<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, 2000
--------------------------------------------------
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: 0-15638
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MICHAEL FOODS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0498850
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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
- --------------------------------------------------------------------------------
(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 8, 2000 was 19,740,438 shares.
1
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PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
================================================================================================================================
March 31, December 31,
ASSETS 2000 1999
------------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 4,526,000 $ 4,961,000
Accounts receivable, less allowances 91,567,000 92,493,000
Inventories 78,398,000 71,197,000
Prepaid expenses and other 4,123,000 4,604,000
---------------- ---------------
Total current assets 178,614,000 173,255,000
PROPERTY, PLANT AND EQUIPMENT-AT COST
Land 4,106,000 4,104,000
Buildings and improvements 133,364,000 133,778,000
Machinery and equipment 363,551,000 357,724,000
---------------- ---------------
501,021,000 495,606,000
Less accumulated depreciation 216,577,000 208,807,000
---------------- ---------------
284,444,000 286,799,000
OTHER ASSETS
Goodwill, net 115,867,000 116,729,000
Joint ventures and other assets 20,574,000 21,134,000
---------------- ---------------
136,441,000 137,863,000
---------------- ---------------
$599,499,000 $597,917,000
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,063,000 $ 3,130,000
Accounts payable 50,364,000 47,009,000
Accrued liabilities
Compensation 9,051,000 13,143,000
Insurance 7,717,000 7,229,000
Customer programs 19,947,000 20,999,000
Income taxes 15,870,000 11,805,000
Other 15,259,000 18,176,000
---------------- ---------------
Total current liabilities 121,271,000 121,491,000
LONG-TERM DEBT, less current maturities 181,534,000 175,404,000
DEFERRED INCOME TAXES 36,745,000 36,423,000
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock 197,000 203,000
Additional paid-in capital 90,315,000 102,777,000
Retained earnings 170,644,000 162,577,000
Accumulated comprehensive income (loss) (1,207,000) (958,000)
---------------- ---------------
259,949,000 264,599,000
---------------- ---------------
$599,499,000 $597,917,000
================ ===============
===============================================================================================================================
</TABLE>
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>
===============================================================================================================================
2000 1999
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<S> <C> <C>
Net sales $251,926,000 $253,378,000
Cost of sales 205,071,000 211,247,000
-------------- -------------
Gross profit 46,855,000 42,131,000
Selling, general and administrative expenses 27,956,000 25,044,000
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Operating profit 18,899,000 17,087,000
Interest expense, net 2,950,000 2,820,000
-------------- -------------
Earnings before income taxes 15,949,000 14,267,000
Income tax expense 6,460,000 5,850,000
-------------- -------------
NET EARNINGS $ 9,489,000 $ 8,417,000
============== =============
Net Earnings Per Share
Basic $ 0.47 $ 0.40
Diluted $ 0.47 $ 0.40
============== =============
Weighted average shares outstanding
Basic 20,158,000 21,009,000
Diluted 20,371,000 21,230,000
============== =============
===============================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, (Unaudited)
<TABLE>
<CAPTION>
=============================================================================================================================
2000 1999
---------------- ---------------
<S> <C> <C>
Net cash provided by operating activities $ 16,424,000 $ 22,199,000
Cash flows from investing activities:
Capital expenditures (8,131,000) (15,308,000)
Investments in joint ventures and other assets 14,000 (9,169,000)
---------------- ---------------
Net cash used in investing activities (8,117,000) (24,477,000)
Cash flows from financing activities:
Payments on long-term debt (37,537,000) (36,526,000)
Proceeds from long-term debt 43,600,000 52,000,000
Proceeds from issuance of common stock 86,000 219,000
Repurchase of common stock (13,470,000) (9,518,000)
Dividends (1,421,000) (1,265,000)
---------------- ---------------
Net cash provided by (used in) financing activities (8,742,000) 4,910,000
---------------- ---------------
Net increase (decrease) in cash and equivalents (435,000) 2,632,000
Cash and equivalents at beginning of year 4,961,000 2,047,000
---------------- --------------
Cash and equivalents at end of period $ 4,526,000 $ 4,679,000
================ ==============
===============================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(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.
