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, 2007
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 ParkwaySuite 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 1, 2007.
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, 2007 | | December 31, 2006 |
| | | (Unaudited) | | |
| ASSETS | | | | | | |
Current Assets | | | | | | |
Cash and equivalents | | $ | 22,395 | | $ | 21,576 |
Accounts receivable, less allowances | | | 113,108 | | | 105,305 |
Inventories | | | 108,732 | | | 103,420 |
Prepaid expenses and other | | | 13,376 | | | 8,201 |
| | | | | | |
Total Current Assets | | | 257,611 | | | 238,502 |
| | |
Property, Plant and Equipment | | | | | | |
Land | | | 4,044 | | | 4,044 |
Buildings and improvements | | | 119,035 | | | 118,890 |
Machinery and equipment | | | 307,319 | | | 301,656 |
| | | | | | |
| | | 430,398 | | | 424,590 |
Less accumulated depreciation | | | 180,664 | | | 165,527 |
| | | | | | |
| | | 249,734 | | | 259,063 |
| | |
Other Assets | | | | | | |
Goodwill | | | 521,435 | | | 521,435 |
Intangible assets, net | | | 212,947 | | | 216,680 |
Other assets | | | 27,064 | | | 28,083 |
| | | | | | |
| | | 761,446 | | | 766,198 |
| | | | | | |
| | $ | 1,268,791 | | $ | 1,263,763 |
| | | | | | |
| LIABILITIES AND SHAREHOLDER’S EQUITY | | | | | | |
Current Liabilities | | | | | | |
Current maturities of long-term debt | | $ | 841 | | $ | 837 |
Accounts payable | | | 71,553 | | | 72,246 |
Accrued liabilities | | | | | | |
Compensation | | | 10,812 | | | 11,894 |
Customer programs | | | 36,108 | | | 39,766 |
Interest | | | 9,921 | | | 2,497 |
Other | | | 25,659 | | | 32,904 |
| | | | | | |
Total Current Liabilities | | | 154,894 | | | 160,144 |
Long-term debt, less current maturities | | | 644,612 | | | 644,957 |
Deferred income taxes | | | 113,610 | | | 117,616 |
Other long-term liabilities | | | 23,602 | | | 16,252 |
| | |
Shareholder’s equity | | | | | | |
Common stock, $0.01 par value, 3,000 shares authorized, issued and outstanding March 31, 2007 and December 31, 2006 | | | — | | | — |
Additional paid-in capital | | | 265,261 | | | 260,935 |
Retained earnings | | | 64,768 | | | 61,466 |
Accumulated other comprehensive income | | | 2,044 | | | 2,393 |
| | | | | | |
| | | 332,073 | | | 324,794 |
| | | | | | |
| | $ | 1,268,791 | | $ | 1,263,763 |
| | | | | | |
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)
| | | | | | |
| | | 2007 | | 2006 |
Net sales | | $ | 327,931 | | $ | 307,391 |
Cost of sales | | | 271,808 | | | 252,504 |
| | | | | | |
Gross profit | | | 56,123 | | | 54,887 |
Selling, general and administrative expenses | | | 36,101 | | | 35,643 |
Plant closing expenses | | | 185 | | | — |
| | | | | | |
Operating profit | | | 19,837 | | | 19,244 |
Interest expense, net | | | 13,364 | | | 12,639 |
| | | | | | |
Earnings before income taxes and equity in losses of unconsolidated subsidiary | | | 6,473 | | | 6,605 |
Income tax expense | | | 2,523 | | | 2,370 |
| | | | | | |
Earnings before equity in losses of unconsolidated subsidiary | | | 3,950 | | | 4,235 |
Equity in losses of unconsolidated subsidiary | | | — | | | 116 |
| | | | | | |
Net earnings | | $ | 3,950 | | $ | 4,119 |
| | | | | | |
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)
| | | | | | | | |
| | | 2007 | | | 2006 | |
Net cash provided by operating activities | | $ | 7,211 | | | $ | 3,577 | |
Cash flows from investing activities: | | | | | | | | |
Capital expenditures | | | (5,846 | ) | | | (6,589 | ) |
Other assets | | | (98 | ) | | | 48 | |
| | | | | | | | |
Net cash used in investing activities | | | (5,944 | ) | | | (6,541 | ) |
Cash flows from financing activities: | | | | | | | | |
Payments on long-term debt | | | (471 | ) | | | (343 | ) |
| | | | | | | | |
Net cash used in financing activities | | | (471 | ) | | | (343 | ) |
Effect of exchange rate changes on cash | | | 23 | | | | 2 | |
| | | | | | | | |
Net increase (decrease) in cash and equivalents | | | 819 | | | | (3,305 | ) |
Cash and equivalents at beginning of period | | | 21,576 | | | | 42,179 | |
| | | | | | | | |
Cash and equivalents at end of period | | $ | 22,395 | | | $ | 38,874 | |
| | | | | | | | |
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 AND SIGNIFICANT ACCOUNTING POLICIES
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 quarterly period ended March 31, 2007 was a 13 week period and the quarterly period ended April 1, 2006 was a 13 week period. 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, 2007 are not necessarily indicative of the results expected for the full year.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a material impact on our consolidated financial position or results of operations.
