgment regarding future expectations. The assumptions, the plan assets and the plan obligations are used to measure our annual DB plans benefits expense and other benefits expense.
Since the DB plans benefits and other benefits liabilities are measured on a discounted basis, the discount rate is a significant assumption. The discount rate was determined based on an analysis of interest rates for high-quality, long-term corporate debt at each measurement date. The discount rate used to determine DB plans and other benefits projected benefit obligation as of the balance sheet date is the rate in effect at the measurement date. The same rate is also used to determine DB plans and other benefits expense for the following fiscal year. The long-term rate of return for DB plans’ assets is based on our historical experience, our DB plans’ investment guidelines and our expectations for long-term rates of return. Our DB plans’ investment guidelines are established based upon an evaluation of market conditions, tolerance for risk, and cash requirements for benefit payments.
During the three and six months ended October 28, 2007, we recognized DB plans benefits expense of $2.6 million and $5.1 million, respectively, and other benefits expense of $0.2 million and $0.4 million, respectively. Our remaining fiscal 2008 DB plans benefits expense is currently estimated to be approximately $5.1 million and other benefits expense is currently estimated to be approximately $0.4 million. Our actual future DB plans benefits and other benefits expense amounts may vary depending upon various factors, including the accuracy of our original assumptions and future assumptions.
Goodwill and Intangibles
Del Monte produces, distributes and markets products under many different brand names. Although each of our brand names has value, in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets,” only those that have been purchased have a carrying value on our consolidated balance sheet. During an acquisition, the purchase price is allocated to identifiable assets and liabilities, including brand names and other intangibles, based on estimated fair value, with any remaining purchase price recorded as goodwill.
We have evaluated our capitalized brand names and determined that some have useful lives that generally range from 15 to 40 years (“Amortizing Brands”) and others have indefinite useful lives (“Non-Amortizing Brands”). Non-Amortizing Brands typically have significant market share and a history of strong earnings and cash flow, which we expect to continue into the foreseeable future.
Amortizing Brands are amortized over their estimated useful lives. We review the asset groups containing Amortizing Brands (including related tangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable in accordance with FASB SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds
17
Table of Contents
its fair value. Non-Amortizing Brands and goodwill are not amortized, but are instead tested for impairment at least annually. Non-Amortizing Brands are considered impaired if the carrying value exceeds the estimated fair value. Goodwill is considered impaired if the book value of the reporting unit containing the goodwill exceeds its estimated fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
The estimated fair value of our Non-Amortizing Brands is determined using the relief from royalty method, which is based upon the estimated rent or royalty we would pay for the use of a brand name if we did not own it. For goodwill, the estimated fair value of a reporting unit is determined using the income approach, which is based on the cash flows that the unit is expected to generate over its remaining life, and the market approach, which is based on market multiples of similar businesses. Annually, we engage third-party valuation experts to assist in this process.
Considerable management judgment is necessary in estimating future cash flows, market interest rates, discount factors and other factors affecting the valuation of goodwill and intangibles, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections, and industry information in making such estimates.
We did not recognize any impairment charges for our Amortizing Brands, Non-Amortizing Brands or goodwill during the three and six months ended October 28, 2007 and October 29, 2006. While we currently believe the fair value of all of our intangible assets exceeds carrying value, materially different assumptions regarding future performance and discount rates could result in future impairment losses. In particular, if the performance of StarKist seafood does not improve, we may conclude in connection with any future impairment tests that the estimated fair value of StarKist assets, including goodwill, are less than the book value and recognize an impairment charge. Such impairment would adversely affect our earnings.
Stock Option Expense
We believe an effective way to align the interests of certain employees with those of our stockholders is through employee stock-based incentives. We typically issue two types of employee stock-based incentives: stock options and restricted stock incentives (“Restricted Shares”).
Stock options are stock incentives in which employees benefit to the extent our stock price exceeds the strike price of the stock option before expiration. A stock option is the right to purchase a share of our common stock at a predetermined exercise price. For the stock options that we grant, the employee’s exercise price is typically equivalent to our stock price on the date of the grant (as set forth in our stock incentive plan). Typically, these employees vest in stock options in equal annual installments over a four year period and such options generally have a ten-year term until expiration.
Restricted Shares are stock incentives in which employees receive the rights to own shares of our common stock and do not require the employee to pay an exercise price. Restricted Shares include restricted stock units, performance shares and performance accelerated restricted stock units. Restricted stock units vest over a period of time. Performance shares vest at predetermined points in time if certain corporate performance goals are achieved or are forfeited if such goals are not met. Performance accelerated shares vest at a point in time, which may accelerate if certain stock performance measures are achieved.
Performance shares granted in fiscal 2006 vest solely in connection with the attainment, as determined by DMFC’s Compensation Committee, of predetermined financial goals for each of fiscal 2008, fiscal 2009, and fiscal 2010. Performance shares granted in fiscal 2007 vest solely in connection with the attainment, as determined by DMFC’s Compensation Committee, of predetermined financial goals for each of fiscal 2009, fiscal 2010, and fiscal 2011. Based on current expectations, management has concluded that the achievement of these targets is improbable. As a result, in the second quarter of fiscal 2008, we reversed approximately $3.8 million of prior expense related to these grants, and we have discontinued recording future expense related to these grants.
Fair Value Method of Accounting. We adopted the provisions of SFAS 123R“Share-Based Payment”as of May 1, 2006 and elected to use the modified prospective transition method of adoption.
Our Assumptions.Under the fair value method of accounting for stock-based compensation, we measure stock option expense at the date of grant using the Black-Scholes valuation model. This model estimates the fair value of the options based on a number of assumptions, such as interest rates, employee exercises, the current price and expected volatility of our common stock and expected dividends, if any. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, volatility and dividend yield must be applied. The expected life is the average length of time in which we expect our employees to exercise their options. The risk-free interest rate is based on the expected U.S. Treasury rate over the expected life. Expected stock volatility reflects movements in our stock price over a historical period that
18
Table of Contents
matches the expected life of the options. The dividend yield assumption is based on our recent history of paying quarterly dividends and our expectation that the Board of Directors will continue to declare quarterly dividends at the same rate for the expected life of options granted.
Retained-Insurance Liabilities
Our business exposes us to the risk of liabilities arising out of our operations. For example, liabilities may arise out of claims of employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We manage these risks through various insurance contracts from third-party insurance carriers. We, however, retain an insurance risk for the deductible portion of each claim. For example, the deductible under our loss-sensitive worker’s compensation insurance policy is up to $0.5 million per claim. An independent, third party actuary is engaged to estimate the ultimate costs of certain retained insurance risks. Actuarial determination of our estimated retained-insurance liability is based upon the following factors:
• | Losses which have been reported and incurred by us; |
• | Losses which we have knowledge of but have not yet been reported to us; |
• | Losses which we have no knowledge of but are projected based on historical information from both our Company and our industry; and |
• | The projected costs to resolve these estimated losses. |
Our estimate of retained-insurance liabilities is subject to change as new events or circumstances develop which might materially impact the ultimate cost to settle these losses. During the three and six months ended October 28, 2007, we reduced our estimate of retained-insurance liabilities related to prior years by approximately $2.8 million primarily as a result of favorable claims history. During the three and six months ended October 27, 2006 we experienced no significant adjustments to our estimates.
