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 December 1, 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
incorporation or organization) Identification No.)
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 December 29, 2001 was 18,939,332.
PART I. FINANCIAL INFORMATION
INTERNATIONAL MULTIFOODS CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ------------------------
Dec. 1, Nov. 25, Dec. 1, Nov. 25,
2001 2000 2001 2000
--------- --------- ----------- -----------
Net sales $ 729,198 $ 649,760 $ 2,080,179 $ 1,845,370
Cost of materials and
production (622,659) (550,313) (1,787,502) (1,569,199)
Delivery and distribution (53,911) (46,836) (154,269) (133,866)
--------- --------- ---------- -----------
Gross profit 52,628 52,611 138,408 142,305
Selling, general
and administrative (39,196) (33,380) (109,237) (100,132)
Unusual items 1,114 (1,511) 770 3,764
--------- --------- ---------- -----------
Operating earnings 14,546 17,720 29,941 45,937
Interest, net (4,779) (3,664) (11,934) (10,180)
Loss on cancellation of
debt offering (10,304) - (10,304) -
Other Income (expense), net (13) (342) (382) (924)
--------- --------- ---------- -----------
Earnings (loss) before
income taxes (550) 13,714 7,321 34,833
Income taxes 451 (5,211) (2,540) (16,301)
--------- --------- ---------- -----------
Earnings (loss) before
extraordinary item (99) 8,503 4,781 18,532
Extraordinary loss on early
extinguishment of debt, net
of tax of $267 (454) - (454) -
--------- --------- ---------- -----------
Net earnings (loss) $ (553) $ 8,503 $ 4,327 $ 18,532
========= ========= ========== ===========
Basic earnings (loss) per share:
Before extraordinary item $ (.01) $ .45 $ .25 $ .99
Extraordinary item (.02) - (.02) -
--------- --------- ---------- -----------
Total $ (.03) $ .45 $ .23 $ .99
========= ========= ========== ===========
Diluted earnings (loss) per share:
Before extraordinary item $ (.01) $ .45 $ .25 $ .98
Extraordinary item (.02) - (.02) -
--------- --------- ---------- -----------
Total $ (.03) $ .45 $ .23 $ .98
========= ========= ========== ===========
Average shares of common stock outstanding:
Basic 18,862 18,740 18,813 18,739
Diluted 18,862 18,883 19,041 18,836
--------- --------- ---------- -----------
Dividends per share of
common stock $ - $ .20 $ - $ .60
--------- --------- ---------- -----------
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
Dec. 1, March 3,
2001 2001
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,372 $ 10,247
Trade accounts receivable, net 155,776 131,780
Inventories 261,158 185,207
Other current assets 74,692 51,083
---------- --------
Total current assets 506,998 378,317
Property, plant and equipment, net 224,575 206,160
Goodwill and other acquisition
related intangibles, net 255,540 93,176
Other assets 175,625 86,972
---------- --------
Total assets $1,162,738 $764,625
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 27,294 $ 39,542
Current portion of long-term debt 22,124 1,000
Accounts payable 196,535 216,050
Other current liabilities 50,865 42,288
---------- --------
Total current liabilities 296,818 298,880
Long-term debt 528,808 145,420
Employee benefits and other liabilities 73,022 64,343
---------- --------
Total liabilities 898,648 508,643
---------- --------
Shareholders' equity:
Common stock 2,184 2,184
Accumulated other comprehensive loss (16,381) (17,670)
Other shareholders' equity 278,287 271,468
---------- --------
Total shareholders' equity 264,090 255,982
---------- --------
Commitments and contingencies
Total liabilities and shareholders' equity $1,162,738 $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)
NINE MONTHS ENDED
----------------------
Dec. 1, Nov. 25,
2001 2000
--------- --------
Cash flows from operations:
Net earnings $ 4,327 $ 18,532
Adjustments to reconcile net earnings
to cash used for operations:
Depreciation and amortization 19,641 18,736
Deferred income tax expense (benefit) (2,396) 4,321
Increase in prepaid pension asset (10,303) (10,851)
Unusual items (1,114) (3,764)
Provision for losses on receivables 1,771 1,798
Changes in working capital, net of
business acquisition:
Accounts receivable (25,739) (11,831)
Inventories (24,027) (22,446)
Other current assets (18,064) (9,620)
Accounts payable (20,416) 10,918
Other current liabilities (935) (3,348)
Other, net 8,075 256
-------- -------
Cash used for continuing operations (69,180) (7,299)
Cash provided by discontinued operations - 1,326
-------- -------
Cash used for operations (69,180) (5,973)
-------- -------
Cash flows from investing activities:
Capital expenditures (19,354) (24,516)
Acquisition of business (310,210) -
Sale of Venezuela operations assets - 7,371
Proceeds from property disposals 5,051 12,958
Payment received on note receivable 17,512 948
-------- -------
Cash used for investing activities (307,001) (3,239)
-------- -------
Cash flows from financing activities:
Net increase (decrease)in notes payable (11,773) 39,921
Additions to long-term debt 550,192 -
Reductions in long-term debt (145,563) (20,000)
Dividends paid - (11,219)
Proceeds from issuance of common stock 1,203 -
Purchase of treasury stock (1) (138)
Debt issuance costs (12,754) (848)
Other, net (2) -
-------- -------
Cash provided by financing activities 381,302 7,716
-------- --------
Effect of exchange rate changes on cash
and cash equivalents 4 (9)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,125 (1,505)
Cash and cash equivalents at beginning of period 10,247 11,224
-------- --------
Cash and cash equivalents at end of period $ 15,372 $ 9,719
======== ========
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 contained in this report reflect 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, results of its operations and cash flows
for the interim periods presented. 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 and
nine months ended December 1, 2001, are not necessarily indicative of the
results to be expected for the full year.