Michael Foods, Inc. (the "Company") utilizes 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, 2000 and 1999 each included thirteen weeks of
operations. For clarity of presentation, the Company has described both periods
presented as if the quarters ended on March 31.
Preparation of the Company's consolidated financial statements requires
management 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.
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,
2000 and the results of operations and cash flows for the three months ended
March 31, 2000 and 1999. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the results for the full year.
The Company's basic net earnings per share is computed by dividing net earnings
by the weighted average number of outstanding common shares. The Company's
diluted net earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares and common share
equivalents relating to stock options, when dilutive. Options to purchase
834,070 shares of Common Stock, with a weighted average exercise price of
$24.70, which were outstanding during the three month period ended March 31,
2000, were excluded from the computation of common share equivalents for that
period because they were anti-dilutive. Options to purchase 769,165 shares of
Common Stock, with a weighted average exercise price of $24.83, were outstanding
during the three month period ended March 31, 1999, but were excluded from the
computation of common share equivalents for that period because they were
anti-dilutive.
NOTE B - INVENTORIES
Inventories, other than flocks, are stated at the lower of cost (determined on a
first-in, first-out basis) or market. Flock inventory represents the cost of
purchasing and raising flocks to laying maturity, at which time their cost is
amortized to operations over their expected useful life of generally one to two
years, assuming no salvage value.
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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<S> <C> <C>
Raw materials and supplies $17,178,000 $15,720,000
Work in process and finished goods 40,240,000 35,447,000
Flocks 20,980,000 20,030,000
-------------- ------------
$78,398,000 $71,197,000
============== ============
</TABLE>
5
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(Unaudited)
NOTE C - COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENT
The Company has an exclusive license agreement for a patented process for the
production and sale of extended shelf-life egg products. Under the license
agreement, the Company has the right to defend and prosecute infringement of the
licensed patents. The U.S. Federal Court of Appeals has upheld the validity of
the four patents subject to the license agreement, but, subsequently, a patent
examiner at the U.S. Patent and Trademark Office ("PTO") rejected the patents.
In August 1999, the examiner's rejections were largely overturned by the Board
of Appeals and Interferences of the PTO. Counsel advises that the four patents
will be reissued in the near future. These patents are scheduled to expire in
2006.
LITIGATION
The Company is engaged in routine litigation incidental to its business.
Management believes it will not have a material effect upon its consolidated
financial position, liquidity or results of operations.
NOTE D - SHAREHOLDERS' EQUITY
During the first quarters of 2000 and 1999 the Company repurchased 609,400 and
505,300 shares of Common Stock under a share repurchase program which began in
July 1998 and which was expanded in February 2000.
NOTE E - COMPREHENSIVE INCOME
Comprehensive income consists of net earnings and foreign currency translation
adjustments. Total comprehensive income was $9,240,000 and $8,417,000 for the
three months ended March 31, 2000 and 1999.
NOTE F - BUSINESS SEGMENTS
The Company operates in four reportable segments - Egg Products, Refrigerated
Distribution, Dairy Products and Potato Products. Certain financial information
on the Company's operating segments is as follows (unaudited, in thousands):
<TABLE>
<CAPTION>
Egg Refrigerated Dairy Potato
Products Distribution Products Products Corporate Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31,
2000:
External net sales $153,553 $56,248 $28,029 $14,096 N/A $251,926
Intersegment sales 2,885 18 485 555 N/A 3,943
Operating profit (loss) 15,121 4,305 (186) 1,301 (1,642) 18,899
THREE MONTHS ENDED MARCH 31, 1999:
External net sales $152,150 $59,122 $28,662 $13,444 N/A $253,378
Intersegment sales 5,694 21 268 607 N/A 6,590
Operating profit (loss) 14,982 2,050 896 1,192 (2,033) 17,087
</TABLE>
6
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MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(Unaudited)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 VS THREE MONTHS ENDED MARCH 31, 1999
RESULTS OF OPERATIONS
Readers are directed to Note F - Business Segments for data on the unaudited
financial results of the Company's four business segments for the three months
ended March 31, 2000 and 1999.
