1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-18859
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INTERNATIONAL HOME FOODS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377322
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1633 LITTLETON ROAD, PARSIPPANY, N.J. 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 359-9920
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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 [ ]
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at June 30, 1998 was 77,431,352.
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INTERNATIONAL HOME FOODS, INC.
INDEX TO FORM 10-Q
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Income 3
Three Months Ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 and 1997
Condensed Consolidated Balance Sheets 4
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows 5
Six Months Ended June 30, 1998 and 1997
Condensed Consolidated Statements of 6
Comprehensive Income
Three Months Ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 16
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit 12. Computation of Consolidated Ratio of 25
Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule 26
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Net sales $ 402,491 $ 249,872 $ 790,942 $ 494,422
Cost of sales 209,492 115,135 411,254 230,794
----------- ----------- ----------- -----------
Gross profit 192,999 134,737 379,688 263,628
Marketing expenses 78,416 56,479 159,430 109,254
Selling, general, and administrative expenses 55,704 37,351 107,145 76,020
----------- ----------- ----------- -----------
Income from operations 58,879 40,907 113,113 78,354
----------- ----------- ----------- -----------
Interest expense 23,672 25,858 46,594 51,765
Interest income and other, net (365) 820 235 1,572
----------- ----------- ----------- -----------
Income before provision for income taxes 34,842 15,869 66,754 28,161
Provision for income taxes 13,762 6,518 26,367 11,264
----------- ----------- ----------- -----------
Net income $ 21,080 $ 9,351 $ 40,387 $ 16,897
=========== =========== =========== ===========
Basic earnings per share (1):
Net income $ 0.27 $ 0.15 $ 0.52 $ 0.27
----------- ----------- ----------- -----------
Shares used in computing basic earnings
per share 77,379,921 61,922,990 77,303,053 61,922,990
----------- ----------- ----------- -----------
Diluted earnings per share (1):
Net income $ 0.26 $ 0.15 $ 0.50 $ 0.27
----------- ----------- ----------- -----------
Shares used in computing diluted earnings
per share 80,958,130 61,922,990 81,018,089 61,922,990
----------- ----------- ----------- -----------
(1) Per share and share amounts are restated to give effect to the 5.3292
for one reverse stock split on November 17, 1997.
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
June 30, December 31,
ASSETS 1998 1997
------------ -------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 22,612 $ 11,872
Accounts receivable, net of allowances 124,602 108,132
Inventories 233,073 220,565
Prepaid expenses and other current assets 24,432 16,661
Deferred income taxes 18,882 21,102
------------ ------------
Total current assets 423,601 378,332
Property, plant and equipment, net 255,398 210,195
Intangible assets, net 393,310 308,846
Deferred income taxes 324,590 338,611
Other assets 26,161 26,066
------------ ------------
Total assets $ 1,423,060 $ 1,262,050
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to banks $ 12,874 $ 12,228
Current portion of long-term debt 42,965 27,400
Revolving credit facility 41,705 40,000
Accounts payable 51,962 38,871
Accrued salaries, wages and benefits 19,822 16,591
Accrued advertising and promotion 52,768 50,308
Accrued interest 7,245 7,844
Other accrued liabilities 33,214 36,954
------------ ------------
Total current liabilities 262,555 230,196
Long-term debt 1,023,335 942,600
Postretirement benefits obligation 21,166 19,545
Other noncurrent liabilities 6,843 2,079
------------ ------------
Total liabilities 1,313,899 1,194,420
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY (1)
Preferred stock - par value $.01 per share; authorized,
100,000,000 shares; no shares issued or outstanding $ -- $ --
Common stock - par value $.01 per share; authorized,
300,000,000 shares; issued and outstanding
77,431,352 and 77,155,550 shares 774 772
Additional paid-in capital 54,921 52,202
Retained earnings 58,421 18,034
Accumulated other comprehensive income (loss) (4,955) (3,378)
------------ ------------
Total stockholders' equity 109,161 67,630
------------ ------------
Total liabilities and stockholders' equity $ 1,423,060 $ 1,262,050
============ ============
(1) Per share and share amounts are restated to give effect to the 5.3292
for one reverse stock split on November 17, 1997.
