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 June 30, 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 July 31, 1998 the number of shares outstanding of each class of common
stock was:
Common Stock, $.01 par value: 34,736,364
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,103 $ 24,388
Temporary investments 17,009 --
Receivables, net of allowance for doubtful accounts
of $12,393 and $3,589, respectively 333,711 164,284
Inventories 217,838 76,087
Prepaid expenses and other current assets 18,648 7,978
Refundable income taxes 19,553 19,836
Deferred income taxes 8,401 2,718
Net assets of discontinued operations -- 100,785
---------- ----------
Total current assets 660,263 396,076
PROPERTY, PLANT AND EQUIPMENT 676,939 363,649
DEFERRED INCOME TAXES 3,179 4,484
INTANGIBLE AND OTHER ASSETS 1,225,087 639,253
---------- ----------
TOTAL $2,565,468 $1,403,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 405,721 $ 178,021
Income taxes payable 4,825 4,006
Lines of credit and current portion of long-term debt 52,678 50,846
---------- ----------
Total current liabilities 463,224 232,873
LONG-TERM DEBT 654,880 777,813
OTHER LONG-TERM LIABILITIES 77,987 13,230
DEFERRED INCOME TAXES 35,265 20,236
MANDATORILY REDEEMABLE CONVERTIBLE TRUST ISSUED PREFERRED SECURITIES 682,646 --
MINORITY INTEREST IN SUBSIDIARIES 25,490 --
COMMITMENTS AND CONTINGENCIES
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, 34,457,891 and 30,463,312 shares issued and outstanding 345 305
Additional paid-in capital 473,613 281,774
Retained earnings 148,277 73,490
---------- ----------
Total stockholders' equity 625,976 359,310
---------- ----------
TOTAL $2,565,468 $1,403,462
========== ==========
See notes to condensed consolidated financial statements.
2
3
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NET SALES $ 768,120 $ 381,689 $ 1,361,241 $ 747,367
COST OF SALES 582,213 291,609 1,038,361 574,967
------------ ------------ ------------ ------------
GROSS PROFIT 185,907 90,080 322,880 172,400
OPERATING COSTS AND EXPENSES:
Selling and distribution 89,127 45,662 159,328 89,740
General and administrative 24,676 13,121 44,121 27,233
Amortization of intangibles 7,248 2,634 12,986 5,358
------------ ------------ ------------ ------------
Total operating costs and expenses 121,051 61,417 216,435 122,331
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 64,856 28,663 106,445 50,069
OTHER (INCOME) EXPENSE:
Interest expense, net 8,445 4,935 21,847 10,623
Financing charges on preferred securities 9,646 -- 10,895 --
Other income, net (739) (580) (1,441) (19,135)
------------ ------------ ------------ ------------
Total other (income) expense 17,352 4,355 31,301 (8,512)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS 47,504 24,308 75,144 58,581
INCOME TAXES 17,325 8,045 26,912 19,913
MINORITY INTEREST 549 -- 549 --
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 29,630 16,263 47,683 38,668
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- 1,313 (3,161) (353)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEMS 29,630 17,576 44,522 38,315
EXTRAORDINARY GAIN (LOSS) 31,698 -- 31,698 (3,270)
------------ ------------ ------------ ------------
NET INCOME $ 61,328 $ 17,576 $ 76,220 $ 35,045
============ ============ ============ ============
NET INCOME APPLICABLE TO COMMON STOCK $ 61,253 $ 17,501 $ 76,058 $ 34,895
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES: Basic 32,516,846 29,545,871 31,645,463 28,789,948
Diluted 43,582,369 31,342,063 39,030,791 30,418,402
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 0.91 $ 0.55 $ 1.50 $ 1.34
Income (loss) from discontinued operations -- 0.04 (0.10) (0.01)
Extraordinary gain (loss) 0.97 -- 1.00 (0.12)
------------ ------------ ------------ ------------
Net income $ 1.88 $ 0.59 $ 2.40 $ 1.21
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 0.82 $ 0.52 $ 1.39 $ 1.27
Income (loss) from discontinued operations -- 0.04 (0.08) (0.01)
Extraordinary gain (loss) 0.72 -- 0.81 (0.11)
------------ ------------ ------------ ------------
Net income $ 1.54 $ 0.56 $ 2.12 $ 1.15
============ ============ ============ ============
See notes to condensed consolidated financial statements.