(2) NEW ACCOUNTING PRONOUNCEMENTS
EITF NO. 00-25,"VENDOR INCOME STATEMENT CHARACTERIZATION OF CONSIDERATION
TO A RESELLER OF THE VENDOR'S PRODUCTS"
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
Reseller of the Vendor's Products." 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 No. 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. For fiscal 2001, the Company
expects to reclassify approximately $10 million in promotional expenses to a
reduction of sales. Excluding the acquired businesses, the projected amount to
be reclassified in fiscal 2002 is also approximately $10 million. These costs
are currently classified as selling expense. The Company does not expect the
adoption of this consensus to have an impact on net earnings.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 141, "BUSINESS
COMBINATIONS"
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations."
SFAS 141 requires that all business combinations initiated after June 30, 2001
be accounted for using the purchase method. In addition, intangible assets
acquired are only recognized and accounted for separately from goodwill if they
arise from either contractual or other legal rights or are capable of being
separated.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS"
In July 2001, FASB also issued Statement of Financial Accounting Standards No.
142 (SFAS 142), "Goodwill and Other Intangible Assets." Under the provisions of
SFAS 142, goodwill and other intangible assets that have indefinite lives will
no longer be amortized, but subjected to impairment testing. Goodwill
amortization expense in fiscal 2001 was $2.6 million pretax, $1.7 million after
tax. SFAS 142 is effective for the Company in the first quarter of fiscal 2003.
However, any goodwill and any intangible assets determined to have an indefinite
life that are acquired in a business combination completed after June 30, 2001
will not be amortized. The Company is currently evaluating the impact of the
standard and may
5
be required to recognize an impairment loss associated with its Multifoods
Distribution Group business upon adoption of the standard. As of December 1,
2001, the unamortized goodwill balance of the Multifoods Distribution Group
business was $65.7 million.
(3) ACQUISITION - On November 13, 2001, the Company acquired the Pillsbury
dessert and specialty products business, the Pillsbury non-custom foodservice
baking mix and frosting products business, and certain regional flour and
side-dish brands of General Mills (the Acquisition). The cash purchase price for
the Acquisition paid at closing was $304.5 million. The purchase price for the
Acquisition was determined through negotiations between the management of the
Company and the management of each of General Mills and Pillsbury. The
Acquisition is expected to complement the Company's existing bakery mix
manufacturing operations and grain-based foods expertise.
The Company will also purchase a plant from General Mills in Toledo, Ohio once
the plant has been converted to produce certain Pillsbury products. Under a
conversion plan agreement, General Mills will acquire and install certain new
processing and packaging equipment at its own expense. The purchase price for
the Toledo plant is $11.5 million, subject to various adjustments. Until the
conversion of the Toledo plant is completed, third-party co-packers will
manufacture and package certain products of the acquired businesses.
Under a transition services agreement, General Mills, itself or, in some cases,
through an agreement with a third-party, will provide various transition
services to the Company for the acquired businesses after the acquisition
closing date. Transition services provided include information systems,
accounting, marketing, raw material procurement and warehousing for varying time
periods, as provided under the agreement.
Under a retail trademark licensing agreement, Pillsbury has licensed to the
Company the exclusive right to use certain Pillsbury trademarks, including the
Pillsbury "doughboy" related trademarks, on a royalty-free basis for an initial
term of 20 years after the closing. The license is automatically renewable by
the Company for unlimited additional 20-year terms on a royalty-free basis after
the initial 20-year term, and may be terminated only by the Company.
The Company entered into a $450 million senior secured credit facility with a
syndicate of banks, financial institutions, and other entities and a $200
million bilateral credit facility to pay for the purchase price of the
acquisition and refinance its debt obligations. See Note 11 to the consolidated
condensed financial statements for additional information on new financing
arrangements.
The transaction was accounted for under the purchase method in accordance with
Statement of Financial Accounting Standards No. 141. The assets and liabilities
of the acquired businesses are included in the consolidated balance sheet as of
December 1, 2001. The operating results of the acquired businesses have been
included in the consolidated statement of operations since the date of
acquisition.
