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 September 27, 1996
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: 0-19887
WORTHINGTON FOODS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-0733120
------------------------ ------------------------------------
(State of incorporation) (IRS Employer Identification Number)
900 PROPRIETORS ROAD, WORTHINGTON, OH 43085
-------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (614) 885-9511
Not Applicable
----------------------------------------------------
(Former name, former address and formal fiscal year,
if changed from 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 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. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 6, 1996
-------------------------- -------------------------------
Common stock, no par value 6,389,218
Exhibit Index at Page 13
Page 1 of 15
<PAGE>
WORTHINGTON FOODS, INC. AND SUBSIDIARY
INDEX
Page No.
PART I FINANCIAL INFORMATION --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 27, 1996 and December 31, 1995............... 3-4
Condensed Consolidated Statements of Income -
For the three month and nine month periods ended
September 27, 1996 and September 29, 1995.............. 5
Condensed Consolidated Statements of Cash Flows -
For the nine month periods ended September 27, 1996
and September 29, 1995............................... 6
Notes to Condensed Consolidated Financial Statements..... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 8-10
PART II OTHER INFORMATION............................................. 11
Item 1. Legal Proceedings........................................ 11
Item 2. Changes in Securities.................................... 11
Item 3. Defaults Upon Senior Securities.......................... 11
Item 4. Submission of Matters to a Vote of Security Holders...... 11
Item 5. Other Information........................................ 11
Item 6. Exhibits and Reports on Form 8-K......................... 11
Signature ......................................................... 12
Exhibit Index....................................................... 13
Exhibit 11 - Computation of Earnings Per Share................ 14
Exhibit 27 - Financial Data Schedule.......................... 15
- 2 -
<PAGE>
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
9/27/96 12/31/95
------- --------
(Unaudited) (Audited)
(000's omitted)
ASSETS
Current Assets
Cash $ 447 $ 963
Accounts receivable less allowance 8,038 7,436
(1996 - $158; 1995 - $100)
Inventories:
Finished goods 10,813 10,403
Work in process 1,061 769
Raw materials 4,277 4,920
Packaging materials and supplies 1,811 1,900
------- -------
17,962 17,992
Prepaid expenses and other 2,451 1,606
------- -------
Total Current Assets 28,898 27,997
Property, Plant and Equipment
Land 817 817
Building and improvements 21,764 16,621
Machinery and equipment 39,740 33,490
Furniture and fixtures 1,465 1,089
Construction in progress 4,004 5,819
------- -------
67,790 57,836
Less accumulated depreciation and amortization 20,641 18,021
------- -------
47,149 39,815
Goodwill 1,077 1,319
Other intangible assets 896 802
------- -------
1,973 2,121
TOTAL ASSETS $78,020 $69,933
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 3 -
<PAGE>
<TABLE>
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
9/27/96 12/31/95
------- --------
(Unaudited) (Audited)
(000's omitted)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable (including outstanding checks
of $1,403 in 1996 and $1,597 in 1995) $ 5,082 $ 6,575
Accrued compensation 1,152 1,208
Other accrued expenses 1,189 1,547
Current portion of long-term debt and capital lease obligations 1,581 1,581
Income taxes 331 99
------- --------
Total Current Liabilities 9,335 11,010
Long-Term Liabilities
Long-term debt and capital lease obligations 17,584 12,790
Deferred income taxes 4,426 4,165
------- --------
Total Long-Term Liabilities 22,010 16,955
Shareholders' Equity
Preferred shares, no par value, authorized 2,000,000 shares,
none issued -- --
Common shares, $1.00 stated value, authorized 15,000,000 shares,
issued 6,389,218 shares in 1996 and 6,356,884 in 1995 6,389 6,357
Additional paid-in capital 14,714 14,677
Retained earnings 25,572 20,955
Less deferred compensation -- (21)
------- --------
46,675 41,968
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $78,020 $ 69,933
======= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 4 -
<PAGE>
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
Three Months Ended Nine Months Ended
9/27/96 9/29/95 9/27/96 9/29/95
------- ------- ------- -------
(Unaudited)
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 27,259 $ 22,256 $ 79,160 $ 66,079
Cost of goods sold 16,288 13,211 48,124 39,558
---------- ---------- ---------- ----------
Gross profit 10,971 9,045 31,036 26,521
Selling and distribution expenses 6,484 5,433 18,355 15,989
General and administrative expenses 796 784 2,601 2,409
Research and development expenses 320 307 990 887
---------- ---------- ---------- ----------
7,600 6,524 21,946 19,285
---------- ---------- ---------- ----------
Income from operations 3,371 2,521 9,090 7,236
Interest expense 341 273 927 884
---------- ---------- ---------- ----------
Income before income taxes 3,030 2,248 8,163 6,352
Provision for income taxes 1,117 921 2,972 2,604
---------- ---------- ---------- ----------
Net income $ 1,913 $ 1,327 $ 5,191 $ 3,748
========== ========== ========== ==========
Earnings per share:
Primary $ 0.29 $ 0.20 $ 0.78 $ 0.58
========== ========== ========== ==========
Fully Diluted $ 0.28 $ 0.20 $ 0.78 $ 0.58
========== ========== ========== ==========
Dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.08
========== ========== ========== ==========
Weighted average number of common
and common equivalent shares used in
computing earnings per share
Primary 6,660,402 6,540,830 6,620,608 6,479,314
Fully Diluted 6,688,557 6,540,830 6,686,121 6,523,803
</TABLE>
Note: 1995 share amounts have been adjusted to reflect the five-for-four share
split in December, 1995.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 5 -
<PAGE>
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended
9/27/96 9/29/95
------- -------
(Unaudited)
(000's omitted)
<S> <C> <C>
Operating activities:
Net income $ 5,191 $ 3,748
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,756 2,163
Deferred income taxes 261 977
Amortization of intangible assets 268 268
Deferred compensation 21 31
Cash provided by (used for) current assets and liabilities:
Accounts receivable (669) (568)
Inventories 29 (1,456)
Prepaid expenses and other (845) (113)
Accounts payable and accrued expenses (1,908) 190
Income taxes 233 (1,497)
(Increase) decrease in other assets (52) 203
-------- --------
Net cash provided by operating activities 5,285 3,946
Investing activities:
Purchases of property, plant and equipment, net (10,090) (3,510)
-------- --------
Net cash used for investing activities (10,090) (3,510)
Financing activities:
Proceeds from line of credit and long-term borrowings 34,775 20,275
Payments on line of credit and long-term borrowings (29,981) (21,264)
Proceeds from the issuance of common shares 69 170
Dividends paid (574) (455)
-------- --------
Net cash provided by (used for) financing activities 4,289 (1,274)
Net decrease in cash (516) (838)
Cash at beginning of period 963 982
-------- --------
Cash at end of period $ 447 $ 144
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
- 6 -
<PAGE>
WORTHINGTON FOODS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. The accompanying condensed consolidated financial statements (unaudited)
include the accounts of Worthington Foods, Inc. and Subsidiary.
The information furnished reflects all adjustments (all of which were of
a normal recurring nature) which are, in the opinion of management,
necessary to fairly present the condensed consolidated financial
position, results of operations, and cash flows on a consistent basis.
Operating results for the three month and nine month periods ended
September 27, 1996 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1996.
The accompanying condensed consolidated financial statements (unaudited)
are presented in accordance with the requirements for Form 10-Q and
consequently do not include all the disclosures normally required by
generally accepted accounting principles. Reference should be made to the
Company's Form 10-K for the fiscal year ended December 31, 1995 (File No.
0-19887) for additional disclosures including a summary of the Company's
accounting policies, which have not significantly changed. The Company's
policy is that each fiscal year includes four, thirteen week periods.
