<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 March 31, 1995
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-15568
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MICHAEL FOODS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 41-1579532
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 324, Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, MN 55416
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(Address of principal executive offices) (Zip code)
(612) 546-1500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of May 15, 1995 was 19,332,001 shares.
1
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PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
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March 31, December 31,
ASSETS 1995 1994
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,386,000 $ 1,641,000
Accounts receivable, less allowances 36,552,000 36,622,000
Inventories 52,744,000 54,631,000
Prepaid expenses and other 1,503,000 1,091,000
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Total current assets 93,185,000 93,985,000
PROPERTY PLANT AND EQUIPMENT-AT COST
Land 4,149,000 4,149,000
Buildings and improvements 94,253,000 93,807,000
Machinery and equipment 188,405,000 182,805,000
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286,807,000 280,761,000
Less accumulated depreciation 105,396,000 99,702,000
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181,411,000 181,059,000
OTHER ASSETS
Goodwill, net 47,087,000 47,439,000
Net assets held for sale 7,624,000 7,761,000
Other 7,422,000 6,401,000
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62,133,000 61,601,000
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$336,729,000 $336,645,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Current maturities of long-term debt $ 11,823,000 $ 11,809,000
Accounts payable 24,521,000 26,360,000
Accrued compensation 3,345,000 5,168,000
Accrued insurance 6,845,000 6,326,000
Other accrued expenses 13,325,000 10,733,000
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Total current liabilities 59,859,000 60,396,000
LONG-TERM DEBT, less current maturities 85,773,000 88,795,000
DEFERRED INCOME TAXES 22,002,000 21,425,000
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
19,945,913 shares issued at March 31, 1995 199,000 199,000
Additional paid-in capital 117,979,000 117,640,000
Retained earnings 56,528,000 53,801,000
Treasury stock, 613,912 shares-at cost (5,611,000) (5,611,000)
-------------- --------------
169,095,000 166,029,000
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$336,729,000 $336,645,000
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-------------- --------------
</TABLE>
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See accompanying notes to condensed consolidated financial statements.
2
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MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, (Unaudited)
<TABLE>
<CAPTION>
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1995 1994
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<S> <C> <C>
Net sales $126,692,000 $121,641,000
Cost of sales 106,749,000 104,473,000
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Gross profit 19,943,000 17,168,000
Selling, general and administrative expenses 11,803,000 9,855,000
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Operating profit 8,140,000 7,313,000
Other (income) expense
Interest expense 2,185,000 2,181,000
Interest capitalized (20,000) (69,000)
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2,165,000 2,112,000
Interest income (27,000) (10,000)
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2,138,000 2,102,000
Earnings before income taxes 6,002,000 5,211,000
Income tax expense 2,310,000 2,000,000
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NET EARNINGS $ 3,692,000 $ 3,211,000
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NET EARNINGS PER SHARE $.19 $.17
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DIVIDENDS PER SHARE $.05 $.05
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Weighted average shares outstanding 19,314,000 19,316,000
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</TABLE>
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See accompanying notes to condensed consolidated financial statements.
3
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MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, (Unaudited)
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<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Net cash provided by (used in) operating activities $11,607,000 $ (729,000)
Cash flows used in investing activities:
Capital expenditures (6,144,000) (4,715,000)
Other assets (1,084,000) (644,000)
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Net cash used in investing activities (7,228,000) (5,359,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 339,000 --
Proceeds from long-term debt 17,403,000 32,900,000
Payments on long-term debt (20,411,000) (22,627,000)
Cash dividends (965,000) (966,000)
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Net cash (used in) provided by financing activities (3,634,000) 9,307,000
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Net increase in cash and cash equivalents 745,000 3,219,000
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 $ 2,386,000 $ 3,442,000
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</TABLE>
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See accompanying notes to condensed consolidated financial statements.
4
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 1995 and March 31, 1994 each
include thirteen weeks of operations. For clarity of presentation, the Company
has described all periods presented as if the quarter ended on March 31.
