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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 the period ended: January 3, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-13403
American Italian Pasta Company
(Exact name of Registrant as specified in its charter)
Delaware 84-1032638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 N. Mulberry Drive
Kansas City, Missouri 64116
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 584-5000
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all documents
and 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding as of February 14, 2003 of the
Registrant's Class A Convertible Common Stock was 17,664,707 and there were no
shares outstanding of the Class B Common Stock.
Page 1
American Italian Pasta Company
Form 10-Q
Quarter Ended January 3, 2003
Table of Contents
Part I - Financial Information Page
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 2002
and September 30, 2002. 3
Consolidated Statements of Income for the three
months ended December 31, 2002 and 2001. 4
Consolidated Statement of Stockholders' Equity
for the three months ended December 31, 2002. 5
Consolidated Statements of Comprehensive Income
for the three months ended December 31, 2002
and 2001. 6
Consolidated Statements of Cash Flows for the
three months ended December 31, 2002 and 2001. 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 19
Part II - Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
Page 2
AMERICAN ITALIAN PASTA COMPANY
Consolidated Balance Sheets
December 31, September 30,
2002 2002
(In thousands)
Assets (Unaudited)
Current assets:
Cash and temporary investments $ 3,989 $ 8,247
Trade and other receivables 43,467 46,463
Prepaid expenses and deposits 12,500 11,282
Inventory 54,181 49,720
Deferred income taxes 2,778 2,420
Total current assets 116,915 118,132
Property, plant and equipment:
Land and improvements 11,184 11,061
Buildings 112,117 111,041
Plant and mill equipment 313,104 312,092
Furniture, fixtures and equipment 15,552 15,509
451,957 449,703
Accumulated depreciation (105,206) (99,607)
346,751 350,096
Construction in progress 61,884 45,844
Total property, plant and equipment 408,635 395,940
Intangible assets 127,749 119,360
Other assets 9,631 7,177
Total assets $662,930 $640,609
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 29,262 $ 21,320
Accrued expenses 16,631 11,359
Income tax payable 1,075 1,585
Current maturities of long-term debt 4,535 4,279
Total current liabilities 51,503 38,543
Long-term debt 265,033 258,193
Deferred income taxes 50,190 46,767
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 10,000,000 -- --
Class A common stock, $.001 par value:
Authorized shares - 75,000,000 20 20
Class B common stock, $.001 par value:
Authorized shares - 25,000,000 -- --
Additional paid-in capital 213,548 213,671
Treasury stock (45,027) (34,394)
Unearned compensation (638) (940)
Retained earnings 130,785 121,862
Accumulated other comprehensive loss (2,484) (3,113)
Total stockholders' equity 296,204 297,106
Total liabilities and stockholders' equity $662,930 $640,609
======== ========
See accompanying notes to consolidated financial statements.
Page 3
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Income
Three Months Ended
December 31,
2002 2001
(In thousands)
(Unaudited)
Revenues $107,036 $ 92,003
Cost of goods sold 73,459 59,159
Gross profit 33,577 32,844
Selling and marketing expense 13,593 13,796
General and administrative expense 2,812 2,977
Provision for acquisition and start-up expenses 1,428 --
Operating profit 15,744 16,071
Interest expense, net 2,427 2,556
Income before income tax expense 13,317 13,515
Income tax expense 4,394 4,663
Net income $ 8,923 $ 8,852
======== ========
Earnings Per Common Share:
Net income per common share $ .50 $ .50
======== ========
Weighted-average common shares outstanding 17,831 17,689
======== ========
Earnings Per Common Share - Assuming Dilution:
Net income per common share assuming dilution $ .49 $ .48
======== ========
Weighted-average common shares outstanding 18,397 18,554
======== ========
See accompanying notes to consolidated financial statements.
Page 4
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statement of Stockholders' Equity
Three months ended
December 31, 2002
------------------
(In thousands)
(unaudited)
Class A Common Shares
Balance, beginning of period 19,677
Issuance of shares of Class A Common stock to option holders
& other issuances (cancellations) (2)
Balance, end of period 19,675
=========
Class A Common Stock
Balance, beginning and end of period $ 20
=========
Additional Paid-in Capital
Balance, beginning of period $ 213,671
Issuance of shares of Class A Common stock to option holders
& other issuances (cancellations) (123)
Balance, end of period $ 213,548
=========
Treasury Stock
Balance, beginning of period $ (34,394)
Purchase of treasury stock (10,633)
Balance, end of period $ (45,027)
=========
Unearned Compensation
Balance, beginning of period $ (940)
Cancellation of common stock 250
Earned compensation 52
Balance, end of period $ (638)
=========
Other Comprehensive Income (Loss)
Foreign currency translation adjustment
Balance, beginning of period $ (1,611)
Change during the period 1,355
Balance, end of period (256)
Interest rate swaps fair value adjustment
Balance, beginning of period (1,502)
Change during the period (726)
Balance, end of period (2,228)
Total accumulated other comprehensive loss $ (2,484)
=========
Retained Earnings
Balance, beginning of period $ 121,862
Net income 8,923
Balance, end of period 130,785
Total Stockholders' Equity $296,204
=========
See accompanying notes to consolidated financial statements.