3
4
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,220 $ 35,045
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations 3,161 353
Depreciation and amortization 36,807 19,630
Minority interest 549 --
Extraordinary (gain) loss (31,698) 3,270
Other (768) 192
Deferred income taxes 5,340 1,513
Changes in operating assets and liabilities, net of acquisitions:
Receivables (21,594) 12,368
Inventories (13,300) (5,745)
Prepaid expenses and other assets 4,857 (262)
Accounts payable and other accrued expenses 22,325 (15,063)
Income taxes 8,218 4,977
------------- -------------
Net cash provided by continuing operations 90,117 56,278
Net cash used by discontinued operations (2,068) (487)
------------- -------------
Net cash provided by operating activities 88,049 55,791
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (64,714) (20,507)
Cash outflows for acquisitions (446,184) (7,321)
Net proceeds from the sale of discontinued operations 172,732 --
Purchases of temporary investments 5,157 --
Other 1,289 (1,203)
------------- -------------
Net cash used by continuing operations (331,720) (29,031)
Net cash used by discontinued operations (14,022) (19,377)
------------- -------------
Net cash used by investing activities (345,742) (48,408)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 722,445 28,100
Repayment of debt (1,052,648) (127,962)
Payment of deferred financing, debt restructuring and merger costs (1,256) (4,970)
Issuance of common stock, net of expenses 27,517 89,748
Issuance of trust issued preferred securities, net of expenses 582,500 --
Other (150) (150)
------------- -------------
Net cash provided by (used by) financing activities 278,408 (15,234)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,715 (7,851)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,388 23,823
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 45,103 $ 15,972
============= =============
See notes to condensed consolidated financial statements.
4
5
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of June 30, 1998 and for
the three and six month periods ended June 30, 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. The consolidated financial
statements of the Company as of and for the periods ended June 30, 1998,
also reflect the acquisitions of a number of businesses during 1998, which
have been accounted for as purchase business combinations as of their
respective acquisition dates, as discussed in Note 6. As a result of these
1998 purchase acquisitions, the assets acquired and liabilities assumed and
the post-acquisition results of operations have resulted in significant
increases in the Company's assets and liabilities and operating results
during 1998 as compared to 1997 levels.
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 June 30, 1998 and for the three month and six month
periods ended June 30, 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. Certain
reclassifications have been made to conform the prior year condensed
consolidated statements of income to the current year classifications.
2. TEMPORARY INVESTMENTS
Temporary investments at June 30, 1998 consist of U.S. Government
obligations due within one year, certificates of deposit or Eurodollar
deposits due within one year and highly rated commercial paper. At June 30,
1998, the carrying value of temporary investments approximates market
value.
3. INVENTORIES
AT JUNE 30, AT DECEMBER 31,
1998 1997
---------- ----------
(IN THOUSANDS)
Raw materials and supplies $ 126,304 $ 43,764
Finished goods 91,534 32,323
---------- ----------
$ 217,838 $ 76,087
========== ==========
4. DEBT
AT JUNE 30, AT DECEMBER 31,
1998 1997
---------- ----------
(IN THOUSANDS)
Subsidiary lines of credit $ 33,506 $ --
========== ==========
Senior credit facility:
Revolving loan facility $ 480,000 $ 265,500
Term loan facility -- 550,000
Subsidiary debt obligations 194,052 13,159
---------- ----------
674,052 828,659
Less: current portion (19,172) (50,846)
---------- ----------
$ 654,880 $ 777,813
========== ==========
Subsidiary Lines of Credit - In connection with the acquisition of
Continental Can Company, Inc. ("Continental Can"), the Company has assumed
existing subsidiary lines of credit of certain of Continental Can's domestic
and foreign subsidiaries. Borrowings under these subsidiary lines of credit
are generally subject to limitations based on a borrowing base, as defined
in the respective agreements, and bear interest generally at floating
interest rates determined for each subsidiary. Outstanding borrowings under
these subsidiary lines of credit, which at June 30, 1998, represented
foreign subsidiary borrowings, have been classified as a current liability
since such borrowings are expected to be repaid within one year.