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 March 31,
1995, and the results of operations and cash flows for the three month periods
ended March 31, 1995 and 1994. The results of operations for the three months
ended March 31, 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:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
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<S> <C> <C>
Work in process and finished goods $17,628,000 $16,233,000
Raw materials and supplies 14,518,000 15,327,000
Flocks 20,598,000 23,071,000
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$52,744,000 $54,631,000
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</TABLE>
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 March 31, 1995, the
Company had $2,400,000 outstanding at the reference rate of 9.0% and
$24,000,000 outstanding at an average variable rate of 6.6%. 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 March 31, 1995, $28,600,000 of this line was unused.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31, 1995 VS THREE MONTHS ENDED MARCH 31, 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:
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1995 1994
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<S> <C> <C>
Eggs and Egg Products 41% 41%
Refrigerated Distribution 34 35
Potato Products 16 16
Dairy Products 13 13
Prepared Foods * -- 2
Intercompany Sales (4) (7)
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TOTAL 100% 100%
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---- ----
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1994
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<S> <C> <C>
Eggs and Egg Products 60% 55%
Refrigerated Distribution 13 14
Potato Products 18 22
Dairy Products 9 9
Prepared Foods * -- --
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TOTAL 100% 100%
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<FN>
* The subsidiary comprising the Prepared Foods Division was liquidated and it's
assets sold in late 1994.
</TABLE>
The Eggs and Egg Products Division had higher dollar sales and earnings in the
period ended March 31, 1995, as compared to the results of the same period in
1994. The shell egg line operated at a loss in both periods. Feed costs, which
represent roughly two-thirds of the cost of producing an egg, were lower in
the 1995 period than in the 1994 period, offsetting an approximate 8%
year-over-year reduction in egg prices as reported by Urner Barry Publications -
a widely quoted industry pricing service. Sales were strong in 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 allowed for divisional margin improvement.
The Refrigerated Distribution Division had flat dollar sales and higher dollar
earnings in the period ended March 31, 1995, as compared to the results of the
same period in 1994. Unit sales were negatively affected by the incremental
sales impact of the Easter holiday falling in the second quarter of 1995 as
compared to the first quarter of 1994. Pricing improvements in certain product
lines, along with tight expense management, allowed for divisional margin
improvement.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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THREE MONTHS ENDED MARCH 31, 1995 VS THREE MONTHS ENDED MARCH 31, 1994
RESULTS OF OPERATIONS, CONT.
The Potato Products Division had higher dollar sales and flat dollar earnings
in the period ended March 31, 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,
resulting in lower earnings for these particular products.
Strong demand for value-added refrigerated potato products in both foodservice
and retail markets pushed unit sales and, therefore, margins higher for these
particular products, which offset the french fry weakness.
The Dairy Products Division had higher dollar sales and earnings in the period
ended March 31, 1995, as compared to the results of the same period in 1994.
Unit sales were strong and were helped by a relatively mild winter, new
national account activity and continuing business expansion at a newer
production facility in Texas. The unit sales improvement generated economies
of scale in production, which resulted in improved margins in the 1995 period.
The improved gross profit margin of the Company for the period ended March 31,
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 period ended March 31, 1995, as compared to the results of the same period
in 1994, due to factors such as increased staffing, inflation and increased
marketing support for certain product lines, particularly the Company's retail
refrigerated potato products.
GENERAL
Certain of the Company's products are sensitive to changes in commodity
prices. The Company's egg operations derive approximately 15% of that
division's net sales from shell eggs, which are sensitive to commodity price
swings. The Easy Eggs-Registered Trademark- product line now accounts for
approximately 45% of the eggs and egg products division's net sales and were
a comparable percent of sales in the first quarter of 1994. The remainder of
egg products division sales are derived from the sale of other value-added egg
products. Gross profit from shell eggs is primarily dependent upon the
relationship between shell egg prices and the cost of feed, both of which can
fluctuate significantly. Shell egg pricing in the first quarter of 1995 was
approximately 8% below first quarter 1994 levels as measured by a widely quoted
pricing service. Gross profit margins from value-added egg products are less
sensitive to commodity price fluctuations.
