1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------------------------------------------March 31, 2000
--------------------------------------------------
or
[ ]/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to___________________________________from to
--------------- ---------------------------------
Commission File Number: 0-15638
-----------------------------------------------------------------------------------------------------------------
MICHAEL FOODS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0498850
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 324, Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, MN, 55416
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(612) 546-1500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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. [ X ]Yes [ ]No
The number of shares outstanding of the registrant's Common Stock, $.01
par value, as of August 6, 1999May 8, 2000 was 20,249,62419,740,438 shares.
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PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,================================================================================================================================
March 31, December 31,
ASSETS 2000 1999 1998
- ------ ------------ ------------------------------- ---------------
CURRENT ASSETS
Cash and equivalents $ 699,0004,526,000 $ 2,047,0004,961,000
Accounts receivable, less allowances 101,522,000 97,639,00091,567,000 92,493,000
Inventories 79,881,000 74,250,00078,398,000 71,197,000
Prepaid expenses and other 4,883,000 3,884,000
------------ ------------4,123,000 4,604,000
---------------- ---------------
Total current assets 186,985,000 177,820,000178,614,000 173,255,000
PROPERTY, PLANT AND EQUIPMENT-AT COST
Land 4,336,000 4,336,0004,106,000 4,104,000
Buildings and improvements 105,706,000 105,567,000133,364,000 133,778,000
Machinery and equipment 366,557,000 328,067,000
------------ ------------
476,599,000 437,970,000363,551,000 357,724,000
---------------- ---------------
501,021,000 495,606,000
Less accumulated depreciation 204,572,000 187,759,000
------------ ------------
272,027,000 250,211,000216,577,000 208,807,000
---------------- ---------------
284,444,000 286,799,000
OTHER ASSETS
Goodwill, net 118,450,000 120,172,000
Investments in115,867,000 116,729,000
Joint Venturesventures and other assets 23,840,000 3,313,000
------------ ------------
142,290,000 123,485,000
------------ ------------
$601,302,000 $551,516,000
============ ============20,574,000 21,134,000
---------------- ---------------
136,441,000 137,863,000
---------------- ---------------
$599,499,000 $597,917,000
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 8,067,0003,063,000 $ 10,663,0003,130,000
Accounts payable 47,591,000 44,376,00050,364,000 47,009,000
Accrued Liabilitiesliabilities
Compensation 8,414,000 11,034,0009,051,000 13,143,000
Insurance 7,235,000 7,369,0007,717,000 7,229,000
Customer programs 20,719,000 19,624,00019,947,000 20,999,000
Income taxes 15,870,000 11,805,000
Other 26,606,000 23,457,000
------------ ------------15,259,000 18,176,000
---------------- ---------------
Total current liabilities 118,632,000 116,523,000121,271,000 121,491,000
LONG-TERM DEBT, less current maturities 204,466,000 155,444,000181,534,000 175,404,000
DEFERRED INCOME TAXES 34,389,000 35,400,00036,745,000 36,423,000
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock 202,000 211,000197,000 203,000
Additional paid-in capital 102,093,000 119,871,00090,315,000 102,777,000
Retained earnings 141,520,000 124,067,000
------------ ------------
243,815,000 244,149,000
------------ ------------
$601,302,000 $551,516,000
============ ============170,644,000 162,577,000
Accumulated comprehensive income (loss) (1,207,000) (958,000)
---------------- ---------------
259,949,000 264,599,000
---------------- ---------------
$599,499,000 $597,917,000
================ ===============
===============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
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MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30,March 31, (Unaudited)
===============================================================================================================================
2000 1999
1998
------------ -------------------------- -------------
Net sales $258,031,000 $243,685,000$251,926,000 $253,378,000
Cost of sales 207,892,000 199,231,000
------------ ------------205,071,000 211,247,000
-------------- -------------
Gross profit 50,139,000 44,454,00046,855,000 42,131,000
Selling, general and administrative expenses 27,432,000 22,371,000
------------ ------------27,956,000 25,044,000
-------------- -------------
Operating profit 22,707,000 22,083,00018,899,000 17,087,000
Interest expense, net 2,801,000 2,580,000
------------ ------------2,950,000 2,820,000
-------------- -------------
Earnings before income taxes 19,906,000 19,503,00015,949,000 14,267,000
Income tax expense 8,160,000 8,190,000