2. During the second quarter of 1996, the Company qualified for a one-time
Investment Tax Credit (ITC) of $500,000 from the State of Ohio. The
Company's provision for income taxes for the third quarter and nine month
periods of 1996 was reduced by $125,000 and $375,000, respectively. The
following table compares the provision for income taxes, net income and
earnings per share for the third quarter and nine month period of 1996
without the one-time investment tax credit.
<TABLE>
Three Months Ended Nine Months Ended
-------------------- --------------------
9/27/96 9/27/96 9/27/96 9/27/96
As Reported Without ITC As Reported Without ITC
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before taxes $3,030,000 $3,030,000 $8,163,000 $8,163,000
Provision for income taxes 1,117,000 1,242,000 2,972,000 3,347,000
--------- --------- --------- ---------
Net income $1,913,000 $1,788,000 $5,191,000 $4,816,000
========== ========== ========== ==========
Earnings per share $ 0.28 $ 0.27 $ 0.78 $ 0.72
========== ========== ========== ==========
</TABLE>
3. On October 22, 1996, the Board of Directors declared a four-for-three
share split to be distributed on December 6, 1996, to shareholders of
record as of November 15, 1996. Also at its meeting on October 22, 1996,
The Board of Directors declared a $0.025 dividend payable on January 27,
1997 to shareholders of record as of December 20, 1996.
- 7 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's Consolidated
Statements of Income expressed as a percentage of net sales for the periods
indicated.
<TABLE>
Three Months Ended Nine Months Ended
9/27/96 9/29/95 9/27/96 9/29/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 59.8 59.4 60.8 59.9
------ ------ ------ ------
Gross profit........................ 40.2 40.6 39.2 40.1
Selling and distribution expenses.......... 23.8 24.4 23.2 24.2
General and administrative expenses........ 2.9 3.5 3.3 3.7
Research and development expenses.......... 1.2 1.4 1.2 1.3
------ ------ ------ ------
27.9 29.3 27.7 29.2
------ ------ ------ ------
Income from operations..................... 12.3 11.3 11.5 10.9
Interest expense........................... 1.2 1.2 1.2 1.3
------ ------ ------ ------
Income before income taxes................. 11.1 10.1 10.3 9.6
Provision for income taxes................. 4.1 4.1 3.7 3.9
------ ------ ------ ------
Net income................................ 7.0% 6.0% 6.6% 5.7%
====== ====== ====== ======
Provision for income taxes as a percentage
of income before income taxes............. 36.9% 41.0% 36.4% 41.0%
====== ====== ====== ======
</TABLE>
Third Quarter and Nine Month Period of 1996 Compared to 1995
Net sales for the third quarter and nine month period ended September 27, 1996
increased approximately $5,003,000 and $13,081,000 or 22.5% and 19.8% over the
similar prior year periods. Net sales in the third quarter and nine month
period of 1996 to the Company's Specialty Markets (Seventh-day Adventist,
Health Food and International) increased approximately $745,000 and $1,827,000
or 10.2% and 7.7% over the similar prior year periods. The Health Food market
increased approximately $294,000 and $1,113,000 or 15.4% and 19.1% over the
similar prior year periods. The broker network which was established for sales
to natural food stores continues to increase the distribution of the Company's
Natural Touch brand of products. International sales for the nine month period
of 1996 increased $605,000 or 16.3% over the similar prior year period,
primarily due to the timing of customer orders.
Foodservice sales for the third quarter and nine month period of 1996
increased approximately $1,077,000 and $2,843,000 or 47.5% and 47.9% over the
similar prior year periods. Growth is particularly strong in the restaurant
portion of this category due to improved acceptance among national chains and
strong re-orders.
