Filed On 11/15/99 ˇ SEC File 1-13537 ˇ Accession Number 950134-99-10091
As Of Filer Filing On/For/As Docs:Pgs Issuer Agent
11/15/99 International Home Foods Inc 10-Q 9/30/99 3:30 Bowne of Dallas I..01/FA
Document/Exhibit Description Pages Size
1: 10-Q Form 10-Q for Quarter Ended September 30, 1999 28 134K
2: EX-12 Computation of Ratio of Earnings to Fixed Charges 1 6K
3: EX-27 Financial Data Schedule 1 6K
10-Q ˇ Form 10-Q for Quarter Ended September 30, 1999
Document Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-18859
-----------------
INTERNATIONAL HOME FOODS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1633 LITTLETON ROAD, PARSIPPANY, N.J. 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 359-9920
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at September 30, 1999 was 73,753,911.
INTERNATIONAL HOME FOODS, INC.
INDEX TO FORM 10-Q
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Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income 3
Three Months Ended September 30, 1999 and 1998
Nine Months Ended September 30, 1999 and 1998
Consolidated Balance Sheets 4
September 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows 5
Nine Months Ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit 12. Computation of Consolidated Ratio of 29
Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule 30
2
INTERNATIONAL HOME FOODS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ˇ Enlarge/Download Table
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(unaudited) (unaudited)
Net sales $ 548,875 $ 439,744 $ 1,575,635 $ 1,230,686
Cost of sales 290,547 231,234 843,024 642,488
--------------- --------------- --------------- ---------------
Gross profit 258,328 208,510 732,611 588,198
Marketing expenses 113,810 84,654 335,057 244,084
Selling, general, and administrative expenses 65,533 56,513 188,487 163,658
Restructuring charge -- 118,087 -- 118,087
--------------- --------------- --------------- ---------------
Income/(loss) from operations 78,985 (50,744) 209,067 62,369
--------------- --------------- --------------- ---------------
Interest expense 25,659 24,196 76,019 70,790
Other (income) expense, net (584) 549 (1,182) 314
Gain on sale of business -- -- (15,779) --
--------------- --------------- --------------- ---------------
Income before provision/(benefit) for
income taxes 53,910 (75,489) 150,009 (8,735)
Provision/(benefit) for income taxes 41,628 (26,518) 79,107 (151)
--------------- --------------- --------------- ---------------
Net income/(loss) $ 12,282 $ (48,971) $ 70,902 $ (8,584)
=============== =============== =============== ===============
Basic earnings per share:
Net income/(loss) $ 0.17 $ (0.63) $ 0.97 $ (0.11)
--------------- --------------- --------------- ---------------
Shares used in computing basic earnings
per share 73,629,067 77,449,186 73,453,424 77,351,764
--------------- --------------- --------------- ---------------
Diluted earnings per share:
Net income/(loss) $ 0.16 $ (0.63)* $ 0.93 $ (0.11)*
--------------- --------------- --------------- ---------------
Shares used in computing diluted earnings
per share 76,344,656 80,460,848 75,976,295 80,832,342
--------------- --------------- --------------- ---------------
* Effect of incremental shares is antidilutive.
See accompanying notes to consolidated financial statements.
3
INTERNATIONAL HOME FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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September 30, December 31,
ASSETS 1999 1998
--------------- ---------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 16,600 $ 17,201
Accounts receivable, net of allowances 189,787 141,422
Inventories 284,489 235,730
Prepaid expenses and other current assets 38,553 16,737
Deferred income taxes 16,355 19,616
--------------- ---------------
Total current assets 545,784 430,706
Property, plant and equipment, net 299,724 262,771
Intangible assets, net 431,876 396,617
Deferred income taxes 274,658 330,651
Other assets 20,534 24,667
--------------- ---------------
Total assets $ 1,572,576 $ 1,445,412
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to banks $ 26,385 $ 17,470
Current portion of long-term debt 73,084 51,694
Revolving credit facility 115,325 62,526
Accounts payable 74,090 44,854
Accrued salaries, wages and benefits 29,240 22,780
Accrued advertising and promotion 43,823 38,317
Accrued interest 22,106 16,311
Other accrued liabilities 30,304 33,378
--------------- ---------------
Total current liabilities 414,357 287,330
Long-term debt 1,024,378 1,102,830
Postretirement benefits obligation 26,772 24,487
Other non-current liabilities 855 861
--------------- ---------------
Total liabilities 1,466,362 1,415,508
--------------- ---------------
Commitments and contingencies
Stockholders' Equity
Preferred stock - par value $.01 per share; authorized,
100,000,000 shares; no shares issued or outstanding $ -- $ --
Common stock - par value $.01 per share; authorized,
300,000,000 shares; issued 78,153,911 and
77,584,348 shares 782 776
Additional paid-in capital 61,711 56,051
Treasury stock, at cost 4,400,000 shares (57,200) (57,200)
Retained earnings 105,399 34,497
Accumulated other comprehensive loss (4,478) (4,220)
--------------- ---------------
Total stockholders' equity 106,214 29,904
--------------- ---------------
Total liabilities and stockholders' equity $ 1,572,576 $ 1,445,412
=============== ===============
See accompanying notes to consolidated financial statements.
