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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 JUNE 30, 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 FOOD LOGO]
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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 August 9, 1999 the number of shares outstanding of each class of
common stock was:
Common Stock, par value $.01 33,744,127
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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............ 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk....................................... 23
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.............................................. 24
Item 6 - Exhibits and Reports on Form 8-K................................................................. 24
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(unaudited)
(Dollars in thousands)
Assets
Current assets:
Cash and cash equivalents ................................................... $ 57,338 $ 54,922
Temporary investments ....................................................... 8,612 9,216
Accounts receivable, net .................................................... 428,557 452,185
Inventories ................................................................. 231,789 223,338
Prepaid expenses and other current assets ................................... 15,634 25,924
Net assets held for sale .................................................... 15,000
Refundable income taxes ..................................................... 7,908 24,455
Deferred income taxes ....................................................... 23,449 23,859
----------- -----------
Total current assets ........................................................ 788,287 813,899
Property, plant and equipment, net ............................................. 934,349 846,956
Deferred income taxes .......................................................... 1,243 2,528
Intangible and other assets .................................................... 1,449,690 1,350,400
----------- -----------
Total .......................................................................... $ 3,173,569 $ 3,013,783
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 484,193 $ 500,303
Income taxes payable ........................................................ 19,671 18,876
Current portion of long-term debt and subsidiary lines of credit ............ 61,557 39,892
----------- -----------
Total current liabilities ................................................... 565,421 559,071
Long-term debt ................................................................. 975,629 893,077
Other long-term liabilities .................................................... 58,029 64,449
Deferred income taxes .......................................................... 40,492 28,702
Mandatorily redeemable convertible trust issued preferred securities ........... 683,213 682,938
Minority interest in subsidiaries .............................................. 143,355 129,775
Commitments and contingencies
Stockholders' equity:
Common stock, 33,712,312 and 33,598,074 shares issued and outstanding ....... 337 336
Additional paid-in capital .................................................. 450,927 446,230
Retained earnings ........................................................... 257,879 204,859
Accumulated other comprehensive income(loss) ................................ (1,713) 4,346
----------- -----------
Total stockholders' equity .................................................. 707,430 655,771
----------- -----------
Total .......................................................................... $ 3,173,569 $ 3,013,783
=========== ===========
See notes to consolidated financial statements.
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SUIZA FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
Net sales ........................................................ $ 1,118,844 $ 768,120 $ 2,272,030 $ 1,361,241
Cost of sales .................................................... 855,895 582,213 1,776,522 1,038,361
------------ ------------ ------------ ------------
Gross profit ..................................................... 262,949 185,907 495,508 322,880
Operating costs and expenses:
Selling and distribution ...................................... 124,332 89,127 246,188 159,328
General and administrative .................................... 41,733 24,676 80,837 44,121
Amortization of intangibles ................................... 10,054 7,248 19,977 12,986
Plant closing and other costs ................................. 4,671 4,671
------------ ------------ ------------ ------------
Total operating costs and expenses ............................ 180,790 121,051 351,673 216,435
------------ ------------ ------------ ------------
Operating income ................................................. 82,159 64,856 143,835 106,445
Other (income) expense:
Interest expense, net ......................................... 15,235 8,445 31,178 21,847
Financing charges on preferred securities ..................... 9,646 9,646 19,293 10,895
Other (income) expense net .................................... 406 (739) (101) (1,441)
------------ ------------ ------------ ------------
Total other (income) expense .................................. 25,287 17,352 50,370 31,301
------------ ------------ ------------ ------------
Income from continuing operations before income taxes and
minority interests ............................................... 56,872 47,504 93,465 75,144
Income taxes ..................................................... 22,092 17,325 36,103 26,912
Minority interest in earnings .................................... 2,633 549 4,342 549
------------ ------------ ------------ ------------
Income from continuing operations ................................ 32,147 29,630 53,020 47,683
Loss from discontinued operations ................................ (3,161)
------------ ------------ ------------ ------------
Income before extraordinary items ................................ 32,147 29,630 53,020 44,522
Extraordinary gain ............................................... 31,698 31,698
------------ ------------ ------------ ------------
Net income ....................................................... $ 32,147 $ 61,328 $ 53,020 $ 76,220
============ ============ ============ ============
Net income applicable to common stock ............................ $ 32,147 $ 61,253 $ 53,020 $ 76,058
============ ============ ============ ============
Average common shares: Basic ..................................... 33,730,348 32,516,846 33,686,492 31,645,463
Average common shares: Diluted ................................... 43,805,753 43,582,369 43,845,578 39,030,791
Basic earnings per common share:
Income from continuing operations ............................. $ 0.95 $ 0.91 $ 1.57 $ 1.50
Loss from discontinued operations ............................. (0.10)
Extraordinary gain ............................................ 0.97 1.00
------------ ------------ ------------ ------------
Net income .................................................... $ 0.95 $ 1.88 $ 1.57 $ 2.40
============ ============ ============ ============
Diluted earnings per common share:
Income from continuing operations ............................. $ 0.87 $ 0.82 $ 1.48 $ 1.39
Loss from discontinued operations ............................. (0.08)
Extraordinary gain ............................................ 0.72 0.81
------------ ------------ ------------ ------------
Net income .................................................... $ 0.87 $ 1.54 $ 1.48 $ 2.12
============ ============ ============ ============
See notes to consolidated financial statements.
