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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 the registrant as specified in its charter)
[SUIZA LOGO]
---------------
DELAWARE 75-2559681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification no.)
2515 MCKINNEY AVENUE, SUITE 1200
DALLAS, TEXAS 75201
(214) 303-3400
(Address, including zip code, and telephone number,
including area code, of the registrant's principal executive offices)
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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 [ ]
As of May 3, 1999 the number of shares outstanding of each class of
common stock was:
Common Stock, par value $.01 33,771,360
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TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements...................................................................................... 3
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................................................ 21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings......................................................................................... 21
Item 6 - Exhibits and Reports on Form 8-K.......................................................................... 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ........................................................ $ 67,901 $ 54,922
Temporary investments ............................................................ 8,111 9,216
Accounts receivable .............................................................. 447,749 452,185
Inventories ...................................................................... 229,062 223,338
Prepaid expenses and other current assets ........................................ 16,319 25,924
Refundable income taxes .......................................................... 7,669 24,455
Deferred income taxes ............................................................ 22,565 23,859
---------- ----------
Total current assets ............................................................. 799,376 813,899
Property, plant and equipment, net .................................................. 893,845 846,956
Deferred income taxes ............................................................... 2,434 2,528
Intangible and other assets ......................................................... 1,385,545 1,350,400
---------- ----------
Total ............................................................................... $3,081,200 $3,013,783
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............................................ $ 504,296 $ 500,303
Income taxes payable ............................................................. 9,629 18,876
Subsidiary lines of credit and current portion of long-term debt ................. 55,292 39,892
---------- ----------
Total current liabilities ........................................................ 569,217 559,071
Long-term debt ...................................................................... 923,730 893,077
Other long-term liabilities ......................................................... 61,313 64,449
Deferred income taxes ............................................................... 34,703 28,702
Mandatorily redeemable convertible trust issued preferred securities ................ 683,068 682,938
Minority interest in subsidiaries ................................................... 131,629 129,775
Commitments and contingencies
Stockholders' equity:
Common stock, 33,720,725 and 33,598,074 shares issued and outstanding ............ 337 336
Additional paid-in capital ....................................................... 450,406 446,230
Retained earnings ................................................................ 225,732 204,859
Accumulated other comprehensive income ........................................... 1,065 4,346
---------- ----------
Total stockholders' equity ....................................................... 677,540 655,771
---------- ----------
Total ............................................................................... $3,081,200 $3,013,783
========== ==========
See notes to condensed consolidated financial statements.
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SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
----------- -----------
(unaudited)
Net sales........................................................................... $ 1,153,186 $ 593,121
Cost of sales....................................................................... 920,627 456,148
----------- -----------
Gross profit........................................................................ 232,559 136,973
Operating costs and expenses:
Selling and distribution......................................................... 121,855 70,201
General and administrative....................................................... 39,104 19,445
Amortization of intangibles...................................................... 9,924 5,738
----------- -----------
Total operating costs and expenses............................................... 170,883 95,384
----------- -----------
Operating income.................................................................... 61,676 41,589
Other (income) expense:
Interest expense, net............................................................ 15,943 13,402
Financing charges on preferred securities........................................ 9,647 1,249
Other income, net................................................................ (507) (702)
----------- -----------
Total other expense.............................................................. 25,083 13,949
----------- -----------
Income from continuing operations before income taxes and minority interests........ 36,593 27,640
Income taxes........................................................................ 14,012 9,587
Minority interest in earnings....................................................... 1,708
----------- -----------
Income from continuing operations................................................... 20,873 18,053
Loss from discontinued operations................................................... (3,161)
----------- -----------
Net income.......................................................................... $ 20,873 $ 14,892
=========== ===========
Net income applicable to common stock............................................... $ 20,873 $ 14,805
=========== ===========
Average common shares: Basic..................................................... 33,642,148 30,727,958
Average common shares: Diluted................................................... 36,206,652 33,821,891
Basic earnings per common share:
Income from continuing operations................................................ $ 0.62 $ 0.58
Loss from discontinued operations................................................ (0.10)
----------- -----------
Net income....................................................................... $ 0.62 $ 0.48
=========== ===========
Diluted earnings per common share:
Income from continuing operations................................................ $ 0.60 $ 0.54
Loss from discontinued operations................................................ (0.09)
----------- -----------
Net income....................................................................... $ 0.60 $ 0.45
=========== ===========
See notes to condensed consolidated financial statements.
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SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -------------
(unaudited)
Cash flows from operating activities:
Net income ...................................................................... $ 20,873 $ 14,892
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations ........................................... 3,161
Depreciation and amortization ............................................... 30,683 16,110
Minority interest ........................................................... 1,708
Deferred income taxes ....................................................... 7,389 5,136
Other ....................................................................... 2,591 (69)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ...................................................... 7,636 (12,199)
Inventories .............................................................. (3,308) (10,844)
Prepaid expenses and other assets ........................................ 32 1,647
Accounts payable, accrued expenses and other liabilities ................. (3,282) 13,509
Income taxes ............................................................. 8,725 816
--------- ---------
Net cash provided by continuing operations ............................. 73,047 32,159
Net cash used by discontinued operations ............................... (3,712)
--------- ---------
Net cash provided by operating activities .............................. 73,047 28,447
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment ....................................... (57,149) (20,004)
Cash outflows for acquisitions ................................................... (48,052) (259,355)
Other ............................................................................ 1,586 282
--------- ---------
Net cash used by continuing operations ................................. (103,615) (279,077)
Net cash used by discontinued operations ............................... (7,379)
--------- ---------
Net cash used by investing activities .................................. (103,615) (286,456)
--------- ---------
Cash flows from financing activities:
Proceeds from the issuance of debt ............................................... 47,722 237,278
Repayment of debt ................................................................ (3,745) (515,016)
Issuance of common stock, net of expenses ....................................... 774 13,034
Issuance of trust issued preferred securities, net of expenses ................... 582,500
Distributions to minority interest ............................................... (1,204)
Other ............................................................................ (150)
--------- ---------
Net cash provided by financing activities .............................. 43,547 317,646
--------- ---------
Increase in cash and cash equivalents ............................................ 12,979 59,637
Cash and cash equivalents, beginning of period ................................... 54,922 24,388
========= ---------
Cash and cash equivalents, end of period ......................................... $ 67,901 $ 84,025
========= =========
See notes to condensed consolidated financial statements.