6
Assuming the Acquisition had occurred on March 1, 2000, the unaudited pro
forma results of operations are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- --------------------------
(in thousands, Dec. 1, Nov. 25, Dec. 1, Nov. 25,
except per share amounts) 2001 2000 2001 2000
------- -------- ----------- ----------
Net sales $886,180 $831,627 $2,425,574 $2,221,204
Earnings before
extraordinary item 15,269 31,391 34,367 54,045
Loss on early extinguishment
of debt, net of tax (454) - (454) -
Net earnings 14,815 31,391 33,913 54,045
-------- -------- ------------ ----------
Basic earnings (loss) per share:
Before extraordinary item $ .81 $ 1.68 $ 1.83 $ 2.88
Extraordinary item (.02) - (.02) -
-------- -------- ------------ ----------
Total $ .79 $ 1.68 $ 1.81 $ 2.88
======== ======== ============ ==========
Diluted earnings (loss) per share:
Before extraordinary item $ .80 $ 1.66 $ 1.80 $ 2.87
Extraordinary item (.02) - (.02) -
-------- -------- ------------ ----------
Total $ .78 $ 1.66 $ 1.78 $ 2.87
======== ======== ============ ==========
The pro forma results of operations are based on the Company's historical
financial statements and those of the acquired businesses. Company management
believes that costs under our ownership, including marketing and product
development, will exceed those included in the historical financial statements
of the acquired businesses. Accordingly, the pro forma results do not purport
to represent what the Company's results of operations would have been had the
Acquisition occurred on March 1, 2000.
The following is a summary of estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition. The purchase price was allocated
to the net assets acquired based on estimates of their fair values at the date
of the acquisition. Since the Company is in the process of obtaining independent
valuation of assets acquired, the preliminary estimates are subject to future
adjustments.
Nov. 13,
(in thousands) 2001
--------
Inventory $ 53,063
Property, plant and equipment, net 20,690
Intangible assets 165,160
Other non-current assets 87,679
--------
Total assets acquired 326,592
--------
Current liabilities 8,889
Deferred tax 5,930
--------
Total liabilities assumed 14,819
--------
Net assets acquired $311,773
========
The preliminary estimate assigned to intangible assets includes various
trademarks of the acquired businesses that have indefinite lives. Other
non-current assets
7
includes the estimated value of equipment that General Mills is required to
install at the Toledo, Ohio plant as part of the conversion plan agreement.
(4) 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 and
ineffectiveness will be assessed.
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 nine months ended December 1, 2001, approximately $0.5 million of pre-tax
loss was reclassified from OCI to earnings.
Interest rate swaps
In November 2001, the Company entered into various interest rate swap agreements
associated with its new financing arrangements. An interest rate swap was
entered into to lock the interest rate on the $200 million senior unsecured
notes that the Company issued in December 2001. In addition, swap agreements
were entered into to fix the rate on $100 million of variable rate-debt
obligations. The notional amount of the interest rate swap agreements totaled
$300 million as of December 1, 2001. The swap agreements qualify for cash flow
hedge accounting. The fair value on these contracts on December 1, 2001 was
approximately $4.9 million.
8
For the nine months ended December 1, 2001, approximately $0.5 million of
pre-tax loss was reclassified from OCI to earnings.
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 futures 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.
(5) COMPREHENSIVE INCOME - The components of total comprehensive income were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
Dec. 1, Nov. 25, Dec. 1, Nov. 25,
(in thousands) 2001 2000 2001 2000
------- ------- ------- -------
Net earnings (loss) $ (553) $ 8,503 $ 4,327 $18,532
Foreign currency translation
adjustment (1,691) (2,867) (1,608) (5,042)
Derivative hedge accounting
adjustment 3,140 - 2,897 -
------- ------- ------- -------
Comprehensive income $ 896 $ 5,636 $ 5,616 $13,490
======= ======= ======= =======
(6) UNUSUAL ITEMS - For the nine months ended December 1, 2001, the Company
recognized a pre-tax unusual gain of $0.8 million as follows:
Employee
Gain on Termination Lease
Sale of and Other Commitment
(in millions) Building Exit Costs Costs Total
--------- ----------- ---------- ------
Condiments facility
consolidation and severance $1.9 $(0.6) $(0.1) $ 1.2
Closure of distribution
center - (0.1) - (0.1)
Severance from divested business - (0.3) - (0.3)
------ ----- ----- -----
Total unusual gain $1.9 $(1.0) $(0.1) $ 0.8
====== ===== ===== =====
In October 2001, the Company completed the sale of its condiment processing
operations in Scarborough, Ontario as part of the plan to consolidate its
condiment processing operations in Dunnville, Ontario. In addition to the gain
on the sale, the Company also recognized a charge for additional employee
termination and facility closing costs. The Company also recognized severance
and related costs associated with the departure of the President of the
Foodservice Products Division.
