Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Report. These forward-looking statements are sometimes identified by their use of terms and phrases such as “believes,” “should,” “expects,” “anticipates,” “intends,” “plans,” “will,” or similar expressions elsewhere in this Report. The Company’s results of operations and financial condition may differ materially from those in the forward-looking statements. Such statements are based on management’s current views and assumptions, and involve risks and uncertainties that could affect expected results. For example, any of the following factors cumulatively or individually may impact expected results:
(i) If the Company is unable to maintain a meaningful price gap between its private label products and the branded products of its competitors, successfully introduce new products or successfully manage costs across all parts of the Company, the Company’s private label businesses could incur operating losses;
(ii) Consolidation among members of the grocery trade may lead to increased wholesale price pressure from larger grocery trade customers and could result in significant profit pressure, or in some cases, the loss of key accounts if the surviving entities are not customers of the Company;
(iii) Significant increases in the cost of certain raw materials (e.g., peanuts, wheat, soybean oil, eggs, various tree nuts, corn syrup, cocoa, fruits) or energy used to manufacture the Company’s products, to the extent not reflected in the price of the Company’s products, could adversely impact the Company’s results;
(iv) In light of its significant ownership in Vail Resorts, Inc., the Company’s non-cash earnings can be adversely affected by unfavorable results from Vail Resorts;
(v) The Company is currently generating profit from certain co-manufacturing contract arrangements with other manufacturers within its competitive categories. The termination or expiration of these contracts and the inability of the Company to replace this level of business could negatively affect the Company’s operating results;
(vi) The Company’s businesses compete in mature segments with competitors having large percentages of segment sales;
(vii) The Company has realized increases to sales and earnings through the acquisitions of businesses, but the ability to undertake future acquisitions depends on many factors that the Company does not control, such as identifying available acquisition candidates and negotiating satisfactory terms upon which to purchase such candidates;
(viii) Presently, a significant portion of the interest on the Company’s indebtedness is set on a short-term basis. Consequently, increases in interest rates will increase the Company’s interest expense;
(ix) If actual or forecasted cash flows of any reporting unit deteriorate such that its fair value falls below its carrying value, goodwill would likely be impaired and an impairment loss would be recorded immediately as a charge against earnings;
(x) In fiscal 2005, the Company will implement new information systems software within its Cereals, Crackers & Cookies segment. Implementation of the new system could cause disruptions to the segment’s operations.
(xi) Recently the Company has experienced increases in the cost to transport finished goods to customers. The costs have risen because of the increased cost of fuel and because there is a limited supply of freight carriers. In the event this situation worsens, transportation costs will increase significantly and the Company will experience service problems with its customers.
(xii) Other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company, may impact its financial position, including those risks detailed from time to time in its publicly filed documents. These and other factors are discussed in the Company’s Securities and Exchange Commission filings.
The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Ralcorp Holdings, Inc. is a Missouri corporation incorporated on October 23, 1996. Our principal executive offices are located at 800 Market Street, Suite 2900, St. Louis, Missouri 63101. The terms “we,” “our,” “Company,” “Ralcorp,” and “Registrant” as used herein refer to Ralcorp Holdings, Inc. and its consolidated subsidiaries.
We are primarily engaged in the manufacturing, distribution and marketing of store brand (private label) food in the grocery, mass merchandise, drug and foodservice channels. Our products include: ready-to-eat and hot cereal products; store brand and branded crackers and cookies; store brand and value branded snack nuts and chocolate candy; store brand wet-filled products such as salad dressings, mayonnaise, peanut butter, syrups, jams and jellies, and specialty sauces; foodservice and branded frozen griddle products and biscuits; and foodservice and store brand breads, rolls and muffins.
The following sections of this report contain financial and other information concerning our business developments and operations and are incorporated into this Item 1: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Report; and “Acquisitions and Goodwill,” “Supplemental Earnings Statement and Cash Flow Information,” and “Segment Information” in the Notes to the Consolidated Financial Statements filed as part of this document under Item 8.
You can find additional information about Ralcorp including our 10-Ks, 10-Qs, 8-Ks, and other securities filings (and amendments thereto) by visiting our website at http://www.ralcorp.com or the SEC’s website at http://www.sec.gov, from which they can be printed free of charge. The Company’s Corporate Governance Guidelines; Code of Business Conduct and Ethics for Employees, including executive officers; Code of Business Conduct and Ethics for the Board of Directors; and the Charters of the Board’s Audit, Corporate Governance, and Compensation Committees are also available on our website, from which they can be printed free of charge. All of these documents are also available to shareholders at no charge upon request sent to the Company’s Secretary (PO Box 618, St. Louis, MO 63188-0618, Teleph
one: 314-877-7046).