Results of Operations
The following discussion provides a summary of operating results for the three and six months ended October 28, 2007, compared to the results for the three and six months ended October 29, 2006.
Net sales.
Three Months Ended | ||||||||||||||||||
October 28, 2007 | October 29, 2006 | Change | % Change | Volume (a) | Rate (b) | |||||||||||||
(In millions, except percentages) | ||||||||||||||||||
Net Sales | ||||||||||||||||||
Consumer Products | $ | 593.5 | $ | 566.5 | $ | 27.0 | 4.8 | % | 3.9 | % | 0.9 | % | ||||||
Pet Products | 344.6 | 327.0 | 17.6 | 5.4 | % | 2.7 | % | 2.7 | % | |||||||||
Total | $ | 938.1 | $ | 893.5 | $ | 44.6 | 5.0 | % | ||||||||||
Six Months Ended | ||||||||||||||||||
October 28, 2007 | October 29, 2006 | Change | % Change | Volume (a) | Rate (b) | |||||||||||||
(in millions, except percentages) | ||||||||||||||||||
Net Sales | ||||||||||||||||||
Consumer Products | $ | 1,038.1 | $ | 987.1 | $ | 51.0 | 5.2 | % | 4.4 | % | 0.8 | % | ||||||
Pet Products | $ | 653.5 | 580.5 | 73.0 | 12.6 | % | 10.4 | % | 2.2 | % | ||||||||
Total | $ | 1,691.6 | $ | 1,567.6 | $ | 124.0 | 7.9 | % | ||||||||||
(a) | This column represents the change, as compared to the prior year period, due to volume and mix. Volume represents the change resulting from the number of units sold, exclusive of any change in price. Mix represents the change attributable to shifts in volume across products or channels. |
(b) | This column represents the change, as compared to the prior year period, attributable to per unit changes in net sales or cost of products sold. |
Net sales for the three months ended October 28, 2007 were $938.1 million, an increase of $44.6 million, or 5.0%, compared to $893.5 million for the three months ended October 29, 2006. Net sales for the six months ended October 28, 2007 were $1,691.6 million, an increase of $124.0 million, or 7.9%, compared to $1,567.6 million for the six months ended October 29, 2006.
19
Table of Contents
Net sales in our Consumer Products reportable segment were $593.5 million for the three months ended October 28, 2007, an increase of $27.0 million or 4.8% compared to the three months ended October 29, 2006. This increase was driven primarily by fruit products, including increased volume in certain lower margin products enabled by a higher-yield peach pack in the current year, new product sales, and pricing. In addition, increased volume in certain vegetable products also contributed to the increase. These increases were partially offset by declines in tuna sales.
Net sales in our Consumer Products reportable segment were $1,038.1 million for the six months ended October 28, 2007, an increase of $51.0 million or 5.2% compared to the six months ended October 29, 2006. This increase was driven primarily by fruit products, including new product sales, increased volume in certain existing products (including lower margin fruit products) and pricing. In addition, increased volume in certain vegetable products also contributed to the increase. These increases were partially offset by declines in tuna sales.
Net sales in our Pet Products reportable segment were $344.6 million for the three months ended October 28, 2007, an increase of $17.6 million or 5.4% compared to $327.0 million for the three months ended October 29, 2006. The increase was primarily driven by new product sales, growth inMeow MixandMilk-Bone products, and pricing.
For the six months ended October 28, 2007, net sales in our Pet Products reportable segment were $653.5 million, an increase of $73.0 million or 12.6% compared to $580.5 million for the six months ended October 29, 2006. The increase was primarily driven by a full six months of sales related to the Meow Mix and Milk-Bone acquisitions which were completed during the first quarter of fiscal 2007, as well as growth inMeow Mix andMilk-Bone products and new product sales.
Cost of products sold.Cost of products sold for the three months ended October 28, 2007 was $704.4 million, an increase of $55.4 million, or 8.5%, compared to $649.0 million for the three months ended October 29, 2006. The cost of products sold for the six months ended October 28, 2007 was $1,272.6 million, an increase of $113.9 million, or 9.8%, compared to $1,158.7 million for the six months ended October 29, 2006. These increases were due to increased sales volumes resulting from new products, as well as continued cost increases. Our cost increases were primarily due to higher ingredient, commodity and raw product and other related costs, particularly in grains, fats and oils which primarily impacted our Pet Products segment, and in fish which primarily impacted our Consumer Products segment. In addition, cost of products sold for the six months ended October 28, 2007 increased as a result of a full six months of operations related to the Meow Mix and Milk-Bone acquisitions.
Gross margin. Our gross margin percentage for the three months ended October 28, 2007 decreased 2.5 points to 24.9%, compared to 27.4% for the three months ended October 29, 2006. Net pricing benefited gross margin by 1.1 margin points. These benefits were more than offset by a 2.9 margin point reduction related to the higher costs noted above and a 0.7 margin point reduction related to product mix primarily related to the lower-margin fruit sales noted above.
For the six months ended October 28, 2007, our gross margin percentage decreased by 1.3 points to 24.8%, compared to 26.1% for the six months ended October 29, 2006. Net pricing benefited gross margin by 0.9 margin points. These benefits were more than offset by a 2.2 margin point reduction related to the higher costs noted above.
Selling, general and administrative expense.Selling, general and administrative (“SG&A”) expense for the three months ended October 28, 2007 was $152.0 million, a decrease of $10.6 million, or 6.5%, compared to SG&A of $162.6 million for the three months ended October 29, 2006. Our decrease in SG&A expense was primarily driven by decreased transformation and integration costs. SG&A costs included transformation-related expenses of $2.6 million for the three months ended October 28, 2007, compared to $10.8 million for the three months ended October 29, 2006. There were no integration costs for the three months ended October 28, 2007, compared to $5.6 million in the three months ended October 29, 2006. These decreases were partially offset by increased customer delivery costs, as well as inflationary and other cost increases.