Egg Products Division net sales for the 2000 period reflected unit sales
increases, particularly for value-added products, which more than offset
significant deflationary pricing impacts on certain products and the planned
decline of shell egg sales. Sales were particularly strong for extended
shelf-life liquid eggs, precooked frozen omelets, patties and curds, and dried
products. Egg prices decreased approximately 15% compared to first quarter 1999
levels, as reported by Urner Barry Publications - a widely quoted industry
pricing service. This decrease reduced the cost of purchased eggs, while also
reducing selling prices for certain egg products and shell eggs. Approximately
two-thirds of the Division's annual egg needs are purchased under contracts, or
in the spot market. While a portion of these eggs are secured under fixed price
contracts, a majority are priced according to the cost of grain inputs or to egg
market prices as reported by Urner Barry. Approximately one-third of annual egg
needs are sourced from internal flocks, where feed costs typically represent
roughly two-thirds of the cost of producing such eggs. Feed costs were lower in
the 2000 period, compared to the 1999 period, due to lower prices for both corn
and soybean meal. Decreased egg costs, for both internally and externally
procured eggs, in the 2000 period, compared to the 1999 period, were offset by
pricing weakness, creating margin pressure for certain egg products.
An unusual approximate four week period in the 2000 period saw open market egg
prices rise sharply and then decline sharply. The impact of increased costs
without a commensurate increase in product pricing reduced margins for certain
industrial egg products. However, profitability for value-added egg products
increased during the first quarter of 2000. The net effect of these factors was
a slight increase in divisional operating profit.
Refrigerated Distribution Division net sales for the 2000 period reflected
strong unit sales increases, with cheese, butter and juice showing particular
strength, which was more than offset by strong deflationary impacts from a
year-over-year decline in the national butterfat market. Unit sales growth
resulted from a brand repositioning over the past two years, a broadening
consumer advertising campaign in selected markets, notable new account activity
and new product introductions. The volume growth, along with a decline in
certain product costs related to the national butterfat market, resulted in
margin expansion in the 2000 period.
Dairy Products Division net sales for the 2000 period reflected higher unit
sales due to strong creamer product sales, ice milk mix sales growth with
national accounts and the impact of sales from a plant acquired during 1999's
second quarter. However, unit sales were flat year-over-year for certain
cartoned specialty dairy products due to the product line having not fully
recovered from a recall in 1999. Also, industrial (tanker) mix volume declined
substantially year-over-year as a result of the loss of a major customer in this
segment in late 1999. Deflationary impacts from a year-over-year decline in the
national butterfat market offset the overall divisional volume growth.
Divisional operating profit declined in the 2000 period largely as a result of
inefficient plant operations. Labor costs were above average due, in part, to
increased training costs and overtime incurred to meet orders in a timely
manner.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
================================================================================
THREE MONTHS ENDED MARCH 31, 2000 VS THREE MONTHS ENDED MARCH 31, 1999, CONT.
RESULTS OF OPERATIONS, CONT.
Potato Products Division net sales for the 2000 period reflected a unit sales
increase, particularly for retail hash brown and mashed items. New account
activity, same-account sales growth and new product introductions contributed to
the sales gain. The operating profit increase in the 2000 period resulted from
the volume growth, an improved sales mix, and efficient plant operations at the
main potato processing facility. Profit growth was constrained by increased
spending to stimulate trade and consumer response to the Division's products.
The increase in gross profit margin of the Company for the period ended March
31, 2000, as compared to the results of the same period in 1999, reflected the
factors discussed above, particularly the strength in the Refrigerated
Distribution and Potato Products segments. 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 in most
periods. Selling, general and administrative expenses increased as a percent of
sales in the period ended March 31, 2000, as compared to the results of the same
period in 1999. Expenses increased due to amortization of the costs associated
with the Company's information systems upgrade project, amortization of a
non-compete agreement related to a Dairy Products acquisition, and additional
sales and marketing efforts.
GENERAL
Certain of the Company's products are sensitive to changes in commodity prices.