- 8 -
<PAGE>
Net sales of Morningstar Farms products to supermarkets in the third quarter
and nine month period of 1996 increased approximately $3,181,000 and
$8,411,000 or 25.0% and 23.2% over the similar prior year periods. Net sales
of Morningstar Farms meat alternative products in the third quarter and nine
month period of 1996 increased approximately $3,611,000 and $9,002,000 or
36.1% and 32.4% over the similar prior year periods. Mass market sales
continue to benefit from an expanded line of products, increased distribution
and targeted new user strategies. Net sales of Morningstar Farms frozen egg
substitutes for the nine month period of 1996 declined approximately 9.1% from
the similar prior year period.
Gross profit as a percentage of net sales for the third quarter of 1996
decreased from 40.6% in 1995 to 40.2% in 1996. For the nine month period,
gross profit decreased from 40.1% in 1995 to 39.2% in 1996. This decrease is
attributable to contract manufacturing arrangements for certain Morningstar
Farms products, increased material costs and the start up of the Zanesville
facility. During the second quarter of 1996, the Company began full operation
of its Zanesville, Ohio facility and eliminated contract manufacturing
arrangements. Gross profit as a percentage of net sales did improve from the
39.1% reported in the second quarter of 1996 to 40.2%. This improvement
reflects continued efficiencies gained at the Worthington and Zanesville
Plants, including the results of adding a second shift of production at the
Zanesville facility.
Selling and distribution expenses for the third quarter of 1996 decreased as a
percentage of net sales from 24.4% in 1995 to 23.8% in 1996. For the nine
month period of 1996, selling and distribution expenses decreased from 24.2%
to 23.2% of net sales. This decrease is attributable to efficiencies gained
through higher sales volume. General and administrative expenses in dollars
were relatively constant for both the third quarter and nine month periods of
1996, thus resulting in decreases as a percentage of net sales. Research and
development expenses remained comparable for both the third quarter and nine
month period of 1996.
Interest expense for the third quarter and nine month period of 1996 increased
approximately $68,000 and $43,000 or 24.9% and 4.9% over the similar prior
year periods. This increase is primarily attributable to higher borrowing
levels associated with the completed $9,000,000 Zanesville expansion project.
Net income for the third quarter and nine month period of 1996 increased
approximately $586,000 and $1,443,000 or 44.2% and 38.5% over the similar
prior year periods. The increase is primarily due to increased sales, lower
selling, general and administrative expenses as a percentage of net sales and
a lower provision for income taxes due to a one-time investment tax credit
recognized by the Company. (See Notes to Condensed Consolidated Financial
Statements.) These were partially offset by slightly lower gross profit
percentages.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash generated from operations and a $20,000,000
revolving credit facility as its principal sources of liquidity. As of
November 6, 1996, $9,550,000 of this credit facility was unused. The Company
believes that this borrowing capability plus internally generated funds will
be adequate to finance current growth levels into the foreseeable future. On
October 22, 1996, the Company's Board of Directors approved an additional
$11,500,000 capital expansion at the Zanesville plant. The project includes a
second production line to produce meat alternative products, and the
construction of an additional 15,000 sq. ft. dry storage warehouse which is
necessary for raw materials and finished goods inventory. The production line
will be installed in current unoccupied space at Zanesville. The expansion
project is expected to be operational by mid-1997 and will have the capacity
for an additional $30,000,000 in sales.
Net cash provided by operating activities for the nine month period of 1996
increased from the similar prior year period primarily due to an increase in
net income.
- 9 -
<PAGE>
Net cash used for investing activities for the nine month period of 1996
increased from the similar prior year period due to purchases of property,
plant and equipment related to the completed $9,000,000 Zanesville expansion
project.
Net cash provided by financing activities for the nine month period of 1996
increased from the similar prior year period, primarily due to increased
borrowings to finance capital expenditures for the completed $9,000,000
Zanesville expansion project.
INFLATION
Although inflation has slowed in recent years, the Company continues to seek
ways to moderate any inflationary impact. To the extent possible based on
competitive conditions, the Company passes increased costs on to its customers
by increasing prices over time.
