1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
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 001-12755
SUIZA FOODS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2559681
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
3811 Turtle Creek Boulevard, Suite 1300
Dallas, Texas 75219
(214) 528-9922
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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 [ ]
As of April 30, 1998 the number of shares outstanding of each class of common
stock was:
Common Stock, $.01 par value: 31,664,611
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
---------- ----------
(unaudited)
(Dollars in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 84,025 $ 24,388
Receivables, net of allowance for doubtful accounts of $4,909 and $3,589,
respectively 222,004 164,284
Inventories 105,444 76,087
Prepaid expenses and other current assets 10,433 7,978
Refundable income taxes 33,103 19,836
Deferred income taxes 3,617 2,718
Net assets of discontinued operations 112,103 100,785
---------- ----------
Total current assets 570,729 396,076
PROPERTY, PLANT AND EQUIPMENT 462,156 363,649
DEFERRED INCOME TAXES 3,831 4,484
INTANGIBLE AND OTHER ASSETS 910,032 639,253
---------- ----------
TOTAL $1,946,748 $1,403,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 241,160 $ 178,021
Income taxes payable 2,990 4,006
Current portion of long-term debt 57,134 50,846
---------- ----------
Total current liabilities 301,284 232,873
LONG-TERM DEBT 493,973 777,813
OTHER LONG-TERM LIABILITIES 20,751 13,230
DEFERRED INCOME TAXES 25,618 20,236
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE CONVERTIBLE TRUST ISSUED
PREFERRED SECURITIES 682,500
SUBSIDIARY PREFERRED STOCK 20,000
STOCKHOLDERS' EQUITY:
Preferred stock, 11,691 shares of Series A preferred stock issued and
outstanding, with stated value of $320 per share 3,741 3,741
Common stock, 31,399,489 and 30,463,312 shares issued and outstanding 314 305
Additional paid-in capital 310,272 281,774
Retained earnings 88,295 73,490
---------- ----------
Total stockholders' equity 402,622 359,310
---------- ----------
TOTAL $1,946,748 $1,403,462
========== ==========
See notes to condensed consolidated financial statements.
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SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
--------------------------------
1998 1997
------------- -------------
(Dollars in thousands, except share data)
NET SALES $ 593,121 $ 365,584
COST OF SALES 456,148 286,003
------------- -------------
GROSS PROFIT 136,973 79,581
OPERATING COSTS AND EXPENSES:
Selling and distribution 70,201 41,338
General and administrative 19,445 14,024
Amortization of intangibles 5,738 2,643
------------- -------------
Total operating costs and expenses 95,384 58,005
------------- -------------
INCOME FROM OPERATIONS 41,589 21,576
OTHER (INCOME) EXPENSE:
Interest expense, net 13,402 5,769
Financing charges on preferred securities 1,249
Other income, net (702) (18,466)
------------- -------------
Total other (income) expense 13,949 (12,697)
------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 27,640 34,273
INCOME TAXES 9,587 11,868
------------- -------------
INCOME FROM CONTINUING OPERATIONS 18,053 22,405
LOSS FROM DISCONTINUED OPERATIONS (3,161) (1,666)
------------- -------------
INCOME BEFORE EXTRAORDINARY LOSS 14,892 20,739
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT (3,270)
------------- -------------
NET INCOME $ 14,892 $ 17,469
============= =============
NET INCOME APPLICABLE TO COMMON STOCK $ 14,805 $ 17,394
============= =============
AVERAGE COMMON SHARES: Basic 30,727,958 28,034,025
Diluted 33,821,891 29,494,741
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 0.58 $ 0.80
Loss from discontinued operations (0.10) (0.06)
Extraordinary loss (0.12)
------------- -------------
Net income $ 0.48 $ 0.62
============= =============
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 0.54 $ 0.76
Loss from discontinued operations (0.09) (0.06)
Extraordinary loss (0.11)
------------- -------------
Net income $ 0.45 $ 0.59
============= =============
See notes to condensed consolidated financial statements.
