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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the forty weeks ended March 3, 1995 Commission file number 0-6566
Thorn Apple Valley, Inc.
(Exact name of Registrant as specified in its charter)
Michigan 38-1964066
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
18700 West Ten Mile Road, Southfield, Michigan 48075
(Address of principal executive offices) (zip Code)
Registrant's telephone number, including area code (810) 552-0700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section II or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____.
At March 3, 1995, there were 5,767,069 shares of Common stock outstanding.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 3, May 27,
1995 1994
-------- -------
Current assets:
Cash and cash equivalents $ 7,629,078 $ 17,441,675
Short-term investments 531,064 531,064
Accounts receivable, less allowance for doubtful accounts
(Mar. 3, 1995, $960,800; May 27, 1994, $731,800) 45,603,457 44,190,499
Inventories (Note 2) 47,646,756 43,780,184
Deferred income taxes (Note 6) 1,609,200 1,448,000
Prepaid expenses and other current assets 4,590,346 3,269,690
------------ ------------
Total current assets 107,609,901 110,661,112
------------ ------------
Property, plant and equipment:
Land 1,199,382 1,198,882
Buildings and improvements 27,815,717 26,617,133
Machinery and equipment 103,101,380 100,476,202
Transportation equipment 7,713,867 7,238,986
Property under capital leases 3,787,218 3,787,218
Construction in progress 44,902,136 16,775,833
------------ ------------
188,519,700 156,094,254
Less accumulated depreciation 93,717,914 87,834,957
------------ ------------
94,801,786 68,259,297
------------ ------------
Other assets 8,158,406 6,521,676
------------ ------------
$210,570,093 $185,442,085
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 31,123,724 $ 33,970,384
Notes payable, banks (Note 3) 6,870,000
Notes payable, officer 3,206,499 1,998,029
Accrued liabilities 22,541,638 20,634,804
Current portion of long-term debt 2,059,228 1,701,091
Income taxes (Note 6) 1,367,603 526,722
------------ ------------
Total current liabilities 67,168,692 58,831,030
------------ ------------
Long-term debt 37,045,805 27,936,985
------------ ------------
Deferred income taxes (Note 6) 2,951,900 2,504,000
------------ ------------
Shareholders' equity:
Preferred stock: $1 par value; authorized 200,000 shares; issued none
Common nonvoting stock: $.10 par value; authorized 20,000,000
shares; issued none
Common voting stock: $.10 par value; authorized 20,000,000 shares;
issued 5,767,069 shares
Mar. 3, 1995 and 5,803,073 shares May 27, 1994 576,707 580,307
Capital in excess of par value 3,491,815 4,778,498
Retained earnings 99,335,174 90,811,265
------------ ------------
103,403,696 96,170,070
------------ ------------
$210,570,093 $185,442,085
============ ============
See notes to consolidated financial statements.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Twelve Weeks Ended Forty Weeks Ended
------------------ -----------------
March 3, March 4, March 3, March 4,
1995 1994 1995 1994
-------- -------- -------- --------
Net sales $163,555,824 $173,316,493 $585,826,349 $594,303,791
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of goods sold, including delivery costs 151,007,669 155,187,117 524,337,231 532,599,331
Selling 5,670,761 5,782,572 18,961,295 19,006,283
General and administrative 4,651,066 5,360,397 17,762,752 17,795,498
Depreciation 2,434,072 2,136,641 8,189,720 7,153,067
------------ ------------ ------------ ------------
163,763,568 168,466,727 569,250,998 576,554,179
------------ ------------ ------------ ------------
Income (loss) from operations (207,744) 4,849,766 16,575,351 17,749,612
------------ ------------ ------------ ------------
Other expenses (income):
Interest 790,528 341,331 1,970,238 1,736,334
Other, net (74,290) (239,297) (673,426) (671,392)
------------ ------------ ------------ ------------
716,238 102,034 1,296,812 1,064,942
------------ ------------ ------------ ------------
Income (loss) from operations before income taxes (923,982) 4,747,732 15,278,539 16,684,670
Provision (benefit) for income taxes (Note 6) (417,000) 1,728,000 5,548,000 6,161,000
------------ ------------ ------------ ------------
Net income (loss) ($506,982) $3,019,732 $9,730,539 $10,523,670