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) effective January 1, 2007. As a result of the adoption of FIN 48, we recognized a charge of approximately $0.7 million to the January 1, 2007 retained earnings balance. As of the adoption date, we had gross tax affected unrecognized tax benefits of approximately $7.6 million, of which $2.5 million, if recognized, would affect our effective tax rate. Also, as of the date of adoption we had accrued penalties and interest expense related to the unrecognized tax benefits of $1.7 million. We recognize penalties and interest expense related to unrecognized tax benefits in interest expense. There were no significant changes to these amounts during the quarter ended March 31, 2007.
Our uncertain tax positions are related to tax years that remain subject to examination. As of the date of adoption, the United States and Minnesota jurisdictions remain subject to examination for tax years 2003 through 2006 and the New Jersey jurisdiction for tax years 2000 through 2006.
Included in the balance of unrecognized tax benefits at January 1, 2007 is $4.3 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. These unrecognized tax benefits are primarily comprised of items related to state income tax audits and expiring statutes.
Goodwill and Intangible Assets
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 assessment of market value 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.
5
Each segment’s share of goodwill was as follows (in thousands):
| | | | | | |
| | | March 31, 2007 | | December 31, 2006 |
Egg Products | | $ | 428,940 | | $ | 428,940 |
Refrigerated Distribution | | | 32,290 | | | 32,290 |
Potato Products | | | 60,205 | | | 60,205 |
| | | | | | |
| | $ | 521,435 | | $ | 521,435 |
| | | | | | |
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. Straight-line amortization reflects an appropriate allocation of the cost of intangible assets to earnings in proportion to the amount of economic benefit obtained by the Company in each reporting period. 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, 2007 | | | December 31, 2006 | |
Amortizable intangible assets, principally customer relationships | | $ | 230,615 | | | $ | 230,615 | |
Accumulated amortization | | | (51,793 | ) | | | (47,960 | ) |
| | | | | | | | |
| | | 178,822 | | | | 182,655 | |
Indefinite lived intangible assets, trademarks | | | 34,125 | | | | 34,025 | |
| | | | | | | | |
| | $ | 212,947 | | | $ | 216,680 | |
| | | | | | | | |
The aggregate amortization expense was $3,833,000 for the three months ended March 31, 2007 and was $3,890,000 for the three months ended March 31, 2006. The estimated amortization expense for the years ending December 31, 2007 through December 31, 2011 is as follows (in thousands):
| | | |
2007 | | $ | 15,331 |
2008 | | | 15,331 |
2009 | | | 15,331 |
2010 | | | 15,331 |
2011 | | | 15,331 |
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 as a component of 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, 2007 | | | December 31, 2006 | |
Deferred financing costs | | $ | 31,435 | | | $ | 31,435 | |
Accumulated amortization | | | (15,288 | ) | | | (14,272 | ) |
| | | | | | | | |
| | $ | 16,147 | | | $ | 17,163 | |
| | | | | | | | |
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 12 to 18 months, assuming no salvage value.
6
Inventories consisted of the following (in thousands):
| | | | | | |
| | | March 31, 2007 | | December 31, 2006 |
Raw materials and supplies | | $ | 19,403 | | $ | 18,485 |
Work in process and finished goods | | | 65,746 | | | 62,220 |
Flocks | | | 23,583 | | | 22,715 |
| | | | | | |
| | $ | 108,732 | | $ | 103,420 |
| | | | | | |
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
In March 2007, we recorded a $4.3 million non-cash capital contribution from our parent, M-Foods Holdings, Inc. (“Holdings”) related to the tax benefit the Company receives on Holdings’ interest deduction due to filing a consolidated Federal tax return with Holdings.