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SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(Dollars in thousands)
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,892 $ 17,469
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations 3,161 1,666
Depreciation and amortization 16,110 9,187
Extraordinary loss from early extinguishment of debt 3,270
Other (69) (616)
Deferred income taxes 5,136 3,660
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (12,199) 5,631
Inventories (10,844) (3,583)
Prepaid expenses and other assets 1,647 (18,958)
Accounts payable and accrued expenses 13,509 (6,549)
Income taxes payable 816 1,672
---------- ----------
Net cash provided by continuing operations 32,159 12,849
Net cash used by discontinued operations (3,712) (437)
---------- ----------
Net cash provided by operating activities 28,447 12,412
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (20,004) (6,921)
Cash outflows for acquisitions (259,355) (7,000)
Other 282 (801)
---------- ----------
Net cash used by continuing operations (279,077) (14,722)
Net cash used by discontinued operations (7,379) (6,802)
---------- ----------
Net cash used in investing activities (286,456) (21,524)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 237,278 33,750
Repayment of debt (515,016) (112,795)
Payment of deferred financing, debt restructuring and merger costs (4,670)
Issuance of common stock, net of expenses 13,034 88,872
Issuance of trust issued preferred securities, net of expenses 582,500
Other (150) (150)
---------- ----------
Net cash provided by financing activities 317,646 5,007
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,637 (4,105)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,388 23,823
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 84,025 $ 19,718
========== ==========
See notes to condensed consolidated financial statements.
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of March 31, 1998
and for the three month periods ended March 31, 1998 and 1997 have been
prepared by Suiza Foods Corporation (the "Company" or "Suiza") without
audit and have been prepared to give retroactive effect to the November
1997 mergers with Country Fresh, Inc. and The Morningstar Group Inc.
which have been accounted for as poolings of interests. In the opinion
of management, all necessary adjustments (which include only normal
recurring adjustments) to present fairly, in all material respects, the
consolidated financial position, results of operations and cash flows
of the Company as of March 31, 1998 and for the three month periods
ended March 31, 1998 and 1997 have been made. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted. These financial statements should be read in conjunction with
the Company's 1997 financial statements contained in its Annual Report
on Form 10-K as filed with the Securities and Exchange Commission on
March 31, 1998.
2. INVENTORIES
At March 31, At December 31,
1998 1997
---------- ----------
(in thousands)
Raw materials and supplies $ 54,276 $ 43,764
Finished goods 51,168 32,323
---------- ----------
$ 105,444 $ 76,087
========== ==========
3. LONG-TERM DEBT
At March 31, At December 31,
1998 1997
---------- ----------
(in thousands)
Senior credit facility:
Revolving loan facility $ -- $ 265,500
Term loan facility 537,500 550,000
Industrial development revenue bonds 12,660 12,660
Capital lease obligations and other debt 947 499
---------- ----------
551,107 828,659
Less: current portion (57,134) (50,846)
---------- ----------
$ 493,973 $ 777,813
========== ==========
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
MARCH 31, 1998
3. LONG-TERM DEBT (Continued)
Senior Credit Facilities - On November 26, 1997, the Company entered
into a credit facility with a group of lenders, including First Union
National Bank of North Carolina, as administrative agent, and The First
National Bank of Chicago, as syndication agent, which provides for an
aggregate senior credit facility (the "Senior Credit Facility") of
$1.25 billion comprised of a $550.0 million term loan facility and a
$700.0 million revolving credit facility. The proceeds from this new
facility were used to repay all amounts due under the separate senior
credit facilities maintained by the Company and certain of its
subsidiaries. Under the terms of the Senior Credit Facility, the term
loan is amortized, on a quarterly basis, over six years in increasing
amounts beginning March 31, 1998, and the revolving credit facility
expires on December 31, 2003. Amounts outstanding under the Senior
Credit Facility bear interest at a rate per annum equal to one of the
following rates, at the Company's option: (i) a base rate equal to the
higher of the Federal Funds rate plus 50 basis points or the prime rate
or (ii) The London Interbank Offering Rate ("LIBOR") plus a margin that
varies from 40 to 100 basis points depending on the Company's ratio of
defined indebtedness to EBITDA (as defined in the Senior Credit
Facility). The Company pays a commitment fee on unused amounts of the
revolving credit facility that ranges from 15 to 25 basis points, based
on the Company's ratio of defined indebtedness to EBITDA. The interest
rate in effect at March 31, 1998, on the Senior Credit Facility was
6.44%.