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Six Months Ended
June 30,
1998 1997
------------ ------------
(unaudited)
OPERATING ACTIVITIES:
Net income $ 40,387 $ 16,897
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 19,576 13,678
Deferred income taxes 16,241 10,005
Stock option compensation 686 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (8,522) (1,732)
Inventories 387 17,495
Other current assets 807 3,356
Accounts payable 8,791 2,368
Accrued liabilities (2,022) 15,222
Other (2,688) (8,682)
------------ ------------
Net cash provided by operating activities 73,643 68,607
------------ ------------
INVESTING ACTIVITIES:
Purchases of plant and equipment, net (17,611) (7,966)
Purchase of businesses, net of cash acquired (145,210) --
------------ ------------
Net cash used in investing activities (162,821) (7,966)
------------ ------------
FINANCING ACTIVITIES:
Increase (Decrease) in due to banks 645 (2,395)
Issuance of long-term debt 110,000 --
Payment of debt issuance costs (378) --
Repayment of long-term debt (13,736) (13,000)
Borrowings from revolving credit facility 183,000 --
Repayment of borrowings from revolving credit facility (181,000) --
Payment to minority stockholder -- (16,556)
Proceeds from exercise of stock options 1,692 --
------------ ------------
Net cash provided by (used in) financing activities 100,223 (31,951)
------------ ------------
Effect of exchange rate changes on cash (305) --
Increase in cash and cash equivalents 10,740 28,690
Cash and cash equivalents at beginning of period 11,872 45,859
------------ ------------
Cash and cash equivalents at end of period $ 22,612 $ 74,549
============ ============
Cash paid during the period for:
Interest $ 45,259 $ 44,935
Income taxes $ 9,340 $ 770
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Net income $ 21,080 $ 9,351 $ 40,387 $ 16,897
Other comprehensive income, net of tax:
Foreign currency translation (984) 33 (1,577) (102)
----------- ----------- ----------- -----------
Total other comprehensive income (loss) (984) 33 (1,577) (102)
----------- ----------- ----------- -----------
Comprehensive income $ 20,096 $ 9,384 $ 38,810 $ 16,795
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. ACCOUNTING POLICIES
Interim Financial Statements
In the opinion of International Home Foods, Inc. ("the Company"), the
accompanying condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's financial position as of
June 30, 1998, results of operations for the three and six months
ended June 30, 1998 and 1997 and the cash flows for the six months
ended June 30, 1998 and 1997. The results of operations for the three
and six month periods are not necessarily indicative of the results
to be expected for the full year. The accompanying condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in
the Company's 1997 Annual Report on Form 10-K/A.
The financial statements for the quarterly period ended March 31,
1998 have been restated on Form 10-Q/A. The restatement, which
reported the effects of a reduction in the 1997 write-off of deferred
financing costs previously reported, resulted in a decrease in net
income of $506 or $0.01 basic earnings per share for the quarter
ended March 31, 1998. The restatement had no effect on previously
reported diluted earnings per share for the quarter ended March 31,
1998.
Use of Estimates
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles and
necessarily include amounts based on judgments and estimates made by
management. Actual results could differ from these estimates.
Estimates are used when accounting for potential bad debts, inventory
obsolescence and spoilage, trade and promotion allowances, coupon
redemptions, depreciation and amortization, stock option
compensation, deferred income taxes and tax valuation allowances,
restructuring charges, and contingencies, among other items.
2. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Background and Basis of Presentation
The Company was previously an indirect wholly-owned subsidiary of
American Home Products Corporation ("American Home Products"). On
September 5, 1996, American Home Products entered into an agreement
pursuant to which an affiliate ("Hicks Muse Holding") of Hicks, Muse,
Tate & Furst Equity Fund III, L.P. ("Hicks Muse") acquired (the "IHF
Acquisition") an 80% interest in the Company. The IHF Acquisition was
consummated on November 1, 1996.
The IHF Acquisition was accounted for as a leveraged
recapitalization. Accordingly, the Company's assets and liabilities
retained their historical bases for financial reporting purposes. For
tax purposes, the IHF Acquisition was treated as a taxable business
combination resulting in a "step-up" in the tax bases of the
Company's assets and liabilities.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Description of Business, and Basis of Presentation, (Continued)
Business
The Company operates in one business segment which manufactures and
markets a diversified portfolio of shelf-stable food products
including entrees, side dishes, spreadable fruit products, snacks and
canned fish, among others. The Company sells its products primarily
in the United States, Canada and Mexico, and is not dependent on any
single or major group of customers for its sales.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following amounts are included in Accumulated other comprehensive
income (loss) at June 30, 1998 and December 31, 1997:
June 30, December 31,
1998 1997
------------ ------------
Foreign currency translation $ (4,955) $ (3,378)
------------ ------------
Accumulated other comprehensive
income (loss) $ (4,955) $ (3,378)
============ ============
The changes in other comprehensive income (loss), and the related tax
effects, are as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Foreign currency translation
Amount before taxes $ (1,241) $ 33 $ (2,204) $ (102)
Income tax benefit 257 -- 627 --
----------- ----------- ----------- -----------
Amount net of taxes (984) 33 (1,577) (102)
----------- ----------- ----------- -----------
Total other comprehensive
income (loss) $ (984) $ 33 $ (1,577) $ (102)
=========== =========== =========== ===========
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
4. INVENTORIES
Inventories consist of: June 30, December 31,
1998 1997
------------ ------------
Raw materials $ 60,772 $ 46,127
Work in progress 15,642 20,770
Finished goods 156,659 153,668
------------ ------------
Total $ 233,073 $ 220,565
============ ============
5. INCOME TAXES
Historically, the Company has generated operating income and
realization of the deferred tax assets is dependent upon the
Company's ability to generate sufficient future taxable income which
management believes is more likely than not. The Company anticipates
future taxable income sufficient to realize the recorded deferred tax
assets. Future taxable income is based on management's forecasts of
the operating results of the Company and there can be no assurance
that such results will be achieved.