Comprehensive Income
The components of and changes in accumulated other comprehensive income (loss), net of taxes, during the three months ended March 31, 2007 were as follows (in thousands):
| | | | | | | | | | | |
| | | Cash Flow Hedges | | | Foreign Currency Translation | | Total | |
Balance at December 31, 2006 | | $ | — | | | $ | 2,393 | | $ | 2,393 | |
Foreign currency translation adjustment | | | — | | | | 10 | | | 10 | |
Change due to cash flow hedges | | | (359 | ) | | | — | | | (359 | ) |
| | | | | | | | | | | |
Balance at March 31, 2007 | | $ | (359 | ) | | $ | 2,403 | | $ | 2,044 | |
| | | | | | | | | | | |
Comprehensive income, net of taxes, for the three months ended March 31, 2007 and 2006 was as follows (in thousands):
| | | | | | | |
Net earnings for the three months ended March 31, 2007 | | | | | $ | 3,950 | |
Net gains (losses) arising during the period: | | | | | | | |
Change due to cash flow hedges | | (359 | ) | | | | |
Foreign currency translation adjustment | | 10 | | | | | |
| | | | | | | |
| | | | | | | |
Other comprehensive loss | | | | | | (349 | ) |
| | | | | | | |
Comprehensive income for the three months ended March 31, 2007 | | | | | $ | 3,601 | |
| | | | | | | |
| | |
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 | |
| | | | | | | |
7
NOTE E—PLANT CLOSING
In November 2006, we announced our decision to close the St. Marys, Ontario egg processing plant due to rising operating costs. The facility was closed on March 31, 2007. In December 2006, we recorded $3,139,000 of plant closing expenses, including employee termination costs of $245,000 and asset impairment charges of $2,894,000 related to the leased building and plant equipment, as well as other plant assets which can not be utilized in other of our processing facilities. We recorded an additional $185,000 (shown on a separate line in the Condensed Consolidated Statements of Earnings) of employee termination costs during the period ended March 31, 2007 reflected in the Egg Products Division segment’s operating income, for a cumulative total of $430,000. We paid $338,000 of the $430,000 during the period ended March 31, 2007. As of March 31, 2007 our accrual related to these employee terminations costs is $92,000. We anticipate incurring an additional $400,000 in other plant closing related costs during the second quarter of 2007.
NOTE F—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 &
ELIMINATIONS | | | TOTAL |
Three months ended March 31, 2007: | | | | | | | | | | | | | | | | |
External net sales | | $ | 229,228 | | $ | 70,190 | | $ | 28,513 | | $ | — | | | $ | 327,931 |
Intersegment sales | | | 3,429 | | | — | | | 4,932 | | | (8,361 | ) | | | — |
Operating profit (loss) | | | 13,774 | | | 4,437 | | | 3,979 | | | (2,353 | ) | | | 19,837 |
Depreciation and amortization | | | 16,358 | | | 1,083 | | | 1,628 | | | 3 | | | | 19,072 |
| | | | | |
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 |
NOTE G—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, 2007 and December 31, 2006, together with our condensed consolidating statements of earnings and cash flows for the three month periods ended March 31, 2007 and 2006. 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, 2007
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor
Subsidiaries | | | Non-Guarantor
Subsidiary | | | Eliminations | | | Consolidated |
| Assets | | | | | | | | | | | | | | | | | | | |
| | | | | |
Current Assets | | | | | | | | | | | | | | | | | | | |
Cash and equivalents | | $ | 19,956 | | | $ | — | | | $ | 2,439 | | | $ | — | | | $ | 22,395 |
Accounts receivable, less allowances | | | 6,736 | | | | 122,793 | | | | 5,732 | | | | (22,153 | ) | | | 113,108 |
Inventories | | | — | | | | 98,101 | | | | 10,631 | | | | — | | | | 108,732 |
Prepaid expenses and other | | | 1,113 | | | | 12,121 | | | | 142 | | | | — | | | | 13,376 |
| | | | | | | | | | | | | | | | | | | |
Total current assets | | | 27,805 | | | | 233,015 | | | | 18,944 | | | | (22,153 | ) | | | 257,611 |
| | | | | | | | | | | | | | | | | | | |
Property, Plant and Equipment—net | | | 21 | | | | 235,182 | | | | 14,531 | | | | — | | | | 249,734 |
| | | | | | | | | | | | | | | | | | | |
| | | | | |
Other assets: | | | | | | | | | | | | | | | | | | | |
Goodwill | | | — | | | | 518,409 | | | | 3,026 | | | | — | | | | 521,435 |
Other assets | | | 16,819 | | | | 238,489 | | | | 2,410 | | | | (17,707 | ) | | | 240,011 |
Investment in subsidiaries | | | 932,924 | | | | (8,070 | ) | | | — | | | | (924,854 | ) | | | — |
| | | | | | | | | | | | | | | | | | | |