4
INTERNATIONAL HOME FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
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Nine Months Ended
September 30,
1999 1998
--------------- ---------------
(unaudited)
OPERATING ACTIVITIES:
Net income/(loss) $ 70,902 $ (8,584)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 32,109 29,834
Deferred income taxes 59,255 (5,543)
Stock option compensation 142 946
Restructuring charge -- 117,519
Gain on sale of business (15,779) --
Changes in assets and liabilities, net of acquisitions and divestiture:
Increase in accounts receivable (31,730) (33,585)
Increase in inventories (24,552) (12,727)
(Increase)/decrease in other current assets (20,826) 3,017
Increase in accounts payable 23,880 13,392
Increase/(decrease) in accrued liabilities 7,537 (1,137)
Increase in non-current assets (2,101) (3,202)
Increase in non-current liabilities 2,892 --
--------------- ---------------
Net cash provided by operating activities 101,729 99,930
--------------- ---------------
INVESTING ACTIVITIES:
Purchases of plant and equipment, net (34,223) (20,442)
Purchase of businesses, net of cash acquired (105,687) (277,773)
Proceeds from sale of business 30,000 --
--------------- ---------------
Net cash used in investing activities (109,910) (298,215)
--------------- ---------------
FINANCING ACTIVITIES:
Increase in due to banks 8,915 4,661
Issuance of long-term debt -- 210,000
Payment of debt issuance costs -- (1,707)
Repayment of long-term debt (57,064) (31,141)
Borrowings from revolving credit facility 127,636 316,000
Repayment of borrowings from revolving credit facility (76,207) (302,984)
Proceeds from exercise of stock options 4,118 1,971
--------------- ---------------
Net cash provided by financing activities 7,398 196,800
--------------- ---------------
Effect of exchange rate changes on cash 182 902
--------------- ---------------
Decrease in cash and cash equivalents (601) (583)
Cash and cash equivalents at beginning of period 17,201 11,872
--------------- ---------------
Cash and cash equivalents at end of period $ 16,600 $ 11,289
=============== ===============
Cash paid during the period for:
Interest $ 66,819 $ 57,882
Income taxes $ 19,989 $ 11,043
See accompanying notes to consolidated financial statements.
5
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. ACCOUNTING POLICIES
Interim Financial Statements
In the opinion of International Home Foods, Inc. ("the Company"), the
accompanying consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the Company's financial position as of September 30, 1999, the
results of operations and comprehensive income for the three and nine
months ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998. In 1999, the Company
converted from monthly calendar reporting periods to 4-4-5 monthly
periods. The impact on the third quarter and nine month results was not
material. The results of operations for the three and nine month
periods are not necessarily indicative of the results to be expected
for the full year. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998
Annual Report on Form 10-K.
Use of Estimates
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles and necessarily include
amounts based on judgments and estimates made by management. Actual
results could differ from these estimates. Estimates are used when
accounting for potential bad debts, inventory obsolescence and
spoilage, trade and promotion allowances, coupon redemptions,
depreciation and amortization, stock option compensation, deferred
income taxes and tax valuation allowances, restructuring charges, and
contingencies, among other items.
Reclassifications
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
2. INVENTORIES
Inventories consist of:
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September 30, December 31,
1999 1998
------------- ------------
Raw materials $ 68,119 $ 47,468
Work in progress 7,502 18,101
Finished goods 208,868 170,161
---------- ----------
Total $ 284,489 $ 235,730
========== ==========
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. RESTRUCTURING
In September 1998, in conjunction with management's plan to reduce
costs and improve operational efficiencies, the Company recorded a
restructuring charge of $118.1 million ($75.3 million after tax). The
principal actions in the restructuring plan involved the closure of
the Vacaville, California and Clearfield, Utah production facilities
and the related impact of the transfer of production to other
facilities, mainly Milton, Pennsylvania, and the write-down of
goodwill associated with the Campfire crisp rice snack bar brand and
the Polaner fruit spreads brand. The Polaner business was subsequently
sold (Note 5).
The Vacaville, California production facility ceased operations in
December 1998, while the adjacent distribution center and the
Clearfield, Utah facility closed in the second quarter of 1999.
With the exception of outsourced products, the Company has moved all
of the products that were manufactured at the Vacaville facility to
other facilities, mainly Milton, Pennsylvania. Production of tomato
paste used in Chef Boyardee canned pasta products and of Ro*Tel diced
tomatoes, both of which were manufactured at the Vacaville facility
prior to its closure, have been outsourced. The manufacturing of the
Campfire products has been transferred from Clearfield, Utah to the
Company's Lakeville, Minnesota facility. The Company incurs
non-capitalizable expenses as the transfer and installation of the
relocated equipment from these facilities occurs. The Company incurred
approximately $2.4 million of such non-capitalizable costs for the
nine months ended September 30, 1999, none of which were incurred in
the third quarter.
At September 30, 1999, $3.6 million of restructuring charges remained
in other accrued liabilities. This amount is comprised of severance
related costs and facility closure costs. Payments totalling $7.5
million have been made to date, including $0.5 million for the three
months ended September 30, 1999.
4. INCOME TAXES
In September 1999, the Company adopted a tax restructuring program,
which resulted in a one-time, non-cash tax charge of $20.6 million, or
$0.27 per diluted share, in the third quarter ended September 30, 1999
to reduce deferred tax assets that had been recorded in prior years.
This program will be implemented by December 31, 1999.
5. SALE OF BUSINESS
On February 5, 1999, the Company sold its Polaner fruit spreads and
spices business to B&G Foods, Inc. for approximately $30.0 million in
cash, resulting in a gain of $15.8 million ($9.6 million, net of tax
or $0.13 per diluted share).
7
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows:
ˇ Enlarge/Download Table
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Net income/(loss) $ 12,282 $ (48,971) $ 70,902 $ (8,584)
Foreign currency translation
Amount before taxes $ (1,253) $ 672 $ (777) $ (1,532)
Income tax benefit (expense) 322 (441) 519 186
---------- ---------- ---------- ----------
Other comprehensive income (loss) $ (931) $ 231 $ (258) $ (1,346)
---------- ---------- ---------- ----------
Total comprehensive income/(loss) $ 11,351 $ (48,740) $ 70,644 $ (9,930)
========== ========== ========== ==========
The following amounts are included in Accumulated other comprehensive
income (loss) at September 30, 1999 and December 31, 1998:
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September 30, December 31,
1999 1998
--------------- ---------------
Minimum pension liability $ (249) $ (249)
Foreign currency translation (4,229) (3,971)
--------------- ---------------
Accumulated other comprehensive loss $ (4,478) $ (4,220)
=============== ===============
7. RELATED PARTY TRANSACTIONS
Effective November 1, 1996, the Company entered into a 10-year
monitoring and oversight agreement with an affiliate of its majority
stockholder. The agreement provides for an annual fee of the greater
of $1,000 or 0.1% of the budgeted consolidated net sales of the
Company for the current year. In addition, effective November 1, 1996,
the Company entered into a financial advisory agreement with the
affiliate under which the affiliate will be entitled to a fee of 1.5%
of the transaction value, as defined, for each add-on transaction, as
defined. The Company incurred monitoring and oversight fees of $507
and $400 for the three months ended September 30, 1999 and 1998 and
$1,481 and $1,200 for the nine months ended September 30, 1999 and
1998, respectively. In addition, the Company incurred financial
advisory fees of $1,008 and $1,890 for the three months ended
September 30, 1999 and 1998 and $1,554 and $3,967 for the nine months
ended September 30, 1999 and 1998, respectively.
