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 September 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 ____________________________________
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 November 13, 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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September 30, December 31,
ASSETS 1995 1994
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CURRENT ASSETS
Cash and cash equivalents $ 2,287,000 $ 1,641,000
Accounts receivable, less allowances 39,893,000 36,622,000
Inventories 51,401,000 54,631,000
Prepaid expenses and other 2,310,000 1,091,000
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Total current assets 95,891,000 93,985,000
PROPERTY PLANT AND EQUIPMENT-AT COST
Land 4,149,000 4,149,000
Buildings and improvements 95,853,000 93,807,000
Machinery and equipment 197,462,000 182,805,000
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297,464,000 280,761,000
Less accumulated depreciation 116,609,000 99,702,000
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180,855,000 181,059,000
OTHER ASSETS
Goodwill, net 46,382,000 47,439,000
Net assets held for sale 6,808,000 7,761,000
Other 8,604,000 6,401,000
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61,794,000 61,601,000
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$338,540,000 $336,645,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 11,812,000 $ 11,809,000
Accounts payable 31,176,000 26,360,000
Accrued compensation 4,253,000 5,168,000
Accrued insurance 6,717,000 6,326,000
Other accrued expenses 15,091,000 10,733,000
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Total current liabilities 69,049,000 60,396,000
LONG-TERM DEBT, less current maturities 70,552,000 88,795,000
DEFERRED INCOME TAXES 23,325,000 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,
shares issued 19,945,913 at September 30, 1995 and 19,915,489
at December 31, 1994 199,000 199,000
Additional paid-in capital 117,979,000 117,640,000
Retained earnings 63,047,000 53,801,000
Treasury stock, 613,912 shares-at cost (5,611,000) (5,611,000)
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175,614,000 166,029,000
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$338,540,000 $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 September 30, (Unaudited)
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1995 1994
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Net sales $ 136,257,000 $ 127,878,000
Cost of sales 116,243,000 109,555,000
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Gross profit 20,014,000 18,323,000
Selling, general and administrative expenses 11,367,000 10,279,000
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Operating profit 8,647,000 8,044,000
Other (income) expense
Interest expense 1,841,000 2,177,000
Interest capitalized (61,000) (66,000)
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1,780,000 2,111,00
Interest income (12,000) (7,000)
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1,768,000 2,104,000
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Earnings before income taxes 6,879,000 5,940,000
Income tax expense 2,650,000 2,300,000
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NET EARNINGS $ 4,229,000 $ 3,640,000
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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
Nine Months Ended September 30, (Unaudited)
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1995 1994
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Net sales $ 393,821,000 $ 375,049,000
Cost of sales 333,913,000 321,227,000
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Gross profit 59,908,000 53,822,000
Selling, general and administrative expenses 34,292,000 30,311,000
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Operating profit 25,616,000 23,511,000
Other (income) expense
Interest expense 6,076,000 6,635,000
Interest capitalized (113,000) (238,000)
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5,963,000 6,397,000
Interest income (91,000) (30,000)
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5,872,000 6,367,000
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Earnings before income taxes 19,744,000 17,144,000
Income tax expense 7,600,000 6,600,000
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NET EARNINGS $ 12,144,000 $ 10,544,000
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NET EARNINGS PER SHARE $ .63 $ .55
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DIVIDENDS PER SHARE $ .15 $ .15
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Weighted average shares outstanding 19,326,000 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
Nine Months Ended September 30, (Unaudited)
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1995 1994
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Net cash provided by operating activities $ 40,588,000 $ 30,833,000
Cash flows from investing activities:
Capital expenditures (17,275,000) (17,092,000)
Net assets held for sale 453,000 1,605,000
Other assets (2,321,000) (1,812,000)
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Net cash used in investing activities (19,143,000) (17,299,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 339,000 --
Proceeds from long-term debt 51,503,000 67,700,000
Payments on long-term debt (69,743,000) (74,607,000)
Cash dividends (2,898,000) (2,898,000)
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Net cash used in financing activities (20,799,000) (9,805,000)
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Net increase in cash and cash equivalents 646,000 3,729,000
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 $ 2,287,000 $ 3,952,000
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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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September 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 September 30, 1995 and September 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 September 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 September
30, 1995, the results of operations for the three and nine month periods ended
September 30, 1995 and 1994, and cash flows for the nine month periods ended
September 30, 1995 and 1994. The results of operations for the nine months
ended September 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:
September 30, December 31,
1995 1994
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Work in process and finished goods $ 19,345,000 $ 16,233,000
Raw materials and supplies 12,823,000 15,327,000
Flocks 19,233,000 23,071,000
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$ 51,401,000 $ 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 September 30, 1995, the
Company had $5,400,000 outstanding at the reference rate of 8.75% and $9,000,000
outstanding at an average variable rate of 6.1%. 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
September 30, 1995, $40,600,000 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 SEPTEMBER 30, 1995 VS THREE MONTHS ENDED SEPTEMBER 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 September 30,
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1995 1994
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Eggs and Egg Products 42% 40%
Refrigerated Distribution 32 31
Potato Products 16 15
Dairy Products 15 17
Prepared Foods * -- 2
Intercompany Sales (5) (5)
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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 September 30,
--------------------------------
1995 1994
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Eggs and Egg Products 61% 43%
Refrigerated Distribution 15 14
Potato Products 6 24
Dairy Products 18 21
Prepared Foods * -- (2)
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TOTAL 100% 100%
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* 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 period ended September 30, 1995, as compared to the results of
the same period in 1994. The shell egg category operated at a loss in both
periods. Profitability expanded for certain egg products. 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. Additionally, egg prices were
approximately 12% higher 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.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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THREE MONTHS ENDED SEPTEMBER 30, 1995 VS THREE MONTHS ENDED SEPTEMBER 30, 1994
RESULTS OF OPERATIONS, CONT.
