UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-15568
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MICHAEL FOODS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 41-1579532
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 324, Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, MN 55416
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(Address of principal executive offices) (Zip Code)
(612) 546-1500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ]Yes [ ]No
The number of shares outstanding of the registrant's Common Stock, $.01
par value, as of August 14, 1995 was 19,332,001 shares.
1
PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, December 31,
1995 1994
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,454,000 $ 1,641,000
Accounts receivable, less allowances 36,471,000 36,622,000
Inventories 50,926,000 54,631,000
Prepaid expenses and other 1,625,000 1,091,000
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Total current assets 91,476,000 93,985,000
PROPERTY PLANT AND EQUIPMENT-AT COST
Land 4,149,000 4,149,000
Buildings and improvements 95,086,000 93,807,000
Machinery and equipment 191,854,000 182,805,000
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291,089,000 280,761,000
Less accumulated depreciation 110,973,000 99,702,000
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180,116,000 181,059,000
OTHER ASSETS
Goodwill, net 46,734,000 47,439,000
Net assets held for sale 7,462,000 7,761,000
Other 7,864,000 6,401,000
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62,060,000 61,601,000
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$333,652,000 $336,645,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 11,816,000 $ 11,809,000
Accounts payable 26,275,000 26,360,000
Accrued compensation 4,066,000 5,168,000
Accrued insurance 6,900,000 6,326,000
Other accrued expenses 13,422,000 10,733,000
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Total current liabilities 62,479,000 60,396,000
LONG-TERM DEBT, less current maturities 76,159,000 88,795,000
DEFERRED INCOME TAXES 22,662,000 21,425,000
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
3,000,000 shares authorized, none
issued -- --
Common stock, $.01 par value,
25,000,000 shares authorized,
19,945,913 shares issued at
June 30, 1995 199,000 199,000
Additional paid-in capital 117,979,000 117,640,000
Retained earnings 59,785,000 53,801,000
Treasury stock, 613,912 shares-at cost (5,611,000) (5,611,000)
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172,352,000 166,029,000
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$333,652,000 $336,645,000
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See accompanying notes to condensed consolidated financial statements.
2
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30, (Unaudited)
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1995 1994
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Net sales $130,872,000 $125,530,000
Cost of sales 110,921,000 107,199,000
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Gross profit 19,951,000 18,331,000
Selling, general and administrative expenses 11,122,000 10,177,000
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Operating profit 8,829,000 8,154,000
Other (income) expense
Interest expense 2,050,000 2,277,000
Interest capitalized (32,000) (103,000)
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2,018,000 2,174,000
Interest income (52,000) (13,000)
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1,966,000 2,161,000
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Earnings before income taxes 6,863,000 5,993,000
Income tax expense 2,640,000 2,300,000
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NET EARNINGS $ 4,223,000 $ 3,693,000
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NET EARNINGS PER SHARE $ .22 $ .19
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DIVIDENDS PER SHARE $ .05 $ .05
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Weighted average shares outstanding 19,332,000 19,316,000
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See accompanying notes to condensed consolidated financial statements.
3
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, (Unaudited)
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1995 1994
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Net sales $257,564,000 $247,171,000
Cost of sales 217,670,000 211,672,000
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Gross profit 39,894,000 35,499,000
Selling, general and administrative expenses 22,925,000 20,032,000
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Operating profit 16,969,000 15,467,000
Other (income) expense
Interest expense 4,235,000 4,458,000
Interest capitalized (52,000) (172,000)
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4,183,000 4,286,000
Interest income (79,000) (23,000)
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4,104,000 4,263,000
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Earnings before income taxes 12,865,000 11,204,000
Income tax expense 4,950,000 4,300,000
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NET EARNINGS $ 7,915,000 $ 6,904,000
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NET EARNINGS PER SHARE $ .41 $ .36
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DIVIDENDS PER SHARE $ .10 $ .10
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Weighted average shares outstanding 19,323,000 19,316,000
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See accompanying notes to condensed consolidated financial statements.
4
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Unaudited)
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1995 1994
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Net cash provided by operating activities $27,241,000 $13,590,000
Cash flows from investing activities:
Capital expenditures (10,637,000) (9,892,000)
Net assets held for sale (34,000) 1,635,000
Other assets (1,535,000) (1,335,000)
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Net cash used in investing activities (12,206,000) (9,592,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 339,000 --
Proceeds from long-term debt 28,103,000 49,800,000
Payments on long-term debt (40,732,000) (49,451,000)
Cash dividends (1,932,000) (1,932,000)
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Net cash used in financing activities (14,222,000) (1,583,000)
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Net increase in cash and cash equivalents 813,000 2,415,000
Cash and cash equivalents at beginning of year 1,641,000 223,000
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Cash and cash equivalents at end of period $ 2,454,000 $ 2,638,000
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See accompanying notes to condensed consolidated financial statements.