8
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
8. ACQUISITIONS
On July 19, 1999, the Company, through its subsidiary Bumble Bee Seafoods,
Inc., acquired the manufacturing, sales distribution and marketing
operations of Louis Kemp from Tyson Foods, Inc. for $68,483, including
transaction fees. The Company financed this acquisition with borrowings
under its Revolving Credit Facility. Louis Kemp is a highly automated and
value-added surimi business in the fast-growing refrigerated sector.
Surimi-based products are made from North Pacific ocean pollack and whiting
fish meats. These products are primarily sold under the trade name Louis
Kemp(R) and other trade names such as Captain Jac, SeaFest and Pacific
Mate.
On January 19, 1999, the Company, through its subsidiary Bumble Bee
Seafoods, Inc., acquired the Cloverleaf and Paramount canned seafood brands
and business of British Columbia Packers ("Cloverleaf/Paramount brands")
from George Weston Ltd. of Canada for a total purchase price of $38,454.
The acquisition was partially funded with borrowings under the Company's
Revolving Credit Facility and the balance of the purchase price from the
Company's available cash balances as of the date of the closing.
The excess of cost over fair value of net assets acquired for the above
acquisitions will be amortized over 40 years for identifiable intangibles
and goodwill. These acquisitions have been accounted for using the purchase
method of accounting, and the operating results of the acquired companies
have been included in the consolidated financial statements from the dates
of acquisition. The information below includes non-cash investing and
financing activities supplemental to the consolidated statements of cash
flows. A summary of the excess of cost over fair value of net assets
acquired resulting from purchase price allocations for these acquisitions
is as follows:
ˇ Download Table
CLOVERLEAF/
LOUIS PARAMOUNT
KEMP BRANDS
--------------- ---------------
Cost of acquisition, including
transaction fees $ 68,483 $ 38,454
Less: acquired assets
Current assets 10,542 40,694
Property, plant and equipment 18,111 1,166
Add: liabilities assumed 571 10,643
--------------- ---------------
Excess of cost over net assets
acquired $ 40,401 $ 7,237
=============== ===============
9
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Acquisitions, (Continued)
The following unaudited proforma consolidated results of operations have
been prepared as if the 1999 and 1998 acquisitions had occurred as of the
beginning of 1998 and reflect proforma adjustments for goodwill, interest
expense and tax expense:
ˇ Enlarge/Download Table
For the Nine Months Ended For the Nine Months Ended
September 30, 1999 September 30, 1998
------------------------------------------- -------------------------------------------
IHF Acquisitions(1) Total IHF Acquisitions(2) Total
------------------------------------------- -------------------------------------------
Net sales $ 1,575,635 $ 67,499 $ 1,643,134 $ 1,230,686 $ 327,240 $ 1,557,926
Operating income $ 209,067 $ 509 $ 209,576 $ 62,369 $ 9,925 $ 79,294
Net income (loss) $ 70,902 $ (1,933) $ 68,969 $ (8,584) $ 2,249 $ (6,335)
Earnings (loss) per share:
Basic $ 0.97 $ (0.03) $ 0.94 $ (0.11) $ 0.03 $ (0.08)
Diluted $ 0.93 $ (0.03) $ 0.90 $ (0.11) $ 0.03 $ (0.08)
(1) Amounts include Louis Kemp and Cloverleaf/Paramount brands.
(2) Amounts include Louis Kemp, Cloverleaf/Paramount brands, Libby's, Grist
Mill and Puritan brands.
The proforma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the period
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
9. IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued
to establish standards for accounting for derivatives and hedging activities
and supersedes and amends a number of existing standards. This statement
requires all derivatives to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. As issued, SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. However, with the introduction of SFAS 137, "Deferral of the
Effective Date of SFAS 133", SFAS 133 is now effective for fiscal years
beginning after June 15, 2000. The Company is currently evaluating the
effect this statement will have on its financial statements.
10
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER SHARE
Basic earnings per share ("EPS") is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if options to issue
common stock are assumed to be exercised or converted into common stock.
The table below summarizes the numerator and denominator for the basic
and diluted earnings (loss) per share calculations (in thousands, except
per share amounts).
ˇ Enlarge/Download Table
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Numerator:
Net income/(loss) available to common
shares $ 12,282 $ (48,971) $ 70,902 $ (8,584)
Denominator:
Average number of shares outstanding 73,629 77,449 73,453 77,352
Effect of dilutive stock options 2,716 3,012 2,523 3,480
---------- ---------- ---------- ----------
Total number of shares outstanding 76,345 80,461 75,976 80,832
Basic earnings per share $ 0.17 $ (0.63) $ 0.97 $ (0.11)
Diluted earnings per share $ 0.16 $ (0.63)* $ 0.93 $ (0.11)*
* Effect of incremental shares is antidilutive
11. BUSINESS SEGMENT INFORMATION
The Company manufactures and markets a diversified portfolio of
shelf-stable food products including entrees, side dishes, snacks,
canned fish, refrigerated surimi and canned meats, among others. The
Company sells its products primarily in the United States, Canada and
Mexico, and is not dependent on any single or major group of customers
for its sales.
The Company has three reportable business segments - Branded Products,
Seafood and Private Label and Foodservice. Branded Products is defined
as U.S. grocery sales for the following products: Chef Boyardee(R),
Libby's(R) brand of canned meats, Southwest brands (Luck's(R),
Ro*Tel(R), Dennison's(R) and Ranch Style(R)), Specialty brands (PAM(R),
Gulden's(R), Maypo(R), Wheatena(R), Maltex(R) and G. Washington's(R))
and Snack brands (Crunch 'n Munch(R), Jiffy Pop(R) and Campfire(R)).
Seafood includes all sales for the Bumble Bee(R), Orleans(R),
Libby's(R), Clover Leaf(R), Paramount(R) and Louis Kemp brands of
seafood products as well as private label and foodservice seafood sales.
