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 EXCHANGE ACT OF 1934
For the quarterly period ended June 2, 2001
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
1-6699
INTERNATIONAL MULTIFOODS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-0871880
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 CHESHIRE LANE, SUITE 300, MINNETONKA, MINNESOTA 55305-1060
(Address of principal executive offices) (Zip Code)
(952) 594-3300
(Registrant's telephone number, including area code)
(NOT APPLICABLE)
(Former name, former address and former fiscal year,
if changed since last report)
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 the registrant's Common Stock, par
value $.10 per share, as of June 30, 2001 was 18,804,132.
PART I. FINANCIAL INFORMATION
INTERNATIONAL MULTIFOODS CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED
---------------------
June 2, May 27,
2001 2000
-----------------------------------------------------------------
Net sales $ 666,092 $ 610,260
Cost of materials and production (574,425) (522,084)
Delivery and distribution (49,452) (43,506)
-----------------------------------------------------------------
Gross profit 42,215 44,670
Selling, general and administrative (35,122) (33,512)
-----------------------------------------------------------------
Operating earnings 7,093 11,158
Interest, net (3,577) (3,215)
Other income (expense), net (151) (282)
-----------------------------------------------------------------
Earnings before income taxes 3,365 7,661
Income taxes (1,279) (2,911)
-----------------------------------------------------------------
Net earnings $ 2,086 $ 4,750
=================================================================
Earnings per share:
Basic $ .11 $ .25
Diluted .11 .25
-----------------------------------------------------------------
Average shares of common stock outstanding:
Basic 18,762 18,736
Diluted 18,972 18,759
-----------------------------------------------------------------
Dividends per share of common stock $ - $ .20
-----------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements.
2
INTERNATIONAL MULTIFOODS CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(in thousands)
CONDENSED
FROM AUDITED
FINANCIAL
(UNAUDITED) STATEMENTS
JUNE 2, MARCH 3,
2001 2001
------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,769 $ 10,247
Trade accounts receivable, net 127,869 131,780
Inventories 187,605 185,207
Other current assets 54,464 51,083
------------------------------------------------------------------------
Total current assets 379,707 378,317
Property, plant and equipment, net 209,130 206,160
Goodwill, net 81,323 81,919
Other assets 102,795 98,229
------------------------------------------------------------------------
Total assets $772,955 $764,625
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 85,723 $ 39,542
Current portion of long-term debt - 1,000
Accounts payable 178,989 216,050
Other current liabilities 37,998 42,288
------------------------------------------------------------------------
Total current liabilities 302,710 298,880
Long-term debt 145,724 145,420
Employee benefits and other liabilities 65,044 64,343
------------------------------------------------------------------------
Total liabilities 513,478 508,643
------------------------------------------------------------------------
Shareholders' equity:
Common stock 2,184 2,184
Accumulated other comprehensive loss (17,178) (17,670)
Other shareholders' equity 274,471 271,468
------------------------------------------------------------------------
Total shareholders' equity 259,477 255,982
------------------------------------------------------------------------
Commitments and contingencies
------------------------------------------------------------------------
Total liabilities and shareholders' equity $772,955 $764,625
========================================================================
See accompanying notes to consolidated condensed financial statements.
3
INTERNATIONAL MULTIFOODS CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(unaudited)
(in thousands)
THREE MONTHS ENDED
--------------------
June 2, May 27,
2001 2000
-------------------------------------------------------------------------
Cash flows from operations:
Net earnings $ 2,086 $ 4,750
Adjustments to reconcile net earnings
to cash used for operations:
Depreciation and amortization 6,420 6,067
Deferred income tax expense 458 792
Increase in prepaid pension asset (3,584) (3,576)
Provision for losses on receivables 502 455
Changes in working capital:
Accounts receivable 3,442 729
Inventories (1,984) 6,058
Other current assets (3,154) (2,598)
Accounts payable (37,253) (10,553)
Other current liabilities (4,347) (5,909)
Other, net (1,142) (616)
-------------------------------------------------------------------------
Cash used for continuing operations (38,556) (4,401)
Cash used for discontinued operations - (41)
-------------------------------------------------------------------------
Cash used for operations (38,556) (4,442)
-------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (7,732) (8,739)
Proceeds from property disposals 22 111
-------------------------------------------------------------------------
Cash used for investing activities (7,710) (8,628)
-------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in notes payable 45,919 18,526
Net decrease in long-term debt (1,000) (5,000)
Dividends paid - (3,739)
Proceeds from issuance of common stock 877 -
Other, net (3) (17)
-------------------------------------------------------------------------
Cash provided by financing activities 45,793 9,770
-------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (5) (5)
-------------------------------------------------------------------------
Net decrease in cash and cash equivalents (478) (3,305)
Cash and cash equivalents at beginning of period 10,247 11,224
-------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,769 $ 7,919
=========================================================================
See accompanying notes to consolidated condensed financial statements.