5
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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June 30, 1995 and 1994
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Regulation S-X pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures are adequate to make the information presented not
misleading.
Effective the first quarter of 1994, the Company began utilizing a fiscal year
consisting of either 52 or 53 weeks, ending on the Saturday nearest to December
31 each year. The quarters ended June 30, 1995 and June 30, 1994 each include
thirteen weeks of operations. For clarity of presentation, the Company has
described all periods presented as if the quarter ended on June 30.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
1995, the results of operations for the three and six month periods ended June
30, 1995 and 1994, and cash flows for the six month periods ended June 30, 1995
and 1994. The results of operations for the six months ended June 30, 1995 are
not necessarily indicative of the results for the full year.
NOTE B - INVENTORIES
Inventories other than raw potatoes and potato products are stated at the lower
of cost (determined on a first-in, first- out basis) or market. Raw potatoes
and potato products are stated at the lower of average cost for the year in
which produced or market. The cost of purchasing and raising flocks to laying
maturity is capitalized to inventory, then amortized, assuming no salvage value,
over the estimated productive life of each flock. Inventories consist of the
following:
June 30, December 31,
1995 1994
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Work in process and finished goods $19,668,000 $16,233,000
Raw materials and supplies 11,378,000 15,327,000
Flocks 19,880,000 23,071,000
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$50,926,000 $54,631,000
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NOTE C - LONG-TERM DEBT
The Company has an unsecured revolving line of credit with its principal banks
for $55,000,000 with interest payable at the banks' reference rates, or
alternative variable rates, at the Company's option. At June 30, 1995, the
Company had $900,000 outstanding at the reference rate of 9.0% and $19,000,000
outstanding at an average variable rate of 6.3%. This revolving line of credit,
which matures on March 31, 1997, contains certain restrictive covenants similar
to the covenants contained in the Company's senior promissory notes. At June
30, 1995, $35,100,000 of this line was unused.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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THREE MONTHS ENDED JUNE 30, 1995 VS THREE MONTHS ENDED JUNE 30, 1994
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales accounted for by each
of the Company's operating divisions for the periods indicated:
Three Months Ended June 30,
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1995 1994
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Eggs and Egg Products 39% 41%
Refrigerated Distribution 33 29
Potato Products 16 15
Dairy Products 17 18
Prepared Foods * -- 2
Intercompany Sales (5) (5)
--- ---
TOTAL 100% 100%
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---- ----
The following table sets forth the percentage of divisional operating earnings
(before corporate, interest and income tax expenses) accounted for by each of
the Company's operating divisions for the periods indicated:
Three Months Ended June 30,
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1995 1994
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Eggs and Egg Products 41% 32%
Refrigerated Distribution 15 8
Potato Products 22 33
Dairy Products 22 25
Prepared Foods * -- 2
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TOTAL 100% 100%
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<FN>
* The assets of the subsidiary comprising the Prepared Foods Division were sold
in late 1994.
The Eggs and Egg Products Division had flat dollar sales and higher dollar
earnings in the period ended June 30, 1995, as compared to the results of the
same period in 1994. The shell egg line operated at a loss in both periods.
Feed costs, which represent roughly two-thirds of the cost of producing an egg,
were lower in the 1995 period than in the 1994 period, somewhat offsetting weak
egg prices, which were approximately flat year-over-year as reported by Urner
Barry Publications - a widely quoted industry pricing service. Sales
increased for certain value-added egg products, notably Easy Eggs-registered
trademark- (extended shelf-life liquid whole eggs) and MicroFresh-TM- (frozen
omelets, patties and curds), which helped produce a divisional profit
improvement.
The Refrigerated Distribution Division had higher dollar sales and higher
dollar earnings in the period ended June 30, 1995, as compared to the results
of the same period in 1994. Unit sales
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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THREE MONTHS ENDED JUNE 30, 1995 VS THREE MONTHS ENDED JUNE 30, 1994
RESULTS OF OPERATIONS, CONT.
increased significantly and benefited somewhat from the impact of the
Easter holiday falling in the second quarter of 1995 as compared to the
first quarter of 1994. The combination of strong volume growth, pricing
improvements in certain product lines and tight expense management allowed
for divisional profit improvement.
The Potato Products Division had higher dollar sales and lower dollar
earnings in the period ended June 30, 1995, as compared to the results of the
same period in 1994. A very competitive environment in the french fry
processing industry depressed unit sales and selling prices for frozen
potato products. Additionally, certain varieties of potatoes held in
storage since the last harvest offered below normal processing yields.