============ ============ ============ ============
Earnings (loss) per share of common stock: (Note 4) ($0.09) $0.52 $1.69 $1.79
============ ============ ============ ============
Weighted average number of shares outstanding (Note 4) 5,727,202 5,860,784 5,750,320 5,895,204
============ ============ ============ ============
See notes to consolidated financial statements.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Capital in
Common stock excess of Retained
Shares Amount par value earnings
------------ ------ ---------- --------
Balance, May 28, 1993 5,920,106 $592,011 $7,405,250 $78,311,895
Net income 10,523,670
Cash dividends, $.20 per share (1,177,088)
Exercise of stock options including
related tax benefits 7,500 750 95,738
Purchase and retirement of common stock (96,533) (9,654) (2,089,041)
--------- -------- ---------- -----------
Balance, March 4, 1994 5,831,073 $583,107 $5,411,947 $87,658,477
========= ======== ========== ===========
Balance, May 27, 1994 5,803,073 $580,307 $4,778,498 $90,811,265
Net income 9,730,539
Cash dividends, $.21 per share (1,206,630)
Exercise of stock options including
related tax benefits 101,067 10,107 2,090,314
Purchase and retirement of common stock (137,071) (13,707) (3,376,997)
--------- -------- ---------- -----------
Balance, March 3, 1995 5,767,069 $576,707 $3,491,815 $99,335,174
========= ======== ========== ===========
See notes to consolidated financial statements.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Forty Weeks Ended
-----------------
March 3, March 4,
1995 1994
-------- --------
Cash flows from operating activities:
Net income $9,730,539 $10,523,670
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 8,189,720 7,153,067
Deferred income taxes 447,900 36,700
Loss on disposition of property,
plant and equipment 5,433 29,413
Provision for losses on accounts receivable 229,000 48,500
(Increase) decrease in assets:
Accounts receivable (1,641,958) (11,132,802)
Inventories (3,866,572) 467,187
Prepaid expenses and other assets (2,957,386) (634,900)
Refundable income taxes 528,574
Deferred income taxes (161,200) (281,500)
Increase (decrease) in liabilities:
Accounts payable (2,846,660) 5,310,688
Accrued liabilities and compensation 1,906,834 3,721,516
Income taxes 840,881 1,465,740
----------- ----------
Total adjustments 145,992 6,712,183
----------- ----------
Net cash provided by operating activities 9,876,531 17,235,853
----------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 262,801 2,040,396
Capital expenditures (32,235,043) (21,402,161)
----------- ----------
Net cash used in investing activities (31,972,242) (19,361,765)
----------- ----------
Cash flows from financing activities:
Proceeds from long-term borrowings 8,000,000 5,500,000
Proceeds from stock options exercised including
related tax benefits 2,100,421 96,488
Principal payments on long-term debt (1,298,443) (1,485,849)
Purchase of common stock (3,390,704) (2,098,695)
Net borowings under lines of credit 6,870,000
Net borrowings from officers 1,208,470 2,301,952
Dividends paid (1,206,630) (1,177,088)
----------- ----------
Net cash provided by financing activities 12,283,114 3,136,808
----------- ----------
Net increase (decrease) in cash and cash equivalents (9,812,597) 1,010,896
Cash and cash equivalents at beginning of year 17,441,675 8,679,429
----------- ----------
Cash and cash equivalents at end of quarter $7,629,078 $9,690,325
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the forty-week period for:
Interest $2,313,351 $1,762,881
=========== ==========
Income taxes $3,961,986 $4,340,000
=========== ==========
Noncash investing activities:
Capital lease obligations $2,765,400 $200,100
=========== ==========
See notes to consolidated financial statements.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and reflect, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position, as of
March 3, 1995 and May 27, 1994 and results of operations and cash flows at
March 3, 1995 and March 4, 1994 and for the periods presented. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes contained in Thorn Apple Valley,
Inc.'s Annual Report on Form 10-K for the fiscal year ended May 27, 1994. The
results for the forty weeks ended March 3, 1995 are not necessarily indicative
of the results to be expected for the fiscal year ending May 26, 1995.