For the six months ended October 28, 2007, selling, general and administrative expense was $293.2 million, an increase of $7.1 million, or 2.5%, compared to SG&A of $286.1 million for the six months ended October 29, 2006. Our increase in SG&A expense was primarily driven by inflationary and other cost increases, as well as incremental SG&A costs primarily associated with operating Meow Mix and Milk-Bone for the full six month period. These increases were partially offset by an $11.7 million decrease in transformation expenses to $8.3 million for the six months ended October 28, 2007, which compared to $20.0 million for the six months ended October 29, 2006, and the absence of the $9.5 million gain on the sale of a perpetual license forS&W branded dry soaked beans and related products as well as the sale of the rights to theS&W trademark in Australia and New Zealand. In addition, there were no integration costs for the six months ended October 28, 2007, compared to $7.8 million in the six months ended October 29, 2006.
20
Table of Contents
Operating income.
Three Months Ended | |||||||||||||||
October 28, 2007 | October 29, 2006 | Change | % Change | ||||||||||||
(In millions, except percentages) | |||||||||||||||
Operating Income | |||||||||||||||
Consumer Products | $ | 45.7 | $ | 52.6 | $ | (6.9 | ) | (13.1 | %) | ||||||
Pet Products | $ | 48.1 | $ | 53.7 | (5.6 | ) | (10.4 | %) | |||||||
Corporate (a) | $ | (12.1 | ) | $ | (24.4 | ) | 12.3 | 50.4 | % | ||||||
Total | $ | 81.7 | $ | 81.9 | $ | (0.2 | ) | (0.2 | %) | ||||||
Six Months Ended | |||||||||||||||
October 28, 2007 | October 29, 2006 | Change | % Change | ||||||||||||
(in millions, except percentages) | |||||||||||||||
Operating Income | |||||||||||||||
Consumer Products | $ | 59.6 | $ | 78.4 | $ | (18.8 | ) | (24.0 | %) | ||||||
Pet Products | $ | 95.5 | $ | 90.3 | 5.2 | 5.8 | % | ||||||||
Corporate (a) | $ | (29.3 | ) | $ | (45.9 | ) | 16.6 | 36.2 | % | ||||||
Total | $ | 125.8 | $ | 122.8 | $ | 3.0 | 2.4 | % | |||||||
(a) | Corporate represents expenses not directly attributable to reportable segments. For the three months ended October 28, 2007 and October 29, 2006, Corporate includes $2.5 million and $10.8 million of transformation-related expenses, respectively, including all severance-related restructuring costs. For the six months ended October 28, 2007 and October 29, 2006, Corporate includes $7.7 million and $20.0 million of transformation-related expenses, respectively, including all severance-related restructuring costs. See below for a discussion of year-over-year changes in corporate expenses. |
Operating income for the three months ended October 28, 2007 was $81.7 million, a decrease of $0.2 million, or 0.2%, compared to operating income of $81.9 million for the three months ended October 29, 2006. For the six months ended October 28, 2007, operating income was $125.8 million, an increase of $3.0 million, or 2.4%, compared to operating income of $122.8 million for the six months ended October 29, 2006.
Our Consumer Products reportable segment operating income decreased by $6.9 million, or 13.1%, to $45.7 million for the three months ended October 28, 2007 from $52.6 million for the three months ended October 29, 2006. This decrease was driven by higher fish and raw product costs. For the six months ended October 28, 2007, our Consumer Products reportable segment operating income decreased by $18.8 million, or 24.0%, to $59.6 million from $78.4 million for the six months ended October 29, 2006. This decrease was driven by the absence of the $9.5 million gain on the sale of a perpetual license forS&W branded dry soaked beans and related products and the sale of the rights to theS&Wtrademark in Australia and New Zealand, as well as higher fish costs and higher raw product costs, partially offset by pricing.
Our Pet Products reportable segment operating income decreased by $5.6 million, or 10.4%, to $48.1 million for the three months ended October 28, 2007 from $53.7 million for the three months ended October 29, 2006. This decrease was driven primarily by the increased costs described above, partially offset by the absence of integration costs and by pricing. For the six months ended October 28, 2007, our Pet Products reportable segment operating income increased by $5.2 million, or 5.8%, to $95.5 million, from $90.3 million for the six months ended October 29, 2006. This increase was driven primarily by the full period impact of the acquisitions, the absence of integration costs, and pricing, partially offset by increased costs described above.
Our corporate expenses decreased by $12.3 million during the three months ended October 28, 2007 compared to the prior year period. This decrease resulted primarily from an $8.3 million decrease in transformation-related expenses from $10.8 million for the three months ended October 29, 2006 to $2.5 million for the three months ended October 28, 2007. In addition, stock compensation expense decreased by approximately $4.6 million, primarily as a result of the reversal of approximately $3.8 million of prior expense related to performance shares as discussed in “Critical Accounting Policies and Estimates”above. Our corporate expenses decreased by $16.6 million during the six months ended October 28, 2007 compared to October 29, 2006. This decrease was primarily due to a decrease in transformation-related expenses from $20.0 million for the six months ended October 29, 2006 to $7.7 million for the six months ended October 28, 2007.
21
Table of Contents
Interest expense. Interest expense decreased $1.9 million, or 4.4%, to $41.0 million for the three months ended October 28, 2007 from $42.9 million for the three months ended October 29, 2006. This decrease resulted primarily from lower average debt levels. Interest expense increased $5.6 million, or 7.6%, to $79.0 million for the six months ended October 28, 2007 from $73.4 million for the six months ended October 29, 2006. This increase was driven by higher average debt levels. We expect our interest expense for the full year to be relatively flat compared to fiscal 2007 levels.
Provision for Income Taxes. The effective tax rate for the three months ended October 28, 2007 was 37.0%, compared to 39.1% for the three months ended October 29, 2006. This decrease is primarily due to the extension of the tax credit for companies operating in American Samoa and the Research tax credit not reflected in the quarter ending October 29, 2006. For the six months ended October 28, 2007, the effective tax rate was 37.0%, an increase of 0.5% from 36.5% for the six months ended October 29, 2006. The increase in the effective tax rate for the six months ended October 28, 2007 was primarily due to the prior year’s rate containing the reversal of valuation allowance relating to foreign net operating loss carryforwards offset by the absence of the tax credits for companies operating in American Samoa and the Research tax credit.
Loss from Discontinued Operations. The loss from discontinued operations of $0.8 million for the three and six months ended October 28, 2007 was primarily related to state unemployment taxes. In September 2007, we received a tax bill of approximately $3.1 million for Pennsylvania unemployment compensation tax for the period January 1, 2003 through June 30, 2007, of which approximately $1.1 million was attributable to discontinued operations. The loss from discontinued operations of $0.5 million for the three months ended October 29, 2006 represents changes in estimates related to our soup and infant feeding businesses that were sold in 2006 (“Soup and Infant Feeding Businesses”). The loss from discontinued operations of $1.7 million for the six months ended October 29, 2006 represents a pre-tax loss of $2.7 million, of which $0.8 million related to reductions in the sales price of the Soup and Infant Feeding Businesses for working capital adjustments and $1.9 million primarily related to changes in estimates related to the Soup and Infant Feeding Businesses.