------------ ------------6,460,000 5,850,000
-------------- -------------
NET EARNINGS $ 11,746,0009,489,000 $ 11,313,000
============ ============8,417,000
============== =============
Net Earnings Per Share
Basic $ 0.570.47 $ 0.520.40
Diluted $ 0.570.47 $ 0.51
============ ============0.40
============== =============
Weighted average shares outstanding
Basic 20,463,000 21,939,00020,158,000 21,009,000
Diluted 20,702,000 22,337,000
============ ============20,371,000 21,230,000
============== =============
===============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
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MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
SixCASH FLOWS
Three Months Ended June 30,March 31, (Unaudited)
=============================================================================================================================
2000 1999
1998
------------ ---------------------------- ---------------
Net sales $511,409,000 $489,274,000
Costcash provided by operating activities $ 16,424,000 $ 22,199,000
Cash flows from investing activities:
Capital expenditures (8,131,000) (15,308,000)
Investments in joint ventures and other assets 14,000 (9,169,000)
---------------- ---------------
Net cash used in investing activities (8,117,000) (24,477,000)
Cash flows from financing activities:
Payments on long-term debt (37,537,000) (36,526,000)
Proceeds from long-term debt 43,600,000 52,000,000
Proceeds from issuance of sales 419,139,000 404,664,000
------------ ------------
Gross profit 92,270,000 84,610,000
Selling, generalcommon stock 86,000 219,000
Repurchase of common stock (13,470,000) (9,518,000)
Dividends (1,421,000) (1,265,000)
---------------- ---------------
Net cash provided by (used in) financing activities (8,742,000) 4,910,000
---------------- ---------------
Net increase (decrease) in cash and administrative expenses 52,476,000 45,515,000
------------ ------------
Operating profit 39,794,000 39,095,000
Interest expense, net 5,621,000 5,344,000
------------ ------------
Earnings before income taxes 34,173,000 33,751,000
Income tax expense 14,010,000 14,180,000
------------ ------------
NET EARNINGSequivalents (435,000) 2,632,000
Cash and equivalents at beginning of year 4,961,000 2,047,000
---------------- --------------
Cash and equivalents at end of period $ 20,163,0004,526,000 $ 19,571,000
============ ============
Net Earnings Per Share
Basic $ 0.97 $ 0.89
Diluted $ 0.96 $ 0.88
============ ============
Weighted average shares outstanding
Basic 20,736,000 21,892,000
Diluted 20,966,000 22,273,000
============ ============4,679,000
================ ==============
===============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
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MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Unaudited)
1999 1998
------------ ------------
Net cash provided by operating activities $ 35,776,000 $ 40,124,000
Cash flows from investing activities:
Capital expenditures (41,419,000) (34,560,000)
Investments in joint ventures and other assets (21,017,000) 207,000
------------ ------------
Net cash used in investing activities (62,436,000) (34,353,000)
Cash flows from financing activities:
Payments on long-term debt (85,374,000) (5,033,000)
Proceeds from long-term debt 131,800,000 700,000
Proceeds from issuance of common stock 523,000 1,817,000
Repurchase of common stock (18,927,000) --
Dividends (2,710,000) (2,406,000)
------------ ------------
Net cash provided by (used in) financing activities 25,312,000 (4,922,000)
------------ ------------
Net increase (decrease) in cash and equivalents (1,348,000) 849,000
Cash and equivalents at beginning of year 2,047,000 4,038,000
------------ ------------
Cash and equivalents at end of period $ 699,000 $ 4,887,000
============ ============
See accompanying notes to condensed consolidated financial statements.
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
====================================================================================================================================
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.
Michael Foods, Inc. (the "Company") utilizes a fiscal year consisting of either
52 or 53 weeks, ending on the Saturday nearest to December 31 each year. The
quarters ended June 30,March 31, 2000 and 1999 and 1998 each included thirteen weeks of
operations. For clarity of presentation, the Company has described both periods
presented as if the quarters ended on June 30.March 31.
Preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
1999March 31,
2000 and the results of operations and cash flows for the three months ended
March 31, 2000 and 1999. The results of operations for the three and six month periods ended
June 30, 1999 and 1998 and cash flows for the six months ended
June 30, 1999
and 1998. The results of operations for the six months ended June 30, 1999March 31, 2000 are not necessarily indicative of the results for the full year.