Management continually reviews such forecasts in comparison with
actual results and expected trends. In the event management
determines that sufficient future taxable income may not be generated
to fully realize the deferred tax assets, the Company will provide a
valuation allowance by a charge to income tax expense in the period
of such determination.
6. LONG-TERM DEBT
The Company amended its Senior Secured Bank Credit Facilities (Senior
Bank Facilities) as of June 17, 1998. The Senior Bank Facilities now
comprise (i) a $516.5 million Tranche A term loan facility, maturing
in 2004 with mandatory semiannual repayments commencing September
30,1998 and aggregating $17.2 million, $50.8 million, $72.4 million,
$92.8 million, $104.2 million and $115.6 million in the years 1998
through 2003, respectively, and the remaining $63.5 million on May
31, 2004; (ii) a $149.8 million Tranche B term loan facility,
maturing in 2005 with mandatory semiannual repayments commencing
September 30, 1998 aggregating $0.2 million in 1998, $0.4 million in
years 1999 through 2003, $20.2 million in 2004, and the remaining
$127.4 million in 2005; (iii) a $230 million revolving credit
facility (the Revolving Credit Facility), which includes a Canadian
facility of $30 million, maturing in 2004, or earlier upon repayment
of the Tranche A term loans.
Borrowings under the amended Senior Bank Facilities bear interest
based on the Eurodollar Rate or an Alternate Base Rate, as defined,
plus applicable margins. The Canadian portion of the Revolving Credit
Facility bears interest at the Canadian Prime Rate, or the Canadian
Bankers' Acceptance Rate, as defined, plus applicable margins.
Margins range from 0.5% to 1.75%. At June 30, 1998, interest rates in
effect for Tranches A and B and the Revolving Credit Facility were
7.16%, 7.41% and 6.66%, respectively.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
The Company has ongoing royalty arrangements with several parties,
primarily representing licensing agreements for its wet spices
business and for the use of characters in the Company's canned pasta
business.
Based upon its experience to date, the Company believes that the
future cost of compliance with existing environmental laws, including
the Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as Superfund, regulations and decrees and
liability for known environmental claims, will not have a material
adverse effect on the Company's financial statements as a whole.
However, future events, such as changes in existing laws and
regulations or their interpretation, and more vigorous enforcement
policies of regulatory agencies, may give rise to additional
expenditures or liabilities that could be material.
In the ordinary course of business, the Company enters into contracts
for the purchase of certain of its raw materials and is involved in
various pending or threatened litigation and claims. Although the
outcome of any legal proceeding cannot be predicted with certainty,
management believes that any liability arising from, or the
resolution of any pending or threatened litigation or claims, in the
aggregate will not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the
Company.
8. RELATED PARTY TRANSACTIONS
Effective November 1, 1996, the Company entered into a 10-year
monitoring and oversight agreement with an affiliate of its majority
stockholder. The agreement provides for an annual fee of the greater
of $1,000 or 0.1% of the budgeted consolidated net sales of the
Company for the current year. In addition, effective November 1,
1996, the Company entered into a financial advisory agreement with
the affiliate under which the affiliate will be entitled to a fee of
1.5% of the transaction value, as defined, for each add-on
transaction, as defined.
The Company incurred monitoring and oversight fees of $400 and $250
for the three months ended June 30, 1998 and 1997 and $800 and $500
for the six months ended June 30, 1998 and 1997, respectively. In
addition, the Company incurred financial advisory fees of $1,560 and
$0 for the three months ended June 30, 1998 and 1997 and $2,077 and
$0 for the six months ended June 30, 1998 and 1997, respectively.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
9. GUARANTOR FINANCIAL DATA
The Company's 10 3/8% Senior Subordinated Notes due 2006 (the
Senior Subordinated Notes) are fully and unconditionally guaranteed
by each of the Company's subsidiaries on a joint and several basis.
