UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
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: 333-112714
MICHAEL FOODS, INC.
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 13-4151741 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
301 Carlson Parkway Suite 400 Minnetonka, MN | | 55305 |
| (Address of principal executive offices) | | (Zip code) |
(952) 258-4000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) 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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The registrant’s Common Stock is not publicly traded. The Registrant had 3,000 shares of $0.01 par value common stock outstanding as of May 5, 2006.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
| | | (Unaudited) | | |
| ASSETS | | | | | | |
CURRENT ASSETS | | | | | | |
Cash and equivalents | | $ | 38,874 | | $ | 42,179 |
Accounts receivable, less allowances | | | 108,356 | | | 103,108 |
Inventories | | | 100,494 | | | 97,879 |
Prepaid expenses and other | | | 10,309 | | | 8,703 |
| | | | | | |
Total current assets | | | 258,033 | | | 251,869 |
| | |
PROPERTY, PLANT AND EQUIPMENT | | | | | | |
Land | | | 4,044 | | | 4,044 |
Buildings and improvements | | | 115,034 | | | 114,793 |
Machinery and equipment | | | 284,275 | | | 277,856 |
| | | | | | |
| | | 403,353 | | | 396,693 |
Less accumulated depreciation | | | 124,367 | | | 109,406 |
| | | | | | |
| | | 278,986 | | | 287,287 |
| | |
OTHER ASSETS | | | | | | |
Goodwill | | | 521,435 | | | 521,435 |
Intangible assets, net | | | 228,343 | | | 232,233 |
Other assets | | | 40,325 | | | 40,752 |
| | | | | | |
| | | 790,103 | | | 794,420 |
| | | | | | |
| | $ | 1,327,122 | | $ | 1,333,576 |
| | | | | | |
| LIABILITIES AND SHAREHOLDER’S EQUITY | | | | | | |
CURRENT LIABILITIES | | | | | | |
Current maturities of long-term debt | | $ | 4,838 | | $ | 3,484 |
Accounts payable | | | 63,932 | | | 69,475 |
Accrued liabilities | | | | | | |
Compensation | | | 10,435 | | | 18,006 |
Customer programs | | | 44,001 | | | 43,750 |
Interest | | | 5,621 | | | 2,632 |
Other | | | 35,738 | | | 34,599 |
| | | | | | |
Total current liabilities | | | 164,565 | | | 171,946 |
LONG-TERM DEBT, less current maturities | | | 704,437 | | | 706,239 |
DEFERRED INCOME TAXES | | | 132,675 | | | 136,328 |
DEFERRED COMPENSATION | | | 15,349 | | | 15,048 |
COMMITMENTS AND CONTINGENCIES | | | — | | | — |
| | |
SHAREHOLDER’S EQUITY | | | | | | |
Common stock, $0.01 par value, 3,000 shares authorized, issued and outstanding at March 31, 2006 and December 31, 2005 | | | — | | | — |
Additional paid-in capital | | | 259,527 | | | 254,617 |
Retained earnings | | | 49,729 | | | 45,610 |
Accumulated other comprehensive income | | | 840 | | | 3,788 |
| | | | | | |
| | | 310,096 | | | 304,015 |
| | | | | | |
| | $ | 1,327,122 | | $ | 1,333,576 |
| | | | | | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2
MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(Unaudited, in thousands)
| | | | | | |
| | | 2006 | | 2005 |
Net sales | | $ | 307,391 | | $ | 304,964 |
Cost of sales | | | 252,504 | | | 247,662 |
| | | | | | |
Gross profit | | | 54,887 | | | 57,302 |
Selling, general and administrative expenses | | | 35,643 | | | 33,747 |
| | | | | | |
Operating profit | | | 19,244 | | | 23,555 |
Interest expense, net | | | 12,639 | | | 11,978 |
Other expense | | | 116 | | | 629 |
| | | | | | |
Earnings before income taxes | | | 6,489 | | | 10,948 |
Income tax expense | | | 2,370 | | | 4,104 |
| | | | | | |
Net earnings | | $ | 4,119 | | $ | 6,844 |
| | | | | | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(Unaudited, in thousands)
| | | | | | | | |
| | | 2006 | | | 2005 | |
Net cash provided by operating activities | | $ | 3,577 | | | $ | 9,854 | |
Cash flows from investing activities: | | | | | | | | |
Capital expenditures | | | (6,589 | ) | | | (10,100 | ) |
Other assets | | | 48 | | | | (324 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (6,541 | ) | | | (10,424 | ) |
Cash flows from financing activities: | | | | | | | | |
Payments on long-term debt | | | (343 | ) | | | (110 | ) |
Proceeds from long-term debt | | | — | | | | 352 | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | (343 | ) | | | 242 | |
Effect of exchange rate changes on cash | | | 2 | | | | (25 | ) |
| | | | | | | | |
Net decrease in cash and equivalents | | | (3,305 | ) | | | (353 | ) |
Cash and equivalents at beginning of period | | | 42,179 | | | | 31,816 | |
| | | | | | | | |
Cash and equivalents at end of period | | $ | 38,874 | | | $ | 31,463 | |
| | | | | | | | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
The accompanying condensed consolidated financial statements have been prepared in accordance with Regulation S-X of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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.
We utilize a fifty-two/fifty-three week fiscal year ending on the Saturday nearest to December 31 each year. The quarter ended March 31, 2006 was a 13 week period ended April 1, 2006 and the quarter ended March 31, 2005 was a 13 week period ended April 2, 2005. For clarity of presentation, we describe both periods as if the quarters ended on March 31st.
In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations for the periods indicated. Our results of operations and cash flows for the period ended March 31, 2006 are not necessarily indicative of the results expected for the full year.
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—An amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4.” SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement, required effective January 1, 2006, did not effect our financial condition or results of operations.