NOTE 2 - Inventories are stated at the lower of last-in, first-out (LIFO) cost
or market. Inventories would have been approximately $4,922,000 higher at
March 3, 1995 and May 27,1994 if they had been stated at the lower of first-in,
first-out (FIFO) cost or market. The following is a breakdown of inventories
by classifications:
March 3, May 27,
1995 1994
-------- -------
Supplies $ 8,146,553 $ 6,029,038
Raw materials 9,857,800 18,333,399
Work in progress 3,919,524 2,933,039
Finished goods 30,644,879 21,406,708
----------- -----------
52,568,756 48,702,184
Less LIFO reserve 4,922,000 4,922,000
----------- -----------
Inventory balance $47,646,756 $43,780,184
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NOTE 3 - At March 3, 1995, the Company had unsecured lines of credit with four
banks whereby it could borrow in the aggregate up to $42,000,000 in short-term
notes with interest ranging from below the prime rate to the prime rate charged
by major banks. At March 3, 1995, the Company had unused lines of credit of
$35,130,000.
NOTE 4 - Earnings per share of common stock are based on the weighted average
number of common shares outstanding during each respective twelve and forty
week periods. The potential dilution from shares issuable under employee stock
option plans is excluded from the computation of the earnings per common share
since it is not material.
NOTE 5 - At March 3, 1995, under the Company's 1982 Employee Stock Option Plan,
155,250 options exercisable at prices of $2.56 and $19.67 per share were
outstanding. The Company's 1990 Employee Stock Option Plan authorizes the
Company's Stock Option Committee to grant options up to 787,500 shares of the
Company's common stock to present or prospective employees. At March 3, 1995,
there were 377,800 options granted but not exercised at prices of $17.00,
$23.00 and $26.00 per share under the 1990 Plan.
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NOTE 6 - The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), as of June 1, 1992. There
were no material cumulative adjustments on the adoption of this change in
accounting principle. Prior years' financial statements have not been restated
to apply the provisions of SFAS No. 109. The adoption of SFAS No. 109 changes
the Company's method of accounting for income taxes from the deferred method
using Accounting Principles Board Opinion No. 11 ("APB No. 11") to an asset and
liability approach.
Deferred income taxes, on a SFAS No. 109 basis, reflect the estimated future
tax effect of temporary differences between the amount of assets and
liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations.
The Company's effective tax rate for the forty weeks ended March 3, 1995 and
March 4, 1994, amounted to approximately 36.3% and 36.9%, respectively.
NOTE 7 -On March 17, 1995, the Company announced its intentions to close its
Tri-Miller Packing Company facility located in Hyrum, Utah. The closing is
expected by the Company to reduce ongoing manufacturing costs, and was made
possible by the recent completion of the expansion of the Company's Grand
Rapids, Michigan facility. The Company expects to have a non-recurring after
tax charge of approximately $5 million during the fourth quarter. It is
anticipated the shut-down will be completed by the end of May 1995 and increase
overall corporate profitability beginning in fiscal 1996.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Thorn Apple Valley, Inc., is a major producer of consumer packaged
meat and poultry products and is one of the largest slaughterers of hogs in the
United States. The Company is engaged in the manufacture and sale of bacon,
hot dogs and luncheon meats, hams, smoked sausages and turkey products, as well
as the slaughtering of hogs and the related sale of fresh pork. The Company
markets its products under premium and other proprietary brand labels including
"Thorn Apple Valley," "Colonial," "Triple M," "Herrud," "Royal Crown," "Bar H"
and "Olde Virginie" and under customer-owned private labels. The Company sells
its products principally to wholesalers, supermarkets and other manufacturers
throughout the United States and in selected international markets. The
Company is the largest purchaser of hogs in the Michigan, Indiana and Ohio
markets.
The Company was originally incorporated in 1959 as a Michigan
corporation. It reincorporated in Delaware in 1971 and reincorporated in
Michigan in 1977. In 1984, the Company changed its corporate name from
Frederick & Herrud, Inc. to Thorn Apple Valley, Inc.
The Company's principal executive offices are located at 18700 West
Ten Mile Road, Southfield, Michigan 48075 (telephone number: (810) 552-0700).
RESULTS OF OPERATIONS
As consumers have become more health conscious, hog slaughterers and
meat and poultry manufacturers have focused on providing healthier and more
convenient fresh pork and manufactured products to successfully compete against
other protein sources. In addition, increased amounts of poultry are being
used in manufactured products which were traditionally made with only beef and
pork. Per capita pork consumption has remained relatively stable in the United
States in recent years.