The Company has not presented separate financial statements and other
disclosures concerning each of the subsidiary guarantors because
management has determined that such information is not material to
the holders of the Senior Subordinated Notes. Presented below is
summarized combined financial information of the subsidiary
guarantors:
June 30, 1998 December 31, 1997
------------- ------------------
(unaudited)
Current assets $ 309,191 $ 262,531
Noncurrent assets 544,809 426,396
Current liabilities 139,857 80,108
Noncurrent liabilities 252,178 269,591
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Net sales $ 193,723 $ 31,206 $ 370,138 $ 68,569
Gross profit 72,976 14,450 135,202 30,082
Net income 7,595 760 13,222 831
Net cash provided by 29,801 17,660
operating activities
Net cash used in (46,650) (5,060)
investing activities
Net cash provided by (used in) 21,536 (11,299)
financing activities
10. IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information", was issued to establish standards for public business
enterprises reporting information regarding operating segments in
annual and interim financial statements issued to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. The Company is
currently evaluating the reporting requirements of this statement and
the impact on its existing segment reporting.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Impact of Recent Accounting Standards, (Continued)
In February 1998, SFAS 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits", was issued to standardize
employers' disclosures about pension and other postretirement benefit
plans. This Statement is effective for fiscal years beginning after
December 15, 1997.
On March 4, 1998 Statement of Position (SOP) No. 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal
Use", was issued. The SOP was issued to address diversity in practice
regarding whether and under what conditions the costs of internal-use
software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The Company
does not expect future adoption of this Statement in 1999 to have a
material effect on reported results.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued to establish standards for accounting
for derivatives and hedging activities and supersedes and amends a
number of existing standards. This statement requires all derivatives
to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented
pursuant to the provisions of SFAS 133. This statement is effective
for fiscal years beginning after June 15, 1999. Based on existing
derivatives and hedging activities of the Company, future adoption of
the requirements of SFAS 133 is not expected to have a material
impact on the Company's reported results.
11. ACQUISITIONS
Effective July 1, 1997, the Company consummated the acquisition of
substantially all of the assets (the "Assets") of Bumble Bee
Seafoods, Inc. and its wholly-owned subsidiaries, Bumble Bee
International, Inc., Santa Fe Springs Holding Company and Commerce
Distributing Company (collectively, the "Sellers"), pursuant to the
terms of an Asset Purchase and Sale Agreement dated as of May 1, 1997
(the "Agreement") by and among the Sellers, the Company and its
wholly-owned subsidiary, Bumble Bee Acquisition Corporation. The
aggregate consideration paid for the Assets was approximately
$163,000 in cash and the assumption of certain liabilities of the
Sellers, including trade payables and certain accrued liabilities.
The Assets consist primarily of inventory, accounts receivable,
property, plant and equipment and trademarks formerly used by the
Sellers for the processing and marketing of canned seafood products,
principally tuna and salmon, including processing facilities in
Puerto Rico, Ecuador and California. The transaction was approved by
an order of the Federal Bankruptcy Court for the Southern District of
California on June 19, 1997, as part of the bankruptcy proceedings of
the Sellers. The Company financed the purchase of the Assets with
approximately $110,000 borrowings under its Senior Bank Facilities
and the balance of the purchase price from the Company's available
cash balances as of the date of the closing.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Acquisitions (Continued)
On October 1, 1997, the Company acquired Productos Del Monte (PDM)
from an affiliate of Hicks Muse for 3,127,415 shares of Common Stock.
The shares issued for PDM were valued at their estimated fair value
of approximately $40,000, which approximated the purchase price that
the Hicks Muse affiliate paid for PDM in 1996. PDM is a leading
manufacturer and marketer of branded catsup, canned vegetables and
bottled salsa in Mexico. The acquisition of PDM was treated as a
combination of entities under common control. Accordingly, the
historical accounting values of PDM were carried over for financial
accounting purposes. In February 1998, the Company settled a dispute
between the Hicks Muse affiliate and PDM's former owners. The
settlement has been recorded as a reduction of the purchase price
paid by the Hicks Muse affiliate, resulting in a reduction of
goodwill recorded by the Company.
On October 1, 1997, the Company acquired all of the stock of Creative
Products, Inc. of Rossville ("Creative Products") for approximately
$52,000 in cash. Creative Products is the leading manufacturer of
cooking spray sold to private label customers and food service
operators. In addition, Creative Products manufactures on a contract
basis a number of health and beauty aid products, including hair
mousses, hair sprays and deodorants.
On November 21, 1997 the Company acquired substantially all of the
assets of Orleans Seafood, Inc. for $26,900, including transaction
fees. Orleans is a specialty canned seafood manufacturer and
marketer. The acquisitions were funded through borrowings under the
Company's Senior Bank Facilities.
On March 9, 1998, the Company, through its Canadian subsidiary,
International Home Foods (Canada), Inc., purchased certain assets
relating to the Puritan stews and canned meats business from
Unilever's T. J. Lipton Canada division for a total purchase price of
approximately $39,000, including transaction fees. The acquisition
was funded with borrowings under the Company's Revolving Credit
Facility. Puritan is the largest processor and marketer of canned
stews and meats in Canada, with products marketed under the Puritan
and Fraser Farms brand names.