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements contained in this
report are unaudited. In our opinion, we have made all necessary adjustments
(which include only normal recurring adjustments) in order to present fairly, in
all material respects, our consolidated financial position, results of
operations and cash flows as of March 31, 1999 and for the three month periods
ended March 31, 1999 and 1998. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. Our results of operations for
the period ended March 31, 1999 may not be indicative of our operating results
for the full year. The financial statements contained in this report should be
read in conjunction with our 1998 consolidated financial statements contained in
our Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 29, 1999.
2. TEMPORARY INVESTMENTS
Temporary investments consisted of U.S. Government obligations due
within one year, certificates of deposit or Eurodollar deposits due within one
year and highly rated commercial paper. The carrying value of temporary
investments approximated market value.
3. INVENTORIES
AT MARCH 31, AT DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
Raw materials and supplies ................... $ 113,672 $ 113,118
Finished goods ............................... 115,390 110,220
------------ ------------
Total ................................... $ 229,062 $ 223,338
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4. DEBT
AT MARCH 31, AT DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
Senior credit facility ............................ $ 730,000 $ 719,500
Subsidiary debt obligations:
Lines of credit ............................... 59,755 46,160
Senior secured notes .......................... 131,078 131,078
Industrial development revenue bonds .......... 12,428 12,635
Capital lease obligations and other ........... 45,761 23,596
------------ ------------
979,022 932,969
Less subsidiary lines of credit and current portion (55,292) (39,892)
============ ============
Total ......................................... $ 923,730 $ 893,077
============ ============
Senior Credit Facility -- Our senior credit facility provides us with a
line of credit of up to $1 billion to be used for general corporate and working
capital purposes, including the financing of acquisitions. Our senior credit
facility expires March 31, 2003, unless extended in accordance with its terms.
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Amounts outstanding under our senior credit facility bear interest at a
rate per annum equal to one of the following rates, at our 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 our ratio of defined
indebtedness to EBITDA. We pay a commitment fee on unused amounts of the senior
credit facility that ranges from 15 to 23 basis points, based on our ratio of
defined indebtedness to EBITDA. Interest is payable quarterly or at the end of
the applicable interest period. The interest rate in effect on our senior credit
facility, including the applicable interest rate margin, was 5.7% at March 31,
1999.
Our senior credit facility contains various financial and other
restrictive covenants and requires that we maintain certain financial ratios,
including a leverage ratio (computed as the ratio of the aggregate outstanding
principal amount of defined indebtedness to defined EBITDA) and an interest
coverage ratio (computed as the ratio of defined EBITDA to defined interest
expense). In addition, the senior credit facility requires that we maintain a
minimum level of defined 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. Our senior credit
facility is secured by the capital stock of certain of our subsidiaries.
Subsidiary Debt Obligations -- The debt obligations of our subsidiaries
include lines of credit, senior secured notes, industrial development revenue
bonds and other obligations.
Borrowings under our subsidiaries' lines of credit are generally
subject to limitations based on a borrowing base and bear interest generally at
floating interest rates. Outstanding borrowings under these lines of credit,
which at March 31, 1999 included only foreign subsidiary borrowings, have been
classified as a current liability since such borrowings are expected to be
repaid within one year.
Plastic Containers, Inc., a subsidiary of our wholly-owned subsidiary
Continental Can, Inc., issued senior secured notes in December 1996. The notes:
o have an original par value of $125 million,
o are due in 2006,
o bear interest at a fixed interest rate of 10% payable semi-annually in
July and December of each year, and
o are secured by the stock of certain of Plastic Containers, Inc.'s
subsidiaries, as well as substantially all of the assets of Plastic
Containers, Inc., other than inventory, receivables and certain
equipment.
In connection with our acquisition of Continental Can, Inc. in May 1998, these
notes were revalued to fair value using a market yield of 8.6% resulting in a
premium of $10.4 million at acquisition date. This premium is being amortized as
an adjustment to interest expense over the life of the notes. These notes are
redeemable, in whole or in part, at the option of Plastic Containers, Inc.,
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 Plastic Containers, Inc. 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. Our tender
offer to redeem these notes in connection with our acquisition resulted in the
redemption of $3.8 million of these notes. The indenture places certain
restrictions on Plastics Containers, Inc. regarding the payment of dividends,
additional liens, disposition of the proceeds of asset sales, sale and leaseback
transactions and additional borrowings.
Certain of our 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
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on these bonds is due semiannually at interest rates that vary based on market
conditions which, at March 31, 1999, ranged from 3.20% to 3.35%.