Page 5
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Comprehensive Income
Three months ended December 31,
2002 2001
(In thousands)
(unaudited)
Net income $ 8,923 $ 8,852
Other comprehensive income (loss)
Net unrealized losses on qualifying cash
flow hedges (net of income tax benefit of
$356 and $134, respectively) (726) (389)
Foreign currency translation adjustment
(net of income tax benefit (expense) of
($667) and $40, respectively) 1,355 (76)
Total other comprehensive income (loss) 629 (465)
Comprehensive income $ 9,552 $ 8,387
======= =======
See accompanying notes to consolidated financial statements.
Page 6
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Cash Flows
Three Months Ended
December 31,
2002 2001
(In thousands)
(Unaudited)
Operating activities:
Net income $ 8,923 $ 8,852
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 5,781 4,872
Deferred income tax expense 3,423 1,420
Changes in operating assets and liabilities:
Trade and other receivables 3,104 569
Prepaid expenses and deposits (1,615) (122)
Inventory (3,370) (1,624)
Accounts payable and accrued expenses 11,654 (2,988)
Income tax payable (737) 2,925
Other (1,448) (307)
Net cash provided by operating activities 25,715 13,597
Investing activities:
Purchase of pasta brands (6,877) --
Additions to property, plant and equipment (15,368) (14,770)
Net cash used in investing activities (22,245) (14,770)
Financing activities:
Additions to deferred debt issuance costs (1,106) --
Proceeds from issuance of debt 8,020 --
Principal payments on debt and capital lease
obligations (4,485) (390)
Proceeds from issuance of common stock, net of
issuance costs 122 1,559
Purchase of treasury stock (10,633) --
Net cash provided by (used in) financing activities (8,082) 1,169
Effect of exchange rate changes on cash 354 536
Net increase (decrease) in cash and temporary
investments (4,258) 532
Cash and temporary investments at beginning of period 8,247 5,284
Cash and temporary investments at end of period $ 3,989 $ 5,816
========== ========
See accompanying notes to consolidated financial statements.
Page 7
AMERICAN ITALIAN PASTA COMPANY
Notes to Consolidated Financial Statements
December 31, 2002
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended December 31,
2002 are not necessarily indicative of the results that may be expected for the
year ended September 30, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 27, 2002.
American Italian Pasta Company (the “Company” or “AIPC”) uses a 52/53 week
financial reporting cycle with a fiscal year which ends on the last Friday of
September or the first Friday of October. The Company's first three fiscal
quarters end on the Friday last preceding December 31, March 31, and June 30 or
the first Friday of the following month. For purposes of this Form 10-Q, the
first fiscal quarter of fiscal years 2003 included 14 weeks of activity and
fiscal 2002 included thirteen weeks of activity and are described as the
three-month periods ended December 31, 2002 and 2001.
Reclassifications
Certain amounts within the prior period financial statements have been
reclassified to conform to the current period presentation.
Inventories
Inventories are stated using product specific standard costs which approximate
the lower of cost or market determined on a first-in, first-out (FIFO) basis.
Inventories consist of the following:
December 31, September 30,
2002 2002
(In thousands)
Finished goods $38,698 $38,881
Raw materials, packaging materials and
work-in-process 15,483 10,839
$54,181 $49,720
======= =======
2. Stock Options/Earnings Per Share
A summary of the Company's stock option activity:
Number of Shares
Outstanding at September 30, 2002 2,665,821
Exercised (1,269)
Granted 181,000
Canceled/Expired (14,063)
Outstanding at December 31, 2002 2,831,489
=========
Page 8
Dilutive securities, consisting of options to purchase the Company's Class A
common stock, included in the calculation of diluted weighted average common
shares were 566,000 shares for the three-month period ended December 31, 2002
and 865,000 shares for the three-month period ended December 31, 2001.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation".
