<PAGE> 1
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, 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: 0-15568
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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 May 14, 1996 was 19,379,274 shares.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
March 31, December 31,
ASSETS 1996 1995
- - ------ ---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $404,000 $1,921,000
Accounts receivable, less allowances 46,719,000 40,583,000
Inventories 58,006,000 58,845,000
Prepaid expenses and other 2,150,000 1,622,000
------------ ------------
Total current assets 107,279,000 102,971,000
PROPERTY PLANT AND EQUIPMENT-AT COST
Land 4,117,000 4,117,000
Buildings and improvements 95,396,000 95,109,000
Machinery and equipment 209,196,000 203,557,000
------------ ------------
308,709,000 302,783,000
Less accumulated depreciation 124,182,000 118,642,000
------------ ------------
184,527,000 184,141,000
OTHER ASSETS
Goodwill, net 57,403,000 57,829,000
Net assets held for sale 3,450,000 4,431,000
Other 9,687,000 9,855,000
------------ ------------
70,540,000 72,115,000
------------ ------------
$362,346,000 $359,227,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES
Notes payable $44,000,000 $--
Current maturities of long-term debt 11,728,000 11,731,000
Accounts payable 27,050,000 27,362,000
Accrued compensation 3,443,000 6,543,000
Accrued insurance 7,141,000 6,945,000
Other accrued expenses 9,840,000 8,295,000
------------ ------------
Total current liabilities 103,202,000 60,396,000
LONG-TERM DEBT, less current maturities 47,098,000 89,690,000
DEFERRED INCOME TAXES 29,114,000 28,566,000
CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
shares issued 19,379,274 at March 31, 1996 and 19,332,001 at
December 31, 1995 194,000 193,000
Additional paid-in capital 112,899,000 112,374,000
Retained earnings 69,839,000 67,528,000
------------ ------------
182,932,000 180,095,000
------------ ------------
$362,346,000 $359,227,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, (Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $143,872,000 $126,692,000
Cost of sales 124,959,000 106,749,000
------------ -------------
Gross profit 18,913,000 19,943,000
Selling, general and administrative expenses 11,525,000 11,803,000
------------ -------------
Operating profit 7,388,000 8,140,000
Other (income) expense
Interest expense 2,028,000 2,185,000
Interest capitalized (96,000) (20,000)
------------ -------------
1,932,000 2,165,000
Interest income (12,000) (27,000)
------------ -------------
1,920,000 2,138,000
------------ -------------
Earnings before income taxes 5,468,000 6,002,000
Income tax expense 2,190,000 2,310,000
------------ -------------
NET EARNINGS $3,278,000 $3,692,000
============ =============
NET EARNINGS PER SHARE $.17 $.19
============ =============
DIVIDENDS PER SHARE $.05 $.05
============ =============
Weighted average shares outstanding 19,353,000 19,314,000
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, (Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $3,435,000 $11,946,000
Cash flows from investing activities:
Capital expenditures (6,265,000) (6,144,000)
Other assets 875,000 (1,084,000)
----------- ------------
Net cash used in investing activities (5,390,000) (7,228,000)
Cash flows from financing activities:
Payments on notes payable and long-term debt (30,295,000) (20,411,000)
Proceeds from notes payable and long-term debt 31,700,000 17,403,000
Cash dividends (967,000) (965,000)
----------- ------------
Net cash provided by (used in) financing activities 438,000 (3,973,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents (1,517,000) 745,000
Cash and cash equivalents at beginning of year 1,921,000 1,641,000
----------- ------------
Cash and cash equivalents at end of period $404,000 $2,386,000
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
(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, 1996 and March 31, 1995 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,
1996, and the results of operations and cash flows for the three month periods
ended March 31, 1996 and 1995. The results of operations for the three months
ended March 31, 1996 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,
1996 1995
---- ----
<S> <C> <C>
Work in process and finished goods $19,364,000 $19,848,000
Raw materials and supplies 15,150,000 16,597,000
Flocks 23,492,000 22,400,000
------------- ------------
$58,006,000 $58,845,000
============= ============
</TABLE>
NOTE C - NOTES PAYABLE
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, 1996, the
Company had $5,000,000 outstanding at the reference rate of 8.25% and
$39,000,000 outstanding at an average variable rate of 5.8%. 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, 1996, $11,000,000 of this line was unused.