4
INTERNATIONAL MULTIFOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(1) In the Company's opinion, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of only normal
recurring adjustments, except as noted elsewhere in the notes to the
consolidated condensed financial statements) necessary to present fairly its
financial position as of June 2, 2001, and the results of its operations and
cash flows for the three months ended June 2, 2001 and May 27, 2000. These
statements are condensed and, therefore, do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The statements should be read in conjunction with the
consolidated financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended March 3, 2001. The results of operations
for the three months ended June 2, 2001, are not necessarily indicative of the
results to be expected for the full year.
(2) ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 (SFAS 133), "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities", as
amended, effective March 4, 2001. SFAS 133 requires that companies record
derivative instruments on the consolidated balance sheet at their fair value.
Changes in fair value will be recorded each period in earnings or other
comprehensive income (OCI), depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. Gains
and losses on derivative instruments reported in OCI will be reclassified as
earnings in the period in which earnings are affected by the hedged item.
The impact of this change resulted in a pre-tax charge of approximately $1
million to OCI and an increase to liabilities of approximately $1 million. The
balance in OCI will be reclassified to earnings over the life of the derivative
instruments, which primarily have maturity terms of one year or less.
The Company is exposed to market risks resulting from changes in foreign
currency exchange rates, interest rates and commodity prices. Changes in these
factors could adversely affect the Company's results of operations and financial
position. To minimize these risks, the Company utilizes derivative financial
instruments, such as currency forward contracts, interest rate swaps and
commodity futures contracts. The Company uses derivative financial instruments
as risk management tools and not for speculative or trading purposes. For
derivative instruments that are accounted for as hedges pursuant to SFAS 133,
the Company formally documents the hedge at inception. The formal documentation
includes identification of the hedging instrument, the hedged item, nature of
the risk being hedged and how the hedging instrument's effectiveness will be
assessed.
5
Foreign currency forward contracts
The Company's Canadian operations use foreign currency forward contracts to
minimize the exposure to foreign currency fluctuations as a result of U.S.
dollar-denominated sales. These contracts are accounted for as foreign currency
cash flow hedges of forecasted transactions. To qualify for hedge accounting
treatment, these transactions are specifically identified in terms of the
customers and the period and the likelihood in which the sales and subsequent
collections are expected to occur. The time value component of the foreign
currency forward contracts is deemed ineffective, and is recorded in earnings.
The unrealized gain (loss) due to the movements in the spot exchange rates,
which represents the effective portion of the hedge, is initially recorded as a
component of accumulated OCI until the underlying hedged transaction occurs. For
the three months ended June 2, 2001, approximately $0.4 million of pre-tax loss
was reclassified from OCI to earnings.
Interest rate swap
The Company has an interest rate swap agreement to manage its exposure to
changes in interest rates on a portion of its variable-rate debt. The swap
agreement qualifies for cash flow hedge accounting. Approximately $0.1 million
was reclassified into interest expense during the three months ended June 2,
2001. There was no ineffectiveness related to the hedge.
Other derivative instruments that are not designated as hedges
The Company utilizes commodity futures contracts, primarily wheat futures
contracts, to reduce the risks associated with price fluctuations on the wheat
inventories and other major bakery ingredients, such as flour and soybean oil.
The futures contracts are not designated as hedges under SFAS 133. The future
contracts are marked-to-market each month and the gains and losses are
recognized in earnings. On an ongoing basis, the Company also enters into
foreign currency forward contracts that are not designated as hedges. Changes in
the fair value are recognized in earnings.
EITF NO. 00-25,"VENDOR INCOME STATEMENT CHARACTERIZATION OF CONSIDERATION TO A
PURCHASER OF THE VENDOR'S PRODUCTS OR SERVICES."
In April 2001, the Emerging Issue Task Force (EITF) issued a consensus on EITF
No. 00-25,"Vendor Income Statement Characterization of Consideration to a
Purchaser of the Vendor's Products or Services." EITF No. 00-25 deals with the
accounting for consideration paid from a vendor (typically a manufacturer or
distributor) to a retailer, including slotting fees, cooperative advertising
arrangements, and buy-downs. The guidance in EITF 00-25 generally requires that
these incentives be classified as a reduction of sales. The consensus is
effective for the Company in the first quarter of fiscal 2003. The Company is
currently assessing the impact of adopting EITF No. 00-25.