Senior Credit Facilities - Effective as of May 29, 1998, the Company amended
and restated its existing credit facility with a group of lenders, including
First Union National Bank, as administrative agent, and The First National
Bank of Chicago, as syndication agent (the "Senior Credit Facility"), which
terminated the term loan facility of the prior agreement and expanded the
revolving loan facility. The new Senior Loan Facility provides the Company
with a line of credit of up to
5
6
$1 billion to be used for general corporate and working capital purposes,
including the financing of acquisitions by the Company. The Senior Credit
Facility expires March 31, 2003, unless extended in accordance with its
terms.
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 50 to 75 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 Senior Credit Facility that ranges from 15 to 23 basis points, based
on the Company's ratio of defined indebtedness to EBITDA. Interest is
payable quarterly or at the end of the applicable interest period. The
interest rate, including the LIBOR margin, in effect on the Senior Credit
Facility, including the applicable interest rate margin, was 6.82% at June
30, 1998.
The Senior Credit Facility is secured by capital stock of the Company's
subsidiaries other than Continental Can Company, Inc. and its subsidiaries
and certain other subsidiaries.
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) and an interest coverage ratio (computed as the ratio of EBITDA to
interest expense). In addition, the Senior Credit Facility requires that the
Company maintain a minimum level of net worth. The Senior Credit Facility
also contains limitations on liens, investments, the incurrence of
additional indebtedness and acquisitions, and prohibits certain dispositions
of property.
Subsidiary Debt Obligations - Subsidiary debt obligations includes senior
secured notes of one of Continental Can's subsidiaries, industrial
development revenue bond obligations of certain subsidiaries and other debt
obligations of certain subsidiaries.
The senior secured notes were issued in December 1996 by one of Continental
Can's subsidiaries, Plastic Containers, Inc. ("PCI"), and have an original
face value of $125 million. These notes, which are due in 2006, bear
interest at a fixed interest rate of 10%, payable semi-annually in July and
December of each year, and are secured by substantially all assets other
than inventory, receivables and certain equipment of PCI, along with the
stock of certain of PCI's subsidiaries. These notes are redeemable, in whole
or in part, at the option of PCI, beginning on December 16, 2001, at an
initial price of 105% of par value, declining ratably each year to par value
on December 15, 2004. In addition, the indenture requires PCI to offer to
redeem the notes at a redemption price of 101% of par value in the event of
a change in control, and at 100% of par value upon the occurrence of certain
other events. The indenture places certain restrictions on the payment of
dividends, additional liens, disposition of the proceeds of asset sales,
sale and leaseback transactions and additional borrowings.
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 June 30, 1998,
ranged from 3.7% to 3.9%.
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.
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, to the extent of outstanding
borrowings, against the Company's variable interest rate exposure on its
loans under the Senior Credit Facility. The portion of these interest rate
contracts which are not hedged against existing variable rate borrowings
under the Senior Credit Facility are accounted for at market value, with any
resulting changes in market value recognized as an adjustment to interest
expense.
At June 30, 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 $435 million at interest rates ranging from
6.03% to 6.14%, plus the applicable LIBOR margin and include $110 million of
swaps that mature in December 2000; $50 million of Swaps that mature in
March 2001; $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 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.
6
7
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.
5. 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 in Puerto Rico from 39% to
3.9% and provided for a 50% tax credit for certain "eligible investments" in
qualified agricultural businesses in Puerto Rico.
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) from the sale of earned tax credits to third parties. In
addition, in April 1998, the Company sold additional tax credits for net
proceeds of $7.6 million related to its 1996 investment in its Puerto Rico
coffee business subject to indemnification provisions. The sale of these tax
credits will be recognized as an adjustment to the original purchase price
of the coffee business, once the uncertainties related to these
indemnification provisions are resolved, which will result in a reduction of
goodwill.
6. ACQUISITIONS
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.
On May 29, 1998 the Company completed the acquisition of Continental Can for
a purchase price of approximately $181 million, which was funded through the
issuance of 2,050,635 shares of Suiza common stock and Suiza stock options
to replace outstanding stock options of Continental Can, along with cash of
$41 million. Suiza also assumed Continental Can's long-term indebtedness of
approximately $200 million at acquisition date. 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 acquisition was accounted for using the purchase method of accounting.