Other subsidiary debt includes various promissory notes for the
purchase of property, plant and equipment and capital lease obligations. The
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 -- We have interest rate derivative agreements
in place, including interest rate caps, swaps and collars that have been
designated as hedges against our variable interest rate exposure on our loans
under our senior credit facility.
The following table summarizes our various interest rate agreements as
of March 31, 1999:
NOTIONAL
AMOUNT
--------------
(IN THOUSANDS)
Interest rate caps with an interest rate limit of 8% expiring March 2000 $ 60,000
Interest rate swaps with interest rates ranging from 6.03% to 6.14%
expiring between December 2000 and December 2003...................... 435,000
Interest rate collars with an interest rate range of 6.08% to 7.5%
expiring between December 2002 and June 2003.......................... 100,000
These derivative agreements provide hedges for loans under our senior
credit facility by limiting or fixing the LIBOR interest rates specified in the
senior credit facility at the interest rates noted above 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.
We are exposed to market risk under these arrangements due to the
possibility of interest rates on our senior credit facility falling below the
rates on our interest rate derivative agreements. Credit risk under these
arrangements is remote since the counterparties to our interest rate derivative
agreements are major financial institutions.
5. ACQUISITIONS
During the first quarter of 1999, we completed the acquisitions of
three small businesses in our dairy segment including:
o Ultra Products, L.L.C., a manufacturer of shelf-stable coffee creamers
that has become part of our Morningstar division,
o New England Dairies, located in our Northeast region, and
o Thompson Beverage Systems, L.P., a beverage packaging design company.
All of these acquisitions were funded primarily through borrowings
under our senior credit facility with the exception of the acquisition of
Thompson Beverage Systems, L.P. Our acquisition of Thompson Beverage Systems,
L.P. was funded at closing through the issuance of 77,233 shares of our common
stock.
All of the above acquisitions have been accounted for using the
purchase method of accounting. The purchase price of each of the acquisitions
was allocated to assets acquired, including identifiable
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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.
6. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
We currently have two reportable segments: dairy and packaging. In our
dairy segment, we manufacture and distribute primarily fluid milk (including
flavored milks), ice cream and novelties, dairy and non-dairy coffee creamers,
half-and-half and whipping cream, sour cream, cottage cheese, yogurt and dairy
and non-dairy frozen whipped toppings. We also manufacture and distribute fruit
juices and other flavored drinks, bottled water and coffee. Our plastic
packaging segment manufactures primarily rigid plastic bottles and containers
for dairy manufacturers, bottled water processors, beverage manufacturers, and
consumer and industrial products companies. Our packaging segment also produces
metal cans, plastic bags and plastic films.
The accounting policies of our segments are the same as those described
in the summary of significant accounting policies set forth in Note 1 to our
1998 consolidated financial statements, contained in our 1998 Annual Report in
Form 10-K.
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
The amounts in the following tables are derived from reports used by
our executive management team:
FIRST QUARTER 1999 (in 000's) DAIRY PACKAGING SEGMENT TOTAL
- ----------------------------- ---------- ---------- ----------
Revenues from external customers ......... $ 977,665 $ 175,521 $1,153,186
Intersegment revenues .................... 6,857 8,529 15,386
Segment operating income ................. 49,895 17,708 67,603
Total segment assets ..................... 2,199,566 829,759 3,029,325
FIRST QUARTER 1998 (in 000's)
- ----------------------------
Revenues from external customers ......... $ 555,973 $ 37,148 $ 593,121
Intersegment revenues .................... 2,375 5,151 7,526
Segment operating income ................. 41,330 4,310 45,640
Total segment assets ..................... 1,504,622 210,613 1,715,235
The following are reconciliations of reportable segment amounts to our
consolidated totals:
CORPORATE/
FIRST QUARTER 1999 (in 000's) SEGMENT OTHER TOTAL
- ----------------------------- ---------- ---------- ----------
Segment operating income ................. $ 67,603 $ (5,927) $ 61,676
Total segment assets ..................... 3,029,325 51,875 3,081,200
FIRST QUARTER 1998 (in 000's)
- -----------------------------
Segment operating income ................. $ 45,640 $ (4,051) $ 41,589
Total segment assets ..................... 1,715,235 231,513 1,946,748
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Geographic information for the first quarter of 1999 (in 000's):
REVENUES LONG-LIVED ASSETS
---------- ------------------
United States ........... $1,038,365 $ 2,071,390
Puerto Rico ............. 59,793 122,573
Europe .................. 55,028 85,428
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Total ................... $1,153,186 $ 2,279,391
No customer within either segment represents greater than ten percent
of our consolidated revenues.
7. COMPREHENSIVE INCOME
During 1998 we 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 $21.9 million for the
three month period ended March 31, 1999, which included net income as reported
and comprehensive income adjustments primarily for foreign currency gains of
$1.6 million ($1.0 million net of taxes) for the three month period ended March
31, 1999. Consolidated comprehensive income was equal to consolidated net income
for the three month period ended March 31, 1998.
8. SUBSEQUENT EVENTS
On April 29, 1999, we agreed to sell a majority interest in our U.S.
plastic packaging operations to Consolidated Container Company LLC, a newly
formed company to be controlled by Vestar Capital Partners III, L.P. Pursuant to
the proposed transaction, our U.S. plastic packaging operations (Franklin
Plastics, Inc. and Plastic Containers, Inc.) would be combined with Vestar
Capital Partners' Reid Plastics Holdings, Inc. Consolidated Container Company
LLC would assume approximately $135 million of our existing debt, and would
repay to us at closing our intercompany debt and preferred stock investment of
approximately $367 million. If the proposed transaction is completed, Vestar
Capital Partners and certain of its affiliates will own a 51% interest, and we
and the minority interest shareholders of Franklin Plastics, Inc. will own a 43%
and 6% interest, respectively, in Consolidated Container Company LLC. Our
interest would be accounted for under the equity method of accounting. Closing
of the transaction is expected to occur on or about July 1, 1999, subject to
certain customary conditions.