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
Three months ended December 31
2002 2001
Net income, as reported $ 8,923 $ 8,852
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards,net of
related tax effects (1,453) (679)
Pro forma net income $ 7,470 $ 8,173
======== ========
Earnings per share:
Basic - as reported $ .50 $ .50
======== ========
Basic - pro forma $ .42 $ .46
======== ========
Diluted - as reported $ .49 $ .48
======== ========
Diluted - pro forma $ .41 $ .44
======== ========
3. Continued Dumping and Subsidy Offset Act of 2000
On October 28, 2000, the U.S. government enacted the "Continued Dumping and
Subsidy Offset Act of 2000" (the "Act") which provides that assessed
anti-dumping and subsidy duties liquidated by the Department of Commerce after
October 1, 2000 will be distributed to affected domestic producers. Accordingly,
in December 2002 and 2001, AIPC received payments from the Department of
Commerce in the amounts of $2.4 million and $7.6 million, respectively, as the
Company's calculated share, based on tariffs liquidated by the government from
October 1, 2000 to September 30, 2002 on Italian and Turkish imported pasta.
According to Congressional documents, these payments to affected U.S. producers
are for the purpose of maintaining jobs and investments that might be affected
through unfair trade practices, and to offset revenues lost through foreign
companies' dumping practices and foreign governments' subsidy practices. There
are no specific requirements on how the funds are to be used by the Company
other than the funds are intended to benefit future periods. As such, the
Company used a significant portion to increase investment in brand building
activities (for example, slotting to expand or recapture distribution and
consumer promotion reinforcing the long-term quality tradition of the Company's
brands), and continued strengthening of the Company's organization.
During the first quarter of 2003 and 2002, the Company recognized $0.6 million
and $1.9 million of retail revenue, respectively, which equals 25% of the
Page 9
payments received. The Company recognizes the receipts ratably over the related
fiscal year, which patterns the program year under which the payments were
received. Accordingly, the Company expects to recognize an additional 25% or $.6
million, in each of the next three quarters of the current fiscal year.
It is the Company's understanding that overpayments under this program may be
recovered by U.S. Customs for a number of reasons up to one year after payment
is made. The Company has not received any claims of overpayment. For this reason
and to match the revenue received with the incremental expenditures made under
the program, the Company recognizes the receipt ratably over the current fiscal
year.
The legislation creating the dumping and subsidy offset payment (referred to as
the Byrd Amendment) provides for annual payments from the U.S. government.
However it is not possible to reasonably estimate the potential amount, if any,
to be received in future periods.
4. Brand Acquisitions
On October 2, 2002, the Company announced the purchase of the Martha Gooch and
LaRosa pasta brands from ADM in the United States and the Lensi pasta brand from
Pastificio Lensi of Vinci, Italy for an approximate total of $9.5 million,
including trade liabilities. The Pastificio Lensi transaction was completed
prior to the fiscal year ended September 27, 2002, and the Martha Gooch and
LaRosa transactions were completed in early October 2002. No manufacturing
assets were included in the transactions.
5. Stock Repurchase Plan
In November 2002, the Company's Board of Directors authorized up to $20 million
to implement a common stock repurchase plan. The Company purchased 323,398
shares for $10,633,000, at prices ranging from $32.52 to $33.00 per share during
the period ended December 31, 2002.
6. Amendment to Credit Facility
On December 13, 2002, the Company completed an amendment to its revolving credit
facility. The amendment provides the Company with an additional $100 million
term loan capacity. The terms of the original credit facility provide commitment
reductions of $110 million between October 1, 2002 and October 1, 2005. The
additional term loan capacity is nearly sufficient to offset the cumulative
annual reductions in credit availability required by the original credit
facility. The original terms of the facility remain generally the same.
7. Subsequent Events
On January 15, 2003, the Company purchased an additional 43,000 shares of its
common stock at $34.45 per share under the Stock Repurchase Plan.
On January 31, 2003, the Company purchased the Golden Grain/Mission pasta brand
from PepsiCo for approximately $43 million plus inventory. No significant
manufacturing assets were included in the transaction.
Page 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion set forth below, as well as other portions of this Quarterly
Report, contains statements concerning potential future events. Such
forward-looking statements are based upon assumptions by our management, as of
the date of this Quarterly Report, including assumptions about risks and
uncertainties faced by AIPC. Readers can identify these forward-looking
statements by their use of such verbs as expects, anticipates, believes or
similar verbs or conjugations of such verbs. If any of our assumptions prove
incorrect or should unanticipated circumstances arise, our actual results could
materially differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in our Annual Report on
Form 10-K dated December 19, 2002. That report has been filed with the
Securities and Exchange Commission (the "SEC" or the "Commission") in
Washington, D.C. and can be obtained by contacting the SEC's public reference
operations or obtaining it through the SEC's web site on the World Wide Web at
http://www.sec.gov. Readers are strongly encouraged to consider those factors
when evaluating any such forward-looking statement. We will not update any
forward-looking statements in this Quarterly Report to reflect future events or
developments.