On December 16, 2004, the FASB issued SFAS 123(R), “Share Based Payment”, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. SFAS No. 123(R) is effective for non-public entities, as defined, on or after January 1, 2006. Non-public entities that used the minimum value method of measuring equity share options for pro forma disclosure purposes under statement 123 shall apply this statement prospectively to new awards and continue to account for any portion of awards outstanding at the effective date using the accounting principles originally applied to those awards. For new awards granted, compensation expense will be recorded over the vesting period based on the fair value of the awards granted. The adoption of this statement, required January 1, 2006, did not materially affect our financial condition or earnings in the current period.
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” (SFAS 154) which replaces APB Opinion No. 20 “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, unless impracticable, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect that adoption of this statement will have a material impact on us.
The FASB has issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments” (SFAS 155) which amends SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 provides accounting guidance for certain derivatives embedded in other financial instruments. This SFAS is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring for fiscal years beginning after September 15, 2006. We do not believe it will have a material impact on us.
5
Goodwill and Intangible Assets with Indefinite Lives
We recognize the excess cost of an acquired entity over the net amount assigned to assets acquired, including intangible assets with indefinite lives, and liabilities assumed, as goodwill. Goodwill and intangible assets with indefinite lives (trademarks) are tested for impairment on an annual basis during the fourth quarter, and between annual tests whenever there is an impairment indicated. Fair values are estimated based on our best estimate of the future cash flows compared with the corresponding carrying value of the reporting unit, including goodwill. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset.
Each segment’s share of goodwill was as follows (in thousands):
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
Egg Products | | $ | 428,940 | | $ | 428,940 |
Refrigerated Distribution | | | 32,290 | | | 32,290 |
Potato Products | | | 60,205 | | | 60,205 |
| | | | | | |
| | $ | 521,435 | | $ | 521,435 |
| | | | | | |
Other Intangibles
We recognize an acquired intangible asset apart from goodwill whenever the asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset or liability. An intangible asset other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.
Our intangible assets were as follows (in thousands):
| | | | | | | | |
| | | March 31, 2006 | | | December 31, 2005 | |
Amortizable intangible assets, principally customer relationships | | $ | 230,615 | | | $ | 230,615 | |
Accumulated amortization | | | (36,297 | ) | | | (32,407 | ) |
| | | | | | | | |
| | | 194,318 | | | | 198,208 | |
Indefinite lived intangible assets-trademarks | | | 34,025 | | | | 34,025 | |
| | | | | | | | |
| | $ | 228,343 | | | $ | 232,233 | |
| | | | | | | | |
The aggregate amortization expense was $3,890,000 for both the three months ended March 31, 2006 and 2005. The estimated amortization expense for the years ending December 31, 2006 through December 31, 2010 is as follows (in thousands):
| | | |
2006 | | $ | 15,554 |
2007 | | | 15,328 |
2008 | | | 15,328 |
2009 | | | 15,328 |
2010 | | | 15,328 |
The above amortization expense forecast is an estimate. Actual amounts may change from such estimated amounts due to additional intangible asset acquisitions, potential impairment, accelerated amortization, or other events.
Deferred Financing Costs
Deferred financing costs are included in other assets and are being amortized using the interest method over the lives of the respective debt agreements. Our deferred financing costs were as follows (in thousands)
| | | | | | | | |
| | | March 31, 2006 | | | December 31, 2005 | |
Deferred financing costs | | $ | 31,273 | | | $ | 31,273 | |
Accumulated amortization | | | (4,590 | ) | | | (4,209 | ) |
| | | | | | | | |
| | $ | 26,683 | | | $ | 27,064 | |
| | | | | | | | |
6
NOTE B—OTHER FINANCIAL STATEMENT DATA
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 lives of generally one to two years, assuming no salvage value.
Inventories consisted of the following (in thousands):
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
Raw materials and supplies | | $ | 18,013 | | $ | 17,752 |
Work in process and finished goods | | | 60,665 | | | 57,961 |
Flocks | | | 21,816 | | | 22,166 |
| | | | | | |
| | $ | 100,494 | | $ | 97,879 |
| | | | | | |
NOTE C—COMMITMENTS AND CONTINGENCIES
Litigation
We are engaged in routine litigation incidental to our business. We believe the ultimate outcome of this litigation will not have a material effect on our consolidated financial position, liquidity or results of operations.
NOTE D—SHAREHOLDER’S EQUITY
Additional Paid in Capital
We recorded a $4.9 million non-cash capital contribution from our parent, M-Foods Holdings, Inc. (“Holdings”) related to the tax benefit the Company receives due to filing a consolidated Federal tax return with Holdings. The tax benefit is derived by the interest expense deduction of Holdings on the consolidated tax return.