Interest is payable quarterly, and scheduled principal installments on
the term loan facilities are due in quarterly installments of
approximately $12.5 million through December 1998, increasing to $18.75
million on March 31, 1999, $25.0 million on March 31, 2001, $28.125
million on March 31, 2002, and $34.375 million on March 31, 2003, with
the balance maturing on December 31, 2003. Loans under the Senior
Credit Facility are collateralized by substantially all the Company's
assets.
Industrial Development Revenue Bonds - Certain of the Company's
subsidiaries have revenue bonds outstanding, certain of which require
aggregate annual sinking fund redemptions aggregating $0.7 million and
are secured by irrevocable letters of credit issued by financial
institutions, along with first mortgages on certain real property and
equipment. Interest on these bonds is due semiannually at interest
rates that vary based on market conditions which, at December 31, 1997,
ranged from 3.7% to 4.3%.
Other Debt - Other debt includes various promissory notes for the
purchase of property, plant and equipment and capital lease
obligations. The various promissory notes payable provide for interest
at varying rates and are payable in monthly installments of principal
and interest until maturity, when the remaining principal balances are
due. Capital lease obligations represent machinery and equipment
financing obligations which are payable in monthly installments of
principal and interest and are collateralized by the related assets
financed.
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 1998
3. LONG-TERM DEBT (Continued)
Interest Rate Agreements - The Company has interest rate derivative
agreements in place, including interest rate caps and interest rate
swaps, that have been designated as hedges against the Company's
variable interest rate exposure on its loans under the Senior Credit
Facility. At March 31, 1998, the interest rate caps have aggregate
notional amounts of $60 million, which mature in March 2000, and caps
interest on LIBOR loans at 8.0%, plus the applicable LIBOR margin. The
interest rate swaps have aggregate notional amounts of $490 million at
interest rates ranging from 6.0% to 6.14%, plus the applicable LIBOR
margin, and include $55 million of swaps that mature in June 1998; $60
million of swaps that mature in September 2000; $100 million of swaps
that mature in December 2000; $225 million of swaps that mature in
December 2002; and $50 million of swaps that mature in December 2003.
In addition, the Company has entered into $100 million of interest rate
collars, which mature from December 2002 to June 2003, and provide for
an interest rate floor and limit of approximately 6.11% and 7.5%,
respectively, plus the applicable LIBOR margin. These derivative
agreements provide hedges for senior credit facility loans by limiting
or fixing the LIBOR interest rates specified in the senior credit
facilities (5.63% at March 31, 1998, excluding the LIBOR margin) at the
above rates until the indicated expiration dates of these
interest-rate-derivative agreements. The original costs and premiums of
these derivative agreements are being amortized on a straight-line
basis as a component of interest expense.
The Company is exposed to market risk under these arrangements due to
the possibility of exchanging a lower interest rate for a higher
interest rate. The counterparties are major financial institutions and
the risk of incurring losses related to credit risk is considered by
the Company to be remote.
Debt Covenants - The Company's Senior Credit Facility contains various
financial and other restrictive covenants and requirements that the
Company maintain certain financial ratios, including a leverage ratio
(computed as the ratio of the aggregate outstanding principal amount of
defined indebtedness to EBITDA, as defined), a fixed charges ratio
(computed as the ratio of the EBITDA to defined fixed charges) and an
interest coverage ratio (computed as the ratio of EBITDA to interest
expense), and requires the Company to maintain a minimum level of net
worth. The Senior Credit Facility also contains limitations on capital
expenditures, investments and the incurrence of additional indebtedness
and requires certain mandatory prepayments from the proceeds of certain
dispositions of property.
4. TAXES
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto
Rico Agricultural Tax Incentives Act of 1995, which reduced the
effective income tax rate for qualified agricultural businesses from
39% to 3.9% and provided for a 50% tax credit for certain "eligible
investments" in qualified agricultural businesses in Puerto Rico.
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 1998
4. TAXES (Continued)
During the first quarter of 1997, the Company obtained a ruling from
the Commonwealth of Puerto Rico confirming that its investments in its
Suiza-Puerto Rico fruit and plastics subsidiaries qualified for the 50%
tax credit. Accordingly, in March 1997, the Company recognized a
nonrecurring gain of $18.1 million, net of discounts and related
expenses ($11.5 million after income taxes) for the sale of earned tax
credits to third parties.