On April 14, 1998, the Company acquired all of the stock of Grist
Mill Co. for approximately $112,350, including transaction fees. The
Company financed the acquisition with borrowings under its Revolving
Credit Facility. Grist Mill is a manufacturer and distributor of
store brand and value-priced branded food products including
ready-to-eat cereals, fruit snacks, granola bars, fruit-filled cereal
bars, crisp rice marshmallow bars and preformed pie crusts.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Acquisitions (Continued)
The excess of cost over fair value of net assets acquired for the above
acquisitions will be amortized over 40 years. The information below includes
non-cash investing and financing activities supplemental to the consolidated
statements of cash flows. These acquisitions have been accounted for using the
purchase method of accounting, and the operating results of the acquired
companies have been included in the consolidated financial statements from the
dates of acquisition. A summary of the excess of cost over fair value of net
assets acquired resulting from preliminary purchase price allocations for the
1998 acquisitions is as follows:
Puritan Grist Mill
------------ ------------
Cost of acquisition, including
transaction fees $ 38,993 $ 112,350
Less: acquired assets:
Current assets 4,654 23,275
Property, plant and equipment 6,473 30,323
Other assets -- 717
Add: Liabilities assumed -- 4,785
------------ ------------
Excess of cost over net assets
acquired $ 27,866 $ 62,820
============ ============
The following unaudited proforma consolidated results of operations have been
prepared as if the acquisitions of Bumble Bee and the Other Acquisitions (PDM,
Creative Products, Orleans Seafood, Puritan and Grist Mill) had occurred as of
the beginning of 1997, and reflect proforma adjustments for goodwill, interest
expense and tax expense:
For the Six Months Ended For the Six Months Ended
June 30, 1998 June 30, 1997
------------------------------------ --------------------------------------------------
Other Other
IHF Acquisitions(1) Total IHF Bumble Bee Acquisitions(2) Total
------------------------------------ --------------------------------------------------
Net sales $ 790,942 $ 37,606 $ 828,548 $ 494,422 $ 183,888 $ 138,269 $ 816,579
Operating income/(loss) $ 113,113 $ 2,512 $ 115,625 $ 78,354 $ (2,957) $ 10,953 $ 86,350
Net income/(loss) $ 40,387 $ (379) $ 40,008 $ 16,897 $ (4,151) $ 3,606 $ 16,352
Earnings per share:
Basic $ 0.52 -- $ 0.52 $ 0.27 $ (0.07) $ 0.06 $ 0.26
Diluted $ 0.50 -- $ 0.50 $ 0.27 $ (0.07) $ 0.06 $ 0.26
(1) Amounts include Puritan and Grist Mill.
(2) Amounts include PDM, Creative Products, Orleans Seafood, Puritan and
Grist Mill.
The proforma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the period
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12. EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if options to issue
common stock are assumed to be exercised or converted into common
stock.
The EPS computations are based on the following amounts:
For the Three Months Ended For the Six Months Ended
---------------------------- ----------------------------
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Basic EPS computation:
Net income available to
common shares $ 21,080 $ 9,351 $ 40,387 $ 16,897
Average number of shares
outstanding 77,379,921 61,922,990 77,303,053 61,922,990
Basic earnings per share $ 0.27 $ 0.15 $ 0.52 $ 0.27
Diluted EPS computation:
Net income available to
common shares $ 21,080 $ 9,351 $ 40,387 $ 16,897
Average number of shares
outstanding 77,379,921 61,922,990 77,303,053 61,922,990
Effect of dilutive stock
options 3,578,209 -- 3,715,036 --
------------ ------------ ------------ ------------
Total number of shares
outstanding 80,958,130 61,922,990 81,018,089 61,922,990
Diluted earnings per share $ 0.26 $ 0.15 $ 0.50 $ 0.27
13. SUBSEQUENT EVENTS
On July 21, 1998 the Company entered into a definitive agreement to
acquire the Libby's(R) brand of retail and international canned meat
products, and the Trenton, Missouri manufacturing facility for those
products from Nestle USA, Inc. for approximately $126.0 million in
cash, excluding transaction fees. The Company, through a fifteen year
license agreement with Nestle, will continue to use the Libby's(R)
trademark. In addition, the Company and Nestle have entered into a
long-term supply agreement under which the Company will continue to
manufacture Nestle foodservice products at the facility in Trenton,
Missouri. Libby's(R) is a leading domestic manufacturer, importer and
global marketer of canned meat products, including Vienna sausages,
corned beef, salmon, hash and chili, and the Spreadables(R) and
Broadcast(R) brands. The transaction is expected to close in
September, 1998. The Company intends to finance the acquisition of
the Libby's canned meat business with borrowings under its Revolving
Credit Facility.