The Refrigerated Distribution Division had higher dollar sales and higher dollar
earnings in the period ended September 30, 1995, as compared to the results of
the same period in 1994. Unit sales rose slightly. Profit margins expanded
mainly as a result of improved pricing in certain lines, improved distribution
efficiencies and effective expense control.
The Potato Products Division had higher dollar sales and lower dollar earnings
in the period ended September 30, 1995, as compared to the results of the same
period in 1994. A competitive environment in the french fry processing industry
depressed 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 caused french fry losses. Strong
demand for value-added refrigerated potato products in both foodservice and
retail markets resulted in sharply higher sales for these products, offsetting
the french fry weakness. However, margins for these products were also affected
by the raw material/processing yield issues discussed above. Processing yields
improved somewhat upon receipt of new crop potatoes later in the quarter.
The Dairy Products Division had flat dollar sales and flat dollar earnings in
the period ended September 30, 1995, as compared to the strong results of the
same period in 1994. Unit sales were flat overall, with an increase in core UHT
dairy mixes offsetting declines in certain other product lines. Pricing and
operating costs were relatively stable year-over-year.
The improved gross profit margin of the Company for the three month period ended
September 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 September 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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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NINE MONTHS ENDED SEPTEMBER 30, 1995 VS NINE MONTHS ENDED SEPTEMBER 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:
Nine Months Ended September 30,
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1995 1994
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Eggs and Egg Products 41% 41%
Refrigerated Distribution 33 32
Potato Products 16 15
Dairy Products 15 16
Prepared Foods * -- 2
Intercompany Sales (5) (6)
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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:
Nine Months Ended September 30,
-------------------------------
1995 1994
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Eggs and Egg Products 57% 46%
Refrigerated Distribution 15 12
Potato Products 13 24
Dairy Products 15 18
Prepared Foods * -- 0
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TOTAL 100% 100%
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* 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 nine months ended September 30, 1995, as compared to the results
of the same period in 1994. The shell egg category operated at a loss in both
periods. Profitability expanded for certain egg products. 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. Egg prices were approximately flat in the
first nine 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- and MicroFresh-TM-, which helped produce a divisional profit
improvement.
The Refrigerated Distribution Division had higher dollar sales and higher dollar
earnings in the nine months ended September 30, 1995, as compared to the results
of the same period in 1994. Unit sales increased compared to the levels of the
first nine months of 1994. The combination of volume growth, pricing
improvements in certain product lines and effective expense control allowed for
divisional profit improvement.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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RESULTS OF OPERATIONS, CONT.
The Potato Products Division had higher dollar sales and lower dollar earnings
in the nine months ended September 30, 1995, as compared to the results of the
same period in 1994. A 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, offsetting the french fry weakness. However, these products were also
affected by the raw material/processing yield issues.
The Dairy Products Division had flat dollar sales and flat dollar earnings in
the nine months ended September 30, 1995, as compared to the results of the same
period in 1994. Unit sales were flat overall, with an increase in core UHT dairy
mixes offsetting declines in certain other product lines. Pricing and operating
costs were relatively stable year-over-year.
The improved gross profit margin of the Company for the nine month period ended
September 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 nine month period ended September 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 was a comparable percent of
sales in the first nine months of 1994. The remainder of divisional 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 nine months of 1995 was approximately flat with 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 Division derives approximately 70% of
its net sales from refrigerated products produced by others, thereby reducing
the effect of commodity price swings. The balance of divisional 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
division typically purchases 80%-90% of its raw potatoes from contract producers
under annual contracts.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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GENERAL, CONT.
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 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 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.
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 $17,275,000 in capital expenditures during
the nine months ended September 30, 1995. The Company's 1995 plan calls for
approximately $28,000,000 in total capital expenditures.
The Company has an unsecured line of credit for $55,000,000 with its principal
banks. As of September 30, 1995, approximately $14,400,000 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
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 1, 1995 the Company, North Carolina State University and Sunny Fresh
Foods, Inc. agreed to dismiss without prejudice the action pending in the United
States District Court for the District of Minnesota, which is more completely
described in Item 3 of the Company's Form 10-K for the year ended December 31,
1994. The dismissal was without prejudice to the right of any party to
recommence the litigation after completion of reexamination and reissue
proceedings pending at the United States Patent and Trademark Office relating to
the patents for ultrapasteurizing liquid whole eggs which are licensed by the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended September
30, 1995.
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: November 13, 1995 By: /s/ Gregg A. Ostrander
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Gregg A. Ostrander
(President and Chief Executive Officer)
Date: November 13, 1995 By: /s/ John D. Reedy
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John D. Reedy
(Vice President - Finance, Treasurer,
Chief Financial Officer and Principal
Accounting Officer)
12