The Company has been informed by Puerto Rico tax authorities that its
investment in its coffee business qualifies for additional tax credits.
These tax credits were sold in April 1998, and will be accounted for in
the second quarter of 1998 as an adjustment to the original purchase
price of the coffee business, which will result in a reduction of
goodwill.
5. MERGERS AND ACQUISITIONS
On January 14, 1998, Suiza signed a definitive agreement to acquire
Continental Can Company, Inc. ("Continental Can"). The purchase price
for Continental Can is payable through the issuance by Suiza of
approximately 2.1 million shares of common stock, the assumption by
Suiza of outstanding options of Continental Can, which will become
exercisable to purchase approximately 0.4 million shares of Suiza's
common stock, and the assumption of Continental Can's long-term
indebtedness outstanding at closing. Continental Can is primarily
engaged in the packaging business through a number of operating
subsidiaries in the United States and in Europe, and reported net sales
of approximately $546 million for the fiscal year ended December 31,
1997. The Continental Can merger, which is subject to the approval of
the stockholders of Continental Can and customary closing conditions,
is expected to close in the second quarter of 1998, and will be
accounted for using the purchase method of accounting. There can be no
assurance, however, that the acquisition of Continental Can will be
completed as currently contemplated or at all.
On February 20, 1998, Suiza completed the acquisition of Land-O-Sun
Dairies, L.L.C., ("Land-O-Sun") for a purchase price of approximately
$248 million, including approximately $128 million in cash. The
non-cash portion of the purchase price was funded through the issuance
of $100 million of company-obligated 5% mandatorily redeemable
convertible preferred securities of a Delaware business trust formed by
Suiza, and the issuance of $20 million of preferred interests of
Land-O-Sun. In addition, Suiza refinanced Land-O-Sun's existing
outstanding long-term indebtedness, which totaled approximately $52
million as of the closing date. Suiza financed the cash portion of the
purchase price and refinanced the existing long-term indebtedness with
borrowings of $180 million under its Senior Credit Facility. Land-O-Sun
is based in Johnson City, Tennessee and operates 13 fluid dairy and ice
cream processing facilities in Tennessee, North Carolina, South
Carolina, Georgia, Illinois, Kentucky and Virginia. Land-O-Sun reported
net sales of approximately $464 million for its fiscal year ended
December 31, 1997. The Land-O-Sun acquisition was accounted for using
the purchase method of accounting.
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
MARCH 31, 1998
5. MERGERS AND ACQUISITIONS (Continued)
Following is a summary of unaudited pro forma results of operations of
Suiza Foods which gives effect to the acquisitions of Dairy Fresh,
Garelick Farms, and Franklin Plastics in 1997 and the acquisitions of
Continental Can and Land-O-Sun in 1998 as if these acquisitions had
occurred at the beginning of 1997.
Three Months Ended March 31,
----------------------------
1998 1997
------------- ------------
(in thousands, except per share data)
Revenues $ 781,973 $ 724,674
Income from continuing operations 20,178 27,639
Net income 17,017 22,703
Income from continuing operations per share:
Basic 0.61 0.91
Diluted 0.57 0.82
Net income per share:
Basic 0.52 0.75
Diluted 0.48 0.70
Suiza has also recently acquired or agreed to acquire a number of
smaller dairy and plastic packaging businesses, including the completed
acquisitions of Louis Trauth Dairy, Inc. ("Trauth"), a Newport,
Kentucky-based manufacturer and distributor of fresh milk, ice cream
and related dairy products and Oberlin Farms Dairy, Inc. ("Oberlin"), a
Cleveland, Ohio-based processor of milk and cultured dairy products.
Trauth and Oberlin recorded net sales of approximately $67 million and
$76 million, respectively, for their most recent fiscal year ends.
6. DISCONTINUED OPERATIONS
On April 30, 1998, Suiza consummated its previously announced sale of
Reddy Ice to Packaged Ice, Inc. ("Packaged Ice") for approximately
$172.5 million in cash. Reddy Ice had revenues during 1997 of
approximately $66.3 million. The assets and operations of Reddy Ice are
presented as discontinued operations in the accompanying condensed
consolidated financial statements.