Private Label and Foodservice includes all private label canned pasta,
cooking spray, fruit snacks, ready-to-eat cereals, wholesome snack bars,
pie crust and personal care products and the sales to foodservice
distributors. The All Other category is comprised of sales of Polaner(R)
products, sales to the military, contract sales to Nestle and
International sales, which includes branded, private label and
foodservice sales in Canada, Mexico, Puerto Rico and other export sales.
11
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Business Segment Information, (Continued)
The Company sold its Polaner fruit spreads and spices business on February
5, 1999 (Note 5). For comparative purposes, the Company has reclassified
the Polaner sales and operating income from the Branded Products Segment
where it was reported in the Company's 1998 Annual Report, to the All
Other category for 1999 and 1998.
The Company sells the products in each of its segments primarily to
wholesalers and distributors, grocery stores and supermarkets, convenience
stores, drug and mass merchants and warehouse clubs.
The Company evaluates segment performance based upon segment operating
income (earnings before interest expense, other [income] expense, net and
income taxes excluding unusual or infrequently occurring items,
restructuring charges and stock compensation expense [income]). Certain
centrally incurred costs are not allocated to the operating segments.
A summary of the Company's three reportable business segments - Branded
Products, Seafood, and Private Label and Foodservice is as follows:
ˇ Enlarge/Download Table
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net Sales:
Branded Products $ 221,022 $ 185,705 $ 636,777 $ 534,503
Seafood 178,948 112,386 492,756 328,711
Private Label and Foodservice 78,751 73,537 228,348 177,764
------------ ------------ ------------ ------------
Subtotal - Reportable Segments 478,721 371,628 1,357,881 1,040,978
All Other 70,154 68,116 217,754 189,708
------------ ------------ ------------ ------------
Total $ 548,875 $ 439,744 $ 1,575,635 $ 1,230,686
============ ============ ============ ============
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1999 1998 1999 1998
------------ ------------ ------------ ------------
Segment Operating Income:
Branded Products $ 50,815 $ 37,904 $ 129,288 $ 111,680
Seafood 8,997 7,820 28,402 21,488
Private Label and Foodservice 10,789 10,899 31,004 25,084
------------ ------------ ------------ ------------
Subtotal - Reportable Segments 70,601 56,623 188,694 158,252
All Other 8,413 10,304 22,171 24,880
------------ ------------ ------------ ------------
Total $ 79,014 $ 66,927 $ 210,865 $ 183,132
============ ============ ============ ============
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Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Reconciliation to Consolidated Results
Segment Operating Income $ 79,014 $ 66,927 $ 210,865 $ 183,132
Less:
Restructuring Charge -- 118,087 -- 118,087
Stock compensation expense 57 260 142 946
Unallocated (income) expense (28) (676) 1,656 1,730
------------ ------------ ------------ ------------
Total consolidated income (loss)
from operations $ 78,985 $ (50,744) $ 209,067 $ 62,369
============ ============ ============ ============
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12. GUARANTOR FINANCIAL DATA
The Company's Senior Subordinated Notes are fully and unconditionally
guaranteed by each of the Company's subsidiary guarantors on a joint and
several basis. The Company has not presented separate financial statements
and other disclosures concerning each of the subsidiary guarantors because
management has determined that such information is not material to the
holders of the Senior Subordinated Notes. Presented below is consolidating
financial information including summarized combined financial information
of the subsidiary guarantors:
ˇ Enlarge/Download Table
SEPTEMBER 30, 1999
------------------ Non-
(unaudited) Guaranteeing Guaranteeing
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Current assets $ 137,893 $ 297,002 $ 110,929 $ (40) $ 545,784
Non-current assets 1,139,760 591,465 45,497 (749,930) 1,026,792
Current liabilities 230,662 113,325 70,410 (40) 414,357
Non-current liabilities 1,045,281 5,342 1,382 -- 1,052,005
DECEMBER 31, 1998
-----------------
(unaudited)
Current assets $ 148,110 $ 239,521 $ 43,166 $ (91) $ 430,706
Non-current assets 1,093,610 526,805 43,026 (648,735) 1,014,706
Current liabilities 170,725 78,502 38,194 (91) 287,330
Non-current liabilities 1,116,613 10,348 1,217 -- 1,128,178
ˇ Enlarge/Download Table
FOR THE THREE MONTHS ENDED
---------------------------
SEPTEMBER 30, 1999 Non-
------------------ Guaranteeing Guaranteeing
(unaudited) Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $ 235,160 $ 237,762 $ 75,953 $ -- $ 548,875
Gross profit 138,098 88,628 31,602 -- 258,328
Net income (loss) 11,784 (1,833) 2,331 -- 12,282
FOR THE THREE MONTHS ENDED
--------------------------
SEPTEMBER 30, 1998
------------------
(unaudited)
Net sales $ 221,158 $ 179,485 $ 39,101 $ -- $ 439,744
Gross profit 128,576 56,888 23,046 -- 208,510
Net income (loss) 5,304(2) (55,827)(2) 1,552 -- (48,971)(2)
13
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Guarantor Financial Data, (Continued)
ˇ Enlarge/Download Table
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 1999
------------------ Non-
(unaudited) Guaranteeing Guaranteeing
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales $ 674,581 $ 679,932 $ 221,122 $ -- $ 1,575,635
Gross profit 398,228 245,939 88,444 -- 732,611
Net income 25,296 39,276(1) 6,330 -- 70,902(1)
Net cash provided by (used)
in operating activities 77,538 58,409 (34,218) -- 101,729
Net cash provided by (used)
in investing activities 1,586 (98,632) (12,864) -- (109,910)
Net cash provided by (used)
in financing activities (6,352) 200 13,550 -- 7,398
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 1998
------------------
(unaudited)
Net sales $ 641,962 $ 480,848 $ 107,876 $ -- $ 1,230,686
Gross profit 373,063 156,895 58,240 -- 588,198
Net income (loss) 32,467(2) (45,296) 4,245 -- (8,584)(2)
Net cash provided by
operating activities 71,074 23,606 5,250 -- 99,930
Net cash used in
investing activities (109,789) (151,905) (36,521) -- (298,215)
Net cash provided by
financing activities 38,270 134,013 24,517 -- 196,800
The 1998 amounts have been restated from amounts previously reported.