Profitability in the hog slaughter industry is affected by the cost
and supply of hogs and pork product selling prices. The slaughtering industry
has generally been characterized by relatively narrow profit margins and a
trend toward larger, higher volume plants in order to reduce per unit costs.
Profit margins on sales of manufactured products are generally more stable than
on fresh pork and by-products. In addition, premium brand label products
generate higher profit margins than items sold under private and non-premium
proprietary brand labels.
Hog prices represent the principal production cost of pork
slaughterers and are an important element in the cost of certain manufactured
products as well. Hog prices and hog supply are determined by constantly
changing market forces of supply and demand. The ability of hog slaughterers
and manufacturers to maintain satisfactory margins may be affected by a
multitude of market factors over which such industry participants have limited
control, including industry-wide slaughter levels, competition, the relative
price of substitute products, overall domestic retail demand and the level of
exports.
The following discussion analyzes material changes in the financial
information on a period to period basis.
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Twelve weeks ended March 3, 1995 compared to twelve weeks ended
March 4, 1994.
The Company's net loss for the third quarter ended March 3, 1995, was
$0.5 million compared with net income of $3.02 million for the comparable
period of the prior year. The decrease is primarily attributable to lower
gross margins for the Company's fresh meat and manufactured products. The
Company's manufactured products divisions' gross margins decreased as a result
of competitive pressures forcing our selling prices to fall more sharply in
relation to decreased raw material costs from the comparable prior year period.
The decline in manufactured products gross margins in the third quarter more
than offset continued increases in unit volume resulting in lower operating
profits. Third quarter operating results for the Company's fresh pork division
were down as a result of lower hog slaughter margins and higher hog slaughter
operating costs. Many of the additional costs incurred were the result of
ongoing minor modifications and to the retraining of employees associated with
the completed renovation and expansion to our slaughter facility in Detroit.
The Company's net sales dollars in the third quarter of fiscal 1995
decreased by $9.8 million or 5.6%. The reduction of net sales dollars was the
result of a decrease in both manufactured product sales and fresh meat sales of
6.8% and 4.6%, respectively. The manufactured product sales decrease resulted
primarily from a decrease in average selling prices of 11.5% which was
partially offset by an increase in tonnage shipped of 5.3%. The decrease in
fresh meat sales resulted primarily from decreased average selling prices and
tonnage shipped of 2.0% and 2.7%, respectively. The lower average selling
prices for manufactured and fresh products was impacted in part by a decrease
of approximately 15% in the cost of live hogs, the Company's primary raw
material.
Cost of goods sold (including delivery costs) decreased by $4.2
million, or 2.7%, mainly as a result of the decrease in the cost of live hogs
referred to above. Partially offsetting the effects of lower hog costs was an
increase in overall tonnage shipped. As a percentage of net sales, cost of
goods sold increased to 92.3% from 89.5% primarily as a result of lower margins
experienced in both fresh and manufactured product sales.
Selling expenses decreased by $0.1 million, or 1.9%. As a percentage
of net sales, selling expenses increased to 3.5% from 3.3%.
General and administrative expenses decreased by $0.7 million, or
13.2% from the previous quarter, as a result of management's efforts to reduce
administrative costs. As a percentage of net sales, general and administrative
expenses decreased to 2.8% from 3.1%.
The provision for income taxes decreased by $2.1 million, or 124.1%,
primarily due to decreased pre-tax income of $5.7 million or 119.5%.
Earnings per share of Common Stock decreased to loss of $.09 per share
or 117.3%, due to decreased profitability resulting from the factors discussed
above.
The results for the twelve weeks ended March 3, 1995 are not
necessarily indicative of the results to be expected for fiscal 1995.
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Forty weeks ended March 3, 1995 compared to forty weeks ended
March 4, 1994.
The Company's net income in the forty weeks ended March 3, 1995
decreased 7.5% to $9.7 million as compared to $10.5 million for the prior year.