Net sales of Reddy Ice were $11.1 million and $8.2 million for the
three month periods ended March 31, 1998 and 1997 respectively.
Interest expense of $1.8 million was charged to the discontinued
operations during the first quarters of 1998 and 1997, based on debt
specifically attributed to Reddy Ice. The loss from discontinued
operations as reported in the condensed consolidated statements of
income is presented net of the related income tax benefit of $1.9
million and $1.0 million for the periods ended March 31, 1998 and 1997,
respectively.
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
MARCH 31, 1998
7. TRUST ISSUED PREFERRED SECURITIES
In connection with the Land-O-Sun acquisition, Suiza issued $100
million of company-obligated 5% mandatorily redeemable convertible
preferred securities of a Delaware business trust. On March 24, 1998,
the Company also completed the sale of $600 million of
company-obligated 5.5% mandatorily redeemable convertible preferred
securities of a Delaware business trust in a private placement to
"qualified institutional buyers" under Rule 144A under the Securities
Act of 1933, as amended. These trust issued preferred securities, which
are recorded net of related fees and expenses, are convertible at the
option of the holders into an aggregate of approximately 9.1 million
shares of the Company's common stock, subject to adjustment in certain
circumstances. These preferred securities are also redeemable, at the
Company's option, at any time after three years from their respective
issue dates at specified amounts and are mandatorily redeemable at
their liquidation preference amount of $50 per share after 30 years
from their respective issue dates or upon occurrence of certain
specified events, as defined.
8. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," issued in June 1997. For interim periods, SFAS 130 requires
disclosure of comprehensive income, which is composed of net income and
other comprehensive income items. Other comprehensive income items are
revenues, expenses, gains and losses that under generally accepted
accounting principles are excluded from net income and reflected as a
component of equity. For the three month period ended March 31, 1998
consolidated comprehensive income was $29,991 which includes tax
benefits of $15,099 related to the exercise of certain employees' stock
options. Consolidated comprehensive income was equal to consolidated
net income for the three-month period ended March 31, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Suiza Foods Corporation (the "Company" or "Suiza") is a leading manufacturer and
distributor of fresh milk and related dairy products and plastic packaging in
the United States. Suiza also manufactures, distributes and markets
refrigerated, shelf-stable and frozen food products. Suiza has grown primarily
through a successful acquisition strategy, having consummated more than 15 dairy
and packaging acquisitions since its initial public offering in April 1996.
Through these acquisitions, Suiza has realized economies of scale, operating
efficiencies and added complimentary product lines. The Company conducts its
dairy operations primarily through its Puerto Rico subsidiaries ("Suiza-Puerto
Rico"), Velda Farms, Inc. ("Velda Farms"), Swiss Dairy Corporation ("Swiss
Dairy"), Model Dairy, Inc. ("Model Dairy"), Dairy Fresh, Inc. ("Dairy Fresh"),
Garelick Farms, Inc. and certain related dairy subsidiaries ("Garelick Farms"),
Country Delite Farms Inc. ("Country Delite"), Country Fresh, Inc. ("Country
Fresh"), The Morningstar Group Inc. ("Morningstar"), LOS Holdings, Inc.
("Land-O-Sun") and Louis Trauth Dairy Inc. ("Trauth"). The Company conducts its
plastics operations through Franklin Plastics, Inc. and subsidiaries ("Franklin
Plastics" or "Plastics"). Each of the Company's dairy and plastic packaging
operating subsidiaries is a leading competitor in its market, with an
established reputation for customer service and product quality. The Company's
dairy subsidiaries market their products through extensive distribution networks
to a diverse group of customers, including convenience stores, grocery stores,
schools and institutional food service customers. The Company's customers in the
plastic packaging business include regional dairy manufacturers, bottled water
processors, beverage manufacturers, and consumer and industrial products
companies.