Amounts are not intended to report results as if the subsidiaries were
separate stand-alone entities.
(1) Includes an after-tax gain of $9.6 million ($15.8 million
pre-tax) from sale of the Polaner fruit spread and spice
business.
(2) Includes restructuring charge of $75.3 million (net of $42.8
million tax benefit). Guaranteeing Subsidiaries $61.3 million
(net of $33.8 million tax benefit) and $14.0 million (net of
$9.0 million tax benefit) for the Parent.
14
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
QUARTERLY REPORTING - In order to improve future quarterly comparability and
achieve operating efficiencies in 1999, the Company converted from monthly
calendar reporting periods to 4-4-5 monthly periods. The impact on the third
quarter and nine month results was not material.
RESULTS OF OPERATIONS - Three and Nine Months Ended September 30, 1999 and
1998.
NET SALES - The Company's net sales were $548.9 million for the three months
ended September 30, 1999 as compared to $439.7 million in the comparable 1998
quarter, an increase of $109.2 million, or 24.8%. Approximately $87.4 million
of the increase was related to sales of Libby's (including contract sales to
Nestle), the Cloverleaf/Paramount brands, and Louis Kemp, which were acquired
in September 1998, January 1999 and July 1999, respectively, and are not fully
reflected in the 1998 amounts, offset by $11.6 million of lower sales due to
the sale of the Polaner business in February 1999. The remaining $33.4 million
increase primarily reflects increases in sales of Branded Products ($17.7
million), Seafood ($13.0 million) and Private Label and Foodservice ($2.3
million).
For the nine months ended September 30, 1999, net sales were $1,575.6 million
as compared to $1,230.7 million in the comparable 1998 period, an increase of
$344.9 million, or 28.0%. Approximately $292.8 million was related to sales of
companies acquired during 1999 and 1998, which were not fully reflected in the
1998 amounts, offset by $32.6 million of lower sales due to the sale of Polaner
in February 1999. The remaining $84.7 million primarily reflects increased
sales of Branded Products ($36.6 million), Seafood ($43.0 million) and Private
Label and Foodservice ($3.3 million).
See Results by Segment on pages 19-21.
COST OF GOODS SOLD - Cost of goods sold was $290.5 million for the three months
ended September 30, 1999 as compared to $231.2 million in the comparable 1998
quarter. Expressed as a percentage of net sales, cost of goods sold increased
to 52.9% from 52.6% in 1998. This was primarily attributable to the inclusion
of the results of the Companies acquired during 1999 and 1998, which have
products with lower average gross margins than the Company's existing products.
In connection with the acquisition of the Libby's canned meat business from
Nestle, the Company entered into a co-packing agreement pursuant to which the
acquired production facility continues to manufacture certain products for
Nestle for sales prices which approximate the Company's cost (contract sales to
Nestle). This cost-based arrangement has a negative impact on realized gross
margin of approximately 0.7%. Excluding results of the 1999 and 1998
acquisitions, cost of goods sold declined to 49.7% of net sales from 51.3% in
1998. This improvement in cost of goods sold as a percentage of net sales
primarily reflects the effect of decreases in some of the Company's commodity
prices (particularly seafood), product mix and management's continuing cost
reduction initiatives.
15
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cost of Goods Sold, (Continued)
For the nine months ended September 30, 1999, cost of goods sold was $843.0
million as compared to $642.5 million for the comparable 1998 period. Expressed
as a percentage of net sales, cost of goods sold increased to 53.5% from 52.2%
in 1998. This was primarily attributable to the inclusion of the results of the
Companies acquired during 1999 and 1998, which have products with lower average
gross margins than the Company's existing products. The Nestle cost-based
arrangement, previously referred to, has a negative impact on realized gross
margin of approximately 1.1%. Excluding results of the 1999 and 1998
acquisitions, cost of goods sold declined to 49.1% of net sales from 51.5% in
1998. This improvement in cost of goods sold as a percentage of net sales
primarily reflects the effect of decreases in some of the Company's commodity
prices (particularly seafood), product mix, and management's continuing cost
reduction initiatives.
MARKETING EXPENSES - Marketing expenses increased to $113.8 million for the
three months ended September 30, 1999 as compared to $84.7 million in 1998.
Expressed as a percentage of net sales, marketing expenses increased to 20.7%
from 19.3% for the comparable 1998 period. The increase of $29.1 million was
primarily attributable to Bumble Bee ($11.5 million) principally due to higher
trade expenses related to lower commodity costs which are passed through to
retailers as trade marketing dollars, the 1999 and 1998 acquisitions ($12.3
million), increases in the Southwest brands ($2.8 million) primarily due to new
product introductions, partially offset by reductions in PAM ($4.4 million)
primarily related to the July 1998 introduction of two new flavors and by a
decrease in Polaner ($1.9 million) due to the sale of the business.
For the nine months ended September 30, 1999, marketing expenses increased to
$335.1 million as compared to $244.1 million for the comparable 1998 period.
Expressed as a percentage of sales, total marketing expenses increased to 21.3%
from 19.8% for the comparable 1998 period. The increase of $91.0 million was
primarily attributable to marketing expenses related to Bumble Bee ($34.2
million), the 1999 and 1998 acquisitions ($33.5 million), increases in Chef
Boyardee ($8.0 million) due to new product introductions in 1999, PAM ($4.2
million) due to a full year impact of July 1998 new product introductions, and
the International business ($2.6 million), primarily as a result of the same
factors discussed above. This was partially offset by a decrease in Polaner
($7.6 million) due to the sale of the business.
SELLING, GENERAL AND ADMINISTRATIVE ("S,G & A") EXPENSES - S,G & A expenses
were $65.5 million for the three months ended September 30, 1999 as compared to
$56.5 million in 1998, an increase of $9.0 million. However, S,G & A expenses
as a percentage of net sales declined to 11.9% in the three months ended
September 30, 1999 from 12.9% in the comparable 1998 quarter. The 1999 and 1998
acquisitions contributed $8.9 million to the increase of S,G & A expenses. The
overall decrease as a percentage of net sales reflects the more efficient
utilization of the Company's administrative resources as the Company's sales
have grown.