These factors depressed french fry profits. Strong demand for
value-added refrigerated potato products in both foodservice and retail
markets resulted in sharply higher sales for these products, providing a
partial offset to the french fry weakness. However, these products were
also affected by the raw material/processing yield issues discussed above.
The Dairy Products Division had flat dollar sales and dollar earnings in the
period ended June 30, 1995, as compared to the strong results of the same
period in 1994. Unit sales increased somewhat due to favorable summer
weather and incremental national account activity.
The improved gross profit margin of the Company for the three month period
ended June 30, 1995, as compared to the results of the same period in 1994,
reflected the factors discussed above, particularly the higher unit sales
in certain value-added product lines. It is management's strategy to
increase value-added product sales as a percent of total sales over time,
while decreasing commodity-sensitive products' contribution to
consolidated sales. These efforts historically have been beneficial to
gross profit margins. Selling, general and administrative expenses
increased as a percent of sales in the three month period ended June 30, 1995,
as compared to the results of the same period in 1994, due to factors such
as increased staffing, inflation and increased marketing support for
certain product lines, particularly the Company's retail refrigerated potato
products.
SIX MONTHS ENDED JUNE 30, 1995 VS SIX MONTHS ENDED JUNE 30, 1994
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales accounted for by
each of the Company's operating divisions for the periods indicated:
Six Months Ended June 30,
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1995 1994
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Eggs and Egg Products 41% 41%
Refrigerated Distribution 33 32
Potato Products 16 16
Dairy Products 15 15
Prepared Foods * -- 2
Intercompany Sales (5) (6)
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TOTAL 100% 100%
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8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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SIX MONTHS ENDED JUNE 30, 1995 VS SIX MONTHS ENDED JUNE 30, 1994
RESULTS OF OPERATIONS, CONT.
The following table sets forth the percentage of divisional operating earnings
(before corporate, interest and income tax expenses) accounted for by each of
the Company's operating divisions for the periods indicated:
Six Months Ended June 30,
-------------------------
1995 1994
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Eggs and Egg Products 45% 38%
Refrigerated Distribution 14 11
Potato Products 24 32
Dairy Products 17 19
Prepared Foods * -- 0
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TOTAL 100% 100%
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<FN>
* The assets of the subsidiary comprising the Prepared Foods Division were sold
in late 1994.
The Eggs and Egg Products Division had higher dollar sales and higher dollar
earnings in the six months ended June 30, 1995, as compared to the results of
the same period in 1994. The shell egg line operated at a loss in both
periods. Feed costs, which represent roughly two-thirds of the cost of
producing an egg, were lower in the 1995 period than in the 1994 period,
somewhat offsetting weak egg prices, which were approximately 4% lower in the
first six months of 1995 as compared to the same period in 1994 as reported
by Urner Barry Publications - a widely quoted industry pricing service. Sales
increased for certain value-added egg products, notably Easy Eggs-registered
trademark- (extended shelf-life liquid whole eggs) and MicroFresh-TM- (frozen
omelets, patties and curds), which helped produce a divisional profit
improvement.
The Refrigerated Distribution Division had higher dollar sales and higher dollar
earnings in the six months ended June 30, 1995, as compared to the results of
the same period in 1994. Unit sales increased compared to the levels of the
first six months of 1994. The combination of volume growth, pricing
improvements in certain product lines and tight expense management allowed for
divisional profit improvement.
The Potato Products Division had higher dollar sales and lower dollar earnings
in the six months ended June 30, 1995, as compared to the results of the same
period in 1994. The competitive environment in the french fry processing
industry depressed unit sales and selling prices for frozen potato products.
Additionally, certain varieties of potatoes held in storage since the last
harvest offered below normal processing yields. These factors depressed french
fry margins. Strong demand for value-added refrigerated potato products in both
foodservice and retail markets resulted in sharply higher sales for these
products, providing a partial offset to the french fry weakness. However, these
products were also affected by the raw material/processing yield issues
discussed above.
The Dairy Products Division had higher dollar sales and higher dollar earnings
in the six months ended June 30, 1995, as compared to the results of the same
period in 1994. Unit sales increased due to favorable weather, strong results
from a newer facility in Texas and new national account activity.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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The improved gross profit margin of the Company for the six month period ended
June 30, 1995, as compared to the results of the same period in 1994, reflected
the factors previously discussed, particularly the higher unit sales in certain
value-added product lines. It is management's strategy to increase value-added
product sales as a percent of total sales over time, while decreasing commodity-
sensitive products' contribution to consolidated sales. These efforts
historically have been beneficial to gross profit margins. Selling, general and
administrative expenses increased as a percent of sales in the six month period
ended June 30, 1995, as compared to the results of the same period in 1994, due
to factors such as increased staffing, inflation and increased marketing support
for certain product lines, particularly the Company's retail refrigerated potato
products.