The reduced level of profits in the first three quarters of fiscal 1995 was
primarily attributable to lower margins in our manufactured products division
and increased operating costs in our fresh meat division as a result of
continuing start-up difficulties associated with the expansion and renovation
project at our main slaughter facility. The anticipated cost and yield
improvements at our Frederick plant have not yet materialized to the extent
that was expected. The Company is continuing to make minor modifications to
the slaughter facility and expects them to be completed by the end of the
fiscal year. Competitive pressures combined with lower hog costs from the
comparable period resulted in lower selling prices in both our manufactured
products and fresh pork product divisions. The Company has begun to firm up its
pricing and margins by emphasizing its superior quality and service.
The Company's net sales dollars for the first three quarters of fiscal
1995 decreased by $8.5 million or 1.4%. The net sales decrease was principally
a result of decreased average selling prices of approximately 7.8% and 8.6%
offset in part by increased tonnage shipped of 8.9% and 5.4% for manufactured
products and fresh pork products, respectively. Lower average selling prices
primarily reflected a decrease of approximately 18.7% in the cost of live hogs,
the Company's primary raw material and increased competitive industry margin
pressures.
Cost of goods sold (including delivery costs) decreased by $8.3
million, or 1.6%, mainly as the result of decreased hog costs. As a
percentage of net sales, cost of goods sold increased from 88.4% to 89.6%.
Selling expenses for the first three quarters of fiscal 1995 remained
relatively unchanged from the comparable prior year period. As a percentage of
net sales, selling expenses increased slightly from 3.1% to 3.2%.
General and administrative expenses remained relatively unchanged from
the comparable prior year period. As a percentage of net sales, general and
administrative expenses decreased from 3.1% to 3.0%.
Interest expense increased by $.2 million, or 13.5%, primarily due to
increased long-term borrowings resulting from the increase in capital
expenditures.
The provision for income taxes decreased by $0.6 million, or 9.9%, due
to the decrease in pre-tax income from operations of $1.4 million, or 8.4%.
The Company's effective tax rate decreased from 36.9% to 36.3%.
Earnings per share of Common Stock decreased by $.10 per share, or
5.6%, due to decreased profitability.
The results for the forty weeks ended March 3, 1995 are not
necessarily indicative of the results to be expected for fiscal 1995.
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FINANCIAL CONDITION
The Company's business is characterized by high unit sales volume and
rapid turnover of inventories and accounts receivable. Because of the rapid
turnover rate, the Company considers its inventories and accounts receivable to
be highly liquid and readily convertible into cash. Borrowings under lines of
credit are used to finance increases in the levels of inventories and accounts
receivable resulting from seasonal and other market-related fluctuations in raw
material costs and quantities. The demand for seasonal borrowings usually
peaks in early December when ham inventories and accounts receivable are at
their highest levels, and these borrowings are generally repaid in January when
the accounts receivable generated by the sales of these hams are collected.
The Company has historically maintained lines of credit in excess of
the cash needs of its business. At March 3, 1995, the Company had total lines
of credit from four financial institutions aggregating $42.0 million, of which
$35.1 million was unused.
The Company is required, pursuant to the terms and covenants of two
unsecured notes agreements, and pursuant to the terms of an industrial revenue
bond and limited obligation revenue bond agreement to maintain a minimum level
of consolidated tangible net worth.
The Company anticipates capital expenditures at existing facilities
during fiscal 1995 of approximately $40.0 million primarily to complete the
modernization of its various slaughtering and manufacturing facilities and to
construct, as previously announced, a new manufacturing facility in Ponca City,
Oklahoma. The Ponca City development is proceeding on schedule, and we expect
to begin operations this Fall. Additional capital expenditures will be used to
upgrade various machinery and equipment, with emphasis on projects that will
further streamline operations, in order to increase efficiencies and
productivity gains. As previously announced on March 17, 1995, and as noted in
the footnotes to the financial statements, the Company will be closing its
Tri-Miller facility located in Hyrum, Utah. The Company expects to have a
non-recurring after-tax charge of approximately $5 million during the fourth
quarter. It is anticipated the shut-down will be completed by the end of May
and increase overall corporate profitability beginning in Fiscal 1996.
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on form 8-K for the period ending March 3,
1995.
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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.
THORN APPLE VALLEY, INC.
(Registrant)
Date: April 12, 1995 By: /S/ Louis Glazier
-------------------------------
Louis Glazier
Executive Vice President of
Finance and Administration
Chief Financial Officer
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Exhibit Index
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
(27) Financial Data Schedule