| | | 949,743 | | | | 748,828 | | | | 5,436 | | | | (942,561 | ) | | | 761,446 |
| | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 977,569 | | | $ | 1,217,025 | | | $ | 38,911 | | | $ | (964,714 | ) | | $ | 1,268,791 |
| | | | | | | | | | | | | | | | | | | |
| Liabilities and Shareholder’s Equity | | | | | | | | | | | | | | | | | | | |
| | | | | |
Current Liabilities | | | | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | — | | | $ | — | | | $ | 841 | | | $ | — | | | $ | 841 |
Accounts payable | | | 163 | | | | 76,722 | | | | 16,821 | | | | (22,153 | ) | | | 71,553 |
Accrued liabilities | | | 18,120 | | | | 62,277 | | | | 2,103 | | | | — | | | | 82,500 |
| | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 18,283 | | | | 138,999 | | | | 19,765 | | | | (22,153 | ) | | | 154,894 |
Long-term debt, less current maturities | | | 616,600 | | | | 21,000 | | | | 27,332 | | | | (20,320 | ) | | | 644,612 |
Deferred income taxes | | | (12,911 | ) | | | 126,523 | | | | (116 | ) | | | 114 | | | | 113,610 |
Other long-term liabilities | | | 23,524 | | | | 78 | | | | — | | | | — | | | | 23,602 |
Shareholder’s equity | | | 332,073 | | | | 930,425 | | | | (8,070 | ) | | | (922,355 | ) | | | 332,073 |
| | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholder’s equity | | $ | 977,569 | | | $ | 1,217,025 | | | $ | 38,911 | | | $ | (964,714 | ) | | $ | 1,268,791 |
| | | | | | | | | | | | | | | | | | | |
9
Condensed Consolidating Balance Sheets
December 31, 2006
(in thousands)
| | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor
Subsidiaries | | | Non-Guarantor
Subsidiary | | | Eliminations | | | Consolidated |
| Assets | | | | | | | | | | | | | | | | | | | |
| | | | | |
Current Assets | | | | | | | | | | | | | | | | | | | |
Cash and equivalents | | $ | 20,727 | | | $ | — | | | $ | 849 | | | $ | — | | | $ | 21,576 |
Accounts receivable, less allowances | | | 4,278 | | | | 110,775 | | | | 7,065 | | | | (16,813 | ) | | | 105,305 |
Inventories | | | — | | | | 93,480 | | | | 9,940 | | | | — | | | | 103,420 |
Prepaid expenses and other | | | 538 | | | | 7,393 | | | | 270 | | | | — | | | | 8,201 |
| | | | | | | | | | | | | | | | | | | |
Total current assets | | | 25,543 | | | | 211,648 | | | | 18,124 | | | | (16,813 | ) | | | 238,502 |
| | | | | | | | | | | | | | | | | | | |
Property, Plant and Equipment - net | | | 24 | | | | 244,070 | | | | 14,969 | | | | — | | | | 259,063 |
| | | | | | | | | | | | | | | | | | | |
Other assets: | | | | | | | | | | | | | | | | | | | |
Goodwill | | | — | | | | 518,409 | | | | 3,026 | | | | — | | | | 521,435 |
Other assets | | | 17,836 | | | | 242,225 | | | | 2,410 | | | | (17,708 | ) | | | 244,763 |
Investment in subsidiaries | | | 923,218 | | | | (7,452 | ) | | | — | | | | (915,766 | ) | | | — |
| | | | | | | | | | | | | | | | | | | |
| | | 941,054 | | | | 753,182 | | | | 5,436 | | | | (933,474 | ) | | | 766,198 |
| | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 966,621 | | | $ | 1,208,900 | | | $ | 38,529 | | | $ | (950,287 | ) | | $ | 1,263,763 |
| | | | | | | | | | | | | | | | | | | |
| Liabilities and Shareholder’s Equity | | | | | | | | | | | | | | | | | | | |
| | | | | |
Current Liabilities | | | | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | — | | | $ | — | | | $ | 837 | | | $ | — | | | $ | 837 |
Accounts payable | | | 265 | | | | 73,023 | | | | 15,753 | | | | (16,795 | ) | | | 72,246 |
Accrued liabilities | | | 19,398 | | | | 65,853 | | | | 1,810 | | | | — | | | | 87,061 |
| | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 19,663 | | | | 138,876 | | | | 18,400 | | | | (16,795 | ) | | | 160,144 |
Long-term debt, less current maturities | | | 615,064 | | | | 22,536 | | | | 27,581 | | | | (20,224 | ) | | | 644,957 |
Deferred income taxes and other | | | (9,152 | ) | | | 126,768 | | | | — | | | | — | | | | 117,616 |
Deferred compensation | | | 16,252 | | | | — | | | | — | | | | — | | | | 16,252 |
Shareholder’s equity | | | 324,794 | | | | 920,720 | | | | (7,452 | ) | | | (913,268 | ) | | | 324,794 |
| | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholder’s equity | | $ | 966,621 | | | $ | 1,208,900 | | | $ | 38,529 | | | $ | (950,287 | ) | | $ | 1,263,763 |
| | | | | | | | | | | | | | | | | | | |
10
Condensed Consolidating Statements of Earnings
Three months ended March 31, 2007
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor
Subsidiaries | | | Non-Guarantor
Subsidiary | | | Eliminations | | | Consolidated |
Net sales | | $ | — | | | $ | 326,760 | | | $ | 13,929 | | | $ | (12,758 | ) | | $ | 327,931 |