Comprehensive Income
The components of and changes in accumulated other comprehensive income (loss), net of taxes, during the three months ended March 31, 2006 were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | Cash Flow Hedges | | | Foreign Currency Translation | | | Interest Rate Caplet | | | Total | |
Balance at December 31, 2005 | | $ | 942 | | | $ | 3,405 | | | $ | (559 | ) | | $ | 3,788 | |
Foreign currency translation adjustment | | | — | | | | (27 | ) | | | — | | | | (27 | ) |
Interest rate caplet | | | — | | | | — | | | | 82 | | | | 82 | |
Change due to cash flow hedges | | | (3,003 | ) | | | — | | | | — | | | | (3,003 | ) |
| | | | | | | | | | | | | | | | |
Balance at March 31, 2006 | | $ | (2,061 | ) | | $ | 3,378 | | | $ | (477 | ) | | $ | 840 | |
| | | | | | | | | | | | | | | | |
7
Comprehensive income, net of taxes, for the three months ended March 31, 2006 and 2005 was as follows (in thousands):
| | | | | | | |
Net earnings for the three months ended March 31, 2006 | | | | | $ | 4,119 | |
Net gains (losses) arising during the period: | | | | | | | |
Change due to cash flow hedges | | (3,003 | ) | | | | |
Interest rate caplet | | 82 | | | | | |
Foreign currency translation adjustment | | (27 | ) | | | | |
| | | | | | | |
Other comprehensive loss | | | | | | (2,948 | ) |
| | | | | | | |
Comprehensive income for the three months ended March 31, 2006 | | | | | $ | 1,171 | |
| | | | | | | |
Net earnings for the three months ended March 31, 2005 | | | | | $ | 6,844 | |
Net gains (losses) arising during the period: | | | | | | | |
Change due to cash flow hedges | | 4,588 | | | | | |
Interest rate caplet | | (16 | ) | | | | |
Foreign currency translation adjustment | | (616 | ) | | | | |
| | | | | | | |
Other comprehensive income | | | | | | 3,956 | |
| | | | | | | |
Comprehensive income for the three months ended March 31, 2005 | | | | | $ | 10,800 | |
| | | | | | | |
NOTE E—BUSINESS SEGMENTS
We operate in three reportable segments—Egg Products, Refrigerated Distribution and Potato Products. Certain financial information on our operating segments is as follows (unaudited, in thousands):
| | | | | | | | | | | | | | | | |
| | | EGG PRODUCTS | | REFRIGERATED DISTRIBUTION | | POTATO PRODUCTS | | CORPORATE | | | TOTAL |
Three months ended March 31, 2006: | | | | | | | | | | | | | | | | |
External net sales | | $ | 212,985 | | $ | 68,616 | | $ | 25,790 | | $ | — | | | $ | 307,391 |
Intersegment sales | | | 1,884 | | | — | | | 1,263 | | | — | | | | 3,147 |
Operating profit (loss) | | | 15,159 | | | 3,257 | | | 3,427 | | | (2,599 | ) | | | 19,244 |
Depreciation and amortization | | | 16,202 | | | 1,156 | | | 1,479 | | | 1 | | | | 18,838 |
Three months ended March 31, 2005: | | | | | | | | | | | | | | | | |
External net sales | | $ | 215,262 | | $ | 65,865 | | $ | 23,837 | | $ | — | | | $ | 304,964 |
Intersegment sales | | | 1,923 | | | — | | | 1,084 | | | — | | | | 3,007 |
Operating profit (loss) | | | 19,498 | | | 3,548 | | | 3,226 | | | (2,717 | ) | | | 23,555 |
Depreciation and amortization | | | 14,819 | | | 1,125 | | | 1,595 | | | 1 | | | | 17,540 |
NOTE F—SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
Our senior credit agreement and senior subordinated notes have been guaranteed, on a joint and several basis, by us and our 100% owned domestic subsidiaries. The senior credit agreement is also guaranteed by our parent, M-Foods Holdings, Inc.
The following condensed consolidating financial information presents our condensed consolidating balance sheets at March 31, 2006 and December 31, 2005, together with our condensed consolidating statements of earnings for the three month periods ended March 31, 2006 and 2005 and the cash flows for the three month periods ended March 31, 2006 and 2005. These financial statements reflect Michael Foods, Inc. (the parent), the wholly-owned guarantor subsidiaries (on a combined basis), the non-guarantor subsidiary (MFI Food Canada Ltd.), and elimination entries necessary to combine such entities on a consolidated basis.
8
Condensed Consolidating Balance Sheets
March 31, 2006
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor Subsidiaries | | Non-Guarantor Subsidiary | | | Eliminations | | | Consolidated |
Assets | | | | | | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | | | | | | |
Cash and equivalents | | $ | 37,833 | | | $ | — | | $ | 1,041 | | | $ | — | | | $ | 38,874 |
Accounts receivable, less allowances | | | 4,684 | | | | 104,232 | | | 7,737 | | | | (8,297 | ) | | | 108,356 |
Inventories | | | — | | | | 93,579 | | | 6,915 | | | | — | | | | 100,494 |
Prepaid expenses and other | | | 980 | | | | 9,091 | | | 238 | | | | — | | | | 10,309 |
| | | | | | | | | | | | | | | | | | |
Total current assets | | | 43,497 | | | | 206,902 | | | 15,931 | | | | (8,297 | ) | | | 258,033 |
| | | | | | | | | | | | | | | | | | |
Property, Plant and Equipment—net | | | 42 | | | | 259,307 | | | 19,637 | | | | — | | | | 278,986 |
| | | | | | | | | | | | | | | | | | |
Other assets: | | | | | | | | | | | | | | | | | | |
Goodwill | | | — | | | | 518,409 | | | 3,026 | | | | — | | | | 521,435 |
Other assets | | | 27,268 | | | | 254,408 | | | 2,410 | | | | (15,418 | ) | | | 268,668 |
Investment in subsidiaries | | | 937,095 | | | | 3,444 | | | — | | | | (940,539 | ) | | | — |
| | | | | | | | | | | | | | | | | | |
| | | 964,363 | | | | 776,261 | | | 5,436 | | | | (955,957 | ) | | | 790,103 |
| | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,007,902 | | | $ | 1,242,470 | | $ | 41,004 | | | $ | (964,254 | ) | | $ | 1,327,122 |
| | | | | | | | | | | | | | | | | | |
Liabilities and Shareholder’s Equity | | | | | | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 4,050 | | | $ | — | | $ | 788 | | | $ | — | | | $ | 4,838 |
Accounts payable | | | 186 | | | | 61,996 | | | 11,314 | | | | (9,564 | ) | | | 63,932 |