In November 2001, the Company closed its Kent, Washington distribution facility
and recognized an $0.1 million charge primarily related to employee termination
costs.
In August 2001, the Company recognized an unusual charge of $0.3 million for
termination benefits for 57 former hourly employees of its divested U.S. flour
9
milling business. As part of the sale agreement, the Company is obligated to
provide, under certain conditions, severance payments for eligible former
employees who are involuntarily terminated by the buyer.
The liability balance associated with unusual items was $1.8 million as of
December 1, 2001. Cash payments related to unusual items were $1.3 million for
the nine months ended December 31, 2001.
(7) INTEREST, NET
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
Dec. 1, Nov. 25, Dec. 1, Nov. 25,
(in thousands) 2001 2000 2001 2000
------ ------- ------- -------
Interest expense $5,128 $4,552 $13,418 $13,227
Capitalized interest (69) (97) (323) (439)
Non-operating interest income (280) (791) (1,161) (2,608)
------ ------- ------- -------
Interest, net $4,779 $3,664 $11,934 $10,180
====== ======= ======= =======
Cash payments for interest, net of amounts capitalized, were $16.2 million and
$15.2 million for the nine months ended December 1, 2001 and November 25, 2000,
respectively.
(8) INCOME TAXES - Cash payments for income taxes were $7.3 million and $6.5
million for the nine months ended December 1, 2001 and November 25, 2000,
respectively.
(9) EXTRAORDINARY ITEM - As a result of the refinancing of its debt facilities
due to the Acquisition, the Company recorded a $0.5 million after-tax charge in
the third quarter of fiscal 2002. The charge consisted of direct costs incurred
for the redemption of the Company's outstanding medium-term notes and write-off
of unamortized bank fees related to previous credit arrangements.
10
(10) SUPPLEMENTAL BALANCE SHEET INFORMATION
Dec. 1, March 3,
(in thousands) 2001 2001
--------- ---------
Trade accounts receivable, net:
Trade $ 159,260 $ 135,991
Allowance for doubtful accounts (3,484) (4,211)
--------- ---------
Total trade accounts receivable, net $ 155,776 $ 131,780
========= =========
Inventories:
Raw materials, excluding grain $ 16,042 $ 12,667
Grain 5,061 3,784
Finished and in-process goods 235,843 164,600
Packages and supplies 4,212 4,156
--------- ---------
Total inventories $ 261,158 $ 185,207
========= =========
Property, plant and equipment, net:
Land $ 13,095 $ 13,079
Buildings and improvements 109,047 106,470
Machinery and equipment 257,413 234,203
Improvements in progress 15,845 14,756
--------- ---------
395,400 368,508
Accumulated depreciation (170,825) (162,348)
--------- ---------
Total property, plant and equipment, net $ 224,575 $ 206,160
========= =========
Accumulated other comprehensive loss:
Foreign currency translation adjustment $ (16,987) $ (15,379)
Minimum pension liability adjustment (2,291) (2,291)
Derivative hedge accounting adjustment 2,897 -
--------- ---------
Total accumulated other comprehensive loss $ (16,381) $ (17,670)
========= =========
(11) NOTES PAYABLE AND LONG-TERM DEBT - In connection with the Acquisition, the
Company entered into a $450 million senior secured credit facility with a
syndicate of banks, financial institutions, and other entities and a $200
million bilateral credit facility. The Company applied the proceeds from
borrowings under the new credit facilities to pay the purchase price of the
Acquisition, to refinance its debt, to pay fees and expenses related to the
refinancing of its indebtedness and to fund its working capital needs.
The $450 million senior secured facility is comprised of a $100 million
revolving credit facility that expires on September 30, 2006, a $150 million
amortizing Term A loan facility and a $200 million amortizing Term B loan
facility. As of December 1, 2001, $67.7 million was available under the
revolving credit facility. The interest rates on borrowings under the $450
million senior secured facility are variable and based on current market
interest rates plus a spread based on the leverage of the Company. The current
spread on LIBOR based loans is 3%. The credit agreement also contains covenants
that restrict dividend payments, limit capital expenditures and require the
maintenance of leverage, interest coverage and fixed charge coverage ratios.
Some of the covenants become more restrictive over time. Borrowings under these
facilities may be used for general corporate purposes. The facility is secured
by the assets of the Company.
In November 2001, the Company entered into interest rate swap agreements in
order to fix a portion of its variable rate borrowings. The interest rate swap
agreements were for terms of 1.5 years, 2 years and 3 years for notional amounts
of
11
$50 million, $25 million, and $25 million, respectively. The fixed pay rates
on the swaps are 2.81%, 3.33% and 3.93%, respectively, with the Company
receiving the three month LIBOR rate.