GENERAL
Certain of the Company's products are sensitive to changes in commodity
prices. The Company's egg operations derive approximately 15% of that
division's net sales from shell eggs, which are sensitive to commodity price
swings. The Easy Eggs-registered trademark- product line now accounts for
approximately 45% of the eggs and egg products division's net sales and were
a comparable percent of sales in the first half of 1994. The remainder of egg
products division sales are derived from the sale of other value-added egg
products. Gross profit from shell eggs is primarily dependent upon the
relationship between shell egg prices and the cost of feed, both of which can
fluctuate significantly. Shell egg pricing in the first half of 1995 was
approximately 4% below first half 1994 levels as measured by a widely quoted
pricing service. Gross profit margins from value-added egg products are less
sensitive to commodity price fluctuations.
The Company's refrigerated distribution operations derive approximately 70% of
that division's net sales from refrigerated products produced by others, thereby
reducing the effect of commodity price swings. The balance of refrigerated
distribution sales are from shell eggs, which are generally produced by the eggs
and egg products division and are sold on a distribution, or non-commodity,
basis by the refrigerated distribution division.
The potato products division now derives approximately one-half of its net sales
from the refrigerated potato products line. The potato products division
typically purchases 80%-90% 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. Small variations in the purchase price of raw
materials or the selling price per pound of end products can have a significant
effect on potato products division operating results. The impact of raw
material costs within the potato products division has been reduced in recent
years due to significant increases in higher value-added refrigerated potato
products sales.
The dairy products division sells its products primarily on a cost-plus basis
and, therefore, the division's earnings are not typically affected greatly by
raw ingredient price fluctuations.
Inflation is not expected to have a significant impact on the Company's
business. The Company generally has been able to offset the impact of inflation
through a combination of productivity gains and price increases.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and capital expenditures have been, and will likely continue to be,
a capital requirement. The Company plans to continue to invest in state-of-the-
art production facilities to enhance its competitive position, although the
annual rate of spending has declined in recent years. Historically, the Company
has financed its growth principally from internally generated funds, bank
borrowings, issuance of senior debt and the sale of Common Stock. The Company
believes that these financing alternatives will continue to meet its anticipated
needs.
The Company invested approximately $10,600,000 in capital expenditures during
the six months ended June 30, 1995. The Company's 1995 plan calls for
approximately $29,000,000 in total capital expenditures.
The Company has an unsecured line of credit for $55,000,000 with its principal
banks. As of June 30, 1995, approximately $19,900,000 was borrowed under this
line of credit.
SEASONALITY
Consolidated quarterly operating results are affected by the seasonality of the
Company's net sales and operating profits. Specifically, shell egg prices
typically rise seasonally in the first and fourth quarters of the year due to
increased demand during holiday periods. Generally, the refrigerated
distribution division experiences higher net sales and operating profits in the
fourth quarter. Operating profits from potato products are less seasonal, but
tend to be higher in the second half of the year coinciding with the potato
harvest. Operating profits from dairy operations typically are significantly
higher in the second and third quarters due to increased consumption of ice milk
and ice cream products during the summer months.
11
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1995 Annual Meeting of Stockholders of Michael Foods, Inc. was held on April
27, 1995. The items voted upon and the results of the vote follow:
1. The election of nine persons to serve as directors until the next annual
election and until their successors are duly elected and qualified:
For Withhold Authority
--- ------------------
Richard A. Coonrod 17,795,918 94,033
Miles E. Efron 17,513,318 376,633
Orville L. Freeman 17,762,094 127,857
Arvid C. Knudtson 17,794,768 95,183
Joseph D. Marshburn 17,784,953 104,998
James H. Michael 17,529,718 360,233
Jeffrey J. Michael 17,515,268 374,683
Richard G. Olson 17,503,013 386,938
Gregg A. Ostrander 17,515,408 374,543
2. Proposal to approve the appointment of Grant Thornton as independent
auditors for 1995:
For Against Abstain
--- ------- -------
17,853,058 21,361 15,532
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.98 Resolution adopted by the Board of Directors on July 27, 1995, amending
the Severance Plan for Eligible Employees of Michael Foods, Inc. and
subsidiaries and extending its termination date for one additional year.
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended June 30,
1995.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MICHAEL FOODS, INC.
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(Registrant)
Date: August 11, 1995 By: /s/ Gregg A. Ostrander
---------------------------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: August 11, 1995 By: /s/ John D. Reedy
---------------------------------------
John D. Reedy
(Vice President -
Finance, Treasurer,
Chief Financial Officer
and Principal
Accounting Officer)
13