<PAGE>
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, 1994
------------------------------------------------
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
-------------------------------------------------------
MICHAEL FOODS, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1579532
- - -------------------------------------------------------------------------------
(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
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(612) 546-1500
- - -------------------------------------------------------------------------------
(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 14, 1994 was 19,316,139 shares.
1
<PAGE>
PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
ASSETS ------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,952,000 $ 223,000
Accounts receivable, less allowances 33,667,000 33,087,000
Inventories 52,982,000 49,138,000
Prepaid expenses and other 1,350,000 1,279,000
------------ ------------
Total current assets 91,951,000 83,727,000
PROPERTY PLANT AND EQUIPMENT-AT COST
Land 4,149,000 4,201,000
Buildings and improvements 92,672,000 89,980,000
Machinery and equipment 180,334,000 166,655,000
------------ ------------
277,155,000 260,836,000
Less accumulated depreciation 95,470,000 80,398,000
------------ ------------
181,685,000 180,438,000
OTHER ASSETS
Goodwill, net 47,790,000 48,844,000
Net assets held for sale 9,977,000 11,939,000
Other 5,771,000 4,139,000
------------ ------------
63,538,000 64,922,000
------------ ------------
$337,174,000 $329,087,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 10,782,000 $ 9,814,000
Accounts payable 29,275,000 20,536,000
Accrued compensation 4,634,000 3,720,000
Accrued insurance 6,847,000 6,701,000
Accrued product line disposal costs 1,916,000 12,702,000
Other accrued expenses 14,632,000 7,987,000
------------ ------------
Total current liabilities 68,086,000 61,460,000
LONG-TERM DEBT, less current maturities 86,319,000 94,194,000
DEFERRED INCOME TAXES 20,120,000 18,430,000
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued - -
Common stock, $.01 par value, 25,000,000 shares authorized,
19,915,489 shares issued at September 30, 1994 199,000 199,000
Additional paid-in capital 117,640,000 117,640,000
Retained earnings 50,121,000 42,475,000
Treasury stock, 599,350 shares-at cost (5,311,000) (5,311,000)
------------ ------------
162,649,000 155,003,000
------------ ------------
$337,174,000 $329,087,000
------------ ------------
------------ ------------
</TABLE>
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- - --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended September 30,
(Unaudited)
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- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Net sales $127,878,000 $120,709,000
Cost of sales 109,555,000 105,004,000
------------ ------------
Gross profit 18,323,000 15,705,000
Selling, general and administrative expenses 10,279,000 9,626,000
------------ ------------
Operating profit 8,044,000 6,079,000
Other (income) expense
Interest expense 2,177,000 2,215,000
Interest capitalized (66,000) (28,000)
------------ ------------
2,111,000 2,187,000
Interest income (7,000) (185,000)
------------ ------------
2,104,000 2,002,000
------------ ------------
Earnings before income taxes 5,940,000 4,077,000
Income tax expense 2,300,000 2,730,000
------------ ------------
NET EARNINGS $ 3,640,000 $ 1,347,000
------------ ------------
------------ ------------
NET EARNINGS PER SHARE $.19 $.07
------------ ------------
------------ ------------
DIVIDENDS PER SHARE $.05 $.05
------------ ------------
------------ ------------
Weighted average shares outstanding 19,316,000 19,365,000
------------ ------------
------------ ------------
</TABLE>
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- - --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended September 30,
(Unaudited)
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- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Net sales $375,049,000 $345,087,000
Cost of sales 321,227,000 301,332,000
------------ ------------
Gross profit 53,822,000 43,755,000
Selling, general and administrative expenses 30,311,000 29,183,000
------------ ------------
Operating profit 23,511,000 14,572,000
Other (income) expense
Interest expense 6,635,000 6,997,000
Interest capitalized (238,000) (85,000)
------------ ------------
6,397,000 6,912,000
Interest income (30,000) (552,000)
------------ ------------
6,367,000 6,360,000
------------ ------------
Earnings before income taxes 17,144,000 8,212,000
Income tax expense 6,600,000 4,220,000
------------ ------------
NET EARNINGS $ 10,544,000 $ 3,992,000
------------ ------------
------------ ------------
NET EARNINGS PER SHARE $.55 $.21
------------ ------------
------------ ------------
DIVIDENDS PER SHARE $.15 $.15
------------ ------------
------------ ------------
Weighted average shares outstanding 19,316,000 19,450,000
------------ ------------
------------ ------------
</TABLE>
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- - --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
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- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 30,833,000 $ 39,703,000
Cash flows from investing activities:
Capital expenditures (17,092,000) (4,861,000)
Net assets held for sale 1,605,000 -
Joint venture and other assets (1,812,000) (2,041,000)
------------ ------------
Net cash used in investing activities (17,299,000) (6,902,000)
Cash flows from financing activities:
Proceeds from long-term debt 67,700,000 49,900,000
Payments on long-term debt (74,607,000) (81,569,000)
Cash dividends (2,898,000) (2,920,000)
Purchase of shares for treasury - (1,828,000)
------------ ------------
Net cash used in financing activities (9,805,000) (36,417,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,729,000 (3,616,000)
Cash and cash equivalents at beginning of year 223,000 6,064,000
------------ ------------
Cash and cash equivalents at end of period $ 3,952,000 $ 2,448,000
------------ ------------
------------ ------------
</TABLE>
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- - --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994 and 1993
(Unaudited)
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- - --------------------------------------------------------------------------------
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, 1994 and September 30, 1993,
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, 1994, and the results of operations for the three and nine month
periods ended September 30, 1994 and 1993, and cash flows for the nine month
periods ended September 30, 1994 and 1993. The results of operations for the
nine months ended September 30, 1994, are not necessarily indicative of the
results for the full year.