RECENT BUSINESS DEVELOPMENTS
On November 6, 2003, we announced that Richard R. Koulouris was appointed Corporate Vice President, and President of Bremner, Inc. and Nutcracker Brands, Inc.
On November 12, 2003, we announced the signing of a definitive agreement to purchase Bakery Chef (a producer of frozen griddle products, biscuits, breads, rolls and muffins) for $287.5 million.
On December 3, 2003, we announced the completion of the acquisition of Bakery Chef.
On December 4, 2003, we announced that David L. Beré was appointed Corporate Vice President, and President and Chief Executive Officer of Bakery Chef.
On February 18, 2004, we announced the signing of a definitive agreement to purchase the assets of Concept 2 Bakers (a producer of frozen par-baked artisan breads and rolls).
On March 1, 2004, we announced the completion of the purchase of the assets of Concept 2 Bakers.
On September 24, 2004, we announced the appointment of Bill G. Armstrong and our Co-Chief Executive Officers, Kevin J. Hunt and David P. Skarie, to the Board of Directors.
On September 24, 2004, we announced the declaration of a special cash dividend of $1.00 per share to shareholders of record on October 8, 2004.
On October 5, 2004, we entered into a Termination Agreement by and among Vail Resorts, Inc., the Registrant and Apollo Ski Partners, L.P. terminating the Shareholder Agreement dated January 3, 1997, as amended.
On October 15, 2004, we entered into a $150,000,000 five-year floating rate revolving Credit Agreement with JPMorgan Chase Bank; Wachovia Bank, National Association; U.S. Bank National Association; PNC Bank, N.A.; Suntrust Bank; Co Bank, ACB; Commerce Bank, N.A.; and Harris Trust and Savings Bank.
On October 21, 2004, we renewed our existing agreement to sell accounts receivable for a period of one year.
OTHER INFORMATION PERTAINING TO THE BUSINESS OF THE COMPANY
Segments
During fiscal year 2004 our businesses were comprised of four reportable business segments: Cereals, Crackers & Cookies (consisting of Ralston Foods and Bremner, Inc.); Dressings, Syrups, Jellies & Sauces (The Carriage House Companies, Inc.); Snack Nuts & Candy (Nutcracker Brands, Inc.); and Frozen Pancakes, Biscuits & Breads (Bakery Chef). At the beginning of fiscal year 2005, we combined the in-store bakery business unit with the Bakery Chef business unit. Consequently, our Cereals, Crackers & Cookies segment will no longer include our in-store bakery products (primarily cookies and artisan breads). The Frozen Pancakes, Biscuits & Breads segment will be renamed Frozen Bakery Products and will include the Bakery Chef, Lofthouse and Concept 2
Bakers businesses.
We develop, manufacture, and market emulations of various types of branded food products that retailers, mass merchandisers and drug stores sell under their own “store” brands or under value brands. We attempt to manufacture products that are equivalent in quality to branded products. In the event branded producers modify their existing products or successfully introduce new products, we may attempt to emulate the modified or new products. In conjunction with our customers, we develop packaging and graphics that rival the national brands. Our goal is that the only difference consumers perceive when purchasing our store brand products is a notable cost savings when compared to branded counterparts.
Also, we develop, manufacture and market signature frozen value-added bakery products to foodservice, retail and mass merchandising channels. Our frozen products typically are not emulations of branded products. Instead, they are designed to have unique tastes or characteristics that customers desire.
Cereals, Crackers & Cookies
The Cereals, Crackers & Cookies segment is composed of two principal product lines: store brand ready-to-eat and hot cereals (the “Cereal Business”), and store brand and branded crackers and cookies (the “Cracker and Cookie Business”). In fiscal 2004, these product lines accounted for approximately 44% and 56%, respectively, of the Company’s Cereals, Crackers & Cookies segment sales.
Cereal Business
Store brand ready-to-eat cereals are currently produced at three operating facilities and include 14 extruded cereals, 14 flaked cereals, seven biscuit cereals and two shredded cereals. Our Cracker and Cookie Business produces shredded wheat cereal for the Cereal Business. Three additional cereals are produced for the Cereal Business through certain co-manufacturing arrangements. Store brand and branded hot cereals are produced at one facility and include old-fashioned oatmeal, quick oatmeal, regular instant oatmeal, flavored instant oatmeals, farina, instant Ralston® (a branded hot wheat cereal), and 3 Minute Brand® hot cereals. As expected, we sell far more hot cereals in cooler months. We believe we are the largest manufacturer in the U.S. of store brand ready-to-eat and hot cereals.