7
8
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
--------------- ----------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $855,017 $763,156 $1,636,988 $1,487,830
Income from continuing operations 31,826 29,883 52,004 57,522
Net income 63,524 31,196 80,541 53,899
Income from continuing operations per share:
Basic 33,846,379 31,596,506 33,333,555 30,840,583
Diluted 45,203,290 35,165,424 45,990,946 34,271,763
Net income per share:
Basic $1.87 $0.98 $2.42 $1.74
Diluted 1.40 0.88 1.75 1.57
On June 30, 1998 the Company acquired the operations of West Lynn Creamery,
Inc. ("West Lynn") for a cash purchase price of approximately $89 million,
which the Company financed with borrowings under its Senior Credit Facility.
In connection with this acquisition, Suiza also repaid approximately $44
million of outstanding West Lynn debt. West Lynn is a leading manufacturer
and distributor of milk, cultured products, extended shelf-life products,
juice and ice cream throughout the northeast United States and reported net
sales of $214 million for its fiscal year ended December 31, 1997. The West
Lynn acquisition has been accounted for using the purchase method of
accounting.
During the first six months of 1998, the Company also acquired 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 years. These acquisitions were
accounted for using the purchase method of accounting.
The purchase price of each of the above acquisitions was allocated to assets
acquired, including identifiable intangibles, and liabilities assumed based
on their estimated fair market values. The excess of the total purchase
prices over the estimated fair values of the net assets represented
goodwill. These allocations are tentative and subject to change.
7. DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEMS
On April 30, 1998, Suiza consummated its previously announced sale of Reddy
Ice Corporation ("Reddy Ice") to Packaged Ice, Inc. ("Packaged Ice") for net
cash proceeds of approximately $172.7 million. The Company reported an
extraordinary gain of $35.5 million from the sale of Reddy Ice, net of $22
million of income taxes. Reddy Ice had revenues during 1997 of approximately
$66.3 million.
Income (loss) from discontinued operations includes interest expense of $1.8
million during the second quarter of 1997 and interest expense of $2.4
million and $3.6 million during the first six months of 1998 and 1997,
respectively. Interest charges allocated to discontinued operations are
based on debt specifically attributed to Reddy Ice. The income (loss) from
discontinued operations as reported in the condensed consolidated statements
of income is presented net of the related income tax expense of $0.8 million
in the second quarter of 1997, and income tax benefits of $2.1 million and
$0.2 million in the first six months of 1998 and 1997, respectively.
During the second quarter of 1998, the Company recognized a $3.8 million
extraordinary loss from the early extinguishment of debt, net of income tax
benefit of $2.3 million, which included the write-off of deferred financing
costs and the recognition of market losses on interest rate contracts, from
the termination of the term loan facility under the Senior Credit Facility
and the repayment of all amounts outstanding under the term loan facility.
In addition, during the six months ended June 30, 1997, the Company
recognized a $3.3 million extraordinary loss from the early extinguishment
of subordinated debt, net of income tax benefit of $2.0 million, which
included the write-off of deferred financing costs and certain prepayment
penalties.
8
9
8. 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.
9. 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. Consolidated comprehensive income was $60.1 million and $75.0
million for the three and six month periods ended June 30, 1998,
respectively, which includes foreign currency losses of $1.2 million for
both periods. Consolidated comprehensive income was equal to consolidated
net income for the three and six month periods ended June 30, 1997.
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 20
dairy and packaging acquisitions since its initial public offering in April
1996. Through these acquisitions, Suiza has realized and continues to realize
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"), Louis Trauth Dairy Inc.
("Trauth") and Oberlin Farms Dairies ("Oberlin"), and effective June 30, 1998,
West Lynn Creamery ("West Lynn"). The Company conducts its plastics operations
through Franklin Plastics, Inc. and subsidiaries ("Franklin Plastics" or
"Plastics") and through Continental Can Company, Inc. ("Continental Can"). 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.
Year 2000 Compliance
As discussed in the Company's Annual Report on Form 10-K, the Company is
currently engaged in a comprehensive project to upgrade its information,
technology, manufacturing and facilities computer software to programs that will
9
10
consistently and properly recognize the Year 2000 and is in the process of
installing new Year 2000 compliant hardware and packaged software at certain of
its locations.