Cost of sales | | | — | | | | 271,628 | | | | 12,938 | | | | (12,758 | ) | | | 271,808 |
| | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 55,132 | | | | 991 | | | | — | | | | 56,123 |
Selling, general and administrative expenses | | | 2,353 | | | | 34,332 | | | | 994 | | | | (1,578 | ) | | | 36,101 |
Plant closing expenses | | | — | | | | — | | | | 185 | | | | — | | | | 185 |
| | | | | | | | | | | | | | | | | | | |
Operating profit (loss) | | | (2,353 | ) | | | 20,800 | | | | (188 | ) | | | 1,578 | | | | 19,837 |
Interest expense, net | | | 13,048 | | | | (126 | ) | | | 442 | | | | — | | | | 13,364 |
Other expense (income) | | | (1,578 | ) | | | — | | | | — | | | | 1,578 | | | | — |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes | | | (13,823 | ) | | | 20,926 | | | | (630 | ) | | | — | | | | 6,473 |
Equity in earnings (loss) of subsidiaries | | | 13,263 | | | | (628 | ) | | | — | | | | (12,635 | ) | | | — |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before income taxes | | | (560 | ) | | | 20,298 | | | | (630 | ) | | | (12,635 | ) | | | 6,473 |
Income tax expense (benefit) | | | (4,510 | ) | | | 7,035 | | | | (2 | ) | | | — | | | | 2,523 |
| | | | | | | | | | | | | | | | | | | |
Net earnings (loss) | | $ | 3,950 | | | $ | 13,263 | | | $ | (628 | ) | | $ | (12,635 | ) | | $ | 3,950 |
| | | | | | | | | | | | | | | | | | | |
11
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 | ) | | | — | | | | — | | | | 1,491 | | | | — |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before equity in earnings (loss) of subsidiaries, income taxes and equity in losses of unconsolidated subsidiary | | | (13,275 | ) | | | 21,512 | | | | (1,632 | ) | | | — | | | | 6,605 |
Equity in earnings (loss) of subsidiaries | | | 12,536 | | | | (999 | ) | | | — | | | | (11,537 | ) | | | — |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before income taxes and equity in losses of unconsolidated subsidiary | | | (739 | ) | | | 20,513 | | | | (1,632 | ) | | | (11,537 | ) | | | 6,605 |
Income tax expense (benefit) | | | (4,858 | ) | | | 7,861 | | | | (633 | ) | | | — | | | | 2,370 |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) before equity in losses of unconsolidated subsidiary | | | 4,119 | | | | 12,652 | | | | (999 | ) | | | (11,537 | ) | | | 4,235 |
Equity in losses of unconsolidated subsidiary | | | — | | | | 116 | | | | — | | | | — | | | | 116 |
| | | | | | | | | | | | | | | | | | | |
Net earnings (loss) | | $ | 4,119 | | | $ | 12,536 | | | $ | (999 | ) | | $ | (11,537 | ) | | $ | 4,119 |
| | | | | | | | | | | | | | | | | | | |
12
Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2007
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Guarantor
Subsidiaries | | | Non-Guarantor
Subsidiary | | | Eliminations | | | Consolidated | |
Net cash provided by (used in) operating activities | | $ | 10,259 | | | $ | 7,427 | | | $ | 2,046 | | | $ | (12,521 | ) | | $ | 7,211 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (5,725 | ) | | | (121 | ) | | | — | | | | (5,846 | ) |
Investments in joint ventures and other assets | | | — | | | | (98 | ) | | | — | | | | — | | | | (98 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | — | | | | (5,823 | ) | | | (121 | ) | | | — | | | | (5,944 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Payments on long-term debt | | | 1,536 | | | | (1,536 | ) | | | (471 | ) | | | — | | | | (471 | ) |
Investment in subsidiaries | | | (12,566 | ) | | | (68 | ) | | | 113 | | | | 12,521 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (11,030 | ) | | | (1,604 | ) | | | (358 | ) | | | 12,521 | | | | (471 | ) |
Effect of exchange rate changes on cash | | | — | | | | — | | | | 23 | | | | — | | | | 23 | |
| | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash and equivalents | | | (771 | ) | | | — | | | | 1,590 | | | | — | | | | 819 | |
Cash and equivalents at beginning of period | | | 20,727 | | | | — | | | | 849 | | | | — | | | | 21,576 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and equivalents at end of period | | $ | 19,956 | | | $ | — | | | $ | 2,439 | | | $ | — | | | $ | 22,395 | |
| | | | | | | | | | | | | | | | | | | | |
13
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 | ) |
Investments in joint ventures and 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 (used in) provided by financing activities | | | (8,987 | ) | | | 9,036 | | | | (392 | ) | | | (343 | ) |
Effect of exchange rate changes on cash | | | — | | | | — | | | | 2 | | | | 2 | |
| | | | | | | | | | | | | | | | |