NOTE B - DISPOSAL OF PRODUCT LINE
Prior to 1994, the Company invested in a joint venture with an unrelated company
for the purpose of producing reduced cholesterol liquid whole eggs. The Company
owned 50% of the joint venture and recognized one half of the profit or loss
which resulted from the joint venture. Under the terms of the joint venture
agreement, the Company paid a processing toll to the joint venture equal to the
costs of production plus an amount to provide a return on each partner's
investment.
Due to significant continuing losses and lack of adequate market acceptance, the
Company decided in December 1993 to cause the early termination of the joint
venture and to discontinue production of the reduced cholesterol liquid whole
eggs product. In the first quarter of 1994, the Company expended $11,500,000 to
acquire the interest of its joint venture partner.
In the third quarter of 1993, the revenues and expenses directly attributable to
the discontinued product line were net sales of $843,000, cost of sales of
$2,339,000, selling, general and administrative expenses of $645,000 and
interest income of $177,000. The Company thus recorded a pre-tax loss directly
attributable to the discontinued product line in the third quarter of 1993 of
approximately $1,964,000.
For the nine months ended September 30, 1993, the revenues and expenses directly
attributable to the discontinued product line were net sales of $3,548,000, cost
of sales of $7,868,000, selling, general and administrative expenses of
$2,079,000 and interest income of $520,000. The Company thus recorded a pre-tax
loss directly attributable to the discontinued product line in the nine months
ended September 30, 1993 of approximately $5,879,000.
6
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
September 30, 1994 and 1993
(Unaudited)
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- - --------------------------------------------------------------------------------
NOTE C - 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. Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ -------------
<S> <C> <C>
Work in process and finished goods $ 18,120,000 $ 14,386,000
Raw materials and supplies 13,702,000 17,028,000
Flocks 21,160,000 17,724,000
------------ -------------
$ 52,982,000 $ 49,138,000
------------ -------------
------------ -------------
</TABLE>
NOTE D - 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, 1994, the
Company had $18,500,000 outstanding at a weighted average rate of 6.2%. This
revolving line of credit, which matures on January 31, 1996, contains certain
restrictive covenants similar to the covenants contained in the Company's senior
promissory notes. At September 30, 1994, $36,500,000 of this line was unused.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1994 VS. THREE MONTHS ENDED SEPTEMBER 30, 1993
RESULTS OF OPERATIONS
Net earnings for the quarter ended September 30, 1994 were $3,640,000, an
increase of $2,293,000 from net earnings of $1,347,000 in the previous year. Net
earnings per share were $.19 versus $.07 in the previous year.
Net sales increased $7,169,000, or 6%, to $127,878,000 for the quarter ended
September 30, 1994 from $120,709,000 in the previous year. A significant
portion of the sales increase was due to higher unit sales in each of the
Company's four main operating divisions. Additionally, improvement was seen in
potato products selling prices. Lower prices for shell eggs and certain
commodity-sensitive egg products, as compared to prior year levels, restricted
sales growth. Third quarter 1993 net sales include $843,000 attributable to the
reduced cholesterol liquid whole eggs product, which was discontinued in the
fourth quarter of 1993.
Gross profit increased $2,618,000 to $18,323,000 for the quarter ended September
30, 1994, while gross profit as a percent of sales increased to 14.3% in the
third quarter of 1994 from 13.0% in the third quarter of 1993. Third quarter
1993 gross profit was reduced by a gross loss of $1,496,000 directly
attributable to the discontinued reduced cholesterol liquid whole eggs product.
Therefore, the improvement in third quarter 1994 gross profit margin is in part
due to the elimination of the gross loss from the discontinued product.
Selling, general and administrative expenses increased $653,000 to $10,279,000,
reflecting the higher sales level, as well as the elimination of expenses from
the discontinued reduced cholesterol liquid whole eggs, which were $645,000 in
the third quarter of 1993. Total selling, general and administrative expenses
were 8.0% of net sales in 1994 and 1993.
In the third quarter of 1993, the Company revised its estimated annual effective
tax rate, primarily to reflect the 1993 change in the Federal statutory rate.