Suiza Foods will utilize both internal and external resources to reprogram or
replace and test all of its software for Year 2000 Compliance, and the Company
expects to complete the project in mid-1999. The total cost to the Company of
these Year 2000 Compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given period,
excluding the cost of new systems, which will be capitalized. These costs, which
are being funded through operating cash flows, and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
regarding future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ from those plans.
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, including its ability to
integrate the operations of its acquired businesses and realize operating
efficiencies (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.
10
11
Results of Operations
The Company currently operates in two distinct businesses as shown below
(dollars in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------------- ---------------------------------------------
1998 1997 1998 1997
---------------------------------------------- ---------------------------------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
DOLLARS NET SALES DOLLARS NET SALES DOLLARS NET SALES DOLLARS NET SALES
----------- --------- ----------- -------- ----------- -------- ----------- --------
Net sales:
Dairy $ 674,499 87.8% $ 381,689 100.0% $ 1,230,472 90.4% $ 747,367 100.0%
Plastics 93,621 12.2 -- -- 130,769 9.6 -- --
----------- --------- ----------- -------- ----------- -------- ----------- --------
Net sales 768,120 100.0% 381,689 100.0% 1,361,241 100.0% 747,367 100.0%
Cost of sales 582,213 75.8 291,609 76.4 1,038,361 76.3 574,967 76.9
----------- --------- ----------- -------- ----------- -------- ----------- --------
Gross profit 185,907 24.2 90,080 23.6 322,880 23.7 172,400 23.1
Operating expenses:
Selling and distribution 89,127 11.6 45,662 12.0 159,328 11.7 89,740 12.0
General and administrative 24,676 3.2 13,121 3.4 44,121 3.2 27,233 3.7
Amortization of intangibles 7,248 1.0 2,634 0.7 12,986 1.0 5,358 0.7
----------- --------- ----------- -------- ----------- -------- ----------- --------
Total operating expenses 121,051 15.8 61,417 16.1 216,435 15.9 122,331 16.4
----------- --------- ----------- -------- ----------- -------- ----------- --------
Operating income (loss):
Dairy 57,727 7.5 29,949 7.8 99,057 7.3 53,323 7.1
Plastics 10,114 1.3 -- -- 14,424 1.0 -- --
Corporate office (2,985) (0.4) (1,286) (0.3) (7,036) (0.5) (3,254) (0.4)
----------- --------- ----------- -------- ----------- -------- ----------- --------
Total operating income $ 64,856 8.4% $ 28,663 7.5% $ 106,445 7.8% $ 50,069 6.7%
=========== ========= =========== ======== =========== ======== =========== ========
Second Quarter and Year-to-date 1998 Compared to Second Quarter and Year-to-date
1997
Net Sales. The Company's net sales increased by 101.2% and 82.1% for the second
quarter and first six months of 1998, respectively, when compared to like
periods of 1997. Dairy net sales increased by 76.7% and 64.6% for the second
quarter and first six months of 1998, respectively, compared to like periods of
1997 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,
Trauth, and Oberlin in the first half of 1998 and (iii) strong sales of branded
products and higher overall pricing at Morningstar. The Company began operating
in the plastics business with the acquisition of Franklin Plastics in July, 1997
and acquired Continental Can in May, 1998.
Cost of Sales. The Company's cost of sales margins were 75.8% and 76.3% for the
second quarter and first six months of 1998, respectively, compared to 76.4% and
76.9% for the same periods in 1997. Dairy cost of sales margins improved from
the prior year due to (i) operating synergies in the Company's fluid dairy
operations and (ii) increased branded sales at Morningstar.
Operating Expenses. The Company's operating expense ratios were 15.8% and 15.9%
for the second quarter and first six months of 1998 compared to 16.1% and 16.4%
for the same periods in 1997. Dairy operating expense margins decreased slightly
in the quarter and year-to-date periods as a result of more efficient operations
from purchasing and administrative synergies. Also, the addition of Plastics
has lowered the Company's overall operating expense ratios.