On December 17, 2001, the Company repaid the $200 million bilateral credit
facility by issuing $200 million of senior unsecured notes. The notes mature on
November 13, 2009 and have an interest rate of 6.602%, payable annually. In
anticipation of the issuance, the Company entered into an interest rate swap
agreement that when terminated had the effect of adjusting the effective
interest rate of the debt to 5.97%. The senior unsecured notes have been
guaranteed by Diageo plc. The guarantee may terminate, in limited circumstances,
prior to the maturity of the notes.
Debt issuance costs related to the new financing arrangements amounted to $12.8
million and included underwriting, legal and other direct costs. These costs are
classified as other assets in the consolidated balance sheet and will be
amortized over the various terms of the new debt arrangements.
In November 2001, the Company purchased all of its outstanding medium-term notes
at par value, which totaled $45 million. As a result of the redemption of the
medium-term notes and refinancing of existing credit arrangements, the Company
recorded an after-tax extraordinary charge of $0.5 million.
In November 2001, the Company also wrote-off $10.3 million of underwriting and
other direct costs associated with the planned issuance of $200 million in
high-yield unsecured notes. The Company cancelled the debt offering as more
favorable financing became available when, as part of the Acquisition, Diageo
plc agreed to guarantee $200 million of the Company's debt obligations.
Notes payable of $27.3 million at December 1, 2001 represents amounts
outstanding under the revolving credit facility.
Long-term debt as of December 1, 2001 was as follows:
Dec. 1,
(in thousands) 2001
--------
Term A loan due September 30, 2006 $150,932
Term B loan due February 28,2008 200,000
Bilateral credit facility 200,000
--------
550,932
Current portion of long-term debt 22,124
--------
Total long-term debt $528,808
========
Minimum principal payments are due as follows:
(in thousands) Amounts
--------
Fiscal 2002 $ 11,062
Fiscal 2003 24,640
Fiscal 2004 32,186
Fiscal 2005 37,218
Fiscal 2006 37,217
Fiscal 2007 81,942
Fiscal 2008 and beyond 326,667
--------
Total $550,932
========
12
(12) SEGMENT INFORMATION
Net Operating Unusual Operating
(in millions) Sales Costs Items Earnings
------- --------- ------- ---------
Three Months Ended Dec. 1, 2001
Multifoods Distribution Group $ 577.0 $ (572.7) $(0.1) $ 4.2
North America Foods 152.2 (140.7) 1.2 12.7
Corporate Expenses - (2.3) - (2.3)
-------- --------- ----- -----
Total $ 729.2 $ (715.7) $ 1.1 $14.6
======== ========= ===== =====
Three Months Ended Nov. 25, 2000
Multifoods Distribution Group $ 518.7 $ (512.7) $ - $ 6.0
North America Foods 131.1 (116.7) (1.5) 12.9
Corporate Expenses - (1.2) - (1.2)
-------- --------- ----- -----
Total $ 649.8 $ (630.6) $(1.5) $17.7
======== ========= ===== =====
Nine Months Ended Dec. 1, 2001
Multifoods Distribution Group $1,690.5 $(1,678.3) $(0.1) $12.1
North America Foods 389.7 (365.5) 1.2 25.4
Corporate Expenses - (7.2) (0.3) (7.5)
-------- --------- ----- -----
Total $2,080.2 $(2,051.0) $ 0.8 $30.0
======== ========= ===== =====
Nine Months Ended Nov. 25, 2000
Multifoods Distribution Group $1,483.4 $(1,468.4) $(0.3) $14.7
North America Foods 362.0 (331.0) (1.5) 29.5
Corporate Expenses - (3.9) 5.6 1.7
-------- --------- ----- -----
Total $1,845.4 $(1,803.3) $ 3.8 $45.9
======== ========= ===== =====
(13) 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. On October 23, 2001, the U.S.
District Court of the Southern District of New York granted the Company summary
judgement on its claim and awarded the Company interest to the date of
judgement. In November 2001, the insurance carrier appealed the judgement to the
U.S. Court of Appeals for the Second Circuit. Although the Company will continue
to vigorously assert its claim in the litigation, the interest awarded by the
U.S. District Court will not be recognized as income until collection is
assured.
13
INTERNATIONAL MULTIFOODS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Results of
Operations and Financial Condition
ACQUISITION
On November 13, 2001, we completed the acquisition of the Pillsbury dessert and
specialty products business, the Pillsbury non-custom foodservice baking mix and
frosting products business, and certain regional flour and side-dish brands of
General Mills (the Acquisition). The cash purchase price for the Acquisition
paid at closing was $304.5 million. The assets and liabilities of the acquired
businesses are included in our consolidated balance sheet as of December 1,
2001. The operating results of the acquired businesses have been included in our
consolidated statement of operations since the date of acquisition. The
Acquisition is expected to complement our existing bakery mix manufacturing
operations and grain-based foods expertise. See Note 3 to the consolidated
condensed financial statements for additional information on the Acquisition.