Liquidity and Capital Resources
We have cash requirements that vary based primarily on the timing of our inventory production for fruit, vegetable and tomato items. Inventory production relating to these items typically peaks during the first and second fiscal quarters. Our most significant cash needs relate to this seasonal inventory production, as well as to continuing cash requirements related to the production of our other products. In addition, our cash is used for the repayment, including interest and fees, of our primary debt obligations (i.e. our revolving credit facility and term loans under our senior credit facility, our senior subordinated notes and, if necessary, our letters of credit), contributions to our pension plans, expenditures for capital assets, lease payments for some of our equipment and properties, expenditures related to our transformation plan, payment of dividends, share repurchases, and other general business purposes. Although we expect to continue to pay dividends, the declaration and payment of future dividends, if any, is subject to determination by our Board of Directors each quarter and is limited by our senior credit facility and indentures. We may from time to time consider other uses for our cash flow from operations and other sources of cash. Such uses may include, but are not limited to, acquisitions, or future transformation or restructuring plans. Our primary sources of cash are typically funds we receive as payment for the products we produce and sell and from our revolving credit facility.
In August 2006, the Pension Protection Act of 2006 (the “Act”) was signed into law. In general, the Act encourages employers to fully fund their defined benefit pension plans. The effect of the Act on Del Monte is to encourage us to fully fund our defined benefit pension plans by 2011 and meet incremental plan funding thresholds applicable prior to 2011. The Act would impose certain consequences on our defined benefit plans beginning in calendar 2008 if they do not meet these threshold funding levels. Accordingly, this legislation has resulted in, and in the future may additionally result in, accelerated funding of our defined benefit pension plans. As of October 28, 2007, we had made contributions of $34.4 million in fiscal 2008, which included a minimum contribution of approximately $16.0 million and an incremental contribution of approximately $18.4 million, intended to achieve the applicable funding levels necessary to avoid consequences under the Act in calendar 2008. We do not expect to make further contributions during the remainder of fiscal 2008. In fiscal 2007, we made contributions of $16.9 million. We continue to analyze the full impact of this law on our financial position, results of operations and cash flows.Refer to Note 12 to the Consolidated Financial Statements in our 2007 Annual Report for a description of our defined benefit pension plans.
On September 27, 2007, our Board of Directors authorized the repurchase of up to $200 million of the Company’s common stock over the next 36 months. Under this authorization, repurchases may be made from time to time through a variety of methods, including open market purchases, privately negotiated transactions, and block transactions. We currently anticipate that approximately one-third of the authorized $200 million will be utilized during each year covered by the authorization. However, the timing, actual number and value of the shares which are repurchased will depend on a number of factors, including the price of the Company’s common stock, and will be at the discretion of management (other than pursuant to the Rule 10b5-1 trading plan discussed below). Additionally, we may suspend or discontinue repurchases at any time.
22
Table of Contents
On October 11, 2007, we entered into a Rule 10b5-1 trading plan with a broker to facilitate the repurchase of the shares of the Company’s common stock. Under this trading plan, repurchases may continue without suspension during trading blackout periods. Additionally, repurchases under the trading plan are intended to qualify for the safe harbor provided by Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Shares repurchased under the trading plan are part of the $200 million share repurchase authorized by our Board of Directors. During the quarter ended October 28, 2007, we repurchased a total of 238,000 shares of the Company’s common stock for a total cash outlay of approximately $2.5 million.
We believe that cash flow from operations and availability under our revolving credit facility will provide adequate funds for our working capital needs, planned capital expenditures, debt service obligations and planned pension plan contributions for at least the next 12 months.
Our debt consists of the following, as of the dates indicated:
October 28, 2007 | April 29, 2007 | |||||
(in millions) | ||||||
Short-term borrowings: | ||||||
Revolving credit facility | $ | 245.6 | $ | 21.0 | ||
Other | 0.3 | 0.8 | ||||
$ | 245.9 | $ | 21.8 | |||
Long-term debt: | ||||||
Term A Loan | $ | 388.8 | $ | 399.1 | ||
Term B Loan | 877.8 | 882.2 | ||||
Total Term Loans | 1,266.6 | 1,281.3 | ||||
8 5/8% senior subordinated notes | 450.0 | 450.0 | ||||
6 3/4% senior subordinated notes | 250.0 | 250.0 | ||||
1,966.6 | 1,981.3 | |||||
Less current portion | 34.5 | 29.4 | ||||
$ | 1,932.1 | $ | 1,951.9 | |||
We borrowed $226.3 million from the revolving credit facility during the three months ended October 28, 2007. A total of $63.3 million was repaid during the three months ended October 28, 2007. During the six months ended October 28, 2007, we borrowed $341.9 million from the revolving credit facility and repaid $117.3 million. As of October 28, 2007, the net availability under the revolving credit facility, reflecting $40.0 million of outstanding letters of credit, was $164.4 million. The blended interest rate on the revolving credit facility was approximately 6.82% on October 28, 2007. Additionally, to maintain availability of funds under the revolving credit facility, we pay a 0.375% commitment fee on the unused portion of the revolving credit facility.
Scheduled maturities of our long-term debt are $14.7 million for the remainder of fiscal 2008. Scheduled maturities of long-term debt for each of the five succeeding fiscal years are as follows (in millions):
2009 | $ | 39.6 | |
2010 | 49.8 | ||
2011 | 494.1 | ||
2012 | 1,118.4 | ||
2013 | — |
Restrictive and Financial Covenants
Agreements relating to our long-term debt, including the credit agreement governing our senior credit facility (as amended through August 15, 2006, the “Amended Senior Credit Facility”) and the indentures governing the senior subordinated notes, contain covenants that restrict the ability of Del Monte Corporation and its subsidiaries, among other things, to incur or guarantee indebtedness, issue capital stock, pay dividends on and redeem capital stock, prepay certain indebtedness, enter into transactions with affiliates, make other restricted payments, including investments, incur liens, consummate asset sales and enter into consolidations or mergers. Del Monte Corporation, the primary obligor on our debt obligations, is a direct, wholly-owned subsidiary of Del Monte Foods Company. Certain of these covenants are also applicable to Del Monte Foods
23
Table of Contents
Company. We are required to meet a maximum leverage ratio and a minimum fixed charge coverage ratio under the Amended Senior Credit Facility. As of October 28, 2007, we believe that we are in compliance with all such financial covenants. Beginning in the fourth quarter of fiscal 2008, the maximum permitted leverage ratio decreases over time and the minimum fixed charge coverage ratio increases over time, as set forth in the Amended Senior Credit Facility.