Net (decrease) increase 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 | |
| | | | | | | | | | | | | | | | |
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. Generally, 70-75% 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. Shell egg pricing, which is generally indicative of the price trend for external eggs we purchase to convert into liquid, and which often foretells market pricing for an array of egg products, was approximately 76% higher in the first three months of 2007 than in the comparable 2006 period (as measured by Urner Barry Publications). Feed costs, determined largely by corn and soybean meal prices, increased approximately 38% year-over-year in the 2007 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 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 the Potato Products Division’s operating results.
Results of Operations
Readers are directed to Note F—Business Segments for data on the unaudited financial results of our business segments for the three month period ended March 31, 2007.
Three Months Ended March 31, 2007 as Compared to Three Months Ended March 31, 2006
Net Sales.Net sales for the three months ended March 31, 2007 increased $20.5 million, or 7%, to $327.9 million from $307.4 million for the three months ended March 31, 2006. We experienced increased sales reflecting increased volume and higher market-related pricing.
Egg Products Division Net Sales.Egg Products Division external net sales for the three months ended March 31, 2007 increased $16.2 million, or 8%, to $229.2 million from $213.0 million for the three months ended March 31, 2006. External net sales in the 2007 period increased for most of our egg products categories, with certain food ingredient product lines showing the strongest gains, as compared to the 2006 period. Unit sales increased for most categories, with overall unit sales for Egg Products up 2% from 2006 period levels. Year-over-year pricing improved for most lines, with significant gains seen in food ingredient egg products, reflecting higher market-related pricing. Sales of higher value-added egg products represented approximately 71% of the Egg Products Division’s net sales in the 2007 period and 73% in the 2006 period.
15
Refrigerated Distribution Division Net Sales.Refrigerated Distribution Division external net sales for the three months ended March 31, 2007 increased $1.6 million, or 2%, to $70.2 million from $68.6 million for the three months ended March 31, 2006. This increase was due primarily to a 25% increase in shell egg sales, reflecting sharply higher market pricing year-over-year. Unit sales for distributed products (i.e., excluding shell eggs) decreased 1% in the 2007 period as compared to the 2006 period, reflecting lower cheese promotional spending.
Potato Products Division Net Sales.Potato Products Division external net sales for the three months ended March 31, 2007 increased $2.7 million, or 11%, to $28.5 million from $25.8 million for the three months ended March 31, 2006. Unit sales increased 6% in the 2007 period, as compared to 2006 period levels. As has been the case for approximately two years, the unit sales growth of our retail potato products was strong, rising 8% year-over-year. As a category, retail refrigerated potato products have experienced notable growth since 2005. Pricing for our potato products improved in both the foodservice and retail trade channels in the 2007 period as compared to the 2006 period.
Gross Profit.Gross profit for the three months ended March 31, 2007 increased $1.2 million, or 2%, to $56.1 million from $54.9 million for the three months ended March 31, 2006. Our gross profit margin decreased to 17.1% compared to 17.9% in the same period in 2006. The lower gross profit margin mainly reflected a decreased gross profit margin in the Egg Products Division, reflecting increased egg costs which we were unable to fully pass-through to our customers in a timely manner. Somewhat offsetting this gross margin pressure was a positive gross margin contribution from food ingredient egg products as compared to the 2006 period.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for the three months ended March 31, 2007 increased $0.6 million, or 1%, to $36.1 million from $35.5 million for the three months ended March 31, 2006. Selling, general and administrative expenses decreased to 11.0% of net sales in the 2007 period compared with 11.6% for the 2006 period, reflecting the relatively strong sales growth we experienced and effective cost management.