16
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Selling, General and Administrative ("S,G & A") Expenses, (Continued)
S,G & A expenses were $188.5 million for the nine months ended September 30,
1999 as compared to $163.7 million in 1998, an increase of $24.8 million.
However, S,G & A expenses as a percentage of net sales declined to 12.0% in
1999 versus 13.3% in 1998, excluding the restructuring charge. The 1999 and
1998 acquisitions contributed $25.4 million to the increase of S,G & A
expenses. The decrease in the existing business ($0.6 million) and the overall
decrease as a percentage of net sales reflects the more efficient utilization
of the Company's administrative resources as the Company's sales have grown.
RESTRUCTURING CHARGE - In September 1998, in conjunction with management's plan
to reduce costs and improve operational efficiencies, the Company recorded a
restructuring charge of $118.1 million ($75.3 million after tax). The principal
actions in the restructuring plan involved the closure of the Vacaville,
California and Clearfield, Utah production facilities and the related impact of
the transfer of production to other facilities, mainly Milton, Pennsylvania,
and the write-down of goodwill associated with the Campfire crisp rice snack
bar brand and the Polaner fruit spreads brand. The Polaner business was
subsequently sold (Note 5).
The Vacaville, California production facility ceased operations in December
1998, while the adjacent distribution center and the Clearfield, Utah facility
closed in the second quarter of 1999.
With the exception of outsourced products, the Company has moved all of the
products that were manufactured at the Vacaville facility to other facilities,
mainly Milton, Pennsylvania. Production of tomato paste used in Chef Boyardee
canned pasta products and of Ro*Tel diced tomatoes, both of which were
manufactured at the Vacaville facility prior to its closure, have been
outsourced. The manufacturing of the Campfire products has been transferred
from Clearfield, Utah to the Company's Lakeville, Minnesota facility. The
Company incurs non-capitalizable expenses as the transfer and installation of
the relocated equipment from these facilities occurs. The Company incurred
approximately $2.4 million of such non-capitalizable costs for the nine months
ended September 30, 1999, none of which were incurred in the third quarter.
At September 30, 1999, $3.6 million of restructuring charges remained in other
accrued liabilities. This amount is comprised of severance related costs and
facility closure costs. Payments totalling $7.5 million have been made to date,
including $0.5 million for the three months ended September 30, 1999.
INTEREST EXPENSE - Interest expense for the three months ended September 30,
1999 was $25.7 million as compared to $24.2 million for the comparable 1998
period. Interest expense for the nine months ended September 30, 1999 increased
to $76.0 million from $70.8 million for the comparable 1998 period. The
increase in interest expense for both periods reflects a higher outstanding
debt balance during 1999 as compared to the comparable 1998 period, primarily
due to increased borrowings for acquisitions, offset by lower average interest
rates.
17
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GAIN ON SALE OF BUSINESS - On February 5, 1999 the Company sold its Polaner
fruit spreads and spices business to B&G Foods, Inc. for $30.0 million in cash,
resulting in a gain of $15.8 million ($9.6 million, net of tax, or $0.13 per
diluted share).
PROVISION FOR INCOME TAXES - The Company adopted a tax restructuring program,
which should reduce the Company's overall effective tax rate in future years.
As a result of this program, a one-time, non-cash tax charge of $20.6 million,
or $0.27 per share, was recorded in the third quarter ended September 30, 1999
to reduce deferred tax assets that had been recorded in prior years. This
program will be implemented by December 31, 1999.
Income taxes increased to $41.6 million for the three months ended September
30, 1999 from a $26.5 million benefit in the comparable 1998 quarter due to
higher income before taxes, the write-off of deferred tax assets associated
with the tax restructuring discussed above and the absence of the tax benefit
associated with the 1998 restructuring charge. Income taxes increased to $79.1
million for the nine months ended September 30, 1999 from a $0.2 million
benefit in 1998 due to the factors discussed above.
Excluding the tax restructuring noted above and the Company's 1998
restructuring charge, the Company's adjusted effective tax rate for the three
months ended September 30, 1999 and 1998 was 39.0% and 38.2%, respectively. The
adjusted effective tax rate was 39.0% for each of the nine months ended
September 30, 1999 and 1998.
The Company anticipates sufficient future income to realize deferred tax assets
recorded at September 30, 1999. In the event management determines that
sufficient future taxable income may not be generated to fully realize the
deferred tax assets, the Company will provide a valuation allowance by a charge
to income tax expense in the period of such determination.
NET INCOME - For the three month period ended September 30, 1999, net income
increased by $61.3 million over the comparable 1998 period, primarily
reflecting the factors discussed above. Basic earnings (loss) per share were
$0.17 and ($0.63) for the three months ended September 30, 1999 and 1998,
respectively, and diluted earnings (loss) per share were $0.16 and ($0.63) for
the three months ended September 30, 1999 and 1998, respectively.
For the nine month period ended September 30, 1999, net income increased by
$79.5 million, primarily reflecting the factors discussed above. Basic earnings
(loss) per share were $0.97 and ($0.11) for the nine months ended September 30,
1999 and 1998, respectively, and diluted earnings (loss) per share were $0.93
and ($0.11) for the nine months ended September 30, 1999 and 1998,
respectively.
18
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS BY SEGMENT - The Company has three reportable business segments -
Branded Products, Seafood and Private Label and Foodservice. Refer to footnote
11 on page 11 for further detail.
BRANDED PRODUCTS - The Branded Products segment net sales increased $35.3
million, or 19%, for the three months ended September 30, 1999 versus the
comparable 1998 period. This increase is primarily due to the impact of a full
quarter's results of Libby's ($17.6 million); the remaining $17.7 million
increase is primarily related to increased sales of Chef Boyardee ($12.1
million), PAM ($2.7 million), Luck's ($2.0 million) and Ro*Tel ($1.5 million),
partially offset by a continuing decline in our Campfire crisp rice bar
business ($0.8 million).