Outlook and Uncertainties
Certain statements and information in this Quarterly Report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be indicated by
phrases such as "believes," "anticipates," "expects," "intends," "foresees,"
"projects," "forecasts" or words of similar meaning or import. Such statements
are subject to certain risks, uncertainties, or assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those set forth in
applicable forward-looking statements. Among the key factors that may have a
direct bearing on the Company's results and financial condition are (i) risks
associated with the Company's acquisition strategy, (ii) risks relating to the
Company's leverage position, (iii) risks associated with intense competition in
the Company's industries and (iv) the impact of governmental regulations
affecting the dairy industry. Any forward-looking statements made or
incorporated by reference herein speak only as of the date of this Quarterly
Report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statements, to reflect any change
in its expectations with regard thereto or any change in events, conditions, or
circumstances on which any such statement is based. Additional information
concerning these and other risk factors is contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, a copy of which
may be obtained from the Company upon request.
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Results of Operations
The Company currently operates in two distinct businesses as shown below
(dollars in thousands):
Three months ended March 31,
---------------------------------------------------------------------
1998 1997
---- ----
Percent Percent
of of
Dollars Net Sales Dollars Net Sales
------- --------- ------- ---------
Net sales:
Dairy $ 555,973 $ 365,584
Plastics 37,148
----------- -----------
Net sales 593,121 100.0% 365,584 100.0%
Cost of sales 456,148 76.9 286,003 78.2
----------- ----------- ----------- -----------
Gross profit 136,973 23.1 79,581 21.8
Operating expenses:
Selling and distribution 70,201 11.8 41,338 11.3
General and administrative 19,445 3.3 14,024 3.8
Amortization of intangibles 5,738 1.0 2,643 0.8
----------- ----------- ----------- -----------
Total operating expenses 95,384 16.1 58,005 15.9
----------- ----------- ----------- -----------
Operating income (loss):
Dairy 41,330 7.0 23,463 6.4
Plastics 4,310 0.7
Corporate office (4,051) (0.07) (1,887) (0.5)
----------- ----------- ----------- -----------
Total operating income $ 41,589 7.0% $ 21,576 5.9%
=========== =========== =========== ===========
First Quarter 1998 Compared to First Quarter 1997
Net Sales. The Company's net sales increased 62.2% to $593.1 million in the
first quarter of 1998 from $365.6 million in 1997. Dairy net sales increased
52.1% or $190.4 million to $556.0 million in the first quarter of 1998
primarily due to (i) the acquisitions of Garelick Farms, Dairy Fresh and Country
Delite in the last half of 1997, (ii) the acquisitions of Land-O-Sun and Trauth
in the first quarter of 1998 and (iii) strong sales of branded products at
Morningstar. The Company began operating in the plastics business with the
acquisition of Franklin Plastics in July, 1997.
Cost of Sales. The Company's cost of sales margin was 76.9% in the first quarter
of 1998 compared to 78.2 % for the same period in 1997. Dairy cost of sales
margins improved from the prior year due to (i) operating efficiencies in the
Company's fluid dairy division and (ii) increased branded and specialty product
sales at Morningstar.
Operating Expenses. The Company's operating expense ratios were 16.1% for the
first quarter of 1998 compared to 15.9% for the same period in 1997. Dairy
operating expense margins increased slightly in the quarter because of
additional goodwill amortization for the acquired companies.
Operating Income. The Company's operating income increased 92.8% to $41.6
million in the first quarter of 1998 from $21.6 million in the first quarter of
1997 primarily as a result of the aforementioned acquisitions and the increased
sales at Morningstar. The Company's operating income
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margin increased to 7.0% in the first quarter of 1998 from 5.9% in the first
quarter of 1997 for the same reasons.
Other (Income) Expense. Interest expense increased to $13.4 million in the first
quarter of 1998 from $5.8 million in the first quarter of 1997 primarily due to
the increased level of debt used to finance the aforementioned acquisitions.
Financing charges on preferred securities amounted to $1.2 million in the first
quarter of 1998, reflecting (i) the issuance on February 20, 1998 of $100
million of company-obligated mandatorily redeemable preferred securities related
to the acquisition of Land-O-Sun and (ii) the issuance on March 24, 1998 of $600
million of company-obligated mandatorily redeemable preferred securities. Other
income decreased to $0.7 million in the first quarter of 1998 from $18.5 million
in the first quarter of 1997 due to the recognition in the 1997 period of a
$18.1 million gain from the sale of tax credits (see Note 4 to the condensed
consolidated financial statements).