Compliance with these covenants is monitored periodically in order to assess the likelihood of continued compliance. Our ability to continue to comply with these covenants may be affected by events beyond our control. If we are unable to comply with the covenants under the senior credit facility or any of the indentures governing our senior subordinated notes, there would be a default, which if not waived, could result in the acceleration of a significant portion of our indebtedness.
Cash Flows
During the six months ended October 28, 2007, our cash and cash equivalents decreased by $0.1 million and during the six months ended October 29, 2006, our cash and cash equivalents decreased by $437.9 million.
Six Months Ended | ||||||||
October 28, 2007 | October 29, 2006 | |||||||
(in millions) | ||||||||
Net Cash Used in Operating Activities | $ | (150.3 | ) | $ | (107.9 | ) | ||
Net Cash Used in Investing Activities | (43.6 | ) | (1,292.3 | ) | ||||
Net Cash Provided by Financing Activities | 194.1 | 962.4 |
Operating Activities. Cash used in operating activities for the six months ended October 28, 2007 was $150.3 million, compared to $107.9 million for the six months ended October 29, 2006. This fluctuation was primarily driven by higher pension contributions and higher inventory levels in the current year. We made pension contributions of $34.4 million in the six months ended October 28, 2007, compared to contributions of $15.0 million in the six months ended October 29, 2006. In addition, inventory levels are higher in the current year period due to higher peach yields. Inventory balances in the current year are also higher as a result of increased ingredient, commodity and raw product costs. The cash requirements of the Consumer Products operating segment vary significantly during the year to coincide with the seasonal growing cycles of fruit, vegetables and tomatoes. The vast majority of our fruit, vegetable and tomato inventories are produced during the packing season, from June through October, and then depleted during the remaining months of the fiscal year. As a result, the vast majority of our total cash flow is generated during the second half of the fiscal year.
Investing Activities. Cash used in investing activities for the six months ended October 28, 2007 was $43.6 million compared to $1,292.3 million for the six months ended October 29, 2006. Cash used in investing activities for the six months ended October 28, 2007 consisted primarily of capital spending. Capital spending during the first six months of fiscal 2008 was $11.1 million higher than during the first six months of fiscal 2007 driven by increased capital spending associated with the execution of our transformation plan and other capital projects. Cash used in investing activities for the six months ended October 29, 2006 consisted primarily of cash used for the Meow Mix and Milk-Bone acquisitions.
Financing Activities. Cash provided by financing activities for the six months ended October 28, 2007 was $194.1 million compared to $962.4 million for the six months ended October 29, 2006. During the first six months of fiscal 2008, we borrowed a net of $224.1 million in short-term borrowings as a result of incurring normal seasonal borrowings for operations. In addition, during the six months ended October 28, 2007 and October 29, 2006, we borrowed $0 and $745.0 million, respectively in Term B loans and made scheduled repayments of $14.7 million and $55.2 million, respectively, towards our outstanding term loan principal. We also paid $16.2 million and $16.0 million in dividends during the six months ended October 28, 2007 and October 29, 2006, respectively. The $962.4 million of cash provided by financing activities for the six months ended October 29, 2006 resulted primarily from borrowings as a result of financing acquisitions.
24
Table of Contents
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have a risk management program which was adopted with the objective of minimizing our exposure to changes in interest rates, commodity and other prices and foreign currency exchange rates. We do not trade or use instruments with the objective of earning financial gains on price fluctuations alone or use instruments where there are not underlying exposures.
During the six months ended October 28, 2007, we were primarily exposed to the risk of loss resulting from adverse changes in interest rates, commodity and other prices and foreign currency exchange rates, which affect interest expense on our floating-rate obligations and the cost of our raw materials and other inputs, respectively.
Interest Rates. Our debt primarily consists of fixed rate notes and floating rate term loans. We also use our floating rate revolving credit facility primarily to fund seasonal working capital needs and other uses of cash. Interest expense on our floating rate debt is typically calculated based on a fixed spread over a reference rate, such as LIBOR. Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given amount of floating rate debt.
We manage a portion of our interest rate risk related to floating rate debt by entering into interest rate swaps in which we receive floating rate payments and make fixed rate payments. On September 6, 2007 we entered into an interest rate swap, with a notional amount of $400.0 million and an effective date of October 26, 2007, as the fixed rate-payer. A formal cash flow hedge accounting relationship was established between the swap and a portion of our interest payment on our floating rate debt. During the six months ended October 28, 2007, the Company’s interest rate cash flow hedges resulted in a $2.7 million decrease to other comprehensive income (“OCI”) and a $1.7 million increase to deferred tax assets. The Company’s interest rate cash flow hedges did not have an impact on other expense. On October 28, 2007, the fair value of our interest rate swap was recorded as a current liability of $4.4 million. There were no outstanding interest rate swaps for the six months ended October 29, 2006.
The table below presents our market risk associated with debt obligations as of October 28, 2007. The fair values are based on quoted market prices. Variable interest rates disclosed represent the weighted average rates in effect on October 28, 2007.
Maturity | ||||||||||||||||||||||||||||||||||
Remainder of 2008 | Fiscal 2009 | Fiscal 2010 | Fiscal 2011 | Fiscal 2012 | Fiscal 2013 | After Fiscal 2013 | Total | Fair Value October 28, 2007 | ||||||||||||||||||||||||||
(in millions, except percentages) | ||||||||||||||||||||||||||||||||||
Interest Rate Risk: | ||||||||||||||||||||||||||||||||||
Debt | ||||||||||||||||||||||||||||||||||
Fixed Rate | $ | — | $ | — | $ | — | $ | — | $ | 450.0 | $ | — | $ | 250.0 | $ | 700.0 | $ | 701.4 | ||||||||||||||||
Average Interest Rate | — | — | — | — | 8.63 | % | — | 6.75 | % | 7.96 | % | |||||||||||||||||||||||
Variable Rate | $ | 14.7 | $ | 39.6 | $ | 49.8 | $ | 494.1 | $ | 668.4 | $ | — | $ | 1,266.6 | $ | 1,266.6 | ||||||||||||||||||
Average Interest Rate | 6.36 | % | 6.36 | % | 6.36 | % | 6.36 | % | 6.36 | % | — | 6.36 | % | |||||||||||||||||||||
Interest Rate Swaps | ||||||||||||||||||||||||||||||||||
Notional Amount | $ | — | $ | — | $ | 400.0 | . | $ | — | $ | — | $ | — | $ | 400.0 | $ | 4.4 | |||||||||||||||||
Average Rate Receivable | — | — | 5.07 | % | — | — | — | — | 5.07 | % | ||||||||||||||||||||||||
Average Rate Payable | — | — | 4.77 | % | — | — | — | — | 4.77 | % |
Commodities and Other Prices.