Operating Profit.Operating profit for the three months ended March 31, 2007 increased $0.6 million, or approximately 3%, to $19.8 million from $19.2 million for the three months ended March 31, 2006. Our operating profit margin decreased to 6.0% in the 2007 period from 6.3% in the 2006 period due to a decline in gross profit margin noted above.
Egg Products Division Operating Profit.Egg Products Division operating profit for the three months ended March 31, 2007 decreased $1.4 million, or 9%, to $13.8 million from $15.2 million for the three months ended March 31, 2006. Operating profits decreased for all higher value-added lines, with food ingredient egg products showing improved results year-over-year. For the Division’s core higher value-added products, we experienced significantly rising ingredient costs, mainly from internal and external eggs, which could not, in many cases, be readily passed-through to customers in a timely manner.
Refrigerated Distribution Division Operating Profit.Refrigerated Distribution Division operating profit for the three months ended March 31, 2007 increased $1.2 million, or 36%, to $4.4 million from $3.2 million for the three months ended March 31, 2006. Operating profits for our key product line, branded cheese, increased significantly in the 2007 period, as compared to the 2006 period, due to lower cheese promotional spending.
Potato Products Division Operating Profit.Potato Products Division operating profit for the three months ended March 31, 2007 increased $0.6 million, or 16%, to $4.0 million from $3.4 million for the three months ended March 31, 2006. This reflected higher operating profits from both foodservice and retail sales in the 2007 period, as compared to the 2006 period, mainly as a result of good volume growth and improved pricing.
Equity in Losses of Unconsolidated Subsidiary. A loss of $116,000 was recorded in the 2006 period. The loss relates to our Belgian joint venture.
Interest Expense and Income Taxes.Net interest expense increased by approximately $0.7 million in the 2007 period compared to the 2006 period, reflecting higher interest rates and additional amortization of debt issuance costs. Our effective tax rate on earnings before equity in losses of unconsolidated subsidiary was 39.0% in the 2007 period compared to 35.9% in the 2006 period. The effective rate was affected by the amount of permanent differences between book and taxable income, including the qualified production activities deduction created by The American Jobs Creation Act of 2004. Additionally, the rate for 2007 was affected by the increase in the valuation allowance associated with one of our foreign subsidiaries.
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.
16
Cash flow provided by operating activities was $7.2 million for the three months ended March 31, 2007, compared to $3.6 million in the comparable 2006 period. The improvement in cash flow provided by operating activities in the 2007 period was largely due to losses from cash flow hedges recorded in the comparable 2006 period. Our cash flows used in investing activities decreased to $5.9 million for the three months ended March 31, 2007 from $6.5 million for the 2006 period. Cash flows from financing activities included payments on long term debt. 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, 2007.
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, 2007 and 2006. 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, | |
| | | 2007 | | | 2006 | |
| | | (Unaudited, in thousands) | |
Calculation of Interest Coverage Ratio: | | | | | | | | |
Consolidated EBITDA (1) | | $ | 180,704 | | | $ | 178,148 | |
Consolidated Cash Interest Expense (2) | | | 53,170 | | | | 47,444 | |
Actual Interest Coverage Ratio (Ratio of consolidated EBITDA to consolidated interest expense) | | | 3.40 x | | | | 3.75 x | |
Minimum Permitted Interest Coverage Ratio | | | 2.50 x | | | | 2.25 x | |
Calculation of Leverage Ratio: | | | | | | | | |
Funded Indebtedness (3) | | $ | 657,716 | | | $ | 722,030 | |
Less: Cash and equivalents | | | (22,395 | ) | | | (38,874 | ) |
| | | | | | | | |
Funded Indebtedness, net of cash | | | 635,321 | | | | 683,156 | |
Consolidated EBITDA (1) | | | 180,704 | | | | 178,148 | |
Actual Leverage Ratio (Ratio of funded indebtedness less cash and equivalents to consolidated EBITDA) | | | 3.52 x | | | | 3.83 x | |
Maximum Permitted Leverage Ratio | | | 5.00 x | | | | 5.25 x | |
17
| (1) | Consolidated EBITDA (earnings before interest expense, taxes, depreciation and amortization) is defined in our senior credit facility as follows: |
| | | | | | | |
| | | Twelve Months Ended March 31, | |
| | | 2007 | | 2006 | |
| | | (Unaudited, in thousands) | |
Net earnings | | $ | 18,986 | | $ | 36,134 | |
Interest expense, excluding amortization of debt issuance costs | | | 51,804 | | | 46,280 | |
Amortization of debt issuance costs | | | 5,378 | | | 1,858 | |
Income tax expense | | | 16,447 | | | 12,532 | |
Depreciation and amortization | | | 75,092 | | | 71,390 | |