Extraordinary Items. The Company incurred a $3.3 million extraordinary loss (net
of a $2.0 million tax benefit) on January 28, 1997 related to the early
extinguishment of subordinated debt, which included the write-off of deferred
financing costs and certain prepayment penalties.
Net Income. The Company reported net income of $14.9 million in the first
quarter of 1998 compared to net income of $17.5 million in the first quarter of
1997 ($9.3 million excluding the after-tax gain on the sale of tax credits of
$11.5 million and the extraordinary loss of $3.3 million).
Liquidity and Capital Resources
As of March 31, 1998, the Company had total stockholders' equity of $402.6
million and total indebtedness of $551.1 million (including long-term debt and
the current portion of long-term debt). The Company is currently in compliance
with all covenants and financial ratios contained in its debt agreements.
Cash Flow. Historically, the working capital needs of the Company have been met
with cash flow from operations along with borrowings under revolving credit
facilities. Net cash provided by operating activities was $28.4 million for the
first three months of 1998 as contrasted to $12.4 million for the first three
months of 1997. Investing activities in the first three months of 1998 included
approximately $20.0 million in capital expenditures of which $17.0 million was
spent at Dairy and $3.0 million was spent at Plastics. Investing activities also
included $259.4 million for acquisitions.
On February 20, 1998, Suiza completed the acquisition of Land-O-Sun for a
purchase price of approximately $248 million, including approximately $128
million in cash. The non-cash portion of the purchase price was funded through
the issuance of $100 million of company-obligated 5% mandatorily redeemable
convertible preferred securities of a Delaware business trust formed by Suiza,
and the issuance of $20 million of preferred interests of Land-O-Sun. In
addition, Suiza refinanced Land-O-Sun's existing outstanding long-term
indebtedness, which totaled approximately $52 million as of the closing date.
Suiza financed the cash portion of the purchase price and refinanced the
existing long-term indebtedness with borrowings of $180 million under its Senior
Credit Facility.
During the quarter the Company also acquired Trauth and two small plastic
packaging businesses. Suiza financed these acquisitions with borrowings under
its Senior Credit Facility.
On March 24, 1998, the Company completed the sale of $600 million of
company-obligated 5.5% mandatorily redeemable convertible preferred securities
of a Delaware business trust in a private placement, resulting in net proceeds
after expenses of approximately $582.5 million. The net proceeds were used to
repay $502.5 million under the revolving loan facility of the Company's Senior
Credit Facility and the remainder was placed in short-term cash investments.
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Future Capital Requirements. During 1998, the Company intends to invest a total
of approximately $101.0 million in its manufacturing facilities and distribution
capabilities. Of this amount, Dairy intends to spend approximately $85.0 million
for the year to expand and maintain its manufacturing facilities and for fleet
replacement and Plastics intends to spend approximately $16.0 million. The
Company plans to substantially expand its Plastics operations by opening new
locations and the majority of Plastics' capital spending will be for this
purpose.
Current Debt Obligations. On November 26, 1997, the Company entered into a new
credit facility with a group of lenders, including First Union National Bank of
North Carolina, as administrative agent, and The First National Bank of Chicago,
as syndication agent, which provides for an aggregate Senior Credit Facility of
$1.25 billion comprised of a $550.0 million term loan facility and a $700.0
million revolving credit facility. At March 31, 1998, $674.0 million was
available under the revolving loan facilities. In connection with the closing of
the sale of Reddy Ice on April 30, 1998, the Company used the cash received to
repay additional Senior Credit Facility outstanding borrowings.
The Company expects that cash flow from operations will be sufficient to meet
the Company's requirements for its existing businesses for the remainder of 1998
and for the foreseeable future. During the remainder of 1998 and in the future,
the Company intends to pursue additional acquisitions in its existing regional
markets and to seek strategic acquisition opportunities that are compatible with
it core businesses. Management believes that the Company has the ability to
secure additional financing to pursue its acquisition and consolidation
strategy. There can be no assurance, however, that the Company will have
sufficient available capital resources to realize its acquisition and
consolidation strategy.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Certificate of Trust of Suiza Capital Trust II.