6
(3) COMPREHENSIVE INCOME - The components of total comprehensive income were as
follows:
THREE MONTHS ENDED
------------------
June 2, May 27,
(in thousands) 2001 2000
-------------------------------------------------------
Net earnings $2,086 $ 4,750
Foreign currency translation
adjustment 745 (3,785)
Derivative hedge accounting
adjustment (253) -
-------------------------------------------------------
Comprehensive income $2,578 $ 965
=======================================================
(4) UNUSUAL ITEMS - The liability balance as of June 2, 2001, which primarily
related to the Company's condiments facility consolidation project, was
approximately $1.6 million. The difference from the March 3, 2001 balance of
$1.9 million was primarily due to cash payments for employee termination
benefits.
(5) INTEREST, NET
THREE MONTHS ENDED
------------------
June 2, May 27,
(in thousands) 2001 2000
------------------------------------------------------
Interest expense $4,159 $4,207
Capitalized interest (154) (231)
Non-operating interest income (428) (761)
------------------------------------------------------
Interest, net $3,577 $3,215
======================================================
Cash payments for interest, net of amounts capitalized, were $4.6 million and
$5.3 million for the three months ended June 2, 2001 and May 27, 2000,
respectively.
(6) INCOME TAXES - Cash payments for income taxes were $3.3 million and $1.9
million for the three months ended June 2, 2001 and May 27, 2000, respectively.
7
(7) SUPPLEMENTAL BALANCE SHEET INFORMATION
June 2, March 3,
(in thousands) 2001 2001
---------------------------------------------------------------------------
Trade accounts receivable, net:
Trade $ 131,027 $ 135,991
Allowance for doubtful accounts (3,158) (4,211)
---------------------------------------------------------------------------
Total trade accounts receivable, net $ 127,869 $ 131,780
===========================================================================
Inventories:
Raw materials, excluding grain $ 12,813 $ 12,667
Grain 6,550 3,784
Finished and in-process goods 163,467 164,600
Packages and supplies 4,775 4,156
---------------------------------------------------------------------------
Total inventories $ 187,605 $ 185,207
===========================================================================
Property, plant and equipment, net:
Land $ 13,095 $ 13,079
Buildings and improvements 107,580 106,470
Machinery and equipment 235,730 234,203
Improvements in progress 19,871 14,756
---------------------------------------------------------------------------
376,276 368,508
Accumulated depreciation (167,146) (162,348)
---------------------------------------------------------------------------
Total property, plant and equipment, net $ 209,130 $ 206,160
===========================================================================
Accumulated other comprehensive loss:
Foreign currency translation adjustment $ (14,634) $ (15,379)
Minimum pension liability adjustment (2,291) (2,291)
Derivative hedge accounting adjustment (253) -
----------------------------------------------------------------------------
Total accumulated other comprehensive loss $ (17,178) $ (17,670)
===========================================================================
(8) SEGMENT INFORMATION
Net Operating Operating
(in millions) Sales Costs Earnings
--------------------------------------------------------------------------
Three Months Ended June 2, 2001
Multifoods Distribution Group $551.9 $(547.6) $ 4.3
North America Foods 114.2 (108.7) 5.5
Corporate Expenses - (2.7) (2.7)
--------------------------------------------------------------------------
Total $666.1 $(659.0) $ 7.1
==========================================================================
Three Months Ended May 27, 2000
Multifoods Distribution Group $495.9 $(490.7) $ 5.2
North America Foods 114.4 (106.9) 7.5
Corporate Expenses - (1.5) (1.5)
--------------------------------------------------------------------------
Total $610.3 $(599.1) $11.2
==========================================================================
8
(9) CONTINGENCIES - In fiscal 1998, the Company was notified that approximately
$6 million in Company-owned inventory was stolen from a ship in the port of St.
Petersburg, Russia. The ship had been chartered by a major customer of the
Company's former food-exporting business. The Company believes, based on the
facts known to date, that the loss is covered by insurance. However, following
submission of a claim for indemnity, the insurance carrier denied the Company's
claim for coverage and the Company commenced a lawsuit seeking to obtain
coverage under the insurance carrier's policy. If the loss from the theft of
product is not covered by insurance, the Company would recognize a material
charge to its results of operations.
9
INTERNATIONAL MULTIFOODS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
OVERVIEW
Net earnings in the first quarter ended June 2, 2001, were $2.1 million, or 11
cents per share, compared with $4.8 million, or 25 cents per share, a year ago.
The decline in net earnings was partially driven by start-up costs and
inefficiencies associated with several large new customer accounts in our
distribution and manufacturing businesses. In addition, our earnings were
impacted by costs related to our pending acquisition of assets from Pillsbury
and General Mills, strategic planning studies and the consolidation of two
condiments processing facilities in Canada.
Segment Results
Multifoods Distribution Group: Net sales increased 11% to $551.9 million,
compared with $495.9 million a year ago. Overall sales volumes increased
approximately 9% for the quarter. We achieved substantial growth in the sandwich
shop and pizza restaurant customer segments due to the addition of several large
new accounts and increased demand with existing accounts. We also had increased
sales to independent vending operators.