Commodities: Certain commodities such as corn, wheat, soybean meal, and soybean oil are used in the production of our products. Generally these commodities are purchased based upon market prices that are established with the vendor as part of the purchase process. We use futures or options contracts, as deemed appropriate, to reduce the effect of price fluctuations on anticipated purchases. We account for these commodities derivatives as either cash flow or economic hedges. For cash flow hedges, the effective portion of derivative gains and losses is deferred in equity and recognized as part of cost of products sold in the appropriate period and the ineffective portion is recognized as other income or expense. Changes in the value of economic hedges are recorded directly in earnings. These contracts generally have a term of less than 18 months.
25
Table of Contents
On October 28, 2007, the fair values of our commodities hedges were recorded as current assets of $3.3 million and current liabilities of $0.3 million. On April 29, 2007, the fair values of our commodities hedges were recorded as current assets of $1.8 million and current liabilities of $2.9 million.
Other: In prior periods, we entered into hedging activities where heating oil contracts were used as a proxy for fluctuations in diesel fuel prices. These contracts generally had a term of less than three months and did not qualify as cash flow hedges for accounting purposes. Accordingly, associated gains or losses were recorded directly as other income or expense. No such contracts were entered into during the six months ended October 28, 2007 and as of April 29, 2007, all such contracts were closed. We may consider incorporating the use of heating oil contracts into our hedging program again in future periods.
We also have a hedging program for natural gas. We account for these natural gas derivatives as either cash flow or economic hedges. These contracts generally have a term of 18 months or less. For cash flow hedges, the effective portion of derivative gains and losses is deferred in equity and recognized as part of cost of products sold in the period natural gas is consumed and the ineffective portion is recognized as other income or expense. Changes in the value of economic hedges are recorded directly in earnings. As of October 28, 2007, the fair values of our natural gas hedges were recorded as current liabilities of $0.6 million. As of April 29, 2007, the fair values of our natural gas hedges were recorded as current assets of $1.1 million. We expect to continue our hedging program with respect to natural gas during the remainder of fiscal 2008.
The table below presents our commodity and natural gas derivative contracts as of October 28, 2007. The fair values indicated are based on quoted market prices. All of the commodity and natural gas derivative contracts held on October 28, 2007 are scheduled to mature prior to the end of fiscal 2008.
Soybean Meal (Short Tons) | Soybean Oil (Pounds) | Corn (Bushels) | Hard Wheat (Bushels) | Natural Gas (Decatherms) | ||||||||||||||
Futures Contracts | ||||||||||||||||||
Contract Volumes | 32,200 | 600,000 | 2,900,000 | 360,000 | 880,000 | |||||||||||||
Weighted Average Price | $ | 243.60 | $ | 0.41 | $ | 3.87 | $ | 6.88 | $ | 8.57 | ||||||||
Contract Amount ($ in millions) | $ | 7.8 | $ | 0.2 | $ | 11.2 | $ | 2.5 | $ | 7.5 | ||||||||
Fair Value ($ in millions) | $ | 1.1 | $ | — | $ | 0.2 | $ | 0.5 | $ | (0.6 | ) | |||||||
Options | ||||||||||||||||||
Calls (Long) | ||||||||||||||||||
Contract Volumes | 22,000 | — | 1,300,000 | — | — | |||||||||||||
Weighted Average Strike Price | $ | 242.27 | $ | — | $ | 3.84 | $ | — | $ | — | ||||||||
Weighted Average Price Paid | $ | 15.77 | $ | — | $ | 0.27 | $ | — | $ | — | ||||||||
Fair Value ($ in millions) | $ | 0.9 | $ | — | $ | 0.4 | $ | — | $ | — | ||||||||
Puts (Written) | ||||||||||||||||||
Contract Volumes | 5,000 | — | 1,300,000 | — | — | |||||||||||||
Weighted Average Strike Price | $ | 230.00 | $ | — | $ | 3.55 | $ | — | $ | — | ||||||||
Weighted Average Price Received | $ | (5.00 | ) | $ | — | $ | (0.16 | ) | $ | — | $ | — | ||||||
Fair Value ($ in millions) | $ | — | $ | — | $ | (0.1 | ) | $ | — | $ | — |
Foreign Currency: During the fourth quarter of fiscal 2007, we began a hedging program to manage our exposure to fluctuations in foreign currency exchange rates. We have entered into forward contracts to cover a portion of our projected expenditures paid in local currency. These contracts generally have a term of less than 18 months and qualify as cash flow hedges for accounting purposes. Accordingly, the effective derivative gains and losses are deferred in equity and recognized in the period the expenditure is incurred as other income or expense. As of October 28, 2007, the fair values of our foreign currency hedges were recorded as current assets of $0.4 million and current liabilities of $1.3 million. As of April 29, 2007, the fair values of our foreign currency hedges were recorded as current assets of $0.1 million. We expect to continue our hedging program with respect to foreign currency during the remainder of fiscal 2008.
26
Table of Contents
The table below presents our foreign currency derivative contracts as of October 28, 2007. The fair values indicated are based on quoted market prices. All of the foreign currency derivative contracts held on October 28, 2007 are scheduled to mature prior to the end of fiscal 2008.
Forward Currency Contracts | |||
Firmly committed Forward Exchange Contracts (Mexican peso) (in millions) | 124.0 | ||
Forward Exchange Agreements (Receive Mexican pesos/Pay $US) ($ in millions) | $ | 11.4 | |
Contract Amount ($ in millions) | $ | 11.1 | |
Average Contractual Exchange Rate (pesos/$US) | 11.2 | ||
Firmly committed Forward Exchange Contracts ($US) (in millions) | $ | 10.6 | |
Forward Exchange Agreements (Receive $US/Pay $CAD) ($CAD in millions) | $ | 10.2 | |
Contract Amount ($CAD in millions) | $ | 11.4 | |
Average Contractual Exchange Rate ($US/$CAD) | 0.93 |
The table below presents the changes in the following balance sheet accounts and impact on statement of income accounts of our commodities and other hedging and foreign currency exchange rate hedging activities:
Three Months Ended | Six Months Ended | |||||||||||||||
October 28, 2007 | October 29, 2006 | October 28, 2007 | October 29, 2006 | |||||||||||||
(in millions) | ||||||||||||||||
(Increase) decrease in other comprehensive income (a) | $ | (0.3 | ) | $ | (1.1 | ) | $ | (1.9 | ) | $ | (0.9 | ) | ||||
(Increase) decrease in deferred tax liabilities | (0.1 | ) | (0.8 | ) | 0.7 | (0.7 | ) | |||||||||
Increase in cost of products sold | 1.3 | 2.0 | 1.0 | 3.2 | ||||||||||||
Decrease in other expense | (2.1 | ) | (0.2 | ) | (1.4 | ) | (0.3 | ) |
(a) | The change in other comprehensive income is net of related taxes. |
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, or “Disclosure Controls,” as of the end of the period covered by this quarterly report on Form 10-Q. This evaluation, or “Controls Evaluation” was performed under the supervision and with the participation of management, including our Chairman of the Board, President, Chief Executive Officer and Director (our “CEO”) and our Executive Vice President, Administration and Chief Financial Officer (our “CFO”). Disclosure Controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure Controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our Disclosure Controls include some, but not all, components of our internal control over financial reporting.