The effect of the change in the estimated annual effective tax rate was to
increase income tax expense for the three-month period ended September 30, 1993
by approximately $1,200,000. Approximately $1,100,000 of this one time
adjustment is the result of applying the newly estimated annual effective tax
rate to the accumulated timing differences which existed at December 31, 1992.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1994 VS. NINE MONTHS ENDED SEPTEMBER 30, 1993
RESULTS OF OPERATIONS
Net earnings for the nine months ended September 30, 1994 were $10,544,000, an
increase of $6,552,000 from net earnings of $3,992,000 in the previous year. Net
earnings per share were $.55 versus $.21 in the previous year.
Net sales increased $29,962,000, or 9%, to $375,049,000 from $345,087,000 in the
previous year. A significant portion of the sales increase was due to higher
unit sales in each of the Company's four main operating divisions. Additionally,
improvement was seen in potato products selling prices. Lower prices for shell
eggs and certain commodity-sensitive egg products, as compared to prior year
levels, restricted sales growth. For the nine months ended September 30, 1993,
net sales include $3,548,000 attributable to the reduced cholesterol liquid
whole eggs product, which was discontinued in the fourth quarter of 1993.
Gross profit increased $10,067,000 to $53,822,000 for the nine months ended
September 30, 1994, while gross profit as a percent of sales increased to 14.4%
in 1994 from 12.7% in 1993. For the nine months ended September 30, 1993, gross
profit was reduced by a gross loss of $4,320,000 directly attributable to the
discontinued reduced cholesterol liquid whole eggs product. Therefore, a
significant portion of the improvement in the gross profit margin for the first
nine months of 1994 relates to the elimination of the gross loss from the
discontinued product. Additionally, volume-driven production economies and
improved potato products pricing contributed to the gross profit margin
increase.
Selling, general and administrative expenses increased $1,128,000 to
$30,311,000, reflecting the higher sales level, as well as the elimination of
expenses from the discontinued reduced cholesterol liquid whole eggs, which were
$2,079,000 for the nine months ended September 30, 1993. Total selling, general
and administrative expenses were 8.1% of net sales in 1994 and 8.5% of net sales
in 1993.
During the third quarter 1993, the Company revised its estimated annual
effective tax rate, primarily to reflect the 1993 change in the Federal
statutory rate. The earnings for the first nine months of 1993 were adjusted to
reflect the newly estimated annual effective tax rate and also include the one
time effect of applying this new rate to December 31, 1992 accumulated timing
differences.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
GENERAL
Certain of the Company's products are sensitive to changes in commodity prices.
The Company's egg operations derive approximately 20% of net sales from shell
eggs, which are sensitive to commodity price swings. The remaining 80% of egg
sales are derived from the sale of 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 third quarter of 1994 was lower than third quarter 1993 levels.
Additionally, the cost of feed was higher due to higher grain costs. Changes in
grain costs affect feed costs, which are a significant cost component in egg
production. Such changes affect both shell egg and egg products production
costs. However, gross profit margins from value-added egg products are less
sensitive to commodity price fluctuations than are shell eggs.
The Company's refrigerated distribution operations derive approximately 65% of
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 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. Prices of frozen french fried potatoes have generally improved over
the past 12 months.
The impact of raw material costs within the potato products division has been
reduced in the past 3 - 4 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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. Historically,
the Company has financed its growth principally from internally generated funds,
bank borrowings, issuance of senior debt and its sale of Common Stock. The
Company believes that these financing alternatives will continue to meet its
anticipated needs.
The Company invested approximately $17,100,000 in capital expenditures during
the nine months ended September 30, 1994. The Company's 1994 plan calls for
approximately $30,000,000 in total capital expenditures.
The Company has an unsecured line of credit for $55,000,000 with its principal
banks. As of September 30, 1994, approximately $18,500,000 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.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) There were no reports on Form 8-K filed during the quarter ended
September 30, 1994.
11
<PAGE>
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.
-------------------------------------------
(Registrant)
Date: November 14, 1994 By: /s/ Gregg A. Ostrander
---------------------------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: November 14, 1994 By: /s/ John D. Reedy
---------------------------------------
John D. Reedy
(Vice President - Finance, Treasurer,
Chief Financial Officer and Principal
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated statements of earnings and condensed consolidated balance
sheets on pages 2 and 4 of the Company's Form 10Q for the quarterly period
ending September 30, 1994, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1
<CASH> 3,952
<SECURITIES> 0
<RECEIVABLES> 33,667
<ALLOWANCES> 0
<INVENTORY> 52,982
<CURRENT-ASSETS> 91,951
<PP&E> 277,155
<DEPRECIATION> 95,470
<TOTAL-ASSETS> 337,174
<CURRENT-LIABILITIES> 68,086
<BONDS> 86,319
<COMMON> 199
0
0
<OTHER-SE> 162,450
<TOTAL-LIABILITY-AND-EQUITY> 337,174
<SALES> 375,049
<TOTAL-REVENUES> 375,049
<CGS> 321,227
<TOTAL-COSTS> 321,227
<OTHER-EXPENSES> 30,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,367
<INCOME-PRETAX> 17,144
<INCOME-TAX> 6,600
<INCOME-CONTINUING> 10,544
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,544
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