RESULTS OF OPERATIONS
Overview
For the third quarter ended December 1, 2001, we reported a net loss of $0.6
million, or 3 cents per share, compared with net earnings of $8.5 million, or 45
cents per share, a year ago. Third-quarter fiscal 2002 results were impacted by
a $10.3 million pre-tax loss due to the cancellation of a planned debt offering
associated with the Acquisition. The decline in results was also partially
driven by lower operating earnings in both our Multifoods Distribution Group and
North America Foods business segments. In addition, results were impacted by
costs associated with the Acquisition.
Third-quarter fiscal 2002 results also included a net pre-tax unusual gain of
$1.1 million, or 5 cents per share, primarily associated with the sale of a
condiments processing facility in Canada. Included in last year's third quarter
results was a pre-tax charge of $1.5 million, or 5 cents per share, for
severance and related costs that resulted from our plan to consolidate our
condiments operations.
For the nine months ended December 1, 2001, net earnings were $4.3 million, or
23 cents per diluted share, compared with $18.5 million, or 98 cents per diluted
share, a year ago.
Segment Results
Multifoods Distribution Group: Net sales in the third quarter increased 11% to
$577 million, compared with $518.7 million a year ago. Sales volumes increased
approximately 7%. We achieved substantial growth in the sandwich and pizza
restaurant customer segments due to the addition of several large new customer
accounts and by growth in existing accounts. The sales increase was partially
offset by a decline in sales to vending operators. Vending distribution sales
were impacted by competitive pricing pressures and lower industry demand in
certain regions of the United States due to the soft economy.
14
Operating earnings before unusual items declined 28% to $4.3 million, compared
with $6 million a year ago. Operating earnings were impacted by inefficiencies
associated with the significant new business accounts as well as a
year-over-year increase in labor rates. Our labor costs increased as we had to
raise pay rates in certain job categories and in certain regions last year
because of the tight labor market. Operating earnings were also impacted by the
decline in sales to vending operators.
In the third quarter of fiscal 2002, we closed our Kent, Washington distribution
facility and recognized a $0.1 million unusual charge primarily related to
employee termination costs.
Net sales for the nine-month period increased 14% to $1,690.5 million, compared
with $1,483.4 million a year ago. Operating earnings before unusual items
declined 19% to $12.2 million, compared with $15 million a year ago. Net sales
and operating earnings for the nine months ended December 1, 2001, were impacted
by essentially the same factors as described in the discussion of third quarter
results.
North America Foods: Net sales in the third quarter increased 16% to $152.2
million, compared with $131.1 million a year ago. Excluding the impact of the
Acquisition and unfavorable currency translation, sales increased approximately
6% for the quarter. The increase was primarily the result of the addition of a
large new customer account in the United States and higher sales prices in
Canada due to increased commodity costs. The increase in net sales was partially
offset by lower consumer sales volumes in Canada and softness in sales to
regional foodservice accounts in the United States.
Operating earnings before unusual items decreased 20% to $11.5 million, compared
with $14.4 million in the third quarter last year. Operating earnings were
affected by costs and inefficiencies resulting from our condiments facility
consolidation project, lower consumer sales volumes in Canada and higher fixed
costs from investment in new production lines. In order to support future growth
in the United States, we made capital investments in new production lines that
increased our manufacturing cost structure. In addition, operating earnings were
impacted by higher commodity costs, competitive pricing pressures and
unfavorable currency translation.
In the third quarter of fiscal 2002, we completed the sale of our condiment
processing operations in Scarborough, Ontario as part of a plan to consolidate
our condiment operations in Dunnville, Ontario. In addition to the gain on the
sale, we also recognized a charge for additional employee termination and
facility closing costs. We also recognized severance and related costs
associated with the departure of the President of the Foodservice Products
Division. As a result of these actions, we recognized a net unusual gain of $1.2
million.
Net sales for the nine-month period increased 8% to $389.7 million, compared
with $362 million a year ago. In addition to the factors described for the third
quarter, sales in the nine-month period improved on higher sales of commercial
bakery products in Canada. Operating earnings before unusual items decreased 22%
to $24.2 million, compared with $31 million last year. The decline resulted from
essentially the same factors as described in the discussion of third quarter
results.
Corporate: Corporate expenses for the third quarter were $2.3 million,
compared with $1.2 million a year ago. The increase was primarily the
result of costs related to the Acquisition.
15
Non-operating Expense and Income
Third quarter net interest expense increased to $4.8 million, compared with $3.7
million a year ago. The increase in net interest expense was due to higher
average debt balances, which resulted from the cost of the Acquisition and
increased working capital levels. The increase was partially offset by lower
average borrowing rates on our variable rate debt obligations.
In the third quarter of fiscal 2002, we wrote off $10.3 million of underwriting
and other direct costs associated with the planned issuance of $200 million in
high-yield unsecured notes. We cancelled the debt offering as more favorable
financing became available when, as part of the Acquisition, Diageo plc agreed
to guarantee $200 million of our debt obligations.