Results of Operations
Overview
We are the largest producer and one of the fastest-growing major marketers of
dry pasta in North America. We began operations in 1988 with the introduction of
new, highly efficient durum wheat milling and pasta production technology. We
believe our singular focus on pasta, our vertically-integrated facilities and
highly efficient production facilities focused primarily on specific market
segments and our highly skilled workforce make us a more efficient company and
enable us to produce high-quality pasta at very competitive costs. We believe
that the combination of our low cost structure, the addition of several new
brands to our portfolio of brands, our scalable production facilities and our
key customer relationships create significant opportunity for continued growth.
We generate revenues in two customer markets: retail and institutional. Retail
market revenues include the revenues from sales of our pasta products to
customers who resell the pasta in retail channels. These revenues represented
76% and 77% of our total revenue for the three months ended December 31, 2002
and 2001, respectively, and include sales to club stores and grocery retailers,
and encompass sales of our private label and branded products. Institutional
market revenues include revenues from product sales to customers who use our
pasta as an ingredient in food products or who resell our pasta in the
foodservice market. It also includes revenues from opportunistic sales to
government agencies and other customers that we pursue periodically when
capacity is available to increase production volumes and thereby lower average
unit costs. The institutional market represented 24% and 23% of our total
revenue for the three months ended December 31, 2002 and 2001, respectively.
Average sales prices in the retail and institutional markets vary depending on
customer-specific packaging and raw material requirements, product manufacturing
complexity and other service requirements. Average retail and institutional
prices will also vary due to changes in the relative share of customer revenues
and item specific sales volumes (i.e., product sales mix). Generally, average
retail sales prices are higher than institutional sales prices. We anticipate
continued changes to historical income statement patterns resulting from the
Mueller's(R) brand acquisition in November 2000, the acquisition of seven pasta
brands from Borden Foods in July 2001, subsequent smaller acquisitions in
September and October 2002, and the
Page 11
Golden Grain/Mission pasta brand in January 2003. Selling prices of our branded
products are significantly higher than selling prices in our other business
units including private label. This is expected to result in higher revenues,
gross profits, and gross margin percentages. Revenues are reported net of cash
discounts, pricing allowances and product returns.
We seek to develop strategic customer relationships with food industry leaders
that have substantial pasta requirements. We have a supply agreement with Sysco
and other arrangements with food industry leaders, such as Sam's Club, that
provide for the "pass-through" of direct material cost changes as pricing
adjustments. The pass-throughs are generally limited to actual changes in cost
and, as a result, impact percentage profitability in periods of changing costs
and prices. The pass-throughs are generally effective 30 to 90 days following
such cost changes and thereby significantly reduce the long-term exposure of our
operating results to the volatility of raw material costs. These pass-through
arrangements also require us to pass on the benefits of any price decrease in
raw material costs.
Our cost of goods sold consists primarily of raw materials, packaging,
manufacturing (including depreciation) and distribution costs. A significant
portion of our cost of goods sold is durum wheat. We purchase durum wheat on the
open market and, consequently, those purchases are subject to fluctuations in
cost. We manage our durum wheat cost risk through durum wheat cost
"pass-through" agreements in long-term contracts and other noncontractual
arrangements with our customers and advance purchase contracts for durum wheat
which are generally less than twelve months' duration.
Our capital asset strategy is to achieve low-cost production through vertical
integration and investment in the most current pasta-making assets and
technologies. The manufacturing- and distribution-related capital assets that
have been or will be acquired to support this strategy are depreciated over
their respective economic lives. Because of the capital-intensive nature of our
business and our current and future facilities expansion plans, including
completion of our new facility in Arizona, we believe our depreciation expense
for production and distribution assets may be higher than that of many of our
competitors. Depreciation expense is a component of inventory cost and cost of
goods sold. Plant expansion costs include incremental direct and indirect
manufacturing and distribution costs that are incurred as a result of
construction, commissioning and start-up of new capital assets. These costs are
expensed as incurred but are unrelated to current production and, therefore,
reported as a separate line item in the statement of operations. By locating our
newest facility in Arizona closer to our western U.S. customers, we believe we
will generate significant logistical savings and provide superior service to our
west coast customers, while creating additional capacity to support the
continued rapid growth of our business sourced from our existing plants. We
believe adding this strategic location will further enhance our low-cost
producer position in the industry.
Selling and marketing costs have increased substantially over the last two years
in line with the significant expansion of our retail business. These costs
increased 198.9% from fiscal year 2000 through fiscal year 2002, and constituted
12.7% of revenues for the three months ended December 31, 2002. We do not expect
continued rapid growth in our selling and marketing expenditures because we have
substantially completed the development of the selling and marketing
infrastructure needed to support our branded businesses. We expect selling and
marketing expense to exceed 10% of revenues for the foreseeable future.
As noted, in November 2000, we purchased the Mueller's® pasta brand from
Bestfoods. In July 2001, we purchased seven pasta brands from Borden Foods. In
addition, we purchased the Lensi brand and Martha Gooch® and LaRosa® brands
Page 12
in September and October 2002, respectively. As discussed below, the timing of
these brand acquisitions had an impact on the period-to-period comparisons.
Critical Accounting Policies
This discussion and analysis discusses our results of operations and financial
condition as reflected in our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. As discussed in note 1 to our September 30, 2002 consolidated
financial statements, the preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting periods. On an ongoing basis, our management
evaluates its estimates and judgments, including those related to the impairment
of intangible assets, the method of accounting for stock options, the estimates
used to record product return reserves, accounts receivable and allowance for
doubtful accounts and derivatives. Our management bases its estimates and
judgments on its substantial historical experience and other relevant factors,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. See note 1 to our September 30, 2002 consolidated financial statements
for a complete listing of our significant accounting policies. Our most critical
accounting policies are described below.
Impairment Testing of Intangible Assets. In accordance with Statement of
Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible
Assets," we do not amortize the cost of intangible assets with indefinite lives.
SFAS No. 142 requires that we perform certain fair value based tests of the
carrying value of indefinite lived intangible assets at least annually and more
frequently should events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. These impairment tests are
impacted by judgments as to future cash flows and brand performance. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Future events could cause
our management to conclude that impairment indicators exist and that the value
of intangible assets is impaired.
Stock Options. We have elected to follow Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for our employee stock options and adopted the pro
forma disclosure requirements under SFAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, because the exercise price of our employee
stock options is equal to or greater than the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if we had accounted for our employee
stock options under the fair value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 2.0% for fiscal 2003; dividend yield of zero; a volatility
factor of the expected market price of our common stock of .408 for fiscal 2003;
and a weighted-average expected life of the options of one to five years.
Page 13
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of our employee stock options.
Product Return Reserves. Revenue is recognized generally when our products are
shipped to our customers. It is our policy across all classes of customers that
all sales are final. As is common in the consumer products industry, customers
occasionally return products for a variety of reasons. Examples include product
damaged in transit, discontinuance of a particular size or form of product and
shipping errors. We record an estimate of products to be returned by customers
as a reserve against sales. We generally base this reserve on our historical
returns experience and sales volume. Significant judgment is required when
estimating the reserves for product returns and there is a risk that actual
product returns may differ from our estimates.
Accounts Receivable - Significant Customers. We generate approximately 25% of
our revenues and corresponding accounts receivable from sales to two customers.
If our primary customers experience significant adverse conditions in their
industry or operations, our customers may not be able to meet their ongoing
financial obligations to us for prior sales or complete the purchase of
additional products from us under the terms of our existing firm purchase and
sale commitments.
Allowance for Doubtful Accounts - Methodology. We evaluate the collectibility of
our accounts receivable based on a combination of factors. In circumstances
where we are aware of a specific customer's inability to meet its financial
obligations to us (e.g. bankruptcy filings, substantial down-grading of credit
scores), we record a specific reserve for bad debts against amounts due to
reduce the net recognized receivable to the amount we reasonably believe will be
collected. For all other customers, we recognize reserves for bad debts based on
the length of time the receivables are past due, and our historical experience.
If circumstances change (i.e., higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet its financial
obligations to us), our estimates of the recoverability of amounts due us could
be reduced by a material amount.
Derivatives. We hold derivative financial instruments to hedge a variety of risk
exposures including interest rate risks associated with our long-term debt and
foreign currency fluctuations for transactions with our overseas subsidiary.
These derivatives qualify for hedge accounting as discussed in detail in note 1
to our September 30, 2002 consolidated financial statements. We do not
participate in speculative derivatives trading. Hedge accounting results when we
designate and document the hedging relationships involving these derivative
instruments. While we intend to continue to meet the conditions for hedge
accounting, if hedges did not qualify as highly effective or if we did not
believe that forecasted transactions would occur, the changes in the fair value
of the derivatives used as hedges would be reflected in earnings.
To hedge foreign currency risks, we use futures contracts. The fair values of
these instruments are determined from market quotes. In addition, we use some
over-the-counter forward contracts in hedging these risks. These forward
contracts are valued in a manner similar to that used by the market to value
exchange-traded contracts; that is, using standard valuation formulas with
assumptions about future foreign currency exchange rates derived from existing
exchange rates, and interest rates observed in the market. To hedge interest
Page 14
rate risk, an interest rate swap is used in which we pay a variable rate and
receive a fixed rate. This instrument is valued using the market standard
methodology of netting the discounted future fixed cash receipts and the
discounted expected variable cash payments. The variable cash payments are based
on an expectation of future interest rates derived from observed market interest
rate curves. We have not changed our methods of calculating these fair values or
developing the underlying assumptions. The values of these derivatives will
change over time as cash receipts and payments are made and as market conditions
change. Our derivative instruments are not subject to multiples or leverage on
the underlying commodity or price index. Information about the fair values,
notional amounts, and contractual terms of these instruments can be found in
note 1 to our September 30, 2002 consolidated financial statements and the
section titled "Quantitative and Qualitative Disclosures About Market Risk."