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SUIZA FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Cash flows from operating activities:
Net income ........................................................................... $ 53,020 $ 76,220
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations ................................................ 3,161
Depreciation and amortization .................................................... 63,202 36,807
Minority interest ................................................................ 4,342 549
Extraordinary gain ............................................................... (31,698)
Deferred income taxes ............................................................ 15,235 5,340
(Gain) loss on disposition of assets ............................................. 4,522 (148)
Other ............................................................................ 1,224 (620)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ........................................................... 38,792 (21,594)
Inventories ................................................................... (3,221) (13,300)
Prepaid expenses and other assets ............................................. (6,574) 10,014
Accounts payable, accrued expenses and other liabilities ...................... (48,110) 22,325
Income taxes .................................................................. 19,621 8,218
----------- -----------
Net cash provided by continuing operations .................................. 142,053 95,274
Net cash used by discontinued operations .................................... (2,068)
----------- -----------
Net cash provided by operating activities ................................... 142,053 93,206
Cash flows from investing activities:
Additions to property, plant and equipment ............................................ (104,758) (64,714)
Cash outflows for acquisitions ........................................................ (147,230) (446,184)
Net proceeds from the sale of discontinued operations ................................. 172,732
Net proceeds from divestitures
6,795
Additions to equity investments ....................................................... (3,726)
Other ................................................................................. 1,675 1,289
----------- -----------
Net cash used by continuing operations ...................................... (247,244) (336,877)
Net cash used by discontinued operations .................................... (14,022)
----------- -----------
Net cash used by investing activities ....................................... (247,244) (350,899)
Cash flows from financing activities:
Proceeds from the issuance of debt .................................................... 105,787 722,445
Repayment of debt ..................................................................... (5,107) (1,052,648)
Payment of deferred financing and debt restructuring .................................. (1,256)
Issuance of common stock, net of expenses ............................................ 2,123 27,517
Issuance of trust issued preferred securities, net of expenses ........................ 582,500
Redemption of common stock ............................................................ (2,975)
Proceeds from issuance of minority interest ........................................... 8,983
Distributions to minority interest .................................................... (1,204)
Other ................................................................................. (150)
----------- -----------
Net cash provided by financing activities ................................... 107,607 278,408
----------- -----------
Increase in cash and cash equivalents .................................................... 2,416 20,715
Cash and cash equivalents, beginning of period ........................................... 54,922 24,388
----------- -----------
Cash and cash equivalents, end of period ................................................. $ 57,338 $ 45,103
=========== ===========
See notes to consolidated financial statements.
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SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. GENERAL
The 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 the dates and for the periods presented. 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 June 30, 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. SUBSEQUENT EVENTS
On July 2, 1999, we sold our U.S. plastic packaging operations
(Franklin Plastics, Inc. and Plastic Containers, Inc.) to Consolidated Container
Company LLC, a newly formed company which owns Reid Plastics Holdings, Inc. and
is controlled by Vestar Capital Partners III, L.P. Pursuant to this transaction,
we and the minority interest shareholders of Franklin Plastics, Inc. received a
43% and 6% interest, respectively, in Consolidated Container Company LLC. In
addition, Consolidated Container Company LLC assumed approximately $135 million
of our debt, paid to us at closing our intercompany debt and preferred stock
investment, including interest and dividends, of approximately $364 million, and
paid to the minority interest holders of Franklin Plastics, Inc. their preferred
stock investment of approximately $9 million. Our interest in Consolidated
Container Company LLC will be accounted for under the equity method of
accounting.
On July 23, 1999, we announced that we have signed a definitive
agreement to acquire Valley of Virginia Cooperative Milk Producers Association,
an agricultural marketing cooperative with dairy processing plants in
Springfield, Virginia and Mt. Crawford, Virginia. Valley of Virginia, which had
net sales of approximately $206 million during the 12 months ended February 28,
1999, sells milk and ice cream products in Virginia, Maryland, Pennsylvania,
Delaware and the District of Columbia, and ultra-high temperature dairy products
across the eastern half of the United States, primarily under the Shenandoah's
Pride(R) brand. The acquisition has been approved by our Board of Directors and
by the Board of Directors of Valley of Virginia, and is subject to customary
conditions, including the receipt of certain governmental approvals and the
approval of the members of Valley of Virginia. Valley of Virginia has also
conditioned its obligation to close upon receipt of certain tax rulings by the
Internal Revenue Service. Valley of Virginia will sell its interest in Valley
Rich Dairy based in Roanoke, Virginia to another purchaser prior to the closing
of the transaction. The transactions are expected to close in the fourth quarter
of 1999.