Income Taxes
For nine months ended December 1, 2001, our overall effective tax rate on
earnings before extraordinary item was 34.7%, compared with 46.8% in the same
period last year. Last year our effective tax rate was affected by income tax
expense of $3.1 million associated with a dividend from our Canadian subsidiary.
In addition, the effective tax rate in both periods was affected by taxes
associated with unusual items. Excluding the impact of the Canadian dividend and
unusual items, our effective tax rate on earnings before extraordinary item was
38% for the first nine months of fiscal 2002 and 2001.
Extraordinary Item
As a result of the refinancing of our debt facilities due to the Acquisition, we
recorded a $0.5 million after-tax charge in the third quarter of fiscal 2002.
The charge consisted of direct costs incurred for the redemption of our
outstanding medium-term notes and write-off of unamortized bank fees related to
previous credit arrangements.
FINANCIAL CONDITION
In connection with the Acquisition, we entered into a $450 million senior
secured credit facility with a syndicate of banks, financial institutions, and
other entities and a $200 million bilateral credit facility. We applied the
proceeds from borrowings under the new credit facilities to pay the purchase
price of the Acquisition, to refinance our debt, to pay fees and expenses
related to the refinancing of our indebtedness and to fund our working capital
needs.
The $450 million senior secured facility is comprised of a $100 million
revolving credit facility that expires on September 30, 2006, a $150 million
amortizing Term A loan facility and a $200 million amortizing Term B loan
facility. As of December 1, 2001, $67.7 million was available under the
revolving credit facility. The interest rates on borrowings under the $450
million senior secured facility are variable and based on current market
interest rates plus a spread based on our leverage. The current spread on LIBOR
based loans is 3%. The credit agreement also contains covenants that restrict
dividend payments, limit capital expenditures and require the maintenance of
leverage, interest coverage and fixed charge coverage ratios. Some of the
covenants become more restrictive over time. Borrowings under these facilities
may be used for general corporate purposes. The facility is secured by our
assets.
16
In November 2001, we entered into interest rate swap agreements in order to fix
a portion of our variable rate borrowings. The interest rate swap agreements
were for terms of 1.5 years, 2 years and 3 years for notional amounts of $50
million, $25 million, and $25 million, respectively. The fixed pay rates on the
swaps are 2.81%, 3.33% and 3.93%, respectively, and we receive the three month
LIBOR rate.
On December 17, 2001, we repaid the $200 million bilateral credit facility by
issuing $200 million senior unsecured notes. The notes mature on November 13,
2009 and have an interest rate of 6.602%, payable annually. In anticipation of
the issuance, we entered into an interest rate swap agreement that when
terminated had the effect of adjusting the effective interest rate of the debt
to 5.97%. The senior unsecured notes have been guaranteed by Diageo plc. The
guarantee may terminate, in limited circumstances, prior to the maturity of the
notes.
In May 2001, Standard and Poor's lowered our corporate credit rating to "BB" in
anticipation of the increased debt from the Acquisition. Standard and Poor's
also assigned a "BB+" bank loan rating to our $450 million senior secured bank
facility. In December 2001, these ratings were affirmed by Standard and Poor's
and a "stable outlook" was assigned.
Also in May 2001, Moody's Investors Service (Moody's) assigned prospective
ratings to us in anticipation of the Acquisition and the resulting increased
leverage. In November 2001, Moody's assigned to us a "Ba3" senior implied rating
and a "B1" senior unsecured issuer rating. Moody's also assigned a "Ba2" rating
to our $450 million senior secured bank facility and a "positive outlook" on our
debt ratings.
Our debt-to-total-capitalization ratio increased to 68.6% at December 1, 2001
compared with 42.1% at March 3, 2001. The increase in the
debt-to-total-capitalization ratio was primarily the result of additional debt
incurred for the Acquisition.
Cash used for operations was $69.2 million for the first nine months of fiscal
2002 compared with $6 million for the first nine months of fiscal 2001. The
change was primarily due to increased working capital usage. Accounts
receivables and inventories increased due to additional sales volumes. In
addition, accounts receivable increased due to the termination of a receivable
securitization program in Canada. Accounts payable declined due to timing of
payments to suppliers. Other current assets increased due to an increase in
market value on the interest rate swaps and a receivable from General Mills for
the net proceeds due us, under a transition services agreement, for the period
in November we owned the acquired businesses.
Cash used for investing activities was $307 million for the first nine months of
fiscal 2002 compared with $3.2 million for the first nine months of fiscal 2001.
Activities in the first nine months of fiscal 2002 primarily consist of the
Acquisition and capital expenditures, which included amounts for the expansion
of our condiments operation in Dunnville, Ontario. Fiscal 2002 also included
$17.5 million received for payment on a note from Gruma, S.A. de C.V. The first
nine months of fiscal 2001 included $12 million received from the sale of our
corporate headquarters building and capital expenditures of $24.5 million.