We produce cereal products based on our estimates of customer orders and consequently maintain, on average, six to eight weeks’ inventory of finished products. Our ready-to-eat and hot cereals are warehoused in and distributed through four independent distribution facilities and two of our cereal plants, and shipped to customers principally via independent truck lines. The ready-to-eat and hot cereal products are sold through internal sales staff and independent food brokers.
Cracker and Cookie Business
We believe our Cracker and Cookie Business is currently the largest manufacturer of store brand crackers and cookies for sale in the United States. The business also produces branded cookies under the Rippin’ Good® brand. The Cracker and Cookie Business also produces Ry Krisp
74; branded crackers. Management positions the Cracker and Cookie Business as a low cost, premier quality producer of a wide variety of store brand crackers and cookies. We produce 54 kinds of store brand cookies and 24 kinds of store brand crackers.
Our Cracker and Cookie Business operates six plants: one produces only Ry Krisp® crackers, two produce store brand crackers and cookies, and three produce store brand and branded cookies. Cracker and Cookie products are largely produced to order and shipped directly to customers. In the fall and winter as consumer consumption of crackers increases, we have the ability to produce to estimated volumes, thereby building product inventories ranging from four to six weeks. Store
brand crackers and cookies are sold through a broker network and internal sales staff. Branded Ry Krisp® crackers and many branded cookies are sold through direct store distributor networks.
Dressings, Syrups, Jellies & Sauces
Our Dressings, Syrups, Jellies & Sauces segment currently operates five plants. Four plants produce a variety of store brand shelf-stable dressings, syrups, jellies, salsas, sauces, and drink mixes under the Major Peters’® brand. One plant produces only peanut butter. We closed the plant in Kansas City, Kansas during the fourth quarter of fiscal 2004. The segment’s products are largely produced to order and shipped directly to customers. However, we maintain wa
rehouses at our plants to hold several weeks’ supply of key products. The products are sold through an internal sales staff and a broker network.
Many wet-filled products are easier to produce than those of the Cereals, Crackers & Cookies segment. However, due to the varied nature of branded counterparts and customer preferences, this segment produces far more variations of each type of product compared to our other segments. For example, we produce up to 40 varieties of many types of salad dressing. At any one time, we maintain over 8,000 active SKUs in this segment.
Snack Nuts & Candy
Our Snack Nuts & Candy segment operates two plants that produce a variety of jarred, canned and bagged snack nuts and one plant that produces chocolate candy. Our snack nut and candy products are largely produced to order and shipped directly to customers; however, we maintain two warehouses where finished snack nut products are stored during peak times of demand. We sell our products through an internal sales staff and a broker network. The segment produces store brand products as well as value branded products under the Nutcracker® and Flavor House® brands. Snack nut sales are seasonal, and the segment sells approximately 45% of its snack nuts in a four-month period between September and December. Profits from the sale of snack nuts are impacted significantly by the cost of raw materials (peanuts and tree nuts). Our chocolate candy products are positioned as premium chocolate products and not as an emulation of a branded product. Consequently, our chocolate candy products are sold to customers who maintain premium store brand product lines.
Frozen Bakery Products
We produce frozen products at seven facilities. One plant produces pancakes and biscuits, one plant produces a variety of griddle products (pancakes, waffles and custom griddle products), one plant produces dry mixes and pancakes, two plants produce breads and rolls, one plant produces cookies and one plant produces muffins. The segment’s griddle, biscuit, muffins and some bread products are largely produced to order and shipped frozen directly to customers or third-party frozen warehouses. Cookies and artisan breads are produced to order and in anticipation of customer needs. These products are stored in onsite frozen warehouses and the majority of the products are shipped frozen.
The Frozen Bakery Products segment sells products through a broker network and a internal sales staff. Products are sold to foodservice customers such as large restaurant chains and distributors of foodservice products, retail grocery chains, and mass merchandisers. We utilize the trademark Krusteaz® for frozen griddle products sold to retail grocery chains and mass merchandisers. Also, we produce in-store bakery cookies under the Lofthouse® and Cascade® brands. Sales of cookies increase significantly in anticipation of holidays.
We sell a significant amount of products to a large international chain of restaurants. The loss of that customer would have a material adverse effect on the Frozen Bakery Products segment.
Ownership of Vail Resorts, Inc.