The Company's basic net earnings per share is computed by dividing net earnings
by the weighted average number of outstanding common shares. The Company's
diluted net earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares and common share
equivalents relating to stock options, when dilutive. Options to purchase
852,767 and 826,724834,070 shares of Common Stock, with a weighted average exercise price of
$24.78,$24.70, which were outstanding during the three and six month periodsperiod ended June 30, 1999,March 31,
2000, were excluded from the computation of common share equivalents for that
period because they were anti-dilutive. Options to purchase 8,000 and 4,000769,165 shares of
common stock,Common Stock, with a weighted average exercise price of $29.75,$24.83, were outstanding
during the three and six month periodsperiod ended June 30, 1998,March 31, 1999, but were excluded from the
computation of common share equivalents for that period because they were
anti-dilutive.
NOTE B - INVENTORIES
Inventories, other than flocks, are stated at the lower of cost (determined on a
first-in, first-out basis) or market. Flock inventory represents the cost of
purchasing and raising flocks to laying maturity, at which time their cost is
amortized to operations over their expected useful life of generally one to two
years, assuming no salvage value.
Inventories consist of the following:
June 30,March 31, December 31,
2000 1999
1998
------------------------- ------------
Raw materials and supplies $19,040,000 $15,389,000$17,178,000 $15,720,000
Work in process and finished goods 39,984,000 36,977,00040,240,000 35,447,000
Flocks 20,857,000 21,884,000
----------- -----------
$79,881,000 $74,250,000
=========== ===========20,980,000 20,030,000
-------------- ------------
$78,398,000 $71,197,000
============== ============
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
====================================================================================================================================
(Unaudited)
NOTE C - COMMITMENTS AND CONTINGENCIES
Use of Estimates
Preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
License AgreementLICENSE AGREEMENT
The Company has an exclusive license agreement for a patented process for the
production and sale of extended shelf-life egg products. Under the license
agreement, the Company has the right to defend and prosecute infringement of the
licensed patents. The U.S. Federal Court of Appeals has upheld the validity of
the four patents subject to the license agreement, but, subsequently, a patent
examiner at the U.S. Patent and Trademark Office ("PTO") rejected the patents.
The Company is appealingIn August 1999, the decisionexaminer's rejections were largely overturned by the Board
of Appeals and Interferences of the examiner and believesPTO. Counsel advises that the validity
of thefour patents
will ultimately be upheld. Duringreissued in the appeal process, the
patents remain valid and in full force and effect.near future. These patents are scheduled to expire in
2006.
LitigationLITIGATION
The Company is engaged in routine litigation incidental to its business.
Management believes it will not have a material effect upon its consolidated
financial position, liquidity or results of operations.
NOTE D - SHAREHOLDERS' EQUITY
During the three months ended June 30,first quarters of 2000 and 1999 the Company repurchased 475,300609,400 and
505,300 shares of Common Stock under a share repurchase program at an average price of
$22.62 per share. Such repurchaseswhich began in
July 1998. Through June 30, 1999,
the Company had repurchased 1,902,800 shares of Common Stock at an average
price of $22.60 per share.1998 and which was expanded in February 2000.
NOTE E - RISKS AND UNCERTAINTIES
The Year 2000 issue relates to limitations in computer systemsCOMPREHENSIVE INCOME
Comprehensive income consists of net earnings and applications
that may prevent proper recognition offoreign currency translation
adjustments. Total comprehensive income was $9,240,000 and $8,417,000 for the
year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable untilthree months ended March 31, 2000 and thereafter. If Year 2000 modifications are not
properly completed either by the Company, or entities the Company conducts
business with, the Company's net sales and financial condition could be
adversely effected.1999.
NOTE F - INTERNATIONAL INVESTMENTS, DAIRY PRODUCTS ACQUISITION AND SUBSEQUENT
EVENT
During the six months ended June 30, 1999, the Company made two investments in
Europe to further its leadership in global egg products processing. The first
investment was a 25% interest in Belovo, S. A., a specialty egg products
company based in Belgium. The second investment was a 50/50 joint venture with
the founding shareholders of Belovo forming The Lipid Company, a company
involved in the extraction of phospholipids from egg yolks for use in the field
of nutraceuticals.
In May 1999, the Company's Kohler Mix Specialties, Inc. subsidiary acquired
certain operating assets, a customer list and a long-term lease, of a dairy mix
plant from H. P. Hood Inc., with an option to purchase the building and land at
the lease's termination. The plant mainly produces ultra-high temperature
pasteurized dairy mixes for foodservice customers in the eastern United States.