The Company uses the LIFO method of accounting for raw materials, packaging
materials and the materials content of work-in-process and finished goods.
Under this method, the cost of products sold reported in the financial
statements approximates current costs.
COMPLIANCE WITH ENVIRONMENTAL PROTECTION REGULATIONS
The Company does not anticipate that compliance with federal, state, and local
regulations with respect to the discharge of materials into the environment,
or otherwise relating to the protection of the environment, will have a
material effect on capital expenditures, earnings, or the competitive position
of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q are "forward-looking statements" within
the meaning of the Private Securities Litigation Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results to differ materially. Such risks, uncertainties and other
factors include, but are not limited to, changes in general economic
conditions, fluctuation in interest rates, increases in raw material costs,
level of competition and other factors described in detail in the Company's
Form 10-K for the year ended December 31, 1995.
- 10 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) No report on Form 8-K was filed during the fiscal
quarter ended September 27, 1996.
- 11 -
<PAGE>
SIGNATURE
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.
WORTHINGTON FOODS, INC.
-----------------------
(Registrant)
Date: November 8, 1996 By: /S/ WILLIAM T. KIRKWOOD
----------------------------
William T. Kirkwood
Executive Vice President and
Chief Financial Officer
- 12 -
<PAGE>
EXHIBIT INDEX
Filed with Worthington Foods, Inc. Report on Form 10-Q for the Quarter
Ended September 27, 1996.
Exhibit No. Page No.
----------- --------
11 Computation of Earnings Per Share 14
27 Financial Data Schedule 15
- 13 -
Exhibit 11
WORTHINGTON FOODS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
Three Months Ended Nine Months Ended
9/27/96 9/29/95 9/27/96 9/29/95
Primary: ------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 6,371,992 6,330,392 6,367,489 6,321,067
Net effect of dilutive stock
options based on treasury
stock method using average
market price 288,410 210,438 253,119 158,247
---------- ---------- ---------- ----------
Weighted average common and
common equivalent shares 6,660,402 6,540,830 6,620,608 6,479,314
========== ========== ========== ==========
Net income $1,913,000 $1,327,000 $5,191,000 $3,748,000
========== ========== ========== ==========
Net income per common share $ 0.29 $ 0.20 $ 0.78 $ 0.58
========== ========== ========== ==========
Fully Diluted:
Weighted average number of common
shares outstanding 6,371,992 6,330,392 6,367,489 6,321,067
Net effect of dilutive stock options
based on treasury stock method using
market price at end of period if
greater than the average market
price during the period 316,565 210,438 318,632 202,736
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares 6,688,557 6,540,830 6,686,121 6,523,803
========== ========== ========== ==========
Net income $1,913,000 $1,327,000 $5,191,000 $3,748,000
========== ========== ========== ==========
Net income per common share $ 0.28 $ 0.20 $ 0.78 $ 0.58
========== ========== ========== ==========
</TABLE>
Note: 1995 share amounts have been adjusted to reflect the five-for-four share
split in December, 1995.
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-27-1996
<CASH> 447
<SECURITIES> 0
<RECEIVABLES> 8,038
<ALLOWANCES> 158
<INVENTORY> 17,962
<CURRENT-ASSETS> 28,898
<PP&E> 67,790
<DEPRECIATION> 20,641
<TOTAL-ASSETS> 78,020
<CURRENT-LIABILITIES> 9,335
<BONDS> 0
0
0
<COMMON> 6,389
<OTHER-SE> 40,286
<TOTAL-LIABILITY-AND-EQUITY> 78,020
<SALES> 79,160
<TOTAL-REVENUES> 79,160
<CGS> 48,124
<TOTAL-COSTS> 70,070
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 927
<INCOME-PRETAX> 8,163
<INCOME-TAX> 2,972
<INCOME-CONTINUING> 9,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,191
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.78
</TABLE>