Based upon the Controls Evaluation, and subject to the limitations noted in this Part I, Item 4, our CEO and CFO have concluded that as of the end of the period covered by this quarterly report on Form 10-Q, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and that material information relating to Del Monte and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
27
Table of Contents
instances of fraud, if any, within Del Monte have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
CEO and CFO Certifications
The certifications of the CEO and the CFO required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended, or the “Rule 13a-14 Certifications” are filed as Exhibits 31.1 and 31.2 of this quarterly report on Form 10-Q. This “Controls and Procedures” section of the quarterly report on Form 10-Q includes the information concerning the Controls Evaluation referred to in the Rule 13a-14 Certifications and this section should be read in conjunction with the Rule 13a-14 Certifications for a more complete understanding of the topics presented.
ITEM 1. | LEGAL PROCEEDINGS |
Except as set forth below, there have been no material developments in the legal proceedings reported in our 2007 Annual Report:
As previously reported in our 2007 Annual Report, beginning with the pet food recall announced by Menu Foods, Inc. in March 2007, many major pet food manufacturers, including Del Monte, announced recalls of select products. We currently believe there are over 90 purported class actions relating to these pet food recalls. To date, we are a defendant in seven purported class actions related to our pet food and pet snack recall, which we initiated March 31, 2007. However, we may be named in additional cases.
As previously reported in our quarterly report on Form 10-Q for the period ended July 29, 2007, we are currently a defendant in the following cases:
• | Blaszkowski v. Del Monte filed on May 9, 2007 in the U.S. District Court for the Southern District of Florida; |
• | Carver v. Del Monte filed on April 4, 2007 in the U.S. District Court for the Eastern District of California; |
• | Ford v. Del Monte filed on April 7, 2007 in the U.S. District Court for the Southern District of California; |
• | Hart v. Del Monte filed on April 10, 2007 in state court in Los Angeles, California (this case was previously reported in our quarterly report on Form 10-Q for the period ended July 29, 2007 as Wahl v. Del Monte; the name of the case has changed because the previously named plaintiffs have been replaced); |
• | Picus v. Del Monte filed on April 30, 2007 in state court in Las Vegas, Nevada; |
• | Schwinger v. Del Monte filed on May 15, 2007 in U.S. District Court for the Western District of Missouri; and |
• | Tompkins v. Del Monte filed on July 13, 2007 in U.S. District Court for the District of Colorado. |
By order dated June 28, 2007, the Carver, Ford, Hart, Schwinger, and Tompkins cases were transferred to the U.S. District Court for the District of New Jersey and consolidated with other pet food class actions under the federal rules for multi-district litigation. The Blaszkowski and Picus cases were not consolidated. On October 12, 2007, we filed a Motion to Dismiss in the Blaszkowski case. The court has not issued a ruling on this motion. On October 12, 2007, we filed a Motion to Dismiss in the Picus case. The state court granted our motion in part and denied the motion in part.
The named plaintiffs allege that their pets suffered injury and/or death as a result of ingesting our and other defendants’ allegedly contaminated pet food and pet snack products. The Blaszkowski and Picus cases also contain allegations of false and misleading advertising by us. The plaintiffs are seeking certification of class actions in the respective jurisdictions as well as unspecified damages and injunctive relief against further distribution of the allegedly defective products. We plan to deny these allegations and vigorously defend ourselves. We believe we have adequate insurance to cover any material liability in these cases.
28
Table of Contents
We are also involved from time to time in various legal proceedings incidental to our business, including proceedings involving product liability claims, worker’s compensation and other employee claims, tort claims and other general liability claims, for which we carry insurance, as well as trademark, copyright, patent infringement and related litigation. Additionally, we are involved from time to time in claims relating to environmental remediation and similar events. While it is not feasible to predict or determine the ultimate outcome of these matters, we believe that none of these legal proceedings will have a material adverse effect on our financial position.
ITEM 1A. | RISK FACTORS |
This quarterly report on Form 10-Q, including the section entitled “Item 1. Financial Statements” and the section entitled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Act of 1934. Statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. These statements are based on our plans, estimates and projections at the time we make the statements, and you should not place undue reliance on them. In some cases, you can identify forward-looking statements by the use of forward-looking terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terms.
Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in or suggested by any forward-looking statement. These factors include, among others:
• | general economic and business conditions; |
• | cost and availability of inputs, commodities, ingredients and other raw materials, including without limitation, energy (including natural gas), fuel, packaging, grains (including corn), meat by-products, crop-based products and tuna; |
• | the accuracy of our assumptions regarding costs and other matters; |
• | our ability to increase prices and manage the price gap between our products and competing private label products; |
• | our ability to reduce costs; |
• | logistics and other transportation-related costs; |
• | our pet food and pet snacks recall which began in March 2007 or other product recalls; |
• | our debt levels and ability to service and reduce our debt; |
• | reduced sales, disruptions, costs or other charges to earnings or expenses that may be generated by our strategic plan and transformation plan efforts; |
• | timely launch and market acceptance of new products; |
• | competition, including pricing and promotional spending levels by competitors; |
• | efforts to improve the performance and market share of our businesses; |
• | changes in U.S., foreign or local tax laws and effective rates; |
• | effectiveness of marketing and trade promotion programs; |
• | changing consumer and pet preferences; |
• | the loss of significant customers or a substantial reduction in orders from these customers or the bankruptcy of any such customer; |
• | availability, terms and deployment of capital; |
• | interest rate fluctuations; |
• | product liability claims and other litigations; |
• | reliance on certain third parties, including co-packers, our broker and third-party distribution centers or managers; |
• | acquisitions, if any, including identification of appropriate targets and successful integration of any acquired businesses; |
• | weather conditions; |
29
Table of Contents
• | crop yields; |
• | any acceleration of our departure from Terminal Island, CA; |
• | changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including environmental regulations and import/export duties; |
• | wage rates; |
• | industry trends, including changes in buying, inventory and other business practices by customers; and |
• | public safety and health issues. |
Certain aspects of these and other factors are described in more detail in our filings with the Securities and Exchange Commission, including the section entitled “Factors That May Affect Our Future Results and Stock Price” in our 2007 Annual Report.