5
<PAGE> 6
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
(Unaudited)
NOTE D - CONTINGENCIES
Use of Estimates
- - ----------------
In preparation of the Company's consolidated financial statements, management
is required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
Patent Litigation
- - -----------------
The Company had prepaid royalty payments of approximately $8,200,000 at March
31, 1996 and $8,300,000 as of December 31, 1995 included in other assets related
to an exclusive license agreement for the production and sale of extended
shelf-life liquid egg products. These amounts have arisen as a result of the
Company making payments to prosecute and defend the patents related to the
exclusive license agreement. The Company has the right to offset up to 50% of
otherwise payable royalties for the legal costs which it has incurred to defend
patents underlying the exclusive license agreement. In January, 1996, the
Company was informed by the U.S. Patent and Trademark Office that a patent
examiner rejected the claims under one of the four process patents, which are
the subject of the license agreement, in a non-final action. Subsequently,
non-final actions have been received in reexamination proceedings on the other
three process patents which are the subject of the license agreement and these
actions included similar rejections of the claims. Management and the licensor
intend to present additional arguments and evidence to the examiner pointing out
reasons why the rejections should be withdrawn. Furthermore, should the
examiner choose not to withdraw the rejections, management intends to appeal the
decision of the examiner and believes the validity of the patents will
ultimately be upheld. During the appeal process, the patents remain valid and in
full force and effect. Based upon current and expected product volume levels,
the Company expects to fully recover the remaining prepaid royalties over the
useful life of the exclusive license agreement. However, there can be no
assurance that the Company will be able to fully recover its prepaid royalty
payments. If the patents are ultimately denied after all appeals have been
concluded, the Company would continue to produce and market the products
currently subject to the license agreement without incurring royalty cost.
Product Litigation
- - ------------------
In the fall of 1994, a customer of the Company recalled product which was
potentially contaminated and is settling claims with consumers who became ill
after eating the product before the recall. The customer has filed a suit,
whereby the Company is a co-defendant with other companies alleged to have
supplied contaminated product to the customer's plant. The customer is seeking
damages for losses incurred, as well as alleged loss of past and future
profits. Management and its counsel believe the Company has substantial
defenses to the allegations and believe it is unlikely the Company will incur a
loss from this claim materially in excess of its insurance coverage.
Other Litigation
- - ----------------
The Company is also engaged in routine litigation incidental to its business,
which management believes will not have a material effect upon its results of
operations, liquidity or consolidated financial position.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 VS THREE MONTHS ENDED MARCH 31, 1995
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,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Egg Products 44% 41%
Refrigerated Distribution 35 34
Potato Products 16 16
Dairy Products 12 13
Intercompany Sales (7) (4)
----- -----
TOTAL 100% 100%
===== =====
</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,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Egg Products 64% 60%
Refrigerated Distribution 23 13
Potato Products 2 18
Dairy Products 11 9
------ ------
TOTAL 100% 100%
====== ======
</TABLE>
The Egg Products Division had higher dollar sales and lower dollar earnings in
the period ended March 31, 1996, as compared to the results of the same period
in 1995. The shell egg line operated at a loss in both periods. Feed costs,
which typically represent roughly two-thirds of the cost of producing an egg,
were sharply higher in the 1996 period than in the 1995 period, reflecting
substantially higher market prices for corn and soybean meal. This more than
offset an approximate 35% year-over-year increase in egg prices as reported by
Urner Barry Publications - a widely quoted industry pricing service. Sales
were strong for certain value-added egg products, notably Easy Eggs(R) (extended
shelf-life liquid whole eggs) and MicroFresh (frozen omelets, patties and
curds), which partially offset the feed cost pressures.