The facility generated 1998 net sales of approximately $37 million.
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
====================================================
(Unaudited)
NOTE F - INTERNATIONAL INVESTMENTS, DAIRY PRODUCTS ACQUISITION AND SUBSEQUENT
EVENT, CONT.
In July 1999, the Company formed a Canadian joint venture, Trilogy Egg
Products, Inc., with two partners, Canadian Inovatech, Inc. and The Egg
Producers Co-op Ltd. Trilogy Egg Products, Inc. will sell value-added egg
products in Canada.
NOTE G - BUSINESS SEGMENTS
The Company has adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information.
The Company operates in four reportable segments - Egg Products, Refrigerated
Distribution, Dairy Products and Potato Products. Certain financial information
on the Company's operating segments is as follows (unaudited, in thousands):
Egg Refrigerated Dairy Potato
Products Distribution Products Products Corporate Total
-------- ------------ -------- -------- --------- --------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2000:
External net sales $153,553 $56,248 $28,029 $14,096 N/A $251,926
Intersegment sales 2,885 18 485 555 N/A 3,943
Operating profit (loss) 15,121 4,305 (186) 1,301 (1,642) 18,899
THREE MONTHS ENDED JUNE 30,MARCH 31, 1999:
External net sales $150,488 $ 51,427 $42,091 $14,025$152,150 $59,122 $28,662 $13,444 N/A $258,031$253,378
Intersegment sales 3,794 24 310 5915,694 21 268 607 N/A 4,7196,590
Operating profit (loss) 19,712 2,534 2,057 1,367 (2,963) 22,707
THREE MONTHS ENDED
JUNE 30, 1998:
External net sales $144,373 $ 49,841 $36,719 $12,752 N/A $243,685
Intersegment sales 4,456 43 480 479 N/A 5,458
Operating profit (loss) 19,463 1,763 2,108 457 (1,708) 22,083
SIX MONTHS ENDED JUNE
30, 1999:
External net sales $302,638 $110,549 $70,753 $27,469 N/A $511,409
Intersegment sales 9,488 45 578 1,198 N/A 11,309
Operating profit (loss) 34,694 4,584 2,953 2,559 (4,996) 39,794
SIX MONTHS ENDED JUNE
30, 1998:
External net sales $296,180 $102,866 $64,867 $25,361 N/A $489,274
Intersegment sales 10,386 74 935 958 N/A 12,353
Operating profit (loss) 34,793 3,557 3,190 1,082 (3,527) 39,09514,982 2,050 896 1,192 (2,033) 17,087
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(Unaudited)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999MARCH 31, 2000 VS THREE MONTHS ENDED JUNE 30, 1998MARCH 31, 1999
RESULTS OF OPERATIONS
Readers are directed to Note GF - Business Segments for data on the unaudited
financial results of the Company's four business segments for the three months
ended June 30, 1999March 31, 2000 and 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
========================================================
THREE MONTHS ENDED JUNE 30, 1999 VS THREE MONTHS ENDED JUNE 30, 1998, CONT.
RESULTS OF OPERATIONS, CONT.1999.
Egg Products Division net sales for the 19992000 period reflected unit sales
increases, particularly for value-added products, which more than offset
significant deflationary pricing impacts on certain products.products and the planned
decline of shell egg sales. Sales were particularly strong for extended
shelf-life liquid eggs, precooked frozen omelets, patties and curds.curds, and dried
products. Egg prices decreased approximately 12%15% compared to secondfirst quarter 19981999
levels, as reported by Urner Barry Publications - a widely quoted industry
pricing service. This decrease helped reducereduced the cost of purchased eggs, while also
reducing selling prices for certain egg products and shell eggs. Approximately
two-thirds of the Division's annual egg needs are purchased under contracts, or
in the spot market. While a portion of these eggs are secured under fixed price
contracts, a majority are priced according to the cost of grain inputs or to egg
market prices as reported by Urner Barry. Approximately one-third of annual egg
needs are sourced from internal flocks, where feed costs typically represent
roughly two-thirds of the cost of producing such eggs. Feed costs were lower in
the 19992000 period, compared to the 19981999 period, due to lower prices for both corn
and soybean meal. Decreased egg costs, for both internally and externally
procured eggs, in the 19992000 period, compared to the 19981999 period, were more than offset by
pricing weakness, creating margin pressure for certain egg products.