During the second quarter of 1999, we repurchased 79,700 shares of our
common stock for a total purchase price of approximately $3.0 million pursuant
to a share repurchase program authorized by our Board of Directors on September
15, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
We are a leading manufacturer and distributor of dairy products and a
leading manufacturer of rigid plastic packaging in the United States. The
following table presents certain information concerning our results of
operations, including information presented as a percentage of net sales
(dollars in thousands):
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------
1999 1998
-------------------------- --------------------------
% OF % OF
DOLLARS NET SALES DOLLARS NET SALES
----------- ----------- ----------- -----------
Net sales:
Dairy ....................... $ 977,665 $ 555,973
Packaging ................... 175,521 37,148
----------- -----------
Total ................... 1,153,186 100.0% 593,121 100.0%
Cost of sales .................... 920,627 79.8 456,148 76.9
----------- ----------- ----------- -----------
Gross profit ..................... 232,559 20.2 136,973 23.1
Operating expenses:
Selling and distribution .... 121,855 10.6 70,201 11.8
General and administrative... 39,104 3.4 19,445 3.3
Amortization of intangibles.. 9,924 0.9 5,738 1.0
----------- ----------- ----------- -----------
Total ................... 170,883 14.9 95,384 16.1
Operating income (loss):
Dairy ....................... 49,895 4.3 41,330 7.0
Packaging ................... 17,708 1.5 4,310 0.7
Corporate ................... (5,927) (0.5) (4,051) (0.7)
----------- ----------- ----------- -----------
Total ................... $ 61,676 5.3% $ 41,589 7.0%
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
Net Sales
Net sales increased 94.4% to $1.15 billion in the first quarter of
1999 from $593.1 million in the first quarter of 1998. Net sales in our dairy
segment increased 75.8%, or $421.7 million, to $977.7 million in 1999 from
$556.0 million for 1998, primarily due to acquisitions. Net sales in our
packaging segment grew to $175.5 million in the first quarter of 1999 from $37.1
million in the first quarter of 1998, due to our acquisition of Continental Can
in the second quarter of 1998, our acquisitions of several smaller businesses
during 1998 and our opening of several new facilities.
Cost of Sales
Our cost of sales ratio was 79.8% in the first quarter of 1999 compared
to 76.9% in the same period in 1998. At our dairy operations the cost of sales
ratio rose to 80.4% in 1999 compared to 77.0% in 1998. This increase is due to a
higher basic formula price for milk and the effect of lower margins from newly
acquired businesses. Our packaging operations cost of sales ratio rose to 76.8%
in the first period of 1999 from 75.7% in the first period of 1998 primarily due
to the inclusion in the 1999 period of Continental Can, which operates with a
higher overall cost of sales ratio.
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Operating Expenses
Our operating expense ratio was 14.9% in the first quarter of 1999
compared to 16.1% in the first quarter of 1998. The dairy operating expense
ratio improved to 14.5% in 1999 compared to 15.6 % in 1998 mostly due to
efficiencies in selling and general and administrative costs. The operating
expense ratio in our packaging segment increased to 13.2% in 1999 from 12.8% in
1998 due to the addition of Continental Can.
Operating Income
Operating income in the first quarter of 1999 was $61.7 million, an
increase of 48.3% from first quarter 1998 operating income of $41.6 million. Our
operating income margin decreased to 5.3% in the first quarter of 1999 from 7.0%
in the comparable period of 1998. This decline is primarily due to a higher
basic formula price for milk and to lower margins at companies acquired in 1998,
partly offset by improved operating efficiencies in our dairy segment.
Other (Income) Expense
Interest expense increased to $15.9 million in the first quarter of
1999 from $13.4 million in 1998 primarily due to increased levels of debt used
to finance acquisitions. Financing charges on preferred securities increased to
$9.6 million in the first quarter of 1999 from $1.2 million in 1998, reflecting
a full quarter's charges in 1999 for
o the issuance on February 20, 1998 of $100 million of 5.0% preferred
securities related to our acquisition of Land-O-Sun, and
o the issuance on March 24, 1998 of $600 million of 5.5% preferred
securities.
Discontinued Operations
In the first quarter of 1998 we reported a loss from discontinued
operations of $3.2 million, net of a tax benefit of $2.1 million, related to the
sale of our packaged ice business. The sale was consummated in April 1998.
Net Income
We reported net income of $20.9 million in the first quarter of 1999
compared to $14.9 million in 1998. Income from continuing operations was $20.9
million in 1999 compared to $18.1 million in 1998.
RECENT DEVELOPMENTS
Partial Sale of our U.S. Plastic Packaging Operations
On April 29, 1999, we agreed to sell a majority interest in our U.S.
plastic packaging operations to Consolidated Container Company LLC, a newly
formed company to be controlled by Vestar Capital Partners III, L.P., a private
equity firm. Closing of the proposed transaction is subject to customary
conditions, including the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, receipt of acceptable
financing for Consolidated Container Company LLC and receipt of certain third
party consents. The closing is expected to occur on or about July 1, 1999;
however, there can be no assurance that the proposed transaction will be
completed within the currently anticipated timeframe or at all. For more
information about the proposed transaction, please see Note 8 to our Condensed
Consolidated Financial Statements contained in this report.