4.2 Amended and restated Declaration of Trust of Suiza Capital Trust
II, dated as of March 24, 1998, among Suiza Foods Corporation, as
Sponsor, Wilmington Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and Tracy L. Noll,
J. Michael Lewis and Joseph B. Armes, as Regular Trustees.
4.3 Indenture for the 5.5% Convertible Subordinated Debentures, dated
as of March 24, 1998, among Suiza Foods Corporation and
Wilmington Trust Company, as Indenture Trustee.
4.4 Form of 5.5% Preferred Securities.
4.5 Form of 5.5% Convertible Subordinated Debenture.
4.6 Preferred Securities Guarantee Agreement, dated as of March 24,
1998, between Suiza Foods Corporation, as Guarantor, and
Wilmington Trust Company, as Guarantee Trustee.
10.1 Registration Rights Amendment, dated March 24, 1998, between
Suiza Foods Corporation, Suiza Capital Trust II, and Donaldson,
Lufkin, Jenrette Securities Corporation, Bear, Stearns & Co. Inc.
and J.P. Morgan & Co.
10.2 Agreement and Plan of Merger dated as of January 14, 1998 by and
among Suiza Foods Corporation, CC Acquisition Corporation, and
Continental Can Company, Inc. (filed as Exhibit 2.1 to the
Registration Statement on Form S-4, Commission File No.
333-46519, and incorporated herein by reference).
11. Statement re computation of per share earnings.
27. Financial Data Schedule.
(b) Reports on Form 8-K
(1) Form 8-K filed on January 15, 1998 to report the definitive
merger agreement between Suiza Foods and Continental Can.
(2) Form 8-K filed on February 25, 1998 to report various matters
including fourth quarter 1997 earnings, potential packaging
operations, the closing of the Land-O-Sun acquisition, and the
signing of a merger agreement with Oberlin.
(3) Form 8-K filed on March 9, 1998 (amended April 7, 1998) to report
the completion of the acquisition of Land-O-Sun.
(4) Form 8-K filed on March 10, 1998 to report the adoption of a
shareholders' rights plan.
(5) Form 8-K filed on March 18, 1998 to report the sale of $600
million of 5.5% company-obligated mandatorily redeemable
preferred securities.
(6) Form 8-K filed on March 20, 1998 to provide pro forma financial
statements related to the issuance of $600 million of 5.5%
company-obligated mandatorily redeemable preferred securities.
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SIGNATURES
Pursuant to the requirement 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.
SUIZA FOODS CORPORATION
/s/ Tracy L. Noll
---------------------------------------
Tracy L. Noll
Executive Vice President,
Chief Financial Officer
(Principal Accounting Officer)
Date: May 14, 1998
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EXHIBIT INDEX
Exhibits No. Descriptions
------------ ------------
4.1 Certificate of Trust of Suiza Capital Trust II.
4.2 Amended and restated Declaration of Trust of Suiza Capital Trust
II, dated as of March 24, 1998, among Suiza Foods Corporation, as
Sponsor, Wilmington Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and Tracy L. Noll,
J. Michael Lewis and Joseph B. Armes, as Regular Trustees.
4.3 Indenture for the 5.5% Convertible Subordinated Debentures, dated
as of March 24, 1998, among Suiza Foods Corporation and
Wilmington Trust Company, as Indenture Trustee.
4.4 Form of 5.5% Preferred Securities.
4.5 Form of 5.5% Convertible Subordinated Debenture.
4.6 Preferred Securities Guarantee Agreement, dated as of March 24,
1998, between Suiza Foods Corporation, as Guarantor, and
Wilmington Trust Company, as Guarantee Trustee.
10.1 Registration Rights Amendment, dated March 24, 1998, between
Suiza Foods Corporation, Suiza Capital Trust II, and Donaldson,
Lufkin, Jenrette Securities Corporation, Bear, Stearns & Co. Inc.
and J.P. Morgan & Co.
10.2 Agreement and Plan of Merger dated as of January 14, 1998 by and
among Suiza Foods Corporation, CC Acquisition Corporation, and
Continental Can Company, Inc. (filed as Exhibit 2.1 to the
Registration Statement on Form S-4, Commission File No.
333-46519, and incorporated herein by reference).
11. Statement re computation of per share earnings.
27. Financial Data Schedule.