Capital expenditures in fiscal 2001 included amounts for facility expansion and
consolidation projects at Multifoods Distribution Group.
17
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, FASB issued Statement of Financial Accounting Standards No. 142
(SFAS 142), "Goodwill and Other Intangible Assets." Under the provisions of SFAS
142, goodwill and other intangible assets that have indefinite lives will no
longer be amortized, but subjected to impairment testing. Goodwill amortization
expense in fiscal 2001 was $2.6 million pretax, $1.7 million after tax. SFAS 142
is effective for the Company in the first quarter of fiscal 2003. However, any
goodwill and any intangible assets determined to have an indefinite life that
are acquired in a business combination completed after June 30, 2001 will not be
amortized. The Company is currently evaluating the impact of the standard and
may be required to recognize an impairment loss associated with its Multifoods
Distribution Group business upon adoption of the standard. As of December 1,
2001, the unamortized goodwill balance of the Multifoods Distribution Group
business was $65.7 million.
Additional discussion on new accounting pronouncements is included in Note 2 to
the consolidated condensed financial statements.
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. 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, successful completion of the integration of the acquired
businesses; reliance on General Mills, Inc., to provide material transition and
co-pack services to our Consumer Products Division, including the conversion of
the General Mills Toledo plant for our use; the results of our review of
strategic alternatives for Multifoods Distribution Group; the impact of
competitive products and pricing; changes in consumer preferences and tastes or
perceptions of health-related issues; effectiveness of advertising or
market-spending programs; 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 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.
18
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Credit Agreement, dated as of September 28, 2001, among
International Multifoods Corporation, Robin Hood
Multifoods Inc., the several lenders from time to time
parties thereto, Rabobank International, as
Documentation Agent, U.S. Bank National Association and
UBS Warburg LLC, as Syndication Agents, and Canadian
Imperial Bank of Commerce, as U.S. Administrative Agent
and Canadian Administrative Agent.
The Company hereby agrees to furnish to the Securities and
Exchange Commission upon request copies of all Schedules and
Exhibits to the Credit Agreement.
4.2 Fiscal Agency Agreement, dated as of December 17, 2001,
among International Multifoods Corporation, as Issuer,
Diageo plc, as Guarantor, JP Morgan Chase Bank, as
Fiscal Agent and Principal Paying Agent, and J.P. Morgan
Bank Luxembourg S.A., as Paying Agent.
10.1 Second Amendment to Employment Agreement, dated as of
November 13, 2001, by and between International
Multifoods Corporation and Gary E. Costley.
10.2 Retail Trademark License Agreement, dated November 13,
2001, between The Pillsbury Company and International
Multifoods Corporation.
11. Computation of Earnings (Loss) Per Common Share.
12. Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K
During the quarter ended December 1, 2001, the Company filed a
Current Report on Form 8-K dated November 13, 2001, relating to the
Company's acquisition of the Pillsbury dessert and specialty
products business and the Pet evaporated milk and dry creamer
business of The Pillsbury Company and the United States Robin Hood
business, the Farmhouse flavored rice and pasta side-dish products
business and the La Pina, Red Band and Softasilk retail flour
businesses of General Mills, Inc.
19
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: January 14, 2002 By: /s/ John E. Byom
--------------------------------
John E. Byom
Vice President - Finance and Chief
Financial Officer
(PRINCIPAL FINANCIAL OFFICER
AND DULY AUTHORIZED OFFICER)
20
EXHIBIT INDEX
4.1 Credit Agreement, dated as of September 28, 2001, among
International Multifoods Corporation, Robin Hood Multifoods Inc.,
the several lenders from time to time parties thereto, Rabobank
International, as Documentation Agent, U.S. Bank National
Association and UBS Warburg LLC, as Syndication Agents, and Canadian
Imperial Bank of Commerce, as U.S. Administrative Agent and Canadian
Administrative Agent.
The Company hereby agrees to furnish to the Securities and Exchange
Commission upon request copies of all Schedules and Exhibits to the Credit
Agreement.
4.2 Fiscal Agency Agreement, dated as of December 17, 2001, among
International Multifoods Corporation, as Issuer, Diageo plc, as
Guarantor, JP Morgan Chase Bank, as Fiscal Agent and Principal
Paying Agent, and J.P. Morgan Bank Luxembourg S.A., as Paying Agent.
10.1 Second Amendment to Employment Agreement, dated as of November 13,
2001, by and between International Multifoods Corporation and Gary
E. Costley.
10.2 Retail Trademark License Agreement, dated November 13, 2001, between
The Pillsbury Company and International Multifoods Corporation.
11. Computation of Earnings (Loss) Per Common Share.
12. Computation of Ratio of Earnings to Fixed Charges.