Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - MICHAEL FOODS GROUP, INC. | Financial_Report.xls |
EX-31.1 - SECTION 302 CEO CERTIFICATION - MICHAEL FOODS GROUP, INC. | d340872dex311.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - MICHAEL FOODS GROUP, INC. | d340872dex312.htm |
EX-32.1 - SECTION 906 CEO CERTIFICATION - MICHAEL FOODS GROUP, INC. | d340872dex321.htm |
EX-32.2 - SECTION 906 CFO CERTIFICATION - MICHAEL FOODS GROUP, INC. | d340872dex322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
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: 333-173400
MICHAEL FOODS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-0344222 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
301 Carlson Parkway, Suite 400 Minnetonka, Minnesota |
55305 | |
(Address of principal executive offices) | (Zip Code) |
(952) 258-4000
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) 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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The registrants Common Stock is not publicly traded. The Registrant had 100 shares of $0.01 par value common stock outstanding as of May 15, 2012.
PART IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHAEL FOODS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except for share data)
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
ASSETS | ||||||||
Current Assets |
||||||||
Cash and equivalents |
$ | 79,236 | $ | 68,118 | ||||
Accounts receivable, less allowances |
156,151 | 153,059 | ||||||
Inventories |
144,385 | 149,507 | ||||||
Prepaid expenses and other |
11,220 | 12,016 | ||||||
|
|
|
|
|||||
Total Current Assets |
390,992 | 382,700 | ||||||
Property, Plant and Equipment |
||||||||
Land |
9,073 | 9,073 | ||||||
Buildings and improvements |
118,242 | 118,096 | ||||||
Machinery and equipment |
264,631 | 260,015 | ||||||
|
|
|
|
|||||
Total Property, Plant and Equipment |
391,946 | 387,184 | ||||||
Less accumulated depreciation |
115,121 | 98,220 | ||||||
|
|
|
|
|||||
Property, Plant and Equipment, net |
276,825 | 288,964 | ||||||
Goodwill |
830,003 | 829,846 | ||||||
Intangible assets, net |
577,508 | 585,208 | ||||||
Deferred financing costs |
44,146 | 46,027 | ||||||
Other assets |
8,891 | 9,084 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 2,128,365 | $ | 2,141,829 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
$ | 9,962 | $ | 10,096 | ||||
Accounts payable |
72,540 | 90,906 | ||||||
Accrued liabilities |
||||||||
Compensation |
14,420 | 10,234 | ||||||
Customer programs |
34,193 | 35,686 | ||||||
Interest |
9,797 | 20,420 | ||||||
Income taxes |
9,293 | 0 | ||||||
Other |
24,958 | 22,446 | ||||||
|
|
|
|
|||||
Total Current Liabilities |
175,163 | 189,788 | ||||||
Long-term debt, less current maturities |
1,239,354 | 1,240,993 | ||||||
Deferred income taxes |
269,498 | 276,464 | ||||||
Other long-term liabilities |
10,434 | 10,621 | ||||||
Commitments and contingencies |
| | ||||||
Shareholders Equity |
||||||||
Common stock, $0.01 par value, 5,000 shares authorized and 100 shares issued and outstanding as of March 31, 2012 and December 31, 2011 |
0 | 0 | ||||||
Additional paid-in capital |
411,900 | 411,162 | ||||||
Retained earnings |
20,921 | 12,338 | ||||||
Accumulated other comprehensive income |
1,095 | 463 | ||||||
|
|
|
|
|||||
Total Shareholders Equity |
433,916 | 423,963 | ||||||
|
|
|
|
|||||
Total Liabilities and Shareholders Equity |
$ | 2,128,365 | $ | 2,141,829 | ||||
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2
MICHAEL FOODS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
For the three months ended March 31, 2012 and April 2, 2011
(Unaudited, in thousands)
2012 | 2011 | |||||||
Net sales |
$ | 444,826 | $ | 417,101 | ||||
Cost of sales |
365,425 | 344,488 | ||||||
|
|
|
|
|||||
Gross profit |
79,401 | 72,613 | ||||||
Selling, general and administrative expenses |
42,680 | 45,021 | ||||||
|
|
|
|
|||||
Operating profit |
36,721 | 27,592 | ||||||
Interest expense, net |
22,769 | 25,205 | ||||||
Unrealized gain on currency transactions |
(403 | ) | (579 | ) | ||||
Loss on early extinguishment of debt |
0 | 3,527 | ||||||
|
|
|
|
|||||
Earnings (loss) before income taxes and equity in losses of unconsolidated subsidiary |
14,355 | (561 | ) | |||||
Income tax expense (benefit) |
4,810 | (245 | ) | |||||
Equity in losses of unconsolidated subsidiary |
193 | 119 | ||||||
|
|
|
|
|||||
Net earnings (loss) |
9,352 | (435 | ) | |||||
Other comprehensive income (loss) |
||||||||
Change in fair value of derivatives, net of tax |
410 | 551 | ||||||
Foreign currency translation adjustment |
222 | (69 | ) | |||||
|
|
|
|
|||||
Other comprehensive income |
632 | 482 | ||||||
|
|
|
|
|||||
Comprehensive income |
$ | 9,984 | $ | 47 | ||||
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
MICHAEL FOODS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
For the three months ended March