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Acquisitions
We have completed three small acquisitions during 1999, all of which
have been in our dairy segment, including:
o Ultra Products, L.L.C. - a manufacturer of shelf-stable coffee creamers
that has become a part of our Morningstar division,
o New England Dairies - located in our Northeast region, and
o Thompson Beverage Systems, L.P., a beverage packaging design company.
For more information about these acquisitions, see Note 5 to our
Condensed Consolidated Financial Statements contained in this report.
On April 28, 1999, we reached an agreement with the U.S. Department of
Justice Antitrust Division to settle the civil antitrust lawsuit brought by the
Department of Justice against us and Broughton Foods Company in March 1999 to
enjoin our proposed merger with Broughton Foods Company. For more information
about the settlement, please see Part II, Item 1 of this report entitled "Legal
Proceedings." As a result of the requirements of the proposed settlement, on
April 28, 1999, we entered into an amendment to the September 1998 Agreement and
Plan of Merger between us and Broughton Foods Company pursuant to which the
consideration to be received by all stockholders of Broughton Foods Company
(other than certain affiliates of Broughton Foods Company) was lowered from $19
cash per share to $16.50 cash per share. Also, certain affiliates of Broughton
will now sell an aggregate of 2 million shares of Broughton Foods Company to us
for $11.25 per share, plus the contingent right to receive $1.25 per share if
certain conditions are satisfied. The amendment to the Agreement and Plan of
Merger is subject to the approval of Broughton's stockholders. Assuming all
conditions to closing are satisfied, we anticipate closing the proposed
acquisition in June 1999. Either party may terminate the amended merger
agreement if the transaction is not closed by June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, we had total stockholders' equity of $677.5
million, total indebtedness of $979.0 million (including long-term debt and the
current portion of long-term debt) and $683.1 million of mandatorily redeemable
convertible trust issued preferred securities. We are currently in compliance
with all covenants and financial ratios contained in our debt agreements.
Cash Flow
Historically, we have met our working capital needs with cash flow from
operations along with borrowings under our senior credit facility. Net cash
provided by continuing operations was $73.0 million for the first quarter of
1999 as contrasted to $32.2 million for the first quarter of 1998. Investing
activities in the first quarter of 1999 included approximately $57.1 million in
capital expenditures of which $44.0 million was spent in our dairy segment,
$10.8 million was spent in our packaging segment, and $2.3 million was spent at
corporate. Investing activities during the first quarter of 1999 also included
$48.1 million of cash paid for acquisitions.
Current Debt Obligations
On May 29, 1998 we amended our senior credit facility. Pursuant to this
amendment, we terminated and repaid the term loan facility and expanded the
revolving loan facility to $1 billion. At March 31, 1999, approximately $235.9
million was available under our senior credit facility. For more information
regarding our debt obligations, see Note 4 to our Condensed Consolidated
Financial Statements contained in this report.
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Future Capital Requirements
We have budgeted a total of approximately $150 to $160 million in
capital expenditures during 1999, of which $57 million has been spent to date.
We intend to spend approximately $60 to $70 million in our dairy segment during
the remainder of 1999 to expand and maintain our manufacturing facilities and
for fleet replacement. We have budgeted capital expenditures of approximately
$30 to $40 million during the remainder of 1999 in our packaging segment (which
may not be fully spent if the proposed sale of a majority interest in our U.S.
plastic packaging operations is completed).
In addition, we have a current commitment, subject to certain
conditions, to expend approximately $85 million on the proposed acquisition of
Broughton Foods Company, which is expected to be completed in June 1999. We
expect to fund this acquisition out of cash flow from operations and/or from
borrowings under our senior credit facility.
We expect that cash flow from operations will be sufficient to meet our
requirements for our existing businesses for the remainder of 1999 and for the
foreseeable future. In the future, we intend to pursue additional acquisitions
in our existing regional markets as well as new markets, and to seek strategic
acquisition opportunities that are compatible with our core business. We expect
to fund future acquisitions out of cash flow from operations and/or from
borrowings under our senior credit facility. If necessary, we believe that we
also have the ability to secure additional financing to pursue this strategy. If
the currently proposed sale of a majority interest in our U.S. plastic packaging
operations is completed, we intend to use the proceeds to fund acquisitions in
our dairy segment, and possibly to repurchase a portion of our outstanding
common stock. There can be no assurance, however, that we will close the
proposed sale of a majority interest in our packaging segment, or that, if that
transaction is not closed, we will have sufficient other resources to realize
our acquisition and consolidation strategy.
KNOWN TRENDS AND UNCERTAINTIES
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 problem. The Year 2000
problem arises from the way dates are recorded and computed in most
applications, operating systems, hardware and embedded chips. If the problem is
not corrected, systems that use a date in its prescribed function may fail or
produce erroneous results before, on and after the year 2000.
We are currently engaged in a comprehensive project to identify and
address any Year 2000 issues that may adversely impact our business. The areas
being assessed are: enterprise systems and related applications; plant floor
systems and equipment; personal computers and related applications; networks and
communications; supplier and customer chains; internal and external Electronic
Data Interchange and associated interfaces; and miscellaneous equipment (time
clocks, postage machines, facsimiles, etc.). These areas relate not only to
"information technology" but also to all segments of our business.