The Company's refrigerated distribution operations derive approximately 70% of
that divison's net sales from refrigerated products produced by others,
thereby reducing the effect of commodity price swings. The balance of
refrigerated distribution sales are from shell eggs, which are generally
produced by the eggs and egg products division and are sold on a distribution,
or non-commodity, basis by the refrigerated distribution division.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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GENERAL, CONT.
The potato products division now derives approximately one-half of
its net sales from the refrigerated potato products line.
The potato products division typically purchases 80%-90% of its raw potatoes
from contract producers under annual contracts. The remainder is purchased at
market prices to satisfy short-term production requirements or to take advantage
of market prices when they are lower than contracted prices. Small
variations in the purchase price of raw materials or the selling price per
pound of end products can have a significant effect on potato products division
operating results. The impact of raw material costs within the potato products
division has been reduced in recent years due to significant increases in
higher value-added refrigerated potato products sales.
The dairy products division sells its products primarily on a cost-plus basis
and, therefore, the division's earnings are not typically affected greatly by
raw ingredient price fluctuations.
Inflation is not expected to have a significant impact on the Company's
business. The Company generally has been able to offset the impact of
inflation through a combination of productivity gains and price increases.
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 $6,100,000 in capital expenditures during
the three months ended March 31, 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 March 31, 1995, approximately $26,400,000 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.
8
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 6, 1995, Schwan's Sales Enterprises, Inc. ("Schwan's") commenced an
action against Kohler Mix Specialties, Inc. ("Kohler Mix"), Associated Milk
Producers, Inc. ("AMPI") and Cliff Viessman, Inc. ("Viessman") claiming that
Kohler Mix and the other defendants were responsible, in whole or in part, for
losses sustained by Schwan's arising out of an outbreak of salmonella
enteritides linked to ice cream products manufactured and sold by Schwan's.
The action is pending in the District Court for Lyon County, Minnesota. The
complaint alleges that ice cream mix supplied by Kohler Mix and AMPI may have
been a contributing factor in the salmonella contamination and that Viessman
may have transported ice cream mix in contaminated tanker trucks. The
complaint seeks recovery of unspecified damages for property damage, loss of
business and goodwill, amounts paid to third parties and for costs of a product
recall. The Company believes that it has substantial factual and legal
defenses to the complaint and that any loss would be covered by insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended
March 31, 1995.
9
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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: May 15, 1995 By: /s/ Gregg A. Ostrander
-----------------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: May 15, 1995 By: /s/ John D. Reedy
---------------------------------------
John D. Reedy
(Vice President - Finance, Treasurer,
Chief Financial Officer and Principal
Accounting Officer)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheets and condensed consolidated
statements of earnings on pages 2 and 3 of the Company's Form 10Q for the
quarterly period ending March 31, 1995, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,386
<SECURITIES> 0
<RECEIVABLES> 36,552
<ALLOWANCES> 0
<INVENTORY> 52,744
<CURRENT-ASSETS> 93,185
<PP&E> 286,807
<DEPRECIATION> 105,396
<TOTAL-ASSETS> 336,729
<CURRENT-LIABILITIES> 59,859
<BONDS> 85,773
<COMMON> 199
0
0
<OTHER-SE> 168,896
<TOTAL-LIABILITY-AND-EQUITY> 336,729
<SALES> 126,692
<TOTAL-REVENUES> 126,692
<CGS> 106,749
<TOTAL-COSTS> 106,749
<OTHER-EXPENSES> 11,803
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,138
<INCOME-PRETAX> 6,002
<INCOME-TAX> 2,310
<INCOME-CONTINUING> 3,692
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,692
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