The Refrigerated Distribution Division had higher dollar sales and higher
dollar earnings in the period ended March 31, 1996, as compared to the results
of the same period in 1995. Unit sales were strong for core refrigerated
grocery items, reflecting, in part, new account activity and new product
introductions. This volume improvement, along with pricing improvements in
certain product lines and tight expense management, allowed for divisional
margin improvement.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
THREE MONTHS ENDED MARCH 31, 1996 VS THREE MONTHS ENDED MARCH 31, 1995
RESULTS OF OPERATIONS, CONT.
The Potato Products Division had higher dollar sales and lower dollar earnings
in the period ended March 31, 1996, as compared to the results of the same
period in 1995. While a competitive environment in the french fry processing
industry depressed unit sales for frozen potato products, value-added
refrigerated potato product unit sales increased. Cost pressures, from
procuring expensive open market potatoes to complement potatoes delivered under
contract, and processing yield pressures, from the utilization of large amounts
of under-sized potatoes, primarily resulted in a significant reduction in the
divisional profit margin.
The Dairy Products Division had higher dollar sales and flat dollar earnings in
the period ended March 31, 1996, as compared to the results of the same period
in 1995. Unit sales were relatively flat and were hampered by a harsh winter
throughout most of the U. S. Pricing and operating costs were comparatively
flat year-over-year.
The decline in gross profit margin of the Company for the period ended March
31, 1996, as compared to the results of the same period in 1995, reflected the
factors discussed above, particularly the significant raw material issues
evident in the Egg Products and Potato Products divisions. 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. However, in the most recent period finished product pricing
did not increase rapidly enough to offset the pressures from raw material cost
and quality issues. Selling, general and administrative expenses decreased as
a percent of sales in the period ended March 31, 1996, as compared to the
results of the same period in 1995, due to the significant sales increase and
effective management of operating expenses across the Company.
GENERAL
Certain of the Company's products are sensitive to changes in commodity prices.
The Company's egg operations derive approximately 19% of that division's net
sales from shell eggs, which are sensitive to commodity price swings. The Easy
Eggs(R) product line now accounts for approximately 41% of the Egg Products
Division's net sales and was a comparable percent of sales in the first quarter
of 1995. 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 1996 was approximately 35% above first quarter 1995 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 division'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 Egg Products Division and are sold on a distribution, or
non-commodity, basis by the Refrigerated Distribution Division.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
GENERAL, CONT.
The Potato Products Division now derives approximately 65% 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 $6,300,000 in capital expenditures during
the three months ended March 31, 1996. The Company's 1996 plan calls for
approximately $29,000,000 in total capital expenditures.
The Company has an unsecured line of credit for $55,000,000 with its principal
banks. As of March 31, 1996, approximately $44,000,000 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, refrigerated distribution
operations experience 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.
9
<PAGE> 10
PART II - OTHER INFORMATION
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,
1996.
10
<PAGE> 11
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: May 14, 1996 By: /s/ Gregg A. Ostrander
-------------------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: May 14, 1996 By: /s/ John D. Reedy
--------------------------------------------
John D. Reedy
(Vice President - Finance, Treasurer,
Chief Financial Officer and Principal
Accounting Officer)
11
<TABLE> <S> <C>
<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, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 404
<SECURITIES> 0
<RECEIVABLES> 46,719
<ALLOWANCES> 0
<INVENTORY> 58,006
<CURRENT-ASSETS> 107,279
<PP&E> 308,709
<DEPRECIATION> 124,182
<TOTAL-ASSETS> 362,346
<CURRENT-LIABILITIES> 103,202
<BONDS> 47,098
0
0
<COMMON> 194
<OTHER-SE> 182,738
<TOTAL-LIABILITY-AND-EQUITY> 362,346
<SALES> 143,872
<TOTAL-REVENUES> 143,872
<CGS> 124,959
<TOTAL-COSTS> 124,959
<OTHER-EXPENSES> 11,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,920
<INCOME-PRETAX> 5,468
<INCOME-TAX> 2,190
<INCOME-CONTINUING> 3,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,278
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