An unusual approximate four week period in the 2000 period saw open market egg
prices rise sharply and then decline sharply. The impact of increased costs
without a commensurate increase in product pricing reduced margins for certain
industrial egg products. However, profitability for value-added egg products
increased during the first quarter of 2000. The net effect of these factors was
a slight increase in divisional operating profit.
Refrigerated Distribution Division net sales for the 19992000 period reflected
strong unit sales increases, with cheese, butter and Mexican itemsjuice showing particular
strength. Salesstrength, which was more than offset by strong deflationary impacts from a
year-over-year decline in the national butterfat market. Unit sales growth
resulted from a brand repositioning over the past two years, and a more recentbroadening
consumer advertising campaign in selected markets, along withnotable new account activity
and new product introductions. The volume growth, along with a decline in
certain product costs related to the national butterfat market, resulted in
margin expansion in the 19992000 period.
The significant
Dairy Products Division net sales increase for the 19992000 period reflected stronghigher unit
sales gains for core dairydue to strong creamer product sales, ice milk mix and creamer productssales growth with
national accounts and the effect of two months'impact of sales from a plant acquired during the1999's
second quarter. SalesHowever, unit sales were weakflat year-over-year for certain
cartoned specialty dairy products as a result ofdue to the product line having not fully
recovered from a recall in 1999's first
quarter.1999. Also, industrial (tanker) mix volume declined
substantially year-over-year as a result of the loss of a major customer in this
segment in late 1999. Deflationary impacts from a year-over-year decline in the
national butterfat market offset the overall divisional volume growth.
Divisional operating profit declined in the 19992000 period largely as a result of
incremental operating expenses incurred post-recall and due to above average
labor and freight costs.inefficient plant operations. Labor costs were highabove average due, in part, to
increased training costs
for newer production personnel and overtime incurred to meet orders in a timely
manner during a strong demand period.manner.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
================================================================================
THREE MONTHS ENDED MARCH 31, 2000 VS THREE MONTHS ENDED MARCH 31, 1999, CONT.
RESULTS OF OPERATIONS, CONT.
Potato Products Division net sales for the 19992000 period reflected a strong unit sales
increase, particularly for foodserviceretail hash brown and mashed items. New account
activity, same-account sales growth and new product introductions all
contributed to
the sales gain. The strong operating profit increase in the 19992000 period resulted primarily from
the volume growth, asan improved sales mix, and efficient plant operations at the
main potato processing facility benefited fromfacility. Profit growth was constrained by increased
spending to stimulate trade and consumer response to the increased production
throughput.Division's products.
The increase in gross profit margin of the Company for the period ended June
30, 1999,March
31, 2000, as compared to the results of the same period in 1998,1999, reflected the
factors discussed above, particularly the strength in the Refrigerated
Distribution and Potato Products segments. It is management's strategy to
increase value-added product sales as a percent of total sales over time, while
decreasing commodity-sensitive products' contribution to consolidated sales.
These efforts historically have been beneficial to gross profit margins in most
periods. Selling, general and administrative expenses increased as a percent of
sales in the period ended June 30, 1999,March 31, 2000, as compared to the results of the same
period in 1998. Expenses increased due to amortization of the costs
associated with the
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
========================================================
THREE MONTHS ENDED JUNE 30, 1999 VS THREE MONTHS ENDED JUNE 30, 1998, CONT.
RESULTS OF OPERATIONS, CONT.
Company's information systems upgrade project, amortization of a non-compete
agreement related to a Dairy Products acquisition, and additional sales and
marketing efforts.
SIX MONTHS ENDED JUNE 30, 1999 VS SIX MONTHS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS
Readers are directed to Note G - Business Segments for data on the unaudited
financial results of the Company's four business segments for the six months
ended June 30, 1999 and 1998.
Egg Products Division net sales for the 1999 period reflected unit sales
increases, particularly for value-added products, which more than offset
significant deflationary pricing impacts on certain products. Sales were
particularly strong for precooked frozen omelets, patties and curds. Egg
prices decreased approximately 9% compared to first half 1998 levels, as
reported by Urner Barry Publications. This decrease helped reduce the cost of
purchased eggs, while also reducing selling prices for certain egg products and
shell eggs. Approximately two-thirds of the Division's annual egg needs are
purchased under contracts, or in the spot market. While a portion of these
eggs are secured under fixed price contracts, a majority are priced according
to the cost of grain inputs or to egg market prices as reported by Urner Barry.