We consider our budgets and forecasts in determining the amounts of our foreign
currency denominated purchases to hedge. We combine the forecasts with
historical observations to establish the percentage of our forecast we are
assuming to be probable of occurring, and therefore eligible to be hedged. The
purchases are hedged for exposures to fluctuations in foreign currency exchange
rates.
We do not believe we are exposed to more than a nominal amount of credit risk in
our interest rate and foreign currency hedges as the counter parties are
established, well-capitalized financial institutions. Our exposure is in liquid
currency (Euros), so there is minimal risk that appropriate derivatives to
maintain our hedging program would not be available in the future.
QUARTER ENDED DECEMBER 31, 2002, COMPARED TO QUARTER ENDED DECEMBER 31, 2001
Revenues. Total revenues increased $15.0 million, or 16.3%, to $107.0 million
for the three-month period ended December 31, 2002, from $92.0 million for the
three-month period ended December 31, 2001. The increase for the three-month
period ended December 31, 2002 was primarily due to volume growth of 20.1% over
the prior year period. Revenue growth lagged volume growth due primarily to
changes in sales mix, and a reduction in the payments received from the U.S.
government under the Continued Dumping and Subsidy Offset Act of 2000 (CDO).
(See note 3 to the consolidated financial statements.)
Revenues for the Retail market increased $10.4 million, or 14.7%, to $81.3
million for the three-month period ended December 31, 2002, from $70.8 million
for the three-month period ended December 31, 2001. The increase primarily
reflects volume growth of 19.3%. Revenue growth lagged volume growth due
primarily to changes in sales mix, and a reduction in the payments received from
the U.S. government under the CDO. In the first quarter of 2003 and 2002, we
recognized retail revenue of $0.6 million and $1.9 million, respectively,
related to this program.
Revenues for the Institutional market increased $4.6 million, or 21.8%, to $25.8
million for the three-month period ended December 31, 2002, from $21.2 million
for the three-month period ended December 31, 2001. This increase was primarily
a result of volume growth of 22.1%.
Gross Profit. Gross profit increased $0.7 million, or 2.2%, to $33.6 million for
the three-month period ended December 31, 2002, from $32.8 million for the
three-month period ended December 31, 2001. This increase was primarily
attributable to revenue growth associated with increased volumes. These
increases were partially offset by higher raw material costs, principally durum
wheat. Gross profit as a percentage of revenues decreased to 31.4% for the
three-month period ended December 31, 2002 from 35.7% for the three-month period
ended December 31, 2001. The decrease in gross profit as a percentage
Page 15
of revenues relates to the lower net revenue impact of the Continued Dumping and
Subsidy Offset payment, product sales mix associated with the continued strong
growth of our ingredient, private label and club businesses, and the impact of
higher raw material costs, principally durum wheat.
Selling and Marketing Expense. Selling and marketing expense decreased $0.2
million, or 1.5%, to $13.6 million for the three-month period ended December 31,
2002, from $13.8 million for the three-month period ended December 31, 2001.
Selling and marketing expense as a percentage of revenue decreased to 12.7% for
the three-month period ended December 31, 2002, from 15.0% for the comparable
prior year period. The lower marketing and selling expense as a percentage of
sales is attributable primarily to higher rates of revenue growth for our
businesses which require little marketing and selling support.
General and Administrative Expense. General and administrative expenses
decreased $0.2 million, or 5.5% to $2.8 million for the three-month period ended
December 31, 2002 from $3.0 million for the three-month period ended December
31, 2001. General and administrative expense as a percentage of revenues
decreased to 2.6% for the three-month period ended December 31, 2002, from 3.2%
for the comparable prior year period. The decrease primarily relates to higher
legal expense in the prior year quarter of $250,000.
Provision for Acquisition and Plant Start-up Expenses. The provision for
acquisition and plant start-up expenses of $1.4 million for the quarter ended
December 31, 2002 consisted of one-time costs associated with the brand
acquisitions and plant start-up costs related to the Arizona facility.
Operating Profit. Operating profit for the three-month period ended December 31,
2002, was $15.7 million, decreasing $0.3 million or 2.0% from the $16.1 million
reported for the three-month period ended December 31, 2001. Excluding the
impact of the $1.4 million charge for acquisition and plant start-up costs,
operating profit for the current quarter totaled $17.2 million, increasing $1.1
million or 6.9%. Operating profit decreased as a percentage of revenues to 14.7%
(16.0% excluding acquisition and plant start-up costs) for the three-month
period ended December 31, 2002, from 17.5% for the three-month period ended
December 31, 2001 as a result of the factors discussed above.