The Company's Egg Products Division derived less than 3% of the Division's net
sales for the first three months of 2000 from shell eggs, which are sensitive to
commodity price swings. Value-added extended shelf-life liquid egg products
lines and precooked egg products accounted for approximately 60% of the Egg
Products Division's net sales. The remainder of Egg Products Division sales is
derived from the sale of other egg products, which vary from being
commodity-sensitive to value-added. 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 2000 period
was approximately 15% below 1999 levels as measured by a widely quoted pricing
service. Gross profit margins for extended shelf-life liquid eggs, egg
substitutes, and precooked egg products are less sensitive to commodity price
fluctuations than are other egg products or shell eggs.
The Company's Refrigerated Distribution Division derives approximately 70% of
its net sales from refrigerated products produced by others, thereby reducing
the effects of commodity price swings. The balance of refrigerated distribution
sales are from shell eggs, some of which are produced by the Egg Products
Division and are sold on a distribution, or non-commodity, basis by the
Refrigerated Distribution Division.
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, except over short time periods.
The Potato Products Division typically purchases 75%-95% 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. Moderate variations
in the purchase price of raw materials or the selling price per pound of
finished products can have a significant effect on Potato Products Division
operating results.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
================================================================================
THREE MONTHS ENDED MARCH 31, 2000 VS THREE MONTHS ENDED MARCH 31, 1999, CONT.
GENERAL, CONT.
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 significant 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 the sale of Common
Stock. The Company believes that these financing alternatives will continue to
meet its anticipated needs.
The Company invested $8,100,000 in capital expenditures during the three months
ended March 31, 2000. The Company plans to spend approximately $55,000,000 on
capital expenditures in 2000, the majority of which is to expand or update
production capacity for value-added products.
The Company has an unsecured line of credit for $80,000,000 with its principal
banks which expires in February 2002. As of March 31, 2000, $48,500,000 was
outstanding under this line of credit.
In July 1998, the Company's Board of Directors authorized the purchase of up to
two million shares of Common Stock on the open market or in privately negotiated
transactions. In February 2000, the Board authorized an additional purchase of
up to two million shares of Common Stock on the open market or in privately
negotiated transactions. Through March 31, 2000, the Company had repurchased
2,512,200 shares of Common Stock for $56,466,000. During the first quarter of
2000 the Company repurchased 609,400 shares of Common Stock.
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, coinciding with incremental consumer demand during the holiday season.
Net sales and 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.
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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
================================================================================
FORWARD-LOOKING STATEMENTS
Certain items in this Form 10-Q are forward-looking statements, which are made
in reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to numerous
risks and uncertainties, including variances in the demand for the Company's
products due to consumer developments and industry developments, as well as
variances in the costs to produce such products, including normal volatility in
egg and feed costs. The Company's actual financial results could differ
materially from the results estimated by, forecasted by, or implied by the
Company in such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's market risk during the three
month period ended March 31, 2000.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on January 25, 2000 disclosing its decision to end
a process to explore strategic alternatives to enhance shareholder value, along
with strong preliminary financial results for 1999.
The Company filed a Form 8-K on March 1, 2000 disclosing an authorization by the
Company's Board of Directors to repurchase up to an additional two million
shares of Common Stock.
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 12, 2000 By: /s/ Gregg A. Ostrander
-----------------------
Gregg A. Ostrander
(Chairman, President and Chief
Executive Officer)
Date: May 12, 2000 By: /s/ John D. Reedy
-----------------------
John D. Reedy
(Executive Vice President, 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
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS INCLUDED
HEREIN 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,526
<SECURITIES> 0
<RECEIVABLES> 94,158
<ALLOWANCES> 2,591
<INVENTORY> 78,398
<CURRENT-ASSETS> 178,614
<PP&E> 501,021
<DEPRECIATION> 216,577
<TOTAL-ASSETS> 599,499
<CURRENT-LIABILITIES> 121,271
<BONDS> 181,534
0
0
<COMMON> 197
<OTHER-SE> 259,752
<TOTAL-LIABILITY-AND-EQUITY> 599,499
<SALES> 251,926
<TOTAL-REVENUES> 251,926
<CGS> 205,071
<TOTAL-COSTS> 205,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 538
<INTEREST-EXPENSE> 2,950
<INCOME-PRETAX> 15,949
<INCOME-TAX> 6,460
<INCOME-CONTINUING> 9,489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,489
<EPS-BASIC> .47
<EPS-DILUTED> .47
</TABLE>