Operating Income. The Company's operating income increased 126.3% to $64.9
million in the second quarter of 1998 from $28.7 million in the second quarter
of 1997 primarily as a result of (i) the aforementioned acquisitions, (ii)
operating efficiencies and synergies and (iii) the increased sales at
Morningstar. For the first six months of 1998, operating income was $106.5
million, an increase of 112.6% from 1997 operating income of $50.1 million. The
Company's operating income margin increased to 8.4% in the second quarter of
1998 from 7.5% in the second quarter of
11
12
1997 and increased to 7.8% in the first six months of 1998 from 6.7% in the
first six months of 1997 for the same reasons.
Other (Income) Expense. Interest expense increased to $8.4 million in the second
quarter of 1998 from $4.9 million in the second quarter of 1997 primarily due to
the increased level of debt used to finance the aforementioned acquisitions. For
the same reasons, interest expense increased to $21.8 million during the first
six months of 1998 from $10.6 million in the first six months of 1997. Financing
charges on preferred securities amounted to $9.6 million and $10.9 million in
the second quarter and first six months of 1998, respectively, 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 $1.4 million in the first six months of 1998 from $19.1 million in
the first six months of 1997 due to the recognition in the 1997 period of a
$18.1 million gain from the sale of Puerto Rico tax credits as discussed in Note
5 to the condensed consolidated financial statements.
Extraordinary Items. In the second quarter of 1998, the Company reported a $35.5
million extraordinary gain (net of $22.0 million of income taxes) from the sale
of Reddy Ice Corporation ("Reddy Ice") and a $3.8 million extraordinary loss
from the early extinguishment of the term loan facility of the Senior Credit
Facility (net of $2.3 million of income tax benefit) related to the write-off of
deferred financing costs and the recognition of interest rate swap losses. The
Company incurred a $3.3 million extraordinary loss (net of a $2.0 million tax
benefit) in the first six months of 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 $61.3 million in the second
quarter of 1998 ($29.6 million excluding the net extraordinary gain of $31.7
million) compared to net income of $17.6 million in the second quarter of 1997.
The Company reported net income of $76.2 million in the first six months of 1998
($44.5 million excluding the net extraordinary gain of $31.7 million) compared
to $35.0 million in the first six months of 1997 ($26.8 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 June 30, 1998, the Company had total stockholders' equity of $626.0
million, total indebtedness of $707.6 million (including long-term debt and the
current portion of long-term debt) and $682.6 million of mandatorily redeemable
convertible trust issued preferred securities. 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 the Senior Credit
Facility. Net cash provided by continuing operations was $90.1 million for the
first six months of 1998 as contrasted to $56.3 million for the first six months
of 1997. Investing activities in the first six months of 1998 included
approximately $64.7 million in capital expenditures of which $45.2 million was
spent at Dairy and $19.5 million was spent at Plastics. Investing activities
also included $446.2 million of cash paid for acquisitions, along with net
proceeds of $172.7 million for the sale of Reddy Ice.
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.
12
13
On May 29, 1998 the Company completed the acquisition of Continental Can for a
purchase price of approximately $181 million, which was funded through the
issuance of 2,050,635 shares of Suiza common stock and Suiza stock options to
replace outstanding stock options of Continental Can, along with cash of $41
million. Suiza also assumed Continental Can's long-term indebtedness of
approximately $200 million at acquisition date.
On June 30, 1998 the Company acquired West Lynn for a cash purchase price of
approximately $89 million and also repaid approximately $44 million of
outstanding debt. During the first six months of 1998 the Company also acquired
Trauth, Oberlin and three 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 amounts outstanding under the revolving loan facility of the Company's
Senior Credit Facility.
Future Capital Requirements. During 1998, the Company intends to invest a total
of approximately $132 million in its manufacturing facilities and distribution
capabilities. Of this amount, Dairy intends to spend approximately $86 million
for the year to expand and maintain its manufacturing facilities and for fleet
replacement and Plastics intends to spend approximately $46 million. The Company
plans to substantially expand its Plastics operations by opening new locations
and approximately $15 million of Plastics' capital spending will be for this
purpose.
Current Debt Obligations. On May 29, 1998 the Company amended its Senior Credit
Facility. Pursuant to this amendment, the Company terminated and repaid the term
loan facility and expanded the revolving loan facility to $1 billion. At June
30, 1998, $491.9 million was available under the revolving loan facilities.