We own 7,554,406 shares of Vail Resorts, Inc. (Vail) common stock (approximately 21 percent of the shares outstanding as of September 30, 2004). Additionally, two of our Directors, Messrs. Stiritz and Micheletto, are on the Vail Board of Directors. Currently, we utilize the equity method of accounting to reflect our share of Vail’s earnings (or losses) on a non-cash basis.
Vail’s results of operations are highly seasonal and are dependent in part on weather conditions and consumers’ discretionary spending trends. In light of the significance of our ownership in Vail in comparison to our earnings and assets, changes in Vail’s common stock price or earnings can impact our stock price.
Trademarks
We own or use under a license a number of trademarks that are substantially important to our businesses, including Flavor House®, Golden Batch®, Krusteaz®, Lofthouse®, Major Peters’®, Nutcracker®, and Rippin’ Good®.
Competition
Our businesses face intense competition from large branded manufacturers and highly competitive store brand and foodservice manufacturers in each of their product lines. Top branded ready-to-eat and hot cereal competitors include Kellogg, General Mills, Kraft Foods’ Post division, and Quaker Oats (owned by PepsiCo). Large branded competitors of the Cracker and Cookie Business include Nabisco (owned by Kraft) and Keebler (owned by Kellogg), which possess large portions of the branded cracker and cookie categories. The Snack Nuts & Candy segment faces significant competition from one significant branded snack nut producer, Planters (owned by Kraft). Top branded competitors of the Dressings, Syrups, Jellies & Sauces segment include Kraft Foods, Bestfoods
(owned by Unilever), Smucker’s, and Heinz. In addition, privately owned store brand manufacturers provide significant competition in all of the Company’s segments. The Frozen Bakery Products segment faces intense competition from numerous producers of griddle, bread and cookie products.
The industries in which we compete are highly sensitive to both pricing and promotion. Competition is based upon product quality, price, effective promotional activities, and the ability to identify and satisfy emerging consumer preferences. These industries are expected to remain highly competitive in the foreseeable future. Our customers do not typically commit to buy predetermined amounts of products. Moreover, many food retailers utilize bidding procedures to select vendors. Consequently, in any segment up to 50% of our business can be subject to a bidding process conducted by our customers.
Future growth opportunities are expected to depend on our ability to implement strategies for competing effectively in all of our businesses, including strategies relating to emulating branded products, enhancing the performance of our employees, maintaining effective cost control programs, developing and implementing methods for more efficient manufacturing and distribution operations, and developing successful new products, while at the same time maintaining high product quality and aggressive pricing and promotion of our products.
Customers
In fiscal 2004, Wal-Mart Stores, Inc. accounted for approximately 15% of our aggregate net sales. Each of our reporting segments sells products to Wal-Mart. Additionally, we sell our products to retail chains, mass merchandisers, grocery wholesalers, warehouse club stores, drug stores, restaurant chains and foodservice distributors across the country and in Canada.
Seasonality
Due to our equity interest in Vail, which typically yields more than the entire year’s equity income during our second and third fiscal quarters, our net earnings are seasonal. In addition, certain aspects of our operations, especially in the Snack Nuts & Candy and hot cereal portion of the Cereal, Crackers & Cookies segment and in-store bakery portion of the Frozen Bakery Products segment business, are seasonal, with a higher percentage of sales and operating profits expected to be recorded in the first and fourth fiscal quarters. See Note 19 in Item 8 for historical quarterly data.
Employees
We employ approximately 6,000 people in the United States (as of September 30, 2004). Approximately 2,200 of our personnel are covered by sixteen union contracts and, from time to time, the Company has experienced union organizing activities at its non-union plants. The contracts expire at various times from April 1, 2005 to April 12, 2009. During fiscal 2004 certain employees at the Lancaster plant went on strike, but the issues were resolved and a new collective bargaining contract was reached. Notwithstanding the foregoing, we believe relations with our employees, including union employees, are good.
Raw Materials and Energy
Our raw materials consist of ingredients and packaging materials. Our principal ingredients are grain and grain products, flour, corn syrup, sugar, soybean oil, eggs, tomatoes and other fruits, various nuts such as peanuts and cashews, and liquid chocolate. Our principal packaging materials are linerboard cartons, corrugated boxes, plastic bottles, plastic containers and composite cans. We purchase raw materials from local, regional, national and international suppliers. The cost of raw materials used in our products may fluctuate widely due to weather conditions, labor disputes, government regulations, industry consolidation, economic climate, energy shortages, transportation delays, or other unforeseen circumstances. Presently, we do not believe any raw materials
we use are in short supply. However, the supply of raw materials can be negatively impacted by the same factors that can impact their cost. From time to time we will enter into supply contracts for periods up to three years to secure favorable pricing for ingredients and up to five years for packaging materials. We also purchase natural gas, electricity, and steam for use in our processing facilities. Where possible, and when advantageous to the Company, we enter into purchase or other hedging contracts of up to 18 months to reduce the price volatility of these items and the cost impact upon our operations. In fiscal 2004, ingredients, packaging, and energy represented approximately 44%, 22%, and 2%, respectively, of our total cost of goods sold.