A project team consisting of corporate and regional employees
representing key segments of our business is guiding our Year 2000 compliance
effort. This team has developed a structured approach that includes detailed
specific tasks needed to satisfy Year 2000 compliance. The plan is broken into
five phases including awareness, assessment/inventory, remediation,
certification and testing. These phases are designed to enable us to
comprehensively and effectively track all activities. External consultants are
being utilized to assist in compliance efforts.
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We have completed the assessment of our information systems and are
aggressively proceeding with remediation, testing and implementation processes
using both internal and external resources. For information and non-information
applications that are provided by a third party software vendor, available
upgrades have been identified and are being certified and implemented.
As a result of the diverse information systems that are being used by
acquired companies and also due to technological enhancements, we have had an
ongoing information systems development plan to move these acquired companies'
systems to our standard platform systems with scheduled replacement of systems
throughout the organization. Year 2000 compliance is a significant portion of
our overall development plan. We have delayed certain nonessential information
projects in order to reassign resources to the Year 2000 strategic plan.
We have finalized the inventory and assessment phase for our plant
equipment and are in the process of researching the detailed inventories for
compliance issues. We believe that the Year 2000 issue will have no significant
impact on our plant operations.
A critical step in our strategic plan is the coordination of Year 2000
readiness with third parties. We have a program in effect to determine the
extent to which we and any interface systems are vulnerable if they fail to
resolve Year 2000 issues. Our program is designed to ensure that the external
business contributors (suppliers, vendors and customers) are pursuing acceptable
compliance efforts so that they will have minimal impact on our business.
Contingency plans are being developed in any areas that pose a possible threat.
We believe that all Year 2000 remediation efforts for our businesses
will be completed on time and within budget estimates. Should any critical
service providers, suppliers (including utility suppliers) or customers be
unable to achieve timely compliance, there may be an adverse impact on our
operation. We believe the most reasonably likely worst case scenario to be
temporary interruptions in production as a result of failure of utility
suppliers to provide adequate power, which could result in potential lost sales
and profits. Our current assessment of risks, based on the most reasonable worst
case scenario, is that there will be no significant adverse impact on our
operations or financial performance. We believe that if any disruption to
operations does occur, it will be isolated and/or short-term in duration.
We have incurred and expensed approximately $2.5 million through March
31, 1999 for remediation costs associated with our Year 2000 compliance
activities and we expect to incur and expense an additional $3.5 million in the
future to remediate our information systems and to write off unamortized costs
for systems replaced. In addition to these remediation costs expensed, we have
also capitalized approximately $6 million of capital expenditures through March
31, 1999 for the replacement and upgrading of purchased software and hardware
for both existing systems and the systems of acquired businesses pursuant to our
Year 2000 compliance activities and our on-going information systems development
plan and we have budgeted an additional $7 million of capital expenditures for
the remainder of 1999 for the purchase of additional replacement systems.
Budgeted amounts are based on our conservative estimates and actual results
could differ as the plan is further implemented.
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Euro Currency Conversion
Companies conducting business in or having transactions denominated in
certain European currencies are facing the European Union's pending conversion
to a new common currency, the "euro." This conversion is expected to be
implemented over a three year period. On January 1, 1999, the euro became the
official currency for accounting and tax purposes of several countries of the
European Union and the exchange rate between the euro and local currencies was
fixed. In 2002, the euro will replace the individual nation's currencies. Since
our packaging group has plants, and otherwise conducts business, in Europe, the
conversion to the euro will have an effect on us. We are currently considering
the specific nature of the impact of the conversion on our operations, but we
currently believe that there will be no material adverse impact of the
conversion on our operations or financial performance.
Trends in Tax Rates
Our 1998 tax rate was approximately 36.4%. We believe that our
effective tax rate will range from 37% to 40% for the next several years. Our
effective tax rate is affected by various tax advantages applicable to our
Puerto Rico based operations. Any additional acquisitions could change this
effective tax rate.
RISK FACTORS
This report contains certain statements about our future that are not
statements of historical fact. In some cases, you can identify these statements
by terminology such as "may," "will," "should," "expects," "anticipates,"
"plans," "believes," "estimates," "intends," "predicts," "potential" or
"continue" or the negative of such terms and other comparable terminology. These
statements are only predictions, and in evaluating those statements, you should
carefully consider the risks outlined below. Actual performance or results may
differ materially and adversely.
We may have difficulties executing our acquisition strategy, which
could affect our growth and financial condition.
We intend to expand our business primarily through acquisitions. Our
ability to expand through acquisitions is subject to various risks, including
o limitations on our financing sources,
o rising acquisition prices,
o increased antitrust constraints on our proposed acquisitions and
acquisition strategy, and
o fewer suitable acquisition candidates.
If we are not able to expand our business through acquisitions at the
rate we have planned, our stock price may be adversely affected.
If we fail to effectively manage our growth, our business could be
adversely affected.
We have expanded our operations rapidly in recent years and intend to
continue this expansion. This rapid growth places a significant demand on our
management and our financial and operational resources. Our growth strategy is
subject to various risks, including
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o inability on our part to successfully integrate or operate acquired
businesses,
o inability to retain key customers of acquired businesses, and
o inability to realize or delays in realizing expected benefits from our
increased size.
The integration of businesses we have acquired or may acquire in the future may
also require us to invest more capital than we expected or require more time and
effort by management than we expected. If we fail to effectively manage the size
and growth of our business, our operations and financial results could be
affected, both materially and adversely.
Our failure to successfully compete could adversely affect our
prospects and financial results.