Sales of the Chef Boyardee brand increased approximately 11% for the three
months ended September 30, 1999 versus the comparable 1998 period. Chef
Boyardee canned pasta sales increased 12% primarily due to new product
introductions and microwave sales increased 7%. Segment operating income of the
Branded Products segment increased $12.9 million, or 34% largely reflecting the
sales factors discussed above. As a percentage of net sales, segment operating
income of the Branded Products segment increased from 20.4% during the three
months ended September 30, 1998 to 23.0% for the same period in 1999. This
increase reflects higher sales in Chef Boyardee and PAM, slightly offset by the
change in product mix caused by the addition of Libby's, which has lower
operating margins than other products within the segment.
For the nine months ended September 30, 1999, the Branded Products segment net
sales increased $102.3 million, or 19%, versus the comparable 1998 period. This
increase is primarily due to the impact of a full nine months of sales of
Libby's ($65.7 million), with the remaining $36.6 million primarily related to
increased sales of Chef Boyardee ($17.3 million), PAM ($13.4 million), Ro*Tel
($5.5 million, primarily due to geographical expansion) and Dennison's ($3.2
million), partially offset by a continuing decline in our Campfire crisp rice
bar business ($4.8 million).
Sales of the Chef Boyardee brand increased approximately 6% for the nine months
ended September 30, 1999 versus the comparable 1998 period. Chef Boyardee
canned pasta sales increased 7%, primarily due to new product introductions and
microwave sales increased 7%, partially offset by declines in Pizza Kits and
Dinners.
PAM sales were primarily driven by strong consumer promotion support to improve
the price/value relationship versus competitive brands, the July 1998 launch of
two new flavors, lemon and garlic, and increased sales to club stores and mass
merchandisers.
19
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results by Segment, (Continued)
Segment operating income of the Branded Products segment for the nine months
ended September 30, 1999 increased $17.6 million. As a percentage of net sales,
segment operating income decreased from 20.9% during the nine months ended
September 30, 1998 to 20.3% for the same period in 1999. This decrease reflects
the change in product mix caused by the addition of Libby's which has lower
operating margins than other products within the segment and an increase in
promotional support related to the Branded Products over the comparable 1998
period.
SEAFOOD - The Seafood segment net sales for the three months ended September
30, 1999 increased $66.6 million, or 59%, over the comparable 1998 period, due
to the 1999 acquisitions of the Cloverleaf/Paramount brands ($29.4 million) and
Louis Kemp ($22.8 million), and the September 1998 acquisition of Libby's and
the increase in its related salmon sales ($1.4 million). The remaining $13.0
million reflects increased Bumble Bee sales primarily due to incremental
distribution in mass merchandisers and club stores, increased sales in Puerto
Rico and in specialty seafood products. Segment operating income increased $1.2
million or 15%.
The Seafood segment net sales for the nine months ended September 30, 1999
increased $164.0 million, or 50%, over the comparable 1998 period, due to the
1999 acquisitions of the Cloverleaf/Paramount brands ($92.0 million) and Louis
Kemp ($22.8 million) and the September 1998 acquisition of Libby's and the
increase in its related salmon sales ($6.2 million). The remaining $43.0
million represents increased sales in Bumble Bee sales primarily due to
incremental distribution in mass merchandisers and club stores, increased sales
in Puerto Rico and in specialty seafood products. Segment operating income
increased $6.9 million, or 32%.
PRIVATE LABEL AND FOOD SERVICE - Net sales of the Private Label and Foodservice
segment for the three months ended September 1999 increased $5.2 million, or
7%, over the comparable 1998 period, due to the September 1998 addition of
Libby's private label and foodservice sales ($2.9 million), the remaining $2.3
million is primarily comprised of increased sales of private label cereal bars,
cereals and fruit snacks ($2.6 million) and other private label items,
primarily canned pasta ($1.2 million), offset by a decrease in sales of the
Company's private label non-food products ($1.4 million). Segment operating
income decreased slightly by $0.1 million or 1%, primarily due to increased
marketing expenditures.
For the nine months ended September 30, 1999, net sales of the Private Label
and Foodservice segment, increased $50.6 million, or 28%, primarily due to the
April 1998 acquisition of Grist Mill ($37.0 million), the September 1998
acquisition of Libby's and its related private label and foodservice sales
($10.3 million). The remaining $3.3 million increase is related to an increase
in sales of other private label items, primarily canned pasta ($2.5 million)
and an increase in Foodservice sales ($2.2 million), offset by a decrease in
sales of the Company's private label non-food products ($1.4 million). Segment
operating income for the nine months ended September 30, 1999 increased $5.9
million, or 24%.
20
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results by Segment, (Continued)
The All Other net sales for the three months ended September 30, 1999 increased
$2.0 million, or 3%, over the comparable 1998 period, primarily due to contract
manufacturing sales to Nestle ($10.6 million) at prices which approximate the
Company's cost of production, the September 1998 acquisition of Libby's ($1.3
million), an increase in Productos Del Monte ("PDM") sales ($3.8 million),
partially offset by the sale of the Polaner business in February 1999 ($11.6
million) and a decrease in other International and Canadian sales ($3.2
million). All Other operating income decreased $1.9 million, or 18%, largely
due to the sale of Polaner.
The All Other net sales for the nine months ended September 30, 1999 increased
$28.0 million, or 15%, primarily due to contract manufacturing sales to Nestle
($38.6 million) at prices which approximate the Company's cost of production,
the acquisition of Libby's ($12.8 million), the acquisition of Puritan in March
1998 ($7.3 million), an increase in PDM sales ($10.4 million), and a decrease
in other International and Canadian sales ($6.3 million). The Company sold its
Polaner business in February 1999, and accordingly, sales for Polaner decreased
$32.6 million as compared to the comparable 1998 period. All Other operating
income decreased $2.7 million, or 11%, largely reflecting the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS - Net cash provided by operating activities for the nine months
ended September 30, 1999 was $101.7 million, or $1.8 million more than the
comparable 1998 period.