The Company intends to amend its Senior Bank Facilities by adding a
new $100.0 million term loan and intends to use the proceeds to repay
a portion of the outstanding borrowings under its Revolving Credit
Facility.
15
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INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Three and Six Months Ended June 30, 1998 and 1997.
NET SALES - The Company's net sales were $402.5 million for the three months
ended June 30, 1998 as compared to $249.9 million in the comparable 1997
quarter, an increase of $152.6 million, or 61.1%. Approximately $94.3 million,
$26.0 million, $16.3 million, $13.1 million, $9.6 million, and $5.5 million of
the increase was related to sales of Bumble Bee Seafood, Grist Mill, Productos
Del Monte, Creative Products, Puritan and Orleans Seafood products,
respectively, each of which were acquired by the Company subsequent to June 30,
1997 and therefore not reflected in the 1997 amounts. Sales of the Company's
existing brands decreased by approximately $12.2 million, primarily as a result
of lower volume in the Company's snack food category due to (i) competitive
pressures in the crisp rice snack bars category, (ii) a temporary cessation in
sales of Crunch `n Munch products to mass merchant customers which the Company
expects to resume beginning in the third quarter 1998, and (iii) continuing
lower sales in Polaner All-Fruit.
For the six months ended June 30, 1998, net sales were $790.9 million as
compared to $494.4 million for the comparable 1997 six months, an increase of
$296.5 million, or 60.0%. Approximately $205.5 million, $29.7 million, $27.3
million, $26.0 million, $11.0 million, and $10.8 million of the increase
related to sales of Bumble Bee Seafood, Productos Del Monte, Creative Products,
Grist Mill, Puritan and Orleans Seafood products, respectively, each of which
were acquired by the Company subsequent to June 30, 1997 and therefore not
reflected in the 1997 amounts. Sales of the Company's existing brands decreased
by approximately $13.8 million, primarily as a result of lower volume in the
Company's snack food category due to (i) competitive pressures in the crisp
rice snack bars category, (ii) a temporary cessation in sales of Crunch `n
Munch products to mass merchant customers which the Company expects to resume
beginning in the third quarter 1998, and (iii) continuing lower sales in
Polaner All-Fruit.
COST OF GOODS SOLD - Cost of goods sold was $209.5 million for the three months
ended June 30, 1998 as compared to $115.1 million in the comparable 1997
quarter. Expressed as a percentage of net sales, cost of goods sold increased to
52.0% from 46.1% in 1997. This was primarily attributable to the inclusion of
the operations of the companies acquired in 1997 and 1998, which have lower
gross margins in comparison with the Company's historical margins. Excluding the
1997 and 1998 acquisitions, cost of sales declined to 43.5% of net sales from
46.1% of net sales in the comparable 1997 quarter. This decline in cost of goods
sold as a percentage of net sales primarily resulted from the continuing overall
reductions in the Company's manufacturing costs, which reflect management's
continuing cost reduction initiatives.
For the six months ended June 30, 1998, cost of goods sold as a percentage of
net sales increased to 52.0% from 46.7% for the comparable 1997 period. This was
primarily attributable to the inclusion of the operations of the companies
acquired in 1997 and 1998, which have lower gross margins in comparison to the
Company's historical margins. Excluding the 1997 and 1998 acquisitions, cost of
goods sold declined to 43.1% of net sales from 46.7% of net sales for the
comparable 1997 period, principally reflecting management's continuing cost
reduction initiatives.
16
17
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
TOTAL MARKETING EXPENSES - Total marketing expenses increased to $78.4 million
for the three months ended June 30, 1998 as compared to $56.5 million in 1997.
Expressed as a percentage of net sales, total marketing expenses decreased to
19.5% from 22.6% for the comparable 1997 period. The increase of $21.9 million
was attributable to the inclusion of the 1997 and 1998 acquisitions, primarily
Bumble Bee Seafood ($17.5 million), Productos Del Monte ($5.0 million), Puritan
($3.5 million), Grist Mill ($2.3 million), Orleans Seafood ($0.8 million) and
Creative Products ($0.4 million), offset by $7.6 million of lower expenditures
for existing brands (primarily PAM and Polaner).
Total marketing expenses increased to $159.4 million for the six months ended
June 30, 1998, as compared to $109.2 million for the comparable 1997 period.