Interest Expense. Interest expense for the three-month period ended December 31,
2002, was $2.4 million, decreasing $.1 million from the $2.6 million reported
for the three-month period ended December 31, 2001. The decrease related
primarily to lower interest rates in the current year.
Income Tax. Income tax expense for the three-month period ended December 31,
2002, was $4.4 million, decreasing $0.3 million from the $4.7 million reported
for the three-month period ended December 31, 2001, reflecting effective tax
rates of 33% and 34.5%, respectively.
Net Income. Net income for the three-month period ended December 31, 2002, was
$8.9 million, increasing $0.1 million or approximately .8%. Excluding the impact
of the $1.4 million ($956,000 after tax) charge for acquisition and plant
start-up costs, net income for the current quarter totaled $9.9 million. Diluted
earnings per common share were $0.49 per share for the three-month period ended
December 31, 2002 compared to $0.48 per share for the three-month period ended
December 31, 2001. Excluding the impact of the $1.4 million charge for
acquisition and plant start-up costs, diluted earnings per common share were
$.54 in the current year. Net income as a percentage of net revenue was 8.3%
versus 9.6% in the prior year. Excluding the impact of the $1.4 million charge
for acquisition and plant start-up costs, net income as a percentage of net
revenue was 9.2%.
Page 16
Financial Condition and Liquidity
Our primary sources of liquidity are cash provided by operations and borrowings
under our credit facility. Cash and temporary investments totaled $4.0 million,
and working capital totaled $65.4 million on December 31, 2002.
Our net cash provided by operating activities totaled $25.7 million for the
three-month period ended December 31, 2002 compared to $13.6 million for the
three-month period ended December 31, 2001. This increase of $12.1 million was
primarily due to lower working capital requirements and higher earnings before
depreciation, amortization and income taxes.
Cash used in investing activities principally relates to the purchase of pasta
brands and investments in manufacturing, distribution, milling and management
information system assets. Capital expenditures were $15.4 million for the
three-month period ended December 31, 2002 compared to $14.8 million in the
comparable prior year period. The majority of these expenditures relate to our
new Arizona manufacturing facility. Additionally, we plan to spend approximately
$20 million in the remainder of fiscal year 2003, primarily for cost saving,
maintenance, and capacity expansion projects. We anticipate completion of the
majority of these projects during the fiscal year ending September 30, 2003.
Net cash used by financing activities was $8.1 million for the three-month
period ended December 31, 2002 compared to net cash provided by financing
activities of $1.2 million for the three-month period ended December 31, 2001.
The $8.0 million borrowing in fiscal 2002 relates to the purchase of treasury
stock. We have purchased 323,398 shares of Company stock for $10.6 million in
the three months ended December 31, 2002. We continue to use our available
credit facility, as well as cash from operations, to fund capital expansion
programs as necessary.
We currently use cash to fund capital expenditures, repayments of debt, working
capital requirements and acquisitions. We expect that future cash requirements
will principally be for capital expenditures, repayments of indebtedness,
working capital requirements and acquisitions.
On December 13, 2002, we completed a $100 million term loan facility as an
amendment to our existing revolving credit agreement. The terms of the original
revolving credit facility provide for commitment reductions of $110 million
between October 1, 2002 and October 1, 2005. The additional term loan capacity
is nearly sufficient to offset the cumulative annual reductions in credit
availability required by the original credit facility. The original terms of the
credit agreement remain generally the same.
We believe that net cash expected to be provided by operating activities and net
cash provided by financing activities will be sufficient to meet our expected
capital and liquidity needs for the foreseeable future.
Page 17
Selected
Contractual
Obligations at
December 31, 2002 Payments Due by Period
--------------------------------------------------------------
--------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
--------------------------------------------------------------
--------------------------------------------------------------
Long term debt $268,629 $ 4,153 $69,476 $195,000 $--
Capital lease
obligations 996 430 566 -- --
Unconditional
durum
purchase
obligations 40,308 39,805 503 -- --
Total contractual
cash
obligations $309,933 $44,388 $70,545 $195,000 $--
======== ======= ======= ======== ===
We have current commitments for $40.3 million in raw material purchases for
fiscal years 2003 and 2004. Additionally, we have approximately $20 million in
expenditures remaining under the previously referenced capital programs. We
anticipate the majority of these current capital programs will be fully funded
by the end of fiscal year 2003. We expect to fund these commitments from
operations and borrowing capacity under our credit facility. At this time, the
current and projected borrowings under the credit facility do not exceed the
facility's available commitment. The facility matures on October 2, 2006. We
anticipate that any borrowing outstanding at that time will be satisfied with
funds from operations or will be refinanced. We currently have no other material
commitments.