On August 2, 1999, we announced the formation of a new joint venture
with Dairy Farmers of America ("DFA") pursuant to which our southern California
dairy operations have been combined with DFA's southern California dairy
operations to form a business with revenues of approximately $270 million. The
joint venture includes our Swiss Dairy business, based in Riverside, California
with annual revenues of approximately $120 million, and the fluid milk business
of Adohr Farms, based in Southgate, California with annual revenues of
approximately $150 million. We own a 75% interest in the venture and DFA owns
the remaining 25%. We will manage the venture, which will be the sole entity
through which we and DFA will conduct fluid milk operations in the 10
southernmost counties in California. In
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connection with the transaction, we and DFA redeemed the interests of two
minority holders of Adohr's milk business.
3. TEMPORARY INVESTMENTS
Temporary investments during all periods and for all dates shown
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.
4. INVENTORIES
AT JUNE 30, AT DECEMBER 31,
1999 1998
------------ --------------
(IN THOUSANDS)
Raw materials and supplies................. $ 127,988 $ 113,118
Finished goods............................. 103,801 110,220
------------ --------------
Total................................. $ 231,789 $ 223,338
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5. DEBT
AT JUNE 30, AT DECEMBER 31,
1999 1998
----------- ---------------
(IN THOUSANDS)
Senior credit facility ................................ $ 783,500 $ 719,500
Subsidiary debt obligations:
Senior secured notes .............................. 130,636 131,078
Lines of credit ................................... 60,837 46,160
Industrial development revenue bonds .............. 12,428 12,635
Capital lease obligations and other ............... 49,785 23,596
----------- -----------
1,037,186 932,969
Less current portion .................................. (61,557) (39,892)
----------- -----------
Total ............................................. $ 975,629 $ 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.
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 a
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 debt (as
defined in the credit agreement) to our net earnings, before deductions for
interest, taxes, depreciation and amortization ("EBITDA"). We pay a commitment
fee for unused credit under our senior credit facility that ranges from 15 to 23
basis points, based on our ratio of debt to EBITDA. Interest is payable
quarterly or at the end of the applicable interest period. The average interest
rate in effect on our senior credit facility, including the applicable interest
rate margin, was 5.7% during the second quarter of 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 debt to EBITDA) and an interest coverage ratio (computed as
the ratio of EBITDA to interest expense). In addition, the senior credit
facility requires that we maintain a minimum
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level of net worth. The senior credit facility also contains limitations on
liens, investments, the incurrence of additional debt and acquisitions, and
prohibits certain property sales. Our senior credit facility is secured by the
stock of certain of our subsidiaries.
Subsidiary Debt Obligations --During the quarter, the debt obligations
of our subsidiaries included senior secured notes, lines of credit, industrial
development revenue bonds and other obligations.
Plastic Containers, Inc., which we sold to Consolidated Container
Company LLC on July 2, 1999 (see Note 2 above), issued senior secured notes in
December 1996. These notes, which were fully redeemed in connection with our
sale of Plastic Containers, Inc. to Consolidated Container Company LLC,
o had an original par value of $125 million,
o were due in 2006,
o bore interest at a fixed interest rate of 10% payable
semi-annually in July and December of each year, and
o were 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.
When we acquired Plastic Containers, Inc. in May 1998, we redeemed
approximately $3.8 million of these notes (at a redemption price of 101% of par
value) pursuant to a mandatory tender offer. We revalued the remaining notes to
fair value using a market yield of 8.6%, which resulted in a premium of $10.4
million at acquisition date. Prior to our sale of Plastic Containers, Inc., this
premium was being amortized as an adjustment to interest expense over the life
of the notes.
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. Of the outstanding borrowings under these lines of
credit, which at June 30, 1999 included only foreign subsidiary borrowings,
$51.7 million is classified as a current liability since such borrowings are
expected to be repaid within one year; the remaining $9.1 million is classified
as long term and will be repaid at various dates through 2003.
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 on these bonds is due semiannually at interest rates that vary based on
market conditions which, at June 30, 1999, ranged from 3.7% to 3.9%.
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.
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The following table summarizes our various interest rate agreements as
of June 30, 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 were entered into for the purpose of
providing 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 used the cash proceeds that we received from
the sale of our U.S. plastic packaging operations on July 2, 1999, to reduce
outstanding debt under our senior credit facility. As a result, certain of our
existing interest rate agreements will no longer be designated as hedges and
will be marked to market with any resulting gain or loss recognized in the third
quarter of 1999. We do not believe that this will have a material impact on our
consolidated financial position or results of operations.
We are exposed to market risk under interest rate derivative agreements
because interest rates on our senior credit facility could fall below the rates
on the interest rate derivative agreements. Credit risk under these agreements
is remote since the counterparties to our interest rate derivative agreements
are major financial institutions.
6. ACQUISITIONS
On June 22, 1999, we completed our previously announced acquisition of
Broughton Foods Company. Broughton Foods Company, which had sales of
approximately $179 million in 1998, is a manufacturer and distributor of fresh
and ultra high temperature ("UHT") milk, ice cream and other UHT dairy products
in Michigan, Ohio, West Virginia, Kentucky, Tennessee and parts of the eastern
United States. Pursuant to an agreement with the U.S. Department of Justice
Antitrust Division, we must sell Broughton Foods Company's operations in Pulaski
County, Kentucky by October 30, 1999. As a result, the portion of the purchase
price allocable to the operation has been classified as assets held for sale.
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 our acquisitions in 1999 have been 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 intangibles, and
liabilities assumed based on their estimated fair market values. The excess of
the total
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purchase prices over the estimated fair values of the net assets represented
goodwill. These allocations are tentative and subject to change.
7. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Our two reportable segments during the quarter were dairy and
packaging. 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. 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 in our dairy segment. On July 2,
1999, we sold our U.S. plastic packaging operations (Franklin Plastics, Inc.,
and Plastic Containers, Inc.) to Consolidated Container Company LLC, a newly
formed company in which we own a minority interest. See Note 2 above for more
information about such sale. Our remaining packaging operations, which will
cease to be reported as a separate segment in the third quarter of 1999, consist
of our European metal can and flexible film operations.
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 on
Form 10-K. The amounts in the following tables are derived from reports used by
our executive management team:
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- -----------------------------------------------
SEGMENT SEGMENT
DAIRY PACKAGING TOTAL DAIRY PACKAGING TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(in 000's) -- -- -- -- -- --
Revenues from external ........ $ 934,794 $ 184,050 $1,118,844 $ 674,499 $ 93,621 $ 768,120
customers .....................
Intersegment revenues ......... 9,448 10,145 19,593 3,225 5,067 8,292
Segment operating income(1) ... 67,784 23,204 90,988 57,727 10,114 67,841
Total segment assets .......... 2,279,188 838,684 3,117,872 1,745,225 776,773 2,521,998
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------------
SEGMENT SEGMENT
DAIRY PACKAGING TOTAL DAIRY PACKAGING TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(in 000's)
Revenues from external customers .... $1,912,459 $ 359,571 $2,272,030 $1,230,472 $ 130,769 $1,361,241
Intersegment revenues ............... 16,036 18,674 34,710 5,600 10,218 15,818
Segment operating income(1) ......... 117,678 40,912 158,590 99,057 14,424 113,481
- --------------------------
(1) 1999 Dairy figure includes a pre-tax charge for plant closing and other
costs of $4.7 million.
The following are reconciliations of reportable segment amounts to our
consolidated totals:
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------
1999 1998
--------------------------------------- ----------------------------------------
CORPORATE/ CORPORATE/
SEGMENT OTHER TOTAL SEGMENT OTHER TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(in 000's)
Segment operating income (loss) ... $ 90,988 $ (8,829) $ 82,159 $ 67,841 $ (2,985) $ 64,856
Total segment assets .............. 3,117,872 55,697 3,173,569 2,521,998 43,470 2,565,468
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------
1999 1998
--------------------------------------- ----------------------------------------
CORPORATE/ CORPORATE/
SEGMENT OTHER TOTAL SEGMENT OTHER TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(in 000's)
Segment operating income(loss)..... $ 158,590 $ (14,755) $ 143,835 $ 113,481 $ (7,036) $ 106,445
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Geographic information for 1999 and 1998 (in 000's):
REVENUES
---------------------------------------------------------------- LONG-LIVED ASSETS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, AT JUNE 30,
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
United States ........ $ 998,895 $ 680,193 $2,037,260 $1,211,353 $2,177,650 $1,703,723
Puerto Rico .......... 60,591 62,813 120,384 124,774 124,053 122,682
Europe ............... 59,358 25,114 114,386 25,114 83,579 78,800
---------- ---------- ---------- ---------- ---------- ----------
Total ................ $1,118,844 $ 768,120 $2,272,030 $1,361,241 $2,385,282 $1,905,205
========== ========== ========== ========== ========== ==========
No customer within either segment represented greater than ten percent
of our consolidated revenues during the quarter.
8. 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 $29.4 million and
$47.0 million for the three- and six-month periods ended June 30, 1999,
respectively, which included net income as reported and comprehensive income
adjustments primarily for foreign currency losses of $4.6 million ($2.8 million
net of taxes) for the three-month period ended June 30, 1999 and $9.9 million
($6.1 million net of taxes) for the six-month period ended June 30, 1999.
Consolidated comprehensive income was $60.1 million and $75.0 million for the
three- and six-month periods ended June 30, 1998, respectively, ($28.4 million
and $46.5 million before discontinued operations and an extraordinary gain)
which includes foreign currency losses of $1.2 million for both periods.
9. STOCKHOLDERS' EQUITY
On September 15, 1998, our Board of Directors authorized an open market
share repurchase program of up to $100 million of our common stock. During the
second quarter of 1999, we repurchased 79,700 shares of common stock for a total
purchase price of approximately $3 million pursuant to this Board authorization.
Prior to the second quarter of 1999, we had purchased an additional $46 million
of our common stock pursuant to the same Board authorization.
10. PLANT CLOSING AND OTHER NON-RECURRING COSTS
During the second quarter of 1999, as part of an overall integration
and cost reduction strategy, we recorded plant closing and other non-recurring
costs of $4.7 million. The impact of the charge was to reduce earnings from $.94
per diluted share to $.87 per diluted share. These costs included the following:
o Closing of one dairy plant and consolidation of production into an
expanded plant,
o Disposition of a small cheese processing plant, and
o Consolidation of administrative offices in one of our regions.
The costs included non-cash asset and plant disposition charges of
$3.6 million as well as other costs of $1.1 million. Set forth below is a
summary of the types and amounts of these other costs that were recognized as
accrued expenses during the second quarter of 1999, and the cash payments made
against such accruals during the period (dollars in thousands):
Balance At
Charge Payments June 30, 1999
------ -------- -------------
Workforce severance obligations....... $ 628 $(460) $ 168
Lease and other obligations........... 495 (46) 449
------- ----- -----
Total $ 1,123 $(506) $ 617
======= ===== =====
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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 in the
United States. We also have holdings in the consumer goods packaging industry.
Our two reportable segments during the quarter were dairy and packaging. On
July 2, 1999, we sold our U.S. plastic packaging operations (Franklin Plastics,
Inc. and Plastic Containers, Inc.) to Consolidated Container Company LLC, in
which we own a minority interest. Our remaining packaging operations, which will
cease to be reported as a separate segment in the third quarter of 1999, consist
of our European metal can and flexible film businesses. The following table
presents certain information concerning our results of operations during the
three- and six-month periods ended June 30, 1999 and 1998, including information
presented as a percentage of net sales (dollars in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------------------------------
1999 1998 1999 1998
-------------------- ------------------- ---------------------- ------------------------
% OF % OF % OF % OF
NET NET NET NET
DOLLARS SALES DOLLARS SALES DOLLARS SALES DOLLARS SALES
---------- -------- ---------- ------- ----------- --------- ---------- ------------
Net sales:
Dairy ................. $ 934,794 $ 674,499 $ 1,912,459 $1,230,472
Packaging ............. 184,050 93,621 359,571 130,769
---------- -------- ---------- ------- ----------- --------- ---------- -----------
Total ............. 1,118,844 100% 768,120 100% 2,272,030 100% 1,361,241 100%
Cost of sales .......... 855,895 76.5 582,213 75.8 1,776,522 78.2 1,038,361 76.3
---------- -------- ---------- ------- ----------- --------- ---------- -----------
Gross profit ........... 262,949 23.5 185,907 24.2 495,508 21.8 322,880 23.7
Operating expenses:
Selling and distrib ... 124,332 11.1 89,127 11.6 246,188 10.8 159,328 11.7
G&A ................... 41,733 3.8 24,676 3.2 80,837 3.6 44,121 3.2
Amortization .......... 10,054 0.9 7,248 1.0 19,977 0.9 12,986 1.0
Plant closing &
other ................ 4,671 0.4 4,671 0.2
---------- -------- ---------- ------- ----------- --------- ---------- -----------
Total ............. 180,790 16.2 121,051 15.8 351,673 15.5 216,435 15.9
---------- -------- ---------- ------- ----------- --------- ---------- -----------
Operating income
(loss):
Dairy1 ............... 67,784 6.0 57,727 7.5 117,678 5.2 99,057 7.3
Packaging ............ 23,204 2.1 10,114 1.3 40,912 1.8 14,424 1.0
Corporate ............ (8,829) (0.8) (2,985) (0.4) (14,755) (0.7) (7,036) (0.5)
---------- -------- ---------- ------- ----------- --------- ---------- -----------
Total ............. $ 82,159 7.3% $ 64,856 8.4% $ 143,835 6.3% $ 106,445 7.8%
========== ======== ========== ======= =========== ========= ========== ===========
- ---------------
(1) 1999 figures include plant closing and other non-recurring costs of
$4.7 million.
SECOND QUARTER AND YEAR-TO-DATE 1999 COMPARED TO SECOND QUARTER AND YEAR-TO-DATE
1998
Net Sales. Net sales increased 45.7% to $1.12 billion in the second
quarter of 1999 from $768.1 million in the second quarter of 1998. For the six
month period ended June 30, net sales increased 66.9% to $2.27 billion in 1999
from $1.36 billion in 1998. Net sales in our dairy segment grew to $934.8
million in the second quarter of 1999 from $674.5 million in the second quarter
of 1998, and to $1.91 billion in the first six months of 1999 compared to $1.23
billion in the same period of 1998, primarily due to acquisitions. Net sales in
our packaging segment grew to $184.1 million in the second quarter of 1999 from
$93.6 million in the second quarter of 1998, and to $359.6 in the first six
months of 1999 compared to $130.8 million in the same period of 1998. Packaging
increases were due to our acquisition of Continental Can in the second quarter
of 1998, our acquisitions of several smaller businesses in 1998 and our opening
of several new facilities.
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Cost of Sales. Our cost of sales ratio was 76.5% in the second quarter
of 1999 compared to 75.8% in the second quarter of 1998, and 78.2 % for the
first six months of 1999 compared to 76.3% for the same period of 1998. The cost
of sales ratio for our dairy group rose to 76.6% in the second quarter of 1999
compared to 75.6% in 1998 due to the effect of lower profit margins from newly
acquired businesses. For the first six months of 1999, the cost of sales ratio
in our dairy segment increased to 78.5% compared to 76.2% in the same period of
1998, primarily due to a higher basic formula price for milk during the first
quarter of 1999, along with the effect of lower profit margins from newly
acquired businesses. The cost of sales ratio for our packaging group fell to
76.1% in the second quarter of 1999 from 77.2% in the same period of 1998 and
fell to 76.4% in the first six months of 1999 from 76.7% in the same period of
1998. These decreases were primarily due to synergies realized from combining
our existing packaging business with those of Continental Can.
Operating Expenses. Our operating expense ratio was 16.2% in the second
quarter of 1999 compared to 15.8% in the second quarter of 1998, and 15.5% for
the first six months of 1999 compared to 15.9% for the same period of 1998. The
operating expense ratio for our dairy group increased to 16.2% in the second
quarter of 1999 compared to 15.9% in 1998 due to $4.7 million in plant closing
and other non-recurring charges. These charges include the costs of closing a
milk plant, selling a cheese processing business, and consolidating
administrative offices in our Midwest region. Excluding these charges, our
operating expense ratio was comparable to 1998 levels. Despite these charges the
operating expense ratio for our dairy group decreased to 15.3% for the first six
months of 1999 compared to 15.7% for the same period of 1998, due to
efficiencies in selling and general and administrative costs. The operating
expense ratio for our packaging group decreased to 11.3% and 12.2% in the second
quarter and first six months of 1999, respectively, from 12.1% and 12.3% in the
same periods of 1998 due to savings in delivery expense.
Operating Income. Operating income increased 26.7% to $82.2 million in
the second quarter of 1999 from $64.9 million in the second quarter of 1998. For
the six-month period ended June 30, operating income increased 35.1% to $143.8
million in 1999 from $106.4 million in 1998. Excluding plant closing and other
non-recurring costs, operating income increased 39.5% to $148.5 million in the
first six months of 1999, compared to the same period in 1998. However,
operating income margin decreased to 7.3% in the first quarter of 1999 from 8.4%
in the same period of 1998, and decreased to 6.3% for the first six months of
1999 from 7.8% in 1998. This decline is primarily due to plant closing and other
non-recurring charges, a higher basic formula price for milk during the first
quarter of 1999 and lower margins for companies acquired in 1998, partly offset
by improved operating efficiencies in our dairy operations held for more than
one year.
Other (Income) Expense. Interest expense increased to $15.2 million in
the second quarter of 1999 from $8.4 million in 1998, and increased to $31.2
million in the first six months of 1999 from $21.8 million in the same period of
1998, primarily due to the increased levels of debt used to finance
acquisitions. Financing charges on preferred securities increased to $19.3
million in the first six months of 1999 from $10.9 million in 1998, reflecting
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 and Extraordinary Items. In the six months
ended June 30, 1998, we reported a loss from discontinued operations of $3.2
million, net of an income tax benefit of $2.1 million. Extraordinary items in
1998 were
o a $35.5 million extraordinary gain, net of income tax expense
of $22.0 million, resulting from the April 1998 sale of our
packaged ice business, and
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o a $3.8 million loss, net of an income tax benefit of $2.3 million,
from the write-off of deferred financing costs and the recognition
of interest rate swap losses in connection with our May 1998
early-extinguishment of the term portion of our credit facility.
Net Income. We reported net income of $32.1 million in the second
quarter of 1999 compared to $61.3 million in the second quarter of 1998. In the
second quarter, income from continuing operations was $32.1 million in 1999
compared to $29.6 million in 1998. For the first six months, we reported net
income of $53.0 million in 1999 compared to $76.2 million in 1998. Income from
continuing operations for the same period was $53.0 million in 1999 compared to
$47.7 million in 1998.
RECENT DEVELOPMENTS
Sale of our U.S. Plastic Packaging Operations
On July 2, 1999, we sold our U.S. plastic packaging operations
(Franklin Plastics, Inc. and Plastic Containers, Inc.) to Consolidated Container
Company LLC, a newly formed company which owns Reid Plastics Holdings, Inc., for
cash and a 43% minority interest in this new company. For more information about
this transaction, see Note 2 to our Consolidated Financial Statements contained
in this report.
Completed Acquisitions
On June 22, 1999, we completed our previously announced acquisition of
Broughton Foods Company. Broughton Foods Company, which had sales of
approximately $179 million in 1998, is a manufacturer and distributor of fresh
and UHT milk, ice cream and other UHT dairy products in Michigan, Ohio, West
Virginia, Kentucky, Tennessee and parts of the eastern United States.
During the first quarter of 1999, we completed three small acquisitions
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 our acquisitions during the first and second
quarters of 1999, see Note 6 to our Consolidated Financial Statements
contained in this report.
On August 2, 1999, we announced the formation of a new joint venture
with Dairy Farmers of America pursuant to which our southern California dairy
operations were combined with DFA's Adohr Farms to form a business with annual
revenues of approximately $270 million. We own 75% of the venture and DFA owns
the remaining 25%. We will manage the entity. For more information about this
transaction, see Note 2 to our Consolidated Financial Statements
contained in this report.
Proposed Acquisition
On July 23, 1999, we announced that we have signed a definitive
agreement to acquire Valley of Virginia Cooperative Milk Producers Association,
an agricultural marketing cooperative with dairy processing plants in
Springfield, Virginia and Mt. Crawford, Virginia. For more information about
this transaction, see Note 2 to our Consolidated Financial Statements
contained in this report.
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Stock Repurchase
On September 15, 1998, our Board of Directors authorized an open market
share repurchase program of up to $100 million of our common stock. During the
second quarter of 1999, we repurchased 79,700 shares of common stock for a total
purchase price of approximately $3 million pursuant to this Board authorization.
Prior to the second quarter of 1999, we had purchased an additional $46 million
of our common stock pursuant to the same Board authorization.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had total stockholders' equity of $707.4
million, total debt of $1.04 billion (including long-term debt and the current
portion of long-term debt) and $683.2 million of mandatorily redeemable
convertible trust issued preferred securities.
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 $142.1 million for the first six months of
1999 as contrasted to $95.3 million for the first six months of 1998. Investing
activities in the first six months of 1999 included approximately $104.8 million
in capital expenditures of which $81.8 million was spent in our dairy segment,
$19.0 million was spent in our packaging segment, and $4.0 million was spent at
corporate. Investing activities during the first six months of 1999 also
included $147.2 million of cash paid for acquisitions,as compared to $273.5
million, net of divestitures, for 1998. Financing activities during the first
six months of 1999 included approximately $3 million of cash spent to
repurchase shares of our common stock in the open market.
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 June 30, 1999, approximately $189.8
million was available under our senior credit facility. On July 2, 1999, we sold
our U.S. plastic packaging operations to Consolidated Container Company LLC, in
which we own a 43% minority interest. Pursuant to that transaction, Consolidated
Container Company LLC assumed approximately $135 million of our debt (which
consisted of senior secured notes issued by a subsidiary). Consolidated
Container Company LLC also paid to us at closing our intercompany debt and
preferred stock investment, including interest and dividends, of approximately
$364 million; all of which was used to pay down outstanding debt under our
senior credit facility. For more information regarding our debt obligations, see
Note 5 to our Consolidated Financial Statements contained in this
report. We are currently in compliance with all covenants and financial ratios
contained in our debt agreements.
Future Capital Requirements
We have budgeted a total of approximately $150 to $160 million in
capital expenditures during 1999, of which $105 million has been spent to date.
We intend to spend approximately $40 to $50 million in our dairy segment during
the remainder of 1999 to expand and maintain our manufacturing facilities and
for fleet replacement. We have budgeted approximately $4 million during the
remainder of 1999 for capital expenditures in our remaining packaging
operations.
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We have current commitments to expend approximately $142 million in
cash on two currently proposed dairy acquisitions, including the previously
announced proposed acquisition of Valley of Virginia Cooperative Milk Producers
Association. We expect to fund these acquisitions out of cash flow from
operations and/or 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.
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, or Y2K, 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 have substantially completed our work on our comprehensive project
to address Year 2000 issues that may adversely impact our business, which
included 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.).
The Year 2000 compliance plan was broken into five phases including
awareness, assessment/inventory, remediation, certification and testing, all of
which have been substantially completed. The primary unfinished tasks are
vendor supplied software updates, which are underway, and some personal computer
swap-outs. In addition, we are in the process of testing our key manufacturing
processes 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 received confirmation from over 90% of our
suppliers and vendors that their systems are Year 2000 compliant. We have
continual contact with our remaining suppliers and vendors in an effort to
ensure that they 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.
As a result of the diverse information systems that are being used by
companies that we have acquired 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
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portion of our overall development plan.
Should any critical service providers, suppliers (including utility
suppliers) or customers fail to achieve 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 $4.5 million through June
30, 1999 for remediation costs associated with our Year 2000 compliance
activities and we expect to incur and expense an additional $.5 million in the
future to complete the remediation of our information systems and to write off
unamortized costs for systems replaced. In addition to these remediation costs
expensed, we have also capitalized approximately $8.5 million of capital
expenditures through June 30, 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
$.5 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; however, we do not expect to incur any material additional costs.
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
we have packaging operations 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.
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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 rising acquisition prices,
o increased antitrust constraints on our proposed acquisitions
and acquisition strategy,
o fewer suitable acquisition candidates, and
o limitations on our financing sources.
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
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.
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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.
Our substantial debt and other financial obligations expose us to risks
that could adversely affect our financial condition.
As of June 30, 1999, we had substantial debt and other financial
obligations, including
o approximately $1.04 billion of borrowings (including $783.5
million under our senior credit facility, $60.8 million under
our subsidiary lines of credit, $49.8 million of subsidiary
debt obligations and $130.6 million of senior secured notes
which were fully redeemed in connection with the sale of our
U.S. plastic packaging operations), and
o $683.2 million of 5.0% preferred securities and 5.5% preferred
securities.
Those amounts compare to our stockholders' equity of $707.4 million as
of June 30, 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
June 30, 1999, we would have been able to borrow an additional $189.8 million
under our senior credit facility. However, on July 2, 1999, we sold our U.S.
plastic packaging operations pursuant to which we received, in addition to a 43%
minority interest in the purchaser, approximately $364 million in cash proceeds,
all of which were used to reduce outstanding debt 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
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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 and cream (including butterfat). 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 issued final rules which would implement changes to this program,
including changes in pricing classifications for certain dairy products.
Additional legislation has been introduced in Congress to modify 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.
Legislation has been proposed to extend the existing Northeast Dairy Compact and
authorize a Southern Compact. We do not know whether new compacts will be
authorized or, if authorized, the extent to which these compacts would increase
the prices we pay for raw 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.
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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.
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.
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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.
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 DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AGREEMENTS
At June 30, 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 (5.6% at June 30, 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.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1999, we held our annual meeting of stockholders. At the
annual meeting, we submitted the following matters to a vote of our
stockholders:
o the re-elections of Stephen L. Green and John R. Muse as
members of our Board of Directors,
o an increase in the number of shares of our common stock
reserved for issuance under our 1997 Stock Option and
Restricted Stock Plan from 4 million shares to 5.5 million
shares, and
o the ratification of our Board of Directors' selection of
Deloitte & Touche LLP as our independent auditors for fiscal
year 1999.
At the annual meeting, the stockholders re-elected the directors named
above, approved the proposed increase in the number of shares reserved for
issuance under our 1997 Stock Option and Restricted Stock Plan and ratified the
selection of Deloitte & Touche LLP as our independent auditors.
The vote of the stockholders with respect to each such matter was as
follows:
o Re-election of directors:
Stephen L. Green - 26,968,162 votes for; 100,628 votes withheld
John R. Muse - 26,968,012 votes for; 100,778 votes withheld
o Approval of the proposed increase in the number of shares
reserved for issuance under our 1997 Stock Option and
Restricted Stock Plan:
19,471,263 votes for; 7,483,403 against; 31,155 abstentions;
82,969 broker non-votes
o Ratification of our selection of Deloitte & Touche LLP as our
independent auditors:
27,028,230 votes for; 30,766 against; 9,794 abstentions
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
3 Amended and Restated Bylaws
10.1 Amended and Restated 1997 Stock Option and Restricted Stock Plan
10.2 Consent and Waiver
10.3 Executive Deferred Compensation Plan
11 Statement re computation of per share earnings.
21 Subsidiaries
27 Financial Data Schedules
Reports on Form 8-K
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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o We filed a Current Report on Form 8-K on July 2, 1999 in
connection with the closing of our acquisition of Broughton
Foods Company.
o We filed a Current Report on Form 8-K on July 19, 1999 in
connection with the closing of the sale of our U.S. plastic
packaging operations.
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 13, 1999
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3 Amended and Restated Bylaws
10.1 Amended and Restated 1997 Stock Option and Restricted Stock Plan
10.2 Consent and Waiver
10.3 Executive Deferred Compensation Plan
11 Statement re computation of per share earnings
21 Subsidiaries
27 Financial Data Schedules