In addition to the foregoing and as we previously reported in our quarterly report on Form 10-Q for the period ended July 29, 2007, other economic, industry and business conditions may affect our future results, for example:
In our 2007 Annual Report, we included a risk factor titled “Risk associated with foreign operations, including changes in import/export duties, wage rates, political or economic climates, or exchange rates, may adversely affect our operations.” As part of that risk factor, we reported that the Andean Trade Preference and Drug Eradication Act (ATPDEA) would expire June 30, 2007. During the first quarter of fiscal 2008, ATPDEA was renewed. It is now scheduled to expire February 28, 2008. If new legislation is not adopted that provides similar benefits to the ATPDEA, our costs could increase and our results of operations could be adversely affected. In addition, steps we may take to mitigate the impact of the expiration of the ATPDEA, such as closing affected facilities and relocating production elsewhere, could disrupt production, increase our expenses, result in asset write-downs and adversely affect our results of operations.
If the operating results of StarKist seafood do not improve, we may recognize an impairment of the StarKist goodwill, which would adversely affect our earnings.
We test the goodwill of StarKist seafood for impairment at least annually. In connection with our annual impairment test for fiscal 2007, we concluded that the StarKist goodwill was not impaired. If the performance of StarKist seafood does not improve, we may, in connection with any future impairment tests, conclude that the estimated fair value is less than the book value, write down StarKist assets, including goodwill, to the estimated fair value and recognize an impairment. Such impairment would adversely affect our earnings and could be material.
All forward-looking statements in this quarterly report on Form 10-Q are qualified by these cautionary statements and are made only as of the date of this report. We undertake no obligation, other than as required by law, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
(a) | NONE. |
(b) | NONE. |
(c) | ISSUER PURCHASES OF EQUITY SECURITIES |
On September 27, 2007, our Board of Directors authorized the repurchase of up to $200 million of the Company’s common stock over the next 36 months. Under this authorization, repurchases may be made from time to time through a variety of methods, including open market purchases, privately negotiated transactions, and block transactions. We currently anticipate that approximately one-third of the authorized $200 million will be utilized during each year covered by the authorization. However, the timing, actual number and value of the shares which are repurchased will depend on a number of factors, including the price of the Company’s common stock, and will be at the discretion of management (other than pursuant to the Rule 10b5-1 trading plan discussed below). Additionally, we may suspend or discontinue repurchases at any time.
In October 2007, we entered into a Rule 10b5-1 trading plan with a broker to facilitate the repurchase of shares of the Company’s common stock. Under this trading plan, repurchases may continue without suspension during trading blackout periods. Additionally, repurchases under the trading plan are intended to qualify for the safe harbor provided by Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Shares repurchased under the trading plan are part of the $200 million share repurchase authorized by our Board of Directors.
30
Table of Contents
The following table provides information about our purchases of the Company’s common stock during the three month period ended October 28, 2007:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | ||||||
July 29 - August 26, 2007 | — | — | — | — | ||||||
August 27 - September 23, 2007 | — | — | — | — | ||||||
September 24 - October 28, 2007 | 238,000 | $ | 10.49 | 238,000 | $ | 197,503,710 | ||||
Total | 238,000 | $ | 10.49 | 238,000 | $ | 197,503,710 |
(1) | The $200 million share repurchase authorized by our Board of Directors was announced on September 28, 2007 and will expire September 26, 2010. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
NONE.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Our Annual Meeting of Stockholders was held on September 27, 2007 in San Francisco, California. Three matters were submitted to a vote of stockholders: (i) the election of three Class III directors to hold office for three-year terms; (ii) the approval of the amendment and restatement of the Del Monte Foods Company 2002 Stock Incentive Plan; and (iii) the ratification of the appointment of KPMG LLP, an independent registered public accounting firm, as the Company’s independent auditors for its fiscal year ending April 27, 2008.
At the Annual Meeting, the following individuals were elected to the Board of Directors for three-year terms upon the following vote:
Votes For | Votes Against | Votes Abstained | ||||
Victor L Lund | 182,937,286 | 3,082,175 | 503,779 | |||
Joe L. Morgan | 183,638,363 | 2,248,642 | 636,255 | |||
David R. Williams | 178,050,842 | 7,980,526 | 491,892 |
141,500,292 votes were cast in favor of the approval of the amendment and restatement of the Del Monte Foods Company 2002 Stock Incentive Plan. 25,195,588 votes were cast against approval and 608,419 votes abstained. In addition, there were 19,218,961 broker non-votes.
183,802,474 votes were cast in favor of the ratification of the appointment of KPMG LLP as the Company’s independent auditors for its fiscal year ending April 27, 2008. 2,418,292 votes were cast against ratification and 302,494 votes abstained.
ITEM 5. | OTHER INFORMATION |
(a) | NONE. |
(b) | NONE. |
31
Table of Contents
ITEM 6. | EXHIBITS |
(a) | Exhibits. |
Exhibit Number | Description | |
*10.1 | Amendment No. 2 to the Del Monte Corporation Additional Benefits Plan, effective January 1, 2008** | |
*10.2 | Amendment No. 2 to the Del Monte Corporation AIP Deferred Compensation Plan, effective January 1, 2008** | |
*10.3 | Amendment No. 2 to the Del Monte Corporation Supplemental Executive Retirement Plan, effective January 1, 2008** | |
*10.4 | Form of Del Monte Foods Company 2002 Stock Incentive Plan Incentive Stock Option Agreement** | |
*10.5 | Form of Del Monte Foods Company 2002 Stock Incentive Plan Non-Qualified Stock Option Agreement ** | |
*10.6 | Form of Del Monte Foods Company Performance Accelerated Restricted Stock Agreement** | |
*10.7 | Form of Del Monte Foods Company Performance Shares Agreement** | |
10.8 | Del Monte Foods Company 2002 Stock Incentive Plan, as amended and restated effective August 6, 2007 and approved by the stockholders September 27, 2007 (incorporated by reference to Exhibit 10.12 to a Current Report on Form 8-K as filed October 2, 2007)** | |
*31.1 | Certification of the Chief Executive Officer Pursuant to Rule 13-14(a) of the Exchange Act | |
*31.2 | Certification of the Chief Financial Officer Pursuant to Rule 13-14(a) of the Exchange Act | |
*32.1 | Certification of the Chief Executive Officer furnished Pursuant to Rule 13-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
*32.2 | Certification of the Chief Financial Officer furnished Pursuant to Rule 13-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | filed herewith |
** | indicates a management contract or compensatory plan or arrangement |
32
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) 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.
DEL MONTE FOODS COMPANY | ||
By: | /S/ RICHARD G. WOLFORD | |
Richard G. Wolford | ||
Chairman of the Board, President and | ||
Chief Executive Officer; Director | ||
By: | /S/ DAVID L. MEYERS | |
David L. Meyers | ||
Executive Vice President, Administration | ||
and Chief Financial Officer |
Dated December 5, 2007
33