Our businesses are subject to intense competition. We have many
competitors in each of our major product, service and geographic markets, and
some of these competitors are larger, more established and better capitalized.
If we fail to successfully compete against our competitors, our business will be
adversely affected.
Our dairy business is subject to significant competition from dairy
operations and large national food service distributors that operate in our
markets. Competition in the dairy business is based primarily on
o service,
o price,
o brand recognition,
o quality, and
o breadth of product line.
The dairy industry has excess production capacity and has been
consolidating for many years. This excess production capacity is the result of
o improved manufacturing techniques,
o the establishment of captive dairy operations by large grocery
retailers, and
o limited growth in the demand for fresh milk products.
We could be adversely affected by any expansion of capacity by our
existing competitors or by new entrants in our markets.
We compete in the packaging business on the basis of a number of
factors, including price, quality and service. Our principal competitors in this
business are larger independent manufacturing companies and vertically
integrated food and industrial companies that operate captive packaging
manufacturing facilities.
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Our substantial debt and other financial obligations expose us to risks
that could adversely affect our financial condition.
As of March 31, 1999, we had substantial debt and other financial
obligations, including
o $979.0 million of borrowings (including $730.0 million under our senior
credit facility, $59.8 million under our subsidiary lines of credit and
$189.2 million of subsidiary debt obligations), and
o $683.1 million of 5.0% preferred securities and 5.5% preferred
securities.
Those amounts compare to our stockholders' equity of $677.5 million as
of March 31, 1999.
Our senior credit facility provides us with a line of credit of up to $1
billion to be used for general corporate and working capital purposes. As of
March 31, 1999, we would have been able to borrow an additional $235.9 million
under our senior credit facility. We have pledged the stock of some of our
subsidiaries to secure this facility and the assets of other subsidiaries to
secure other indebtedness. Our senior credit facility and related debt service
obligations
o limit our ability to obtain additional financing in the future without
obtaining prior consent,
o require us to dedicate a significant portion of our cash flow to the
payment of interest on our debt, which reduces the funds we have
available for other purposes,
o limit our flexibility in planning for, or reacting to, changes in our
business and market conditions, and
o impose on us additional financial and operational restrictions.
Our ability to make scheduled payments on our debt and other financial
obligations depends on our financial and operating performance. Our financial
and operating performance is subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond our control. If
we do not comply with the financial and other restrictive covenants under our
senior credit facility, we may default under this facility. Upon default, our
lenders could accelerate the indebtedness under this facility, foreclose against
their collateral or seek other remedies.
Increases in our raw material costs could adversely affect our
profitability.
The most important raw materials that we use in our operations are raw
milk, cream (including butterfat) and high density polyethylene resin. The
prices of these materials increase and decrease depending on supply and demand
and, in some cases, governmental regulation. In many cases, we are not able to
pass on the increased price of raw materials to our customers due primarily to
timing problems. Therefore, volatility in the cost of our raw materials can
adversely affect our profitability and financial performance.
Changes in regulations could adversely affect many aspects of our
business.
Under the Federal Milk Marketing Order program, the federal government
and several state agencies establish minimum regional prices paid to producers
for raw milk. In 1996, the U.S. Congress passed legislation to phase out the
Federal Milk Marketing Order program. This program is currently scheduled to be
phased out by October 1999. The U.S. Department of Agriculture ("USDA") has also
recently
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issued final rules which would implement changes to this program, including
changes in pricing classifications for certain dairy products. An additional
bill has been introduced in Congress to override the USDA's final rules and
implement other proposed pricing changes. We do not know which, if any, of the
various proposed changes will be adopted, and we do not know what effect any
final legislation or the termination of this federal program will have on the
market for dairy products. In addition, various states have adopted or are
considering adopting compacts among milk producers, which would establish
minimum prices paid by milk processors, including us, to raw milk producers. We
do not know whether new compacts will be adopted or the extent to which these
compacts would increase the prices we pay for milk.
As a manufacturer and distributor of food products, we are subject to
federal, state and local laws and regulations relating to
o food quality,
o manufacturing standards,
o labeling, and
o packaging.
Our operations are subject to other federal, foreign, state and local
governmental regulation, including laws and regulations relating to occupational
health and safety, labor, discrimination and other matters. Material changes in
these laws and regulations could have positive or adverse effects on our
business.
Our business involves risks of product liability claims which could
result in significant costs.
We sell food products for human consumption, which involves risks
such as
o product contamination or spoilage,
o product tampering, and
o other adulteration of food products.
Consumption of an adulterated, contaminated or spoiled product may
result in personal illness or injury. We could be subject to claims or lawsuits
relating to an actual or alleged illness or injury, and we could incur
liabilities that are not insured or that exceed our insurance coverages.
An actual or alleged problem with the quality or safety of products
at any of our facilities could result in
o product withdrawals,
o product recalls,
o negative publicity,
o temporary plant closings, and
o substantial costs of compliance.
Any of these events could have a material and adverse effect on our
financial condition.
Loss of key personnel could adversely affect our business.
Our success depends to a large extent on the skills, experience and
performance of our executive management. The loss of one or more of these
persons could hurt our business. We do not maintain key man life insurance on
any of our executive officers or directors.
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Failure to complete the sale of our packaging business could affect our
liquidity and our stock price.