Equity sponsor management fee | | | 1,787 | | | 1,824 | |
Expenses related to industrial revenue bonds guaranteed by certain of our subsidiaries | | | 993 | | | 973 | |
Other (a) | | | 10,501 | | | 6,769 | |
| | | | | | | |
| | | 180,988 | | | 177,760 | |
Less: Unrealized gains (losses) on swap contracts | | | 284 | | | (388 | ) |
| | | | | | | |
Consolidated EBITDA, as defined in our senior credit facility | | $ | 180,704 | | $ | 178,148 | |
| | | | | | | |
| (a) | Reflects the following: |
| | | | | | | |
| | | Twelve Months Ended March 31, | |
| | | 2007 | | 2006 | |
| | | (Unaudited, in thousands) | |
Equity in losses (earnings) of unconsolidated subsidiaries | | $ | 2,597 | | $ | (58 | ) |
Losses from the disposition of assets not in the ordinary course of business | | | 2,979 | | | 116 | |
Non-cash compensation | | | 1,892 | | | 1,027 | |
Debt extinguishment expenses which do not represent a cash item | | | — | | | 4,134 | |
Letter of credit fees | | | 138 | | | 138 | |
Other non-recurring charges | | | 2,895 | | | 1,412 | |
| | | | | | | |
| | $ | 10,501 | | $ | 6,769 | |
| | | | | | | |
| (2) | Consolidated cash interest expense, as calculated in our senior credit facility, was as follows: |
| | | | | | |
| | | Twelve Months Ended March 31, |
| | | 2007 | | 2006 |
| | | (Unaudited, in thousands) |
Interest expense, net | | $ | 56,653 | | $ | 47,780 |
Interest income | | | 1,895 | | | 1,522 |
| | | | | | |
Gross interest expense | | | 58,548 | | | 49,302 |
| | |
minus: | | | | | | |
Amortization of debt issuance costs | | | 5,378 | | | 1,858 |
| | | | | | |
Consolidated cash interest expense | | $ | 53,170 | | $ | 47,444 |
| | | | | | |
18
| (3) | Funded indebtedness was as follows: |
| | | | | | |
| | | March 31, |
| | | 2007 | | 2006 |
| | | (Unaudited, in thousands) |
Term loan facility | | $ | 477,300 | | $ | 540,000 |
8% senior subordinated notes | | | 150,000 | | | 150,000 |
Insurance bonds | | | 404 | | | 201 |
Guarantee obligations (see debt guarantees described below) | | | 15,648 | | | 15,989 |
Capital leases | | | 5,477 | | | 6,183 |
Standby letters of credit (primarily with our casualty insurance carrier) | | | 6,461 | | | 6,815 |
Funded indebtedness of Trilogy Egg Products, Inc. | | | 2,376 | | | 2,792 |
Other | | | 50 | | | 50 |
| | | | | | |
| | $ | 657,716 | | $ | 722,030 |
| | | | | | |
We use EBITDA as a measurement of our financial results because we believe it is indicative of the relative strength of our operating performance, it is used to determine incentive compensation levels and it is a key measurement contained in the financial covenants of our senior indebtedness.
As of March 31, 2007, approximately $477.3 million was outstanding under the senior credit facility, and additional capacity of approximately $6.5 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 7.4% at March 31, 2007. 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 three municipalities where we have food processing facilities. The repayment of these bonds is funded through the wastewater treatment charges paid by us to the three municipalities. 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, 2007 was approximately $15.6 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, 2007 was $127.4 million. As a wholly-owned subsidiary of M-Foods Holdings, Inc., we are responsible for servicing 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 $5.8 million in capital expenditures in the three months ended March 31, 2007. We plan to spend approximately $41 million in total capital expenditures for 2007, which has been, or will be, used to expanded capacity for higher value-added egg products, maintain existing production facilities, replace tractors and trailers, and to upgrade information technology systems, among other projects. 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, 2007. 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, 2006.
| 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 officers, 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, 2007. Based on these evaluations, our principal executive and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2007.
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, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Readers are directed to our Form 10-K for 2006 filed March 29, 2007, 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.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBIT INDEX
| | |
| Exhibit No. | | Description |
| 10.40 | | Employment Agreement dated as of April 2, 2007, by and among Michael Foods, Inc., David S. Johnson and Michael Foods Investors, LLC |
| |
| 10.41 | | First Amendment to Michael Foods Investors, LLC Amended and Restated Limited Liability Company Agreement |
| |
| 10.42 | | First Amendment to Michael Foods Investors, LLC Securityholders Agreement |
| |
| 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 14, 2007 | | 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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