Expressed as a percentage of net sales, total marketing expenses decreased to
20.2% from 22.1% for the comparable 1997 six month period. The increase of $50.2
million was attributable to the inclusion of the 1997 and 1998 acquisitions,
primarily Bumble Bee ($39.7 million), Productos Del Monte ($7.3 million),
Puritan ($4.1 million), Orleans Seafood ($1.4 million), Grist Mill ($2.3
million), and Creative Products ($0.7 million), offset by $5.3 million of lower
expenditures on existing brands (primarily PAM and Polaner).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative (SG&A) expenses were $55.7 million for the three months ended
June 30, 1998 as compared to $37.4 million in 1997. Total SG&A expenses as a
percentage of net sales declined to 13.8% in the three months ended June 30,
1998 from 14.9% in the comparable 1997 quarter. SG&A expenses increased to
$107.1 million for the six months ended June 30, 1998 compared to $76.0 million
for the comparable 1997 period. Total SG&A expenses as a percentage of net sales
declined to 13.5% for the six months ended June 30, 1998 from 15.4% for the
comparable 1997 period. The decreases in SG&A expenses reflect management's
continued cost reduction initiatives.
INTEREST EXPENSE - Interest expense for the three months ended June 30, 1998 was
$23.7 million as compared to $25.9 million for the comparable 1997 period. The
decrease in interest expense reflects a lower outstanding debt balance during
the quarter ended June 30, 1998 as compared to the comparable 1997 quarter as
well as a lower weighted average interest rate for the period.
Interest expense for the six months ended June 30, 1998 was $46.6 million as
compared to $51.8 million for the comparable 1997 period. The decrease in
interest expense is due to a lower outstanding debt balance during the six
months ended June 30, 1998 as compared to the comparable 1997 period as well as
a lower weighted average interest rate for the period.
17
18
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
PROVISION FOR INCOME TAXES - Income taxes increased to $13.8 million for the
three months ended June 30, 1998 from $6.5 million in 1997 due to higher income
before tax. The effective tax rate decreased to 39.5% in 1998 from 41.1% in
1997.
Income taxes increased to $26.4 million for the six months ended June 30, 1998
from $11.3 million in 1997 due to higher income before tax. The effective tax
rate decreased to 39.5% in 1998 from 40.0% in 1997. The Company anticipates
sufficient future income to realize deferred tax assets recorded at June 30,
1998. In the event management determines that sufficient future taxable income
may not be generated to fully realize the deferred tax assets, the Company will
provide a valuation allowance by a charge to income tax expense in the period of
such determination.
NET INCOME - For the three month period ended June 30, 1998, net income
increased by $11.7 million over the comparable 1997 quarter and for the six
months ended June 30, 1998, net income increased by $23.5 million over the
comparable 1997 period, primarily reflecting the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30, 1998
was $73.6 million, or $5.0 million higher than the comparable 1997 period. The
increase was attributable to higher net income ($23.5 million), additional
depreciation, amortization and stock option compensation expense ($6.6 million)
and deferred income taxes ($6.2 million), offset by changes in assets and
liabilities ($31.3 million).
The Company through its Canadian subsidiary, International Home Foods (Canada),
Inc., purchased substantially all of the assets relating to the Puritan stews
and canned meats business from Unilever's T. J. Lipton Canada division for
approximately $39.0 million. In addition, the Company purchased Grist Mill Co.
for approximately $106.2 million, net of cash acquired. For the six months ended
June 30, 1998, the Company invested $17.6 million in capital expenditures, an
increase of $9.6 million over the comparable 1997 period.
Cash provided by financing activities was $100.2 million for the six months
ended June 30, 1998, compared to cash used in financing activities for the six
months ended June 30, 1997 of $32.0 million. The Company borrowed $183.0 million
and repaid $181.0 million under the terms of its Revolving Credit Facility. In
addition, the Company borrowed $110.0 million in term loans under the tranches
of its Senior Bank Facilities, and repaid $13.7 million under the term loans.
The net additional borrowings were used to fund the acquisitions of Puritan and
Grist Mill. The Company amended its Senior Bank Facilities as of June 17, 1998.
The Company received $1.7 million in proceeds from the exercise of stock
options.
18
19
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, (Continued)
On July 21, 1998 the Company entered into a definitive agreement to acquire the
Libby's(R) brand of retail and international canned meat products, and the
Trenton, Missouri manufacturing facility for those products from Nestle USA,
Inc. for approximately $126.0 million in cash, excluding transaction fees. The
Company, through a fifteen year license agreement with Nestle, will continue to
use the Libby's(R) trademark. In addition, the Company and Nestle have entered
into a long-term supply agreement under which the Company will continue to
manufacture Nestle foodservice products at the facility in Trenton, Missouri.
Libby's(R) is a leading domestic manufacturer, importer and global marketer of
canned meat products, including Vienna sausages, corned beef, salmon, hash and
chili, and the Spreadables(R) and Broadcast(R) brands. The transaction is
expected to close in September, 1998. The Company intends to finance the
acquisition of the Libby's canned meat business with borrowings under its
Revolving Credit Facility.
The Company intends to amend its Senior Bank Facilities by adding a new $100.0
million term loan and intends to use the proceeds to repay a portion of the
outstanding borrowings under its Revolving Credit Facility. At August 12, 1998,
the Company had available $198.2 million under its Revolving Credit Facility.