Net cash used by investing activities for the nine months ended September 30,
1999 was $109.9 million, a decrease of $188.3 million over the comparable 1998
period, as a result of fewer acquisitions and the $30.0 million in proceeds
from the sale of Polaner, partially offset by higher capital expenditures. In
1999, the Company through its subsidiary, Bumble Bee Seafoods, Inc., acquired
the Cloverleaf/Paramount brands for approximately $38.3 million, net of cash
acquired and the Louis Kemp business for $67.4 million. In 1998, the Company
purchased the Libby's brand of retail and international canned meat products
and its Trenton, Missouri manufacturing facility for $129.0 million; Grist Mill
for approximately $106.6 million, net of cash acquired; and through its
Canadian subsidiary, International Home Foods (Canada), Inc., the Company
purchased substantially all of the assets relating to the Puritan stews and
canned meats business from Unilever's T. J. Lipton Canada division for
approximately $41.0 million.
Cash provided by financing activities was $7.4 million for the nine month period
ended September 30, 1999, compared to $196.8 million in the comparable 1998
period. In 1999, the principal factors of the decrease relate to fewer
acquisitions. The Company borrowed $127.6 million to fund working capital and
the Louis Kemp and Cloverleaf/Paramount brands acquisitions and to repay $76.2
million, $51.6 million and $5.5 million under the terms of its revolving credit
21
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, (Continued)
facility, its Senior Bank Facilities and Grist Mill term loan, respectively. In
1998, the Company amended its Senior Bank Facilities and borrowed an additional
$210.0 million in term loans and also borrowed $316.0 million under the terms of
its revolving credit facility. The net additional borrowings were used to fund
working capital and the acquisitions of Puritan, Grist Mill and Libby's. The
Company also repaid $303.0 million and $31.1 million under the terms of its
revolving credit facility and its Senior Bank Facilities, respectively, in 1998.
The Company is highly leveraged with Senior Bank Facilities that comprise (i) a
$516.5 million Tranche A term loan facility, maturing in 2004, (ii) a $149.8
million Tranche B term loan facility, maturing in 2005, (iii) a $100.0 million
Tranche B-1 term loan facility, maturing in 2006, and (iv) a $230.0 million
revolving credit facility, maturing in 2004. As of September 30, 1999, the
outstanding balance of the Senior Bank Facilities was $812.8 million, which
included $115.3 million of borrowings under the revolving credit facility. In
addition to scheduled periodic repayments aggregating $73.1 million in 2000,
the Company is also required to make mandatory repayments of the loans under
the Senior Bank Facilities with a portion of its excess cash flow, as defined.
The Company also has outstanding $400.0 million of 10 3/8% Senior Subordinated
Notes due 2006 requiring semi-annual interest payments without any scheduled
repayments of principal prior to maturity,
Both the Senior Bank Facilities and the Senior Subordinated Notes contain a
number of significant covenants that, among other things, restrict the ability
of the Company to dispose of assets, incur additional indebtedness, repay other
indebtedness or amend other debt instruments, pay dividends, create liens on
assets, enter into capital leases, make investments or acquisitions, engage in
mergers or consolidations, make capital expenditures, engage in certain
transactions with affiliates and otherwise restrict corporate activities. In
addition, under the Senior Bank Facilities the Company is required to comply
with specified minimum interest coverage, maximum indebtedness to earnings
before interest, taxes, depreciation and amortization (EBITDA) and minimum
fixed charge coverage ratios.
Management believes that cash generated from operations and borrowings under
the Senior Bank Facilities will be sufficient to satisfy working capital
requirements and required capital expenditures. Further expansion of the
business through acquisitions may require the Company to incur additional
indebtedness or issue equity securities. There can be no assurance that
additional debt or equity will be available to the Company, or if available,
will be on terms acceptable to the Company.
22
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL INSTRUMENTS
The Company currently does not use derivative financial instruments for trading
or speculative purposes, nor is the Company a party to leveraged derivatives.
In accordance with the Senior Bank Facilities, the Company is required to enter
into interest rate protection agreements to the extent necessary to provide
that, when combined with the Company's Senior Subordinated Notes, at least 50%
of the Company's aggregate indebtedness is subject to either fixed interest
rates or interest rate protection.
The Company has entered into interest rate swap, cap and collar agreements to
reduce the impact of changes in interest rates on its floating rate debt. The
swap agreements are contracts to exchange floating interest rate payments for
fixed interest rate payments as well as fixed interest rate payments for
floating interest rate payments periodically over the life of the agreements
without the exchange of the underlying notional amounts. The notional amounts
of interest rate agreements are used to measure interest to be paid or received
and do not represent the amount of exposure to credit loss. For interest rate
instruments that effectively hedge interest rate exposures, the net cash amounts
paid or received on the agreements are accrued and recognized as an adjustment
to interest expense.
The Company is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate nonperformance by the counterparties.
As of September 30, 1999, the Company had the following interest rate
instruments in effect for which the fair value of these instruments is based on
estimated current settlement cost (notional amounts are in millions):
ˇ Download Table
Notional Strike Fair
Amount Rate Value Period Rates
-------- ------ ------- ------------- -----
Interest Rate Swaps $200 (1) 6.23% $ 1.3 8/98 - 11/01 6 - month
600 (1) 5.55% - 5/99 - 5/04 3 - month
Interest Rate Cap $225 (1) 6.75% - 10/98 - 10/99 6 - month
200 (2) 6.75% - 8/98 - 11/01 6 - month
600 (2) 6.30% 2.6 5/99 - 5/04 3 - month
Interest Rate Floor $200 (1) 5.20% (1.8) 8/98 - 11/01 6 - month
600 (1) 4.45% (5.2) 5/99 - 5/04 3 - month
Interest Rate Collar $150 (1) 5.75% 0.5 10/98 - 10/01 3 - month
3.76%
-----
$(2.6)
=====
(1) Agreement exchanges floating interest rate payments for fixed
interest rate payments.
(2) Agreement exchanges fixed interest rate payments for floating
interest rate payments.
23
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued to
establish standards for accounting for derivatives and hedging activities and
supersedes and amends a number of existing standards. This statement requires
all derivatives to be recognized in the statement of financial position as
either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS 133. As issued, SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. However, with the
introduction of SFAS 137, "Deferral of the Effective Date of SFAS 133", SFAS
133 is now effective for fiscal years beginning after June 15, 2000. The
Company is currently evaluating the effect this statement will have on its
financial statements.
READINESS FOR YEAR 2000
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year, and as a result may be unable to
accurately process certain data before, during or after the Year 2000 ("Y2K"). 