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 as well as new 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.
13
14
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1998, the Company held its annual meeting of stockholders (the
"Annual Meeting"). At the Annual Meeting, the Company submitted the following
matters to a vote of its stockholders: (i) the election of Alan J. Bernon, Gregg
L. Engles, P. Eugene Pender and Joseph S. Hardin, Jr. as Class III directors to
serve until the expiration of their terms and until their successors are elected
and qualified; (ii) the approval of an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock, $.01
par value per share ("Common Stock"), from 100,000,000 shares to 500,000,000
shares (the "Charter Amendment"); (iii) the approval of an amendment to the
Suiza Foods Corporation 1997 Stock Option and Restricted Stock Plan (the "1997
Stock Option Plan") to increase the number of shares of Common Stock authorized
for issuance thereunder from 3,000,000 shares to 4,000,000 shares (the "Plan
Amendment"); and (iv) the ratification of the selection of Deloitte & Touche LLP
as the Company's independent auditors for fiscal year 1998. At the Annual
Meeting, the stockholders elected the Class III directors noted above, approved
the Charter Amendment, approved the Plan Amendment and ratified the selection of
Deloitte & Touche LLP as the Company's independent auditors. The vote of the
stockholders with respect to each such matter was as follows:
(i) Election of Class III directors:
Alan J. Bernon - 26,544,845 votes for; 87,173 votes
withheld.
Gregg L. Engles - 26,545,615 votes for; 86,403 votes
withheld.
P. Eugene Pender - 26,561,606 votes for; 70,412 votes
withheld.
Joseph S. Hardin Jr. - 26,544,484 votes for; 87,534 votes
withheld.
(ii) Approval of the Charter Amendment:
18,744,473 votes for; 7,635,862 against; 115,375 abstentions;
136,308 broker non-votes.
(iii) Approval of the Plan Amendment:
18,616,401 votes for; 7,762,754 against; 116,555 abstentions;
136,308 broker non-votes.
(iv) Ratification of selection of independent auditors:
26,586,012 votes for; 37,042 against; 8,964 abstentions.
A proper proposal submitted by a stockholder of the Company in
accordance with applicable rules and regulations for presentation at
the Company's 1999 annual meeting that is received at the Company's
principal executive office by December 5, 1998 will be included in the
Company's proxy statement and form of proxy for such meeting. Proxies
solicited by the Company with respect to such meeting will confer
discretionary authority to vote on any matter as to which the Company
has not received notice by March 2, 1999.
14
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Certificate of Amendment of Certificate of Incorporation of
Suiza Foods Corporation.
10.1 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).
10.2 Suiza Foods Corporation Amended and Restated 1997 Stock
Option and Restricted Stock Plan.
10.3 Amended and Restated Credit Agreement dated as of May 22,
1998 between Suiza Foods Corporation, each of the Lenders
identified therein; and First Union National Bank, as
administrative agent for the Lenders.
11 Statement re computation of per share earnings.
27 Financial Data Schedules
(b) Reports on Form 8-K
(1) On April 7, 1998, the Company filed a Form 8-K/A, amending a
previously filed Form 8-K to provide certain pro forma
financial information in connection with the acquisition of
Land-O-Sun Dairies, L.L.C.
(2) On June 2, 1998, the Company filed a Form 8-K in connection
with the acquisition of Continental Can. Pursuant to General
Instruction B.3. of Form 8-K, no financial statements were
included in this filing because substantially the same
information as that required was previously reported by the
Company in Form S-4 registration statements related to the
Continental Can merger.
15
16
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/ Barry A. Fromberg
-------------------------------------
Barry A. Fromberg
Executive Vice President,
Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
16
17
INDEX TO EXHIBITS
Exhibits No. Description
------------ -----------
4.1 Certificate of Amendment of Certificate of Incorporation of
Suiza Foods Corporation.
10.1 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).
10.2 Suiza Foods Corporation Amended and Restated 1997 Stock
Option and Restricted Stock Plan.
10.3 Amended and Restated Credit Agreement dated as of May 22,
1998 between Suiza Foods Corporation, each of the Lenders
identified therein; and First Union National Bank, as
administrative agent for the Lenders.
11 Statement re computation of per share earnings.
27 Financial Data Schedules