We believe that net cash provided by operating and financing activities
will be sufficient to meet our expected capital and liquidity needs for the
foreseeable future.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk associated with financial instruments
relates to interest rate risk associated with variable rate borrowings and
foreign currency exchange rate risk associated with borrowings denominated in
foreign currency. We occasionally utilize simple derivative instruments such as
interest rate swaps to manage our mix of fixed and floating rate debt. We had
various fixed interest rate swap agreements with notional amounts of $150
million outstanding at December 31, 2002. The estimated fair value of the
interest rate swap agreements of ($3.4 million) is the amount we would be
required to pay to terminate the swap agreements at December 31, 2002. If
interest rates for our long-term debt under our credit facility had averaged 10%
more and the full amount available under our credit facility had been
outstanding for the entire year, our interest expense would have increased, and
income before taxes would have decreased by $0.6 million for the quarter ended
December 31, 2002. We hedge our net investment in our foreign subsidiaries with
euro borrowings under our credit facility. Changes in the U.S. dollar equivalent
of euro-based borrowings are recorded as a component of the net translation
adjustment in the consolidated statement of stockholders' equity.
Page 18
The functional currency for our Italy operation is the Euro. At December
31, 2002, long-term debt includes obligations of 37.5 million Euros ($36.0
million) under a credit facility which bears interest at a variable rate based
upon the Euribor rate.
Item 4. CONTROLS AND PROCEDURES
During November and early December 2002, the Company conducted a review of
its disclosure controls and procedures. Based on their evaluation of these
controls and procedures as of February 14, 2003, Mr. Webster, our CEO, and Mr.
Schmidgall, our CFO, concluded that the Company's disclosure controls and
procedures were appropriate and effective in causing information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported within the required time periods.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls since February 14, 2003.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------------
Not applicable
Item 2. Changes in Securities
- -------------------------------
On December 31, 2002 the Company entered into a Certificate and First
Amendment to Rights Agreement, amending the Rights Agreement, dated December 3,
1998, between the Company and UMB Bank, N.A., as rights agent. The Rights
Agreement provides certain purchase rights to the Company's Class A Convertible
common stock, par value $.001 per share.
This amendment amends the definition of an "Acquiring Person" to allow an
Institutional Investor to own up to, but not including, twenty percent (20%) of
the outstanding shares of the Company's common stock before being deemed to be
an Acquiring Person. An "Institutional Investor" is defined to include persons
deemed to be an Institutional Investor by the Board of Directors of the Company
and (i) has a Schedule 13G on file with the Securities and Exchange Commission
pursuant to the requirements of Rule 13d-1 under the Exchange Act with respect
to its holdings of shares of the Company's common stock as long as the person is
engaged in the business of managing investment funds for unaffiliated securities
investors and holds or exercises voting or dispositive power over the shares of
the Company's common stock; (ii) acquires beneficial ownership of the shares of
the Company's common stock pursuant to trading activities undertaken in the
ordinary course of such person's business and not with the purpose nor effect of
exercising power to direct or cause the direction of the management and policies
of the Company or of otherwise changing or influencing the control of the
Company; and (iii) if such person is a person included in Rule 13b-1(b)(1)(ii)
of the Exchange Act, such person is not obligated to, and does not, file a
Schedule 13D with respect to the securities of the Company.
Item 3. Defaults Upon Senior Securities
- -------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------
Not applicable
Page 19
Item 5. Other Information
- -------------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------
(a) Exhibits.
4.1 Certificate and First Amendment to Rights Agreement, which
is attached as Exhibit 4 to the Company's Form 8-K filed on
January 6, 2003, is incorporated by reference herein as
Exhibit 4.1.
4.2 First Amendment to the Credit Agreement, dated December 12,
2002, among American Italian Pasta Company, various
financial institutions and Bank of America, N.A. as
administrative agent.
10.1 Asset Purchase Agreement, dated September 30, 2002, among
American Italian Pasta Company, Gooch Foods, Inc. and
Archer-Daniels-Midland Company.
99 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
None
Page 20
SIGNATURES
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.
American Italian Pasta Company
February 14, 2003 /s/ Timothy S. Webster
- ------------------------------------ -----------------------------------------
Date Timothy S. Webster
President and Chief Executive Officer
(Principal Executive Officer)
February 14, 2003 /s/ Warren B. Schmidgall
- ------------------------------------ -----------------------------------------
Date Warren B. Schmidgall
Executive Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Page 21
CERTIFICATION
I, Timothy S. Webster, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Italian
Pasta Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involved management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Timothy S. Webster
-----------------------------------------
Timothy S. Webster, President & CEO
Page 22
CERTIFICATION
I, Warren Schmidgall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Italian
Pasta Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involved management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Warren Schmidgall
-----------------------------------------
Warren Schmidgall, EVP & CFO
Page 23