Governmental Regulation; Environmental Matters
We are subject to regulation by federal, state and local governmental entities and agencies. As a producer of goods for human consumption, our operations are subject to stringent production and labeling standards. For example, in the early 1990s, new labeling regulations were promulgated and implemented which required us to modify information disclosed on our packaging. Recently, new labeling regulations relating to trans fatty acids have been adopted by regulatory bodies. Management expects that changes in packaging and formulations can be implemented without a material adverse impact on our businesses if existing packaging stock can be used during a transition period while formulas are modified.
Our operations, like those of similar businesses, are subject to various federal, state and local laws and regulations with respect to environmental matters, including air and water quality, underground fuel storage tanks, waste handling and disposal, and other regulations intended to protect public health and the environment. While it is difficult to quantify with certainty the potential financial impact of actions regarding expenditures for environmental matters, particularly remediation, and future capital expenditures for environmental control equipment, in the opinion of management, based upon the information currently available, the ultimate liability arising from such environmental matters, taking into account established accruals for estimated liabilities, s
hould not have a material effect on our consolidated results of operations, financial position, capital expenditures or other cash flows. In fiscal 2005 or 2006 we may be required to spend approximately $4.5 million to fund the building of a waste water treatment facility for use by the Dressings, Syrups, Jellies & Sauces segment.
Contract Manufacturing
From time to time, any of our segments may provide products for branded companies. Often such products are new branded products for which branded companies lack capacity. Typically, branded companies retain ownership of the formulas and trademarks related to products we produce for them. Also, the contract manufacturing business tends to be inconsistent in volume. Often, initial orders can be significant and favorably impact a fiscal period but later volume will level off or the branded company will ultimately produce the product internally and cease purchasing product from us.
Our principal properties are our manufacturing locations. Shown below are our principal owned and leased properties. We also lease our principal executive offices and research and development facilities in St. Louis, Missouri. Management believes its facilities are suitable and adequate for the purposes for which they are used and are adequately maintained. We believe each segment’s combination of facilities provides adequate capacity for current and anticipated future customer demand.
| |
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Size |
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Owned/ |
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Production |
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|
|
|
Plant Locations |
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(Sq. Ft.) |
|
Leased |
|
Lines |
|
Products |
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| |
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|
|
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|
|
|
|
|
|
Cereals, Crackers & Cookies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battle Creek, MI |
|
|
476,896 |
|
|
Owned |
|
|
7 |
|
|
Ready-to-Eat Cereal |
|
|
Cedar Rapids, IA |
|
|
150,000 |
|
|
Owned |
|
|
5 |
|
|
Hot Cereal |
|
|
Lancaster, OH |
|
|
478,719 |
|
|
Owned |
|
|
11 |
|
|
Ready-to-Eat Cereal |
|
|
Sparks, NV |
|
|
243,000 |
|
|
Owned |
|
|
7 |
|
|
Ready-to-Eat Cereal |
|
|
Princeton, KY |
|
|
700,000 |
|
|
Owned |
|
|
6 |
|
|
Crackers and Cookies |
|
|
Poteau, OK |
|
|
250,000 |
|
|
Owned |
|
|
5 |
|
|
Crackers and Cookies |
|
|
Minneapolis, MN |
|
|
40,000 |
|
|
Owned |
|
|
3 |
|
|
Crackers |
|
|
Tonawanda, NY |
|
|
95,000 |
|
|
Owned |
|
|
3 |
|
|
Cookies |
|
|
Ripon, WI (two plants) |
|
|
350,000 |
|
|
Owned |
|
|
11 |
|
|
Cookies |
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| |
|
|
|
|
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|
|
|
|
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|
|
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Snack Nuts & Candy |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Billerica, MA |
|
|
80,000 |
|
|
Owned |
|
|
8 |
|
|
Snack Nuts |
|
|
Dothan, AL |
|
|
135,000 |
|
|
Leased |
|
|
13 |
|
|
Snack Nuts |
|
|
Womelsdorf, PA |
|
|
100,000 |
|
|
Owned |
|
|
5 |
|
|
Candy |
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| |
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