Approximately one-third of annual egg needs are sourced from internal flocks,
where feed costs typically represent roughly two-thirds of the cost of
producing such eggs. Feed costs were lower in the 1999 period, compared to the
1998 period, due to lower prices for both corn and soybean meal. Decreased egg
costs, for both internally and externally procured eggs, in the 1999 period,
compared to the 1998 period, were more than offset by pricing weakness,
creating margin pressure for certain egg products.
Refrigerated Distribution Division net sales for the 1999 period reflected
strong unit sales increases, with cheese and Mexican items showing particular
strength. Sales growth resulted from a brand repositioning over the past two
years and a more recent consumer advertising campaign in selected markets,
along with new account activity and new product introductions. The volume
growth, along with a decline in product costs related to the national butterfat
market, resulted in margin expansion in the 1999 period.
The Dairy Products Division net sales increase for the 1999 period reflected
strong unit sales gains for core dairy mix and creamer products and the effect
of two months' of sales from a plant acquired during the first half of 1999.
Sales were weak for cartoned specialty dairy products as a result of a recall
of certain items in 1999's first quarter. Divisional operating profit declined
in the 1999 period as a result of incremental operating expenses incurred as a
result of the recall and due to above average labor and freight costs. Labor
costs were high due, in part, to training costs for newer production personnel
and overtime incurred to meet orders in a timely manner.
Potato Products Division net sales for the 1999 period reflected a strong unit
sales increase, particularly for foodservice mashed items. New account
activity, same-account sales growth and new product introductions all
contributed to the sales gain. The strong operating profit increase in the
1999 period resulted primarily from the volume growth, as plant operations at
the main potato processing facility benefited from the increased production
throughput.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
========================================================
SIX MONTHS ENDED JUNE 30, 1999 VS SIX MONTHS ENDED JUNE 30, 1998, CONT.
RESULTS OF OPERATIONS, CONT.
The increase in gross profit margin of the Company for the period ended June
30, 1999, as compared to the results of the same period in 1998, reflected the
factors discussed above, particularly the strength in the Refrigerated
Distribution and Potato Products segments. It is management's strategy to
increase value-added product sales as a percent of total sales over time, while
decreasing commodity-sensitive products' contribution to consolidated sales.
These efforts historically have been beneficial to gross profit margins in most
periods.
Selling, general and administrative expenses increased as a percent of sales in
the period ended June 30, 1999, as compared to the results of the same period
in 1998. Expenses increased due to amortization of the costs associated
with the Company's information systems upgrade project, amortization of a
non-compete agreement related to a Dairy Products acquisition, and additional
sales and marketing efforts.
GENERAL
Certain of the Company's products are sensitive to changes in commodity prices.
The Company's Egg Products Division derived less than 5%3% of the Division's net
sales for the first sixthree months of 19992000 from shell eggs, which are sensitive to
commodity price swings. Value-added extended shelf-life liquid egg products
lines and precooked egg products accounted for approximately 50%60% of the Egg
Products Division's net sales. The remainder of Egg Products Division sales is
derived from the sale of other egg products, which vary from being
commodity-sensitive to value-added. Gross profit from shell eggs is primarily
dependent upon the relationship between shell egg prices and the cost of feed,
both of which can fluctuate significantly. Shell egg pricing in the 19992000 period
was approximately 9%15% below 19981999 levels as measured by a widely quoted pricing
service. Gross profit margins for extended shelf-life liquid eggs, egg
substitutes, and precooked egg products are less sensitive to commodity price
fluctuations than are other egg products or shell eggs.
The Company's Refrigerated Distribution Division derives approximately 70% of
its net sales from refrigerated products produced by others, thereby reducing
the effects of commodity price swings. The balance of refrigerated distribution
sales are from shell eggs, some of which are produced by the Egg Products
Division and are sold on a distribution, or non-commodity, basis by the
Refrigerated Distribution Division.
The Dairy Products Division sells its products primarily on a cost-plus basis
and, therefore, the Division's earnings are not typically affected greatly by
raw ingredient price fluctuations, except over short time periods.
The Potato Products Division typically purchases 70%-90%75%-95% of its raw potatoes
from contract producers under annual contracts. The remainder is purchased at
market prices to satisfy short-term production requirements or to take advantage
of market prices when they are lower than contracted prices. Moderate variations
in the purchase price of raw materials or the selling price per pound of
finished products can have a significant effect on Potato Products Division
operating results.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
================================================================================
THREE MONTHS ENDED MARCH 31, 2000 VS THREE MONTHS ENDED MARCH 31, 1999, CONT.
GENERAL, CONT.
Inflation is not expected to have a significant impact on the Company's
business. The Company generally has been able to offset the impact of inflation
through a combination of productivity gains and price increases.
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12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
========================================================
CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and capital expenditures have been, and will likely continue to be,
a significant capital requirement. The Company plans to continue to invest in
state-of-the-art production facilities to enhance its competitive position.
Historically, the Company has financed its growth principally from internally
generated funds, bank borrowings, issuance of senior debt and the sale of Common
Stock. The Company believes that these financing alternatives will continue to
meet its anticipated needs.
During the first half of 1999, the Company made two investments in Europe. The
first investment was a 25% interest in Belovo, S. A., a specialty egg products
company based in Belgium. The second investment was a 50/50 joint venture with
the founding shareholders of Belovo forming The Lipid Company, a company
involved in the extraction of phospholipids from egg yolks for use in the field
of nutraceuticals. The cash paid at the time of closing the transactions was
approximately $9.3 million, which was funded through the Company's bank line of
credit. The investments will expand the Company's leadership position in
global egg products processing.
Also in the first half of 1999, the Company acquired certain operating assets
and the long-term lease of a dairy products plant in Connecticut. The cash
paid at time of closing was approximately $5.7 million, which was funded
through the Company's bank line of credit. This transaction greatly expanded
the Company's Dairy Products business in the eastern United States.
The Company invested $41,419,000$8,100,000 in capital expenditures during the sixthree months
ended June 30, 1999.March 31, 2000. The Company plans to spend approximately $75,000,000 in
total$55,000,000 on
capital expenditures in 1999,2000, the majority of which is to expand or update
production capacity for value-added products.
The Company has an unsecured line of credit for $80,000,000 with its principal
banks.banks which expires in February 2002. As of June 30, 1999, $70,900,000March 31, 2000, $48,500,000 was
outstanding under this line of credit.
In July 1998, the Company's Board of Directors authorized the purchase of up to
two million shares of Common Stock on the open market.market or in privately negotiated
transactions. In February 2000, the Board authorized an additional purchase of
up to two million shares of Common Stock on the open market or in privately
negotiated transactions. Through June 30, 1999,March 31, 2000, the Company had repurchased
1,902,8002,512,200 shares of Common Stock for $43,005,000.$56,466,000. During the first quarter of
2000 the Company repurchased 609,400 shares of Common Stock.
SEASONALITY
Consolidated quarterly operating results are affected by the seasonality of the
Company's net sales and operating profits. Specifically, shell egg prices
typically rise seasonally in the first and fourth quarters of the year due to
increased demand during holiday periods. Generally, refrigerated distribution
operations experience higher net sales and operating profits in the fourth
quarter, coinciding with incremental consumer demand during the holiday season.
Net sales and operating profits from dairy operations typically are
significantly higher in the second and third quarters due to increased
consumption of ice milk and ice cream products during the summer months.
Operating profits from potato products are less seasonal, but tend to be higher
in the second half of the year coinciding with the potato harvest.
YEAR 2000
The Company's Year 2000 initiative is separated into several projects: legacy
systems, personal computer components, wide area network components, local area
network components, and non-computer components. The approach for each of
these projects includes an inventory of 2000
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13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
========================================================
YEAR 2000, CONT.
components, an assessment of Year 2000 compliance of each component, and
identification and execution of corrective actions for items that fail the
assessment phase.
In 1995, the Company undertook implementation of the SAP Enterprise Resource
Planning system as a means to present a single interface with customers and to
have better information available for management to make more effective
decisions. The SAP system encompasses all significant processes and has been
certified Year 2000 compliant by an outside party. The SAP system will be
implemented for three of the five operating companies prior to the end of 1999.
The legacy systems of the remaining two operating companies are certified as
Year 2000 compliant. Beyond the SAP project, several non-critical legacy
systems are being addressed throughout 1999. The costs to modify and test any
remaining legacy systems, if necessary, would not be material to the
consolidated financial position, liquidity or results of operations of the
Company.
The Company completed corrective actions for all personal computer hardware in
late 1998. An evaluation and any needed remediation of personal computer
software is expected to be completed by September 1999. The remaining
information technology systems for wide area networking and local area
networking are currently being assessed for Year 2000 compliance, with
corrective action to be completed by September 1999. The Company's overall
business risk from these systems is not significant.
The Company's non-computer components have been assessed for Year 2000
compliance. The assessment of these systems was completed in May 1999. Any
corrective actions are expected to be completed by September 1999.
The Year 2000 projects also include an evaluation of critical vendors,
suppliers, brokers and customers relative to their Year 2000 readiness.
Information is being solicited from these important business partners and will
be evaluated as it is received. Electronic data communications with customers
have been tested.
Based upon the assessment completed at this time, the Company does not
anticipate any significant Year 2000 issues. All Year 2000 projects are
generally proceeding according to management's expectations. However, if there
are significant delays in their completion, or if major suppliers or customers
experience Year 2000 issues with their systems, such issues could adversely
affect the operations of the Company. After assessing the information received
from its business partners and evaluating the status of the Year 2000 projects,
the Company will develop an appropriate contingency plan, as required. It is
anticipated that this plan will be developed during the fourth quarter of 1999.
Achieving Year 2000 compliance for the Company will largely be a by-product of
the SAP system installation. The costs of achieving Year 2000 compliance for
software not affected by the SAP system, computer components, and non-computer
components is estimated to be less than $3,000,000, of which approximately
$2,500,000 has already been incurred and expensed through June 30, 1999.================================================================================
FORWARD-LOOKING STATEMENTS
Certain items in this Form 10-Q are forward-looking statements, which are made
in reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking 13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
========================================================
FORWARD-LOOKING STATEMENTS, CONT.
statements are subject to numerous
risks and uncertainties, including the
possibility that capital projects and the Year 2000 initiative may not be
completed as rapidly as management expects. Additional risks and uncertainties
include variances in the demand for the Company's
products due to consumer developments and industry developments, as well as
variances in the costs to produce such products, including normal volatility in
egg and feed costs. The Company's actual financial results could differ
materially from the results estimated by, forecasted by, or implied by the
Company in such forward-looking statements.
ItemITEM 3. Quantitative and Qualitative Disclosures about Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's market risk during the sixthree
month period ended June 30, 1999.March 31, 2000.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Shareholders of Michael Foods, Inc. was held on
April 29, 1999. The items voted upon and the results of the vote follow:
1. The election of eleven persons to serve as directors until the next
annual election and until their successors are duly elected and qualified:
For Withhold Authority
---------- ------------------
Maureen B. Bellantoni 15,390,929 39,909
Richard A. Coonrod 15,393,280 37,558
Daniel P. Dillon 15,393,460 37,378
Jerome J. Jenko 15,392,335 38,503
Arvid C. Knudtson 15,383,486 47,352
Joseph D. Marshburn 15,387,405 43,433
Jeffrey J. Michael 15,390,410 40,428
Margaret D. Moore 15,391,454 39,384
Gregg A. Ostrander 15,392,360 38,478
Arthur J. Papetti 15,393,990 36,848
Stephen T. Papetti 15,393,990 36,848
2. Proposal to ratify an amendment to the 1997 Stock Incentive Plan of
Michael Foods, Inc. and Affiliated Companies:
For Against Abstain
---------- --------- -------
14,063,827 1,323,290 43,721
3. Proposal to ratify the appointment of Grant Thornton LLP as independent
auditors for 1999:
For Against Abstain
---------- ------- -------
15,371,790 47,645 11,403
14
15
ItemITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(a) There were no reports(b) Reports on Form 8-K
The Company filed duringa Form 8-K on January 25, 2000 disclosing its decision to end
a process to explore strategic alternatives to enhance shareholder value, along
with strong preliminary financial results for 1999.
The Company filed a Form 8-K on March 1, 2000 disclosing an authorization by the
quarter ended June 30,
1999.
SignaturesCompany's Board of Directors to repurchase up to an additional two million
shares of Common Stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MICHAEL FOODS, INC.
---------------------------------------------------------------------------
(Registrant)
Date: August 16, 1999May 12, 2000 By: /s/ Gregg A. Ostrander
-------------------------------------------------------------
Gregg A. Ostrander
(President(Chairman, President and Chief
Executive Officer)
Date: August 16, 1999May 12, 2000 By: /s/ John D. Reedy
-------------------------------------------------------------
John D. Reedy
(Vice(Executive Vice President, - Finance, Treasurer,
Chief Financial Officer and Principal
Accounting Officer)
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