Accrued liabilities | | | 18,096 | | | | 76,177 | | | 1,522 | | | | — | | | | 95,795 |
| | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 22,332 | | | | 138,173 | | | 13,624 | | | | (9,564 | ) | | | 164,565 |
Long-term debt, less current maturities | | | 669,107 | | | | 27,143 | | | 27,237 | | | | (19,050 | ) | | | 704,437 |
Deferred income taxes | | | (7,666 | ) | | | 142,198 | | | (1,857 | ) | | | — | | | | 132,675 |
Deferred compensation | | | 15,349 | | | | — | | | — | | | | — | | | | 15,349 |
Shareholder’s equity | | | 308,780 | | | | 934,956 | | | 2,000 | | | | (935,640 | ) | | | 310,096 |
| | | | | | | | | | | | | | | | | | |
Total liabilities and shareholder’s equity | | $ | 1,007,902 | | | $ | 1,242,470 | | $ | 41,004 | | | $ | (964,254 | ) | | $ | 1,327,122 |
| | | | | | | | | | | | | | | | | | |
9
Condensed Consolidating Balance Sheets
December 31, 2005
(in thousands)
| | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor Subsidiaries | | Non-Guarantor Subsidiary | | | Eliminations | | | Consolidated |
Assets | | | | | | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | | | | | | |
Cash and equivalents | | $ | 41,153 | | | $ | — | | $ | 1,026 | | | $ | — | | | $ | 42,179 |
Accounts receivable, less allowances | | | 3,180 | | | | 101,193 | | | 7,008 | | | | (8,273 | ) | | | 103,108 |
Inventories | | | — | | | | 91,054 | | | 6,825 | | | | — | | | | 97,879 |
Prepaid expenses and other | | | 605 | | | | 7,954 | | | 144 | | | | — | | | | 8,703 |
| | | | | | | | | | | | | | | | | | |
Total current assets | | | 44,938 | | | | 200,201 | | | 15,003 | | | | (8,273 | ) | | | 251,869 |
| | | | | | | | | | | | | | | | | | |
Property, Plant and Equipment—net | | | 34 | | | | 267,060 | | | 20,193 | | | | — | | | | 287,287 |
| | | | | | | | | | | | | | | | | | |
Other assets: | | | | | | | | | | | | | | | | | | |
Goodwill | | | — | | | | 518,409 | | | 3,026 | | | | — | | | | 521,435 |
Other assets | | | 37,903 | | | | 248,192 | | | 2,410 | | | | (15,520 | ) | | | 272,985 |
Investment in subsidiaries | | | 928,038 | | | | 4,438 | | | — | | | | (932,476 | ) | | | — |
| | | | | | | | | | | | | | | | | | |
| | | 965,941 | | | | 771,039 | | | 5,436 | | | | (947,996 | ) | | | 794,420 |
| | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,010,913 | | | $ | 1,238,300 | | $ | 40,632 | | | $ | (956,269 | ) | | $ | 1,333,576 |
| | | | | | | | | | | | | | | | | | |
Liabilities and Shareholder’s Equity | | | | | | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 2,700 | | | $ | — | | $ | 784 | | | $ | — | | | $ | 3,484 |
Accounts payable | | | 853 | | | | 69,511 | | | 8,896 | | | | (9,785 | ) | | | 69,475 |
Accrued liabilities | | | 19,843 | | | | 77,453 | | | 1,691 | | | | — | | | | 98,987 |
| | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 23,396 | | | | 146,964 | | | 11,371 | | | | (9,785 | ) | | | 171,946 |
Long-term debt, less current maturities | | | 679,171 | | | | 18,613 | | | 27,553 | | | | (19,098 | ) | | | 706,239 |
Deferred income taxes | | | (6,370 | ) | | | 143,926 | | | (1,228 | ) | | | — | | | | 136,328 |
Deferred compensation | | | 15,048 | | | | — | | | — | | | | — | | | | 15,048 |
Shareholder’s equity | | | 299,668 | | | | 928,797 | | | 2,936 | | | | (927,386 | ) | | | 304,015 |
| | | | | | | | | | | | | | | | | | |
Total liabilities and shareholder’s equity | | $ | 1,010,913 | | | $ | 1,238,300 | | $ | 40,632 | | | $ | (956,269 | ) | | $ | 1,333,576 |
| | | | | | | | | | | | | | | | | | |
10
Condensed Consolidating Statements of Earnings
Three months ended March 31, 2006
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor Subsidiaries | | | Non-Guarantor Subsidiary | | | Eliminations | | | Consolidated |
Net sales | | $ | — | | | $ | 297,196 | | | $ | 14,549 | | | $ | (4,354 | ) | | $ | 307,391 |
Cost of sales | | | — | | | | 242,640 | | | | 14,218 | | | | (4,354 | ) | | | 252,504 |
| | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 54,556 | | | | 331 | | | | — | | | | 54,887 |
Selling, general and administrative expenses | | | 2,599 | | | | 33,036 | | | | 1,499 | | | | (1,491 | ) | | | 35,643 |
| | | | | | | | | | | | | | | | | | | |
Operating profit (loss) | | | (2,599 | ) | | | 21,520 | | | | (1,168 | ) | | | 1,491 | | | | 19,244 |
Interest expense, net | | | 12,167 | | | | 8 | | | | 464 | | | | — | | | | 12,639 |
Other expense (income) | | | (1,491 | ) | | | 116 | | | | — | | | | 1,491 | | | | 116 |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes | | | (13,275 | ) | | | 21,396 | | | | (1,632 | ) | | | — | | | | 6,489 |
Equity in earnings (loss) of subsidiaries | | | 12,536 | | | | (999 | ) | | | — | | | | (11,537 | ) | | | — |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before income taxes | | | (739 | ) | | | 20,397 | | | | (1,632 | ) | | | (11,537 | ) | | | 6,489 |
Income tax expense (benefit) | | | (4,858 | ) | | | 7,861 | | | | (633 | ) | | | — | | | | 2,370 |
| | | | | | | | | | | | | | | | | | | |
Net earnings (loss) | | $ | 4,119 | | | $ | 12,536 | | | $ | (999 | ) | | $ | (11,537 | ) | | $ | 4,119 |
| | | | | | | | | | | | | | | | | | | |
11
Condensed Consolidating Statements of Earnings
Three months ended March 31, 2005
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor Subsidiaries | | | Non-Guarantor Subsidiary | | | Eliminations | | | Consolidated |
Net sales | | $ | — | | | $ | 296,316 | | | $ | 14,685 | | | $ | (6,037 | ) | | $ | 304,964 |
Cost of sales | | | — | | | | 239,898 | | | | 13,801 | | | | (6,037 | ) | | | 247,662 |
| | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 56,418 | | | | 884 | | | | — | | | | 57,302 |
Selling, general and administrative expenses | | | 2,717 | | | | 31,189 | | | | 1,284 | | | | (1,443 | ) | | | 33,747 |
| | | | | | | | | | | | | | | | | | | |
Operating profit (loss) | | | (2,717 | ) | | | 25,229 | | | | (400 | ) | | | 1,443 | | | | 23,555 |
Interest expense, net | | | 11,376 | | | | 142 | | | | 460 | | | | — | | | | 11,978 |