On April 29, 1999, we agreed to sell a majority interest in our U.S.
plastic packaging operations to Consolidated Container Company LLC, a newly
formed company to be controlled by affiliates of Vestar Capital Partners III,
L.P., a private equity firm. For more information about the proposed
transactions, see our discussion of "Recent Developments" on page 11. We expect
the transaction to close on or about July 1, 1999. However, completion of the
proposed transaction is subject to customary conditions, including expiration of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, obtaining third party consents to the transaction and the consummation of
acceptable financing for Consolidated Container Company LLC. There can be no
assurance that the proposed transaction will close by July 1, 1999 or ever. If
the transaction is not completed, we may be forced to raise funds through the
sale of equity or by incurring more expensive indebtedness in order to pursue
our present acquisition and consolidation strategy.
Year 2000 problems for us or our suppliers or customers could increase
our liabilities or expenses and impact our profitability.
We are in the process of addressing our Year 2000 computer issues. If
we do not complete the necessary systems modifications on a timely basis or if
important service providers, suppliers or customers are unable to resolve their
Year 2000 issues in a timely manner, our operations could be adversely affected
and we could experience increased liabilities and expenses as a result.
Provisions of our certificate of incorporation, bylaws and Delaware law
could deter takeover attempts.
Some provisions in our certificate of incorporation and bylaws could
delay, prevent or make more difficult a merger, tender offer, proxy contest or
change of control. Our stockholders might view any such transaction as being in
their best interests since the transaction could result in a higher stock price
than the current market price for our common stock. Among other things, our
certificate of incorporation and bylaws
o authorize our board of directors to issue preferred stock in series
with the terms of each series to be fixed by our board of directors,
o divide our board of directors into three classes so that only
approximately one-third of the total number of directors is elected
each year,
o permit directors to be removed only for cause, and
o specify advance notice requirements for stockholder proposals and
director nominations.
In addition, with some exceptions, the Delaware General Corporation Law
restricts mergers and other business combinations between us and any stockholder
that acquires 15% or more of our voting stock.
We also have a stockholder rights plan. Under this plan, after the
occurrence of specified events, our stockholders will be able to buy stock from
us or our successor at reduced prices. These rights do not extend, however, to
persons participating in takeover attempts without the consent of our board of
directors. Accordingly, this plan could delay, defer, make more difficult or
prevent a change of control.
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Environmental regulations could result in charges or increase our costs
of doing business.
We, like others in similar businesses, are subject to a variety of
federal, foreign, state and local environmental laws and regulations including,
but not limited to, those regulating waste water and stormwater, air emissions,
storage tanks and hazardous materials. We believe that we are in material
compliance with these laws and regulations. Future developments, including
increasingly stringent regulations, could require us to make currently
unforeseen environmental expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE AGREEMENTS
At March 31, 1999, we had interest rate derivative agreements in place,
including interest rate caps, swaps and collars which have been designated as
hedges against our variable interest rate exposure on loans under our senior
credit facility. The following table summarizes our various interest rate
agreements:
TYPE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
---- -------------------- ---------------- ---------------
Caps.......... 8.0% $60.0 million March 2000
Swaps......... 6.03% to 6.14% 110.0 million December 2000
50.0 million March 2001
225.0 million December 2002
50.0 million December 2003
Collars....... 6.08% and 7.50% 100.0 million December 2002
To June 2003
The original costs and premiums of these derivative agreements are
being amortized on a straight-line basis as a component of interest expense.
These derivative agreements provide hedges for senior credit facility loans by
limiting or fixing the LIBOR interest rates specified in the senior credit
facility (5.70% at March 31, 1999, including the LIBOR margin) at the interest
rates specified above until the indicated expiration dates of these interest
rate derivative agreements.
FOREIGN CURRENCY
We are exposed to foreign currency risk due to operating cash flows and
various financial instruments that are denominated in foreign currencies. Our
most significant foreign currency exposures relate to the French franc and the
German mark. Potential losses due to foreign currency fluctuations would not
have a material impact on our consolidated financial position, results of
operations or operating cash flow.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 1999, we reached an agreement with the U.S. Department of
Justice Antitrust Division (the "DOJ") to settle the civil antitrust lawsuit
brought by the DOJ against us and Broughton Foods Company in March 1999 to
enjoin our proposed merger with Broughton Foods Company. The settlement allows
us to complete our proposed merger with Broughton Foods Company, conditioned
upon our agreement to sell the business conducted at Broughton Foods Company's
Southern Belle Dairy based in Pulaski County, Kentucky. Pursuant to the proposed
settlement, we must sell the Southern Belle Dairy to a buyer acceptable to the
DOJ by October 29, 1999. The settlement is subject to approval by the U.S.
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District Judge for the Eastern District of Kentucky London Division where the
DOJ's antitrust lawsuit is currently pending. Before the settlement is approved
by the court, it must be submitted for public comment for a period of 60 days,
but the parties may close the merger prior to final approval of the settlement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re computation of per share earnings.
27 Financial Data Schedules
(b) Reports on Form 8-K
o We filed a Current Report on Form 8-K on February 12, 1999 in
connection with our announcement of earnings for the quarter and
year ended December 31, 1998.
o We filed a Current Report on Form 8-K on May 5, 1999 in connection
with our announcements of the proposed sale of a majority interest
in our U.S. plastic packaging operations, and the settlement of the
antitrust lawsuit brought against us in connection with our proposed
acquisition of Broughton Foods Company.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUIZA FOODS CORPORATION
/s/ Barry A. Fromberg
-------------------------------------------
Barry A. Fromberg Executive Vice President,
Chief Financial Officer (Principal
Accounting Officer)
Date: May 14, 1999
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11 Statement re computation of per share earnings
27 Financial Data Schedules
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