Operating earnings declined 17% to $4.3 million, compared with $5.2 million a
year ago. Operating earnings were impacted by start-up costs and inefficiencies
associated with the significant new business accounts. These costs included
temporary warehouse help and special freight, which were incurred in order to
ensure successful account transitions and high service levels. Our earnings were
also negatively impacted in the quarter by increased wage rates, as we had to
raise pay in certain job categories and in certain regions last year because of
the tight labor market. In vending distribution, we experienced competitive
pricing pressures and lower industry demand in certain regions of the United
States due to the weakening economy.
North America Foods: Net sales were $114.2 million, compared with $114.4 million
a year ago. Excluding the impact of unfavorable currency translation, net sales
increased 3%. In Canada, sales volumes increased in consumer condiments,
consumer ethnic grains, commercial flour and commercial bakery mixes. In the
United States, sales benefited from a large new account for our ready-to-bake
products that commenced late in the fourth quarter last year. Sales, however,
were impacted by the loss of a large baking mix customer in the United States
that was purchased by a competitor last year and by a decline in consumer flour
and bakery mix sales in Canada.
10
Operating earnings declined 27% to $5.5 million, compared with $7.5 million a
year ago. Operating earnings were affected by start-up costs and inefficiencies
associated with the large new account in the United States, expansion of
manufacturing capacity to support future growth and costs for our condiments
facility consolidation project. We made capital investments in production lines
in order to produce new product platforms, including ready-to-bake and
thaw-and-serve products. These new production lines increased our manufacturing
cost structure but provide us with capacity for future growth.
Corporate: Corporate expenses were $2.7 million, compared with $1.5 million last
year. The increase was primarily the result of costs related to our pending
acquisition of assets from Pillsbury and General Mills and strategic planning
studies.
Non-operating Expense and Income
Net interest expense increased to $3.6 million, compared with $3.2 million last
year. Interest expense was impacted by higher debt levels, but benefited from
lower interest rates.
FINANCIAL CONDITION
The debt-to-total capitalization ratio increased to 47% at June 2, 2001,
compared with 42% at March 3, 2001. The increase was primarily the result of
increased working capital levels and capital expenditures. Working capital
levels were affected by the timing of payments to suppliers and by the impact of
several large new customer accounts.
In May 2001, Standard and Poor's lowered our corporate credit rating and the
rating on our existing medium-term note program to "BB" and "BB+", respectively,
as a result of the increased debt leverage we will incur from our pending
acquisition of assets from Pillsbury and General Mills. In addition, Standard
and Poor's assigned a "BB+" bank loan rating to our proposed $450 million senior
secured bank facility and a "B+" rating to our proposed $200 million senior
unsecured notes. Also in May 2001, Moody's Investors Service (Moody's) assigned
a "(P)Ba2" rating and a "(P)B1" rating to the proposed $450 million senior
secured bank facility and the proposed $200 million senior unsecured notes,
respectively. In addition, the "Prime-3" rating on our short-term debt
obligations as well as the "Baa3" unsecured ratings on our medium-term notes are
under review by Moody's for possible downgrade.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. In addition, we may from
time-to-time make written and oral forward-looking statements. These
forward-looking statements are based on current expectations or beliefs,
including, but not limited to, statements concerning our operations and
financial performance and condition. For this purpose, statements that are not
statements of historical fact may be deemed to be forward-looking statements. We
caution that these statements by their nature involve risks and uncertainties,
and actual results may differ materially depending on a variety of important
factors, including, among others, the closing of the pending acquisition and the
timing of the close; actions in the financial markets; regulatory approval
related to the pending acquisition; integration problems associated with the
pending acquisition; the results of our review of strategic alternatives for our
Multifoods Distribution Group; the impact of competitive products and pricing;
market or weather conditions that may affect the costs of grain, cheese, other
raw materials, fuel and labor; changes in laws and regulations; fluctuations in
interest rates; the inability to collect on a $6 million insurance claim related
11
to the theft of product in St. Petersburg, Russia; fluctuations in foreign
exchange rates; risks commonly encountered in international trade; and other
factors as may be discussed in our reports filed with the Securities and
Exchange Commission.
12
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings per Common Share.
12. Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 2, 2001
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL MULTIFOODS CORPORATION
Date: July 11, 2001 By /s/ John E. Byom
---------------------------------------------
John E. Byom
Vice President, Finance, and
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER
AND DULY AUTHORIZED OFFICER)
14
EXHIBIT INDEX
11. Computation of Earnings per Common Share.
12. Computation of Ratio of Earnings to Fixed Charges.