Management believes that cash generated from operations and borrowings under the
Senior Bank Facilities will be sufficient to satisfy working capital
requirements and required capital expenditures. Further expansion of the
business through acquisitions may require the Company to incur additional
indebtedness or issue equity securities. There can be no assurance that
additional debt or equity will be available to the Company, or if available,
will be on terms acceptable to the Company.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT STRATEGIES
The Company currently does not use derivative financial instruments for trading
or speculative purposes, nor is the Company a party to leveraged derivatives. In
accordance with the Senior Bank Facilities, the Company is required to enter
into interest rate protection agreements to the extent necessary to provide
that, when combined with the Company's Senior Subordinated Notes, at least 50%
of the Company's aggregate indebtedness is subject to either fixed interest rate
or interest rate protection through December 1998. Accordingly, the Company
entered into an interest rate collar transaction that became effective on
September 8, 1997 and expires on December 8, 1998. The notional amount of the
collar is $135,000 with the cap set at 8% and the floor set at 5.25%.
19
20
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures About Segments of an Enterprise and Related Information", was
issued to establish standards for public business enterprises reporting
information regarding operating segments in annual and interim financial
statements issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. The Company is currently evaluating the
reporting requirements of this statement and the impact on its existing segment
reporting.
In February 1998, SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", was issued to standardize employers' disclosures about
pension and other postretirement benefit plans. This Statement is effective for
fiscal years beginning after December 15, 1997.
On March 4, 1998 Statement of Position (SOP) No. 98-1, "Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use", was issued. The
SOP was issued to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized. SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
The Company does not expect future adoption of this Statement in 1999 to have a
material effect on reported results.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued to establish standards for accounting for derivatives
and hedging activities and supersedes and amends a number of existing standards.
This statement requires all derivatives to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. This statement is effective
for fiscal years beginning after June 15, 1999. Based on existing derivatives
and hedging activities of the Company, future adoption of the requirements of
SFAS 133 is not expected to have a material impact on the Company's reported
results.
READINESS FOR YEAR 2000 - The Company has taken actions to understand the nature
and extent of the work required to make its systems, products and infrastructure
Year 2000 compliant and to access the risks of noncompliance. The assessment of
business systems risks is substantially complete, with Year 2000 compliance for
critical business systems targeted for completion by December 31, 1998. Total
projected costs are anticipated to not exceed $0.2 million. The assessment of
physical and manufacturing process control systems along with recommendations to
insure compliance is targeted for completion by November 30, 1998. Cost
estimates for physical and manufacturing process control systems are not yet
finalized, but are not expected to be material. Management anticipates critical
manufacturing process control systems compliance by January 31, 1999. In
addition, the Company is surveying its business partners and original equipment
manufacturers to understand their Year 2000 compliance efforts.
20
21
INTERNATIONAL HOME FOODS, INC.
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The matters described under item 4 (c) below were submitted to a
vote of security holders, through the solicitation of proxies
pursuant to Section 14 under the Securities Exchange Act of 1934, as
amended, at the Annual Meeting of Stockholders held on May 6, 1998
(the "Annual Meeting").
(b) Not applicable
(c) The following describes the matters voted upon at the Annual Meeting
and sets forth the number of votes cast for, against or withheld and
the number of abstentions as to each such matter:
(i) Election of directors:
Nominee For Withheld
------- ---- --------
L. Hollis Jones 69,506,798 98,976
John R. Muse 69,446,713 159,061
Roger T. Staubach 69,295,878 309,896
(ii) Approval of the proposed amendment to the 1997 Stock
Option Plan:
For Against Abstain
--- ------- -------
65,129,641 2,674,760 32,522
(iii) Ratification of the appointment of Coopers & Lybrand
L.L.P. as independent auditors for 1998:
For Against Abstain
--- ------- -------
69,597,834 7,080 860
(d) Not applicable
21
22
INTERNATIONAL HOME FOODS, INC.
ITEM 6 EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits:
(12) Statements showing computation of ratio of earnings to fixed
charges based on SEC Regulation S-K, Item 503.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Dated April 20, 1998, under Item 5 (Other Events) and Item 7
(Financial Statements and Exhibits).
22
23
INTERNATIONAL HOME FOODS, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
International Home Foods, Inc.
(Registrant)
/s/ C. DEAN METROPOULOS
Date: August 14, 1998 ------------------------------------
C. Dean Metropoulos
Chairman of the Board and
Chief Executive Officer
/s/ N. MICHAEL DION
Date: August 14, 1998 ------------------------------------
N. Michael Dion
Senior Vice President and
Chief Financial Officer
23
24
INTERNATIONAL HOME FOODS, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- ------ --------
12 Computation of Consolidated Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
24