Other expense (income) | | | (1,443 | ) | | | 629 | | | | — | | | | 1,443 | | | | 629 |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes | | | (12,650 | ) | | | 24,458 | | | | (860 | ) | | | — | | | | 10,948 |
Equity in earnings (loss) of subsidiaries | | | 14,792 | | | | (447 | ) | | | — | | | | (14,345 | ) | | | — |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before income taxes | | | 2,142 | | | | 24,011 | | | | (860 | ) | | | (14,345 | ) | | | 10,948 |
Income tax expense (benefit) | | | (4,702 | ) | | | 9,219 | | | | (413 | ) | | | — | | | | 4,104 |
| | | | | | | | | | | | | | | | | | | |
Net earnings (loss) | | $ | 6,844 | | | $ | 14,792 | | | $ | (447 | ) | | $ | (14,345 | ) | | $ | 6,844 |
| | | | | | | | | | | | | | | | | | | |
12
Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2006
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor Subsidiaries | | | Non-Guarantor Subsidiary | | | Consolidated | |
Net cash provided by (used in) operating activities | | $ | 5,678 | | | $ | (2,667 | ) | | $ | 566 | | | $ | 3,577 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Capital expenditures | | | (11 | ) | | | (6,417 | ) | | | (161 | ) | | | (6,589 | ) |
Other assets | | | — | | | | 48 | | | | — | | | | 48 | |
| | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (11 | ) | | | (6,369 | ) | | | (161 | ) | | | (6,541 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Payments on long-term debt | | | — | | | | — | | | | (343 | ) | | | (343 | ) |
Investment in subsidiaries | | | (8,987 | ) | | | 9,036 | | | | (49 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (8,987 | ) | | | 9,036 | | | | (392 | ) | | | (343 | ) |
Effect of exchange rate changes on cash | | | — | | | | — | | | | 2 | | | | 2 | |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and equivalents | | | (3,320 | ) | | | — | | | | 15 | | | | (3,305 | ) |
Cash and equivalents at beginning of period | | | 41,153 | | | | — | | | | 1,026 | | | | 42,179 | |
| | | | | | | | | | | | | | | | |
Cash and equivalents at end of period | | $ | 37,833 | | | $ | — | | | $ | 1,041 | | | $ | 38,874 | |
| | | | | | | | | | | | | | | | |
13
Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2005
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor Subsidiaries | | | Non-Guarantor Subsidiary | | | Consolidated | |
Net cash provided by (used in) operating activities | | $ | (3,884 | ) | | $ | 13,688 | | | $ | 50 | | | $ | 9,854 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (9,702 | ) | | | (398 | ) | | | (10,100 | ) |
Other assets | | | 6 | | | | (330 | ) | | | — | | | | (324 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 6 | | | | (10,032 | ) | | | (398 | ) | | | (10,424 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Payments on long-term debt | | | — | | | | (9 | ) | | | (101 | ) | | | (110 | ) |
Proceeds from long-term debt | | | — | | | | 483 | | | | (131 | ) | | | 352 | |
Investment in subsidiaries | | | 4,130 | | | | (4,130 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 4,130 | | | | (3,656 | ) | | | (232 | ) | | | 242 | |
Effect of exchange rate changes on cash | | | — | | | | — | | | | (25 | ) | | | (25 | ) |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and equivalents | | | 252 | | | | — | | | | (605 | ) | | | (353 | ) |
Cash and equivalents at beginning of period | | | 29,954 | | | | — | | | | 1,862 | | | | 31,816 | |
| | | | | | | | | | | | | | | | |
Cash and equivalents at end of period | | $ | 30,206 | | | $ | — | | | $ | 1,257 | | | $ | 31,463 | |
| | | | | | | | | | | | | | | | |
14
ITEM 2— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a producer and distributor of specialty egg products to the foodservice, retail and food ingredients markets. We are also a producer and distributor of refrigerated potato products to the foodservice and retail grocery markets. Additionally, we distribute refrigerated food items, primarily cheese and other dairy products, to the retail grocery market, predominantly in the central United States. We focus our growth efforts on the specialty sectors within our food categories and strive to be a market leader in product innovation and low-cost production. We have a strategic focus on value-added processing of food products which is designed to capitalize on key food industry trends, such as (i) the desire for improved safety and convenience, (ii) the focus by foodservice operators on reducing labor and waste, and (iii) the growing trend toward food consumption away from home. We believe our operational scale, product breadth and geographic scope make us an attractive and important strategic partner for our larger customers.
Commodities and Product Pricing
The profit margins we earn on many of our products are sensitive to changes in commodity prices. Approximately 65% of the Egg Products Division’s annual net sales come from higher value-added egg products, such as extended shelf-life liquid and precooked products, with the remainder coming from products mainly used in the food ingredients market, or shell eggs. Gross profit margins for higher value-added egg products are generally less sensitive to commodity price fluctuations, such as grains used for hen feed and certain externally sourced eggs, than are other egg products or shell eggs; however, we are unable to adjust pricing for these products as quickly as we are for other egg products and shell eggs when our costs change. Margins for our food ingredient egg products and shell eggs are more commodity price-sensitive than are higher value-added product sales. 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. Graded shell egg pricing in the first three months of 2006 was approximately 10% lower than in the comparable 2005 period (as measured by Urner Barry Publications). Feed costs declined year-over-year during the 2006 period.
The Refrigerated Distribution Division derives 80% to 90% of its net sales from refrigerated products produced by others, thereby somewhat reducing the effects of commodity price swings. However, a majority of the 80% to 90% of net sales represents cheese and butter, and the costs for both fluctuate with national dairy markets. Time lags between cost changes for these lines and wholesale/retail pricing changes can result in significant margin expansion or compression. The balance of the Refrigerated Distribution Division’s sales are mainly from shell eggs, some of which are produced by the Egg Products Division, sold on a distribution, or non-commodity, basis.
The Potato Products Division purchases approximately 90% to 95% of its raw potatoes from contract producers under annual contracts. The remainder are 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 the Potato Products Division’s operating results.
Results of Operations
Readers are directed to Note E—Business Segments for data on the unaudited financial results of our business segments for the three months ended March 31, 2006 and 2005.
Three Months Ended March 31, 2006 as Compared to Three Months Ended March 31, 2005
Net Sales.Net sales for the three months ended March 31, 2006 increased $2.4 million, or approximately 0.8%, to $307.4 million from $305.0 million for the three months ended March 31, 2005, reflecting increased unit sales in two of our divisions, partially offset by deflationary impacts.
Egg Products Division Net Sales.Egg Products Division external net sales for the three months ended March 31, 2006 decreased $2.3 million, or 1%, to $213.0 million from $215.3 million for the three months ended March 31, 2005. External net sales in the 2006 period increased for most higher value-added lines and decreased for most other product lines, the latter reflecting historically low egg market pricing. Divisional unit sales were approximately the same during the 2006 period as they were in the 2005 period, although the important egg substitutes product line had a unit sales increase of 7%. Sales were weakest for dried items, which recorded a 14% net sales decline due to a decline in volume. Given weak market pricing, we chose to not pursue certain dried business that might be attractive under more normal business conditions. Sales of higher value-added egg products represented approximately 66% of the Egg Products Division’s net sales in the 2006 period and approximately 64% in the 2005 period.
15
Refrigerated Distribution Division Net Sales.Refrigerated Distribution Division external net sales for the three months ended March 31, 2006 increased $2.7 million, or 4%, to $68.6 million from $65.9 million for the three months ended March 31, 2005. This increase was due primarily to strong cheese unit sales. Branded cheese unit sales increased 9% in the 2006 period as compared to the 2005 period. We saw continued success in gaining cheese market share, as has largely been the case in recent years. Results from other product lines were mixed, although potato products net sales increased 11% in the 2006 period as compared to the 2005 period, reflecting category growth. Butter net sales were weak (down 9%), due to a decline in market-related pricing as compared to the 2005 period.
Potato Products Division Net Sales.Potato Products Division external net sales for the three months ended March 31, 2006 increased $2.0 million, or 8%, to $25.8 million from $23.8 million for the three months ended March 31, 2005. This increase was attributable to strong unit sales growth for both foodservice and retail potato products, with the latter increasing 17% from 2005 period levels. As a category, retail refrigerated potato products experienced notable growth in 2005 and thus far in 2006. Pricing of our potato products was generally unchanged year-over-year.
Gross Profit.Gross profit for the three months ended March 31, 2006 decreased $2.4 million, or 4%, to $54.9 million from $57.3 million for the three months ended March 31, 2005. Our gross profit margin decreased to 17.9% compared to 18.8% in the same period in 2005. The lower gross profit margin reflected a decreased gross profit margin in the Egg Products Division. This decrease was due to negative gross profits from certain food ingredients egg products, reflecting very poor market pricing. Additionally, we experienced increases in energy, packaging and freight costs, which we were not able to fully offset via selective price increases.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for the three months ended March 31, 2006 increased $1.9 million, or 6%, to $35.6 million from $33.7 million for the three months ended March 31, 2005. Selling, general and administrative expenses increased to 11.6% of net sales in the 2006 period compared with 11.1% for the 2005 period. Salaries, wages and employee benefits costs increased year-over-year in the 2006 period and marketing costs have also increased from prior year levels.
Operating Profit.Operating profit for the three months ended March 31, 2006 decreased $4.4 million, or approximately 18%, to $19.2 million from $23.6 million for the three months ended March 31, 2005. Our operating profit margin decreased to 6.3% in the 2006 period from 7.7% in the 2005 period due to a decline in gross profit margin and an increase in operating expenses for the reasons noted above.
Egg Products Division Operating Profit.Egg Products Division operating profit for the three months ended March 31, 2006 decreased $4.3 million, or 22%, to $15.2 million from $19.5 million for the three months ended March 31, 2005. Operating profits declined for most egg products categories. Significant losses were recorded from the sale of food ingredient egg products, reflecting market pricing.
Refrigerated Distribution Division Operating Profit.Refrigerated Distribution Division operating profit for the three months ended March 31, 2006 decreased $0.3 million, or 8%, to $3.2 million from $3.5 million for the three months ended March 31, 2005. Operating profits for our key product line, branded cheese, decreased 10% in the 2006 period, as compared to the 2005 period, due to increased promotional spending.
Potato Products Division Operating Profit.Potato Products Division operating profit for the three months ended March 31, 2006 increased $0.2 million, or 6% to $3.4 million from $3.2 million for the three months ended March 31, 2005. This reflected approximately flat results from the foodservice business in the 2006 period, compared to the 2005 period, while operating profits from our retail potato products sales increased significantly. The operating profit improvement resulted from strong retail volume growth.
Other Expense (Income). Other expense of $116,000 was recorded in the 2006 period as compared to $629,000 in the 2005 period. The change is related to a decrease in net losses from our Belgium joint venture for the 2006 period compared to the 2005 period.
Interest Expense and Income Taxes.Interest expense increased by approximately $0.7 million in the 2006 period compared to the 2005 period, reflecting higher interest rates. Our effective tax rate was 36.5% in the 2006 period compared to 37.5% in the 2005 period. The effective tax rate is affected by the amount of permanent differences between book and taxable income and a reduction in our state tax rate.
16
Liquidity and Capital Resources
Historically, we have financed our liquidity requirements through internally generated funds, senior bank borrowings and the issuance of other indebtedness. We believe such sources remain viable financing alternatives to meet our anticipated needs. Our investments in acquisitions, joint ventures and capital expenditures have been a significant use of capital. We plan to continue to invest in advanced production facilities to enhance our competitive position.
Cash flow provided by operating activities was $3.6 million for the three months ended March 31, 2006, compared to $9.9 million in the comparable 2005 period. The decrease in cash flow provided by operating activities was due to increased working capital and decreased earnings in the 2006 period. Our cash flows used in investing activities decreased to $6.5 million for the three months ended March 31, 2006 from $10.4 million for the 2005 period. Cash flows from financing activities were not significant in either period, as we relied on internally generated funds for our capital requirements.
We continue to have substantial annual cash interest expense. Our senior credit facility requires us to meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the senior credit facility and the indenture relating to the 8% Senior Subordinated Notes due 2013 contain certain restrictive covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in these agreements. Our failure to comply with these covenants could result in an event of default, which if not cured or waived could have a material adverse effect on our results of operations, financial position and cash flow. In general, the debt covenants limit our discretion in the operation of our businesses. We were in compliance with all of the covenants under the senior credit facility and the indenture as of March 31, 2006.
The following is a calculation of our minimum interest coverage and maximum leverage ratios under our senior credit facility for the twelve-month periods ended March 31, 2006 and 2005. The terms and related calculations are defined in our senior credit facility, which agreement and amendments thereto were included as Exhibit 10.1 of our registration statement on Form S-4 (Registration No. 333-112714) as filed with the Commission on February 11, 2004, as Exhibit 10.33 to our current report on Form 8-K as filed with the Commission on September 22, 2004 and as Exhibit 10.1 to our current report on Form 8-K as filed with the Commission on May 18, 2005.
| | | | | | | | |
| | | Twelve Months Ended March 31, | |
| | | 2006 | | | 2005 | |
| | | (Unaudited, in thousands) | |
Calculation of Interest Coverage Ratio: | | | | | | | | |
Consolidated EBITDA (1) | | $ | 178,148 | | | $ | 170,993 | |
Consolidated Cash Interest Expense (2) | | | 47,444 | | | | 43,163 | |
Actual Interest Coverage Ratio (3) | | | 3.75 x | | | | 3.96 x | |
Minimum Permitted Interest Coverage Ratio | | | 2.25 x | | | | 2.15 x | |
Calculation of Leverage Ratio: | | | | | | | | |
Funded Indebtedness (4) | | $ | 722,030 | | | $ | 764,026 | |
Less: Cash and equivalents | | | (38,874 | ) | | | (31,463 | ) |
| | | | | | | | |
Funded Indebtedness, net of cash | | | 683,156 | | | | 732,563 | |
Consolidated EBITDA (1) | | | 178,148 | | | | 170,993 | |
Actual Leverage Ratio (5) | | | 3.83 x | | | | 4.28 x | |
Maximum Permitted Leverage Ratio | | | 5.25 x | | | | 5.75 x | |
17
| (1) | Consolidated EBITDA is defined in our senior credit facility as follows: |
| | | | | | | |
| | | Twelve Months Ended March 31, |
| | | 2006 | | | 2005 |
| | | (Unaudited, in thousands) |
Net earnings | | $ | 36,134 | | | $ | 32,177 |
Interest expense, excluding amortization of debt issuance costs | | | 46,280 | | | | 41,480 |
Amortization of debt issuance costs | | | 1,858 | | | | 2,052 |
Income tax expense | | | 12,532 | | | | 19,966 |
Depreciation and amortization | | | 71,390 | | | | 67,394 |
Equity sponsor management fee (a) | | | 1,824 | | | | 1,800 |
Industrial revenue bonds related expenses (b) | | | 973 | | | | 917 |
Other non-recurring charges related to acquisition accounting (c) | | | — | | | | 1,268 |
Other (d) | | | 6,769 | | | | 4,644 |
| | | | | | | |
| | | 177,760 | | | | 171,698 |
Unrealized gains (losses) on swap contracts | | | (388 | ) | | | 705 |
| | | | | | | |
Consolidated EBITDA, as defined in our senior credit facility | | $ | 178,148 | | | $ | 170,993 |
| | | | | | | |
| (a) | Reflects management fees paid to equity sponsors. |
| (b) | Reflects fees associated with industrial revenue bonds guaranteed by certain of our subsidiaries. |
| (c) | Reflects loss associated with SFAS 141 purchase accounting primarily for inventories. |
| (d) | Reflects the following: |
| | | | | | | |
| | | Twelve Months Ended March 31, |
| | | 2006 | | | 2005 |
| | | (Unaudited, in thousands) |
Equity in losses (earnings) of unconsolidated subsidiaries | | $ | (58 | ) | | $ | 1,195 |
Losses from the sale of assets not in the ordinary course of business | | | 116 | | | | 996 |
Preferred return on deferred compensation | | | 1,027 | | | | 1,534 |
Fees and expenses in connection with the exchange of the Senior Subordinated Notes for registered notes | | | — | | | | 291 |
Debt extinguishment expenses which do not represent a cash item | | | 4,134 | | | | — |
Letter of credit fees | | | 138 | | | | 146 |
Other non-recurring charges | | | 1,412 | | | | 482 |
| | | | | | | |
| | $ | 6,769 | | | $ | 4,644 |
| | | | | | | |
| (2) | Consolidated cash interest expense, as calculated in our senior credit facility, was as follows: |
| | | | | | |
| | | Twelve Months Ended March 31, |
| | | 2006 | | 2005 |
| | | (Unaudited, in thousands) |
Interest expense, net | | $ | 47,780 | | $ | 44,483 |
Interest income | | | 1,522 | | | 732 |
| | | | | | |
Gross interest expense | | | 49,302 | | | 45,215 |
| | |
Less: Amortization of debt issuance costs | | | 1,858 | | | 2,052 |
| | | | | | |
Consolidated cash interest expense | | $ | 47,444 | | $ | 43,163 |
| | | | | | |
| (3) | Represents ratio of consolidated EBITDA to consolidated interest expense. |
18
| (4) | Funded indebtedness was as follows: |
| | | | | | |
| | | March 31, |
| | | 2006 | | 2005 |
| | | (Unaudited, in thousands) |
Term loan facility | | $ | 540,000 | | $ | 455,050 |
Senior unsecured term loan facility | | | — | | | 135,000 |
8% senior subordinated notes | | | 150,000 | | | 150,000 |
Insurance bonds | | | 201 | | | 878 |
Guarantee obligations (see Debt Guarantees described below) | | | 15,989 | | | 6,038 |
Capital leases | | | 6,183 | | | 6,751 |
Standby letters of credit (primarily with our casualty insurance carrier) | | | 6,815 | | | 6,489 |
Funded indebtedness of Trilogy Egg Products, Inc. | | | 2,792 | | | 3,577 |
Other | | | 50 | | | 243 |
| | | | | | |
| | $ | 722,030 | | $ | 764,026 |
| | | | | | |
| (5) | Represents ratio of funded indebtedness less cash and equivalents to consolidated EBITDA. |
As of March 31, 2006, approximately $540.0 million was outstanding under the senior credit facility, and additional capacity of approximately $6.8 million was used under our $100 million revolving line of credit for outstanding letters of credit. The weighted average interest rate for our borrowings under the senior credit facility was approximately 6.7% at March 31, 2006. Given our business trends and cash flow forecast, we do not anticipate any use of the revolving line of credit in the near future, except for letters of credit purposes. However, it is possible that one or more acquisitions could arise, which could result in much, or all, of the revolving line of credit being utilized at some point.
We have guaranteed, through our Waldbaum subsidiary, the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of four municipalities where we have food processing facilities. The repayment of these bonds is funded through the wastewater treatment charges paid by us. However, should those charges not be sufficient to fund the bond payments as they become due, we have agreed to pay any shortfall. The remaining principal balance of these bonds at March 31, 2006 was approximately $16.0 million.
Our parent, M-Foods Holdings, Inc., has outstanding 9.75% Senior Discount Notes due October 1, 2013. The accreted balance of these notes as of March 31, 2006 was $115.8 million. We do not have any obligation to make payments on these Notes.
Our ability to make payments on and to refinance our debt, including the notes and to fund planned capital expenditures will depend on our ability to generate sufficient cash in the future. This, to some extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We believe that, based on current levels of operations, we will be able to meet our debt service obligations when due. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including the notes, on or before maturity. We cannot assure our investors that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness, including the Senior Subordinated Notes and our senior credit facility, may limit our ability to pursue any of these alternatives.
We invested approximately $7 million in capital expenditures in the three months ended March 31, 2006. We plan to spend approximately $34 million in total capital expenditures for 2006, which has been, or will be, used to maintain existing production facilities, to expand our value-added egg products and potato products capacity, and to secure new trucks and trailers. We expect to fund this spending from operating cash flows.
Our longer-term planning is focused on growing our sales, earnings and cash flows primarily by focusing on our existing business lines through expanding product offerings, increasing production capacity for value-added products and broadening customer bases. We believe our financial resources are sufficient to meet the working capital and capital spending necessary to execute our longer-term plans. In executing these plans, we expect to reduce debt over the coming years. However, possible significant acquisition activity could result in us seeking additional financing resources, which we would expect would be available to us if they are sought.
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Seasonality
Our consolidated quarterly operating results are affected by the seasonal fluctuations of our net sales and operating profits. Specifically, egg prices typically rise seasonally in the first and fourth quarters of the year due to increased demand during holiday periods. Consequently, net sales in the Egg Products Division may increase in the first and fourth quarters. Operating profits from the Potato Products Division are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest and incremental consumer demand. Generally, the Refrigerated Distribution Division has higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season.
Forward-looking Statements
Certain items in this Form 10-Q may be forward-looking statements. Such forward-looking statements are subject to numerous risks and uncertainties, including variances in the demand for our products due to consumer, industry and broad economic developments, as well as variances in the costs to produce such products, including normal volatility in egg, feed, cheese and butter costs. Our actual financial results could differ materially from the results estimated by, forecasted by, or implied by us in such forward-looking statements. Forward-looking statements contained in this Form 10-Q speak only as of the date hereof. We disclaim any obligation or understanding to publicly release updates to, or revisions of, forward-looking statements to reflect changes in our expectations or events, conditions or circumstances on which any such statement is made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our market risk during the three months ended March 31, 2006. For additional information regarding our market risk, please refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures.
Our management evaluated, with the participation of our principal executive and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2006. Based on these evaluations, our principal executive and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2006.
b. Changes in internal controls
There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Readers are directed to our Form 10-K for 2005 filed March 23, 2006, Item 1A, for a discussion of Risk Factors. We do not believe there have been any material changes to our Risk Factors since that filing.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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EXHIBIT INDEX
| | |
| Exhibit No. | | Description |
| 31.1 | | Certification of Chief Executive Officer |
| |
| 31.2 | | Certification of Chief Financial Officer |
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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.
| | | | |
| | MICHAEL FOODS, INC. |
| | |
| Date: May 11, 2006 | | By: | | /s/ GREGG A. OSTRANDER |
| | | | Gregg A. Ostrander (Chairman and Chief Executive Officer) |
| | |
| | By: | | /s/ JOHN D. REEDY |
| | | | John D. Reedy (Executive Vice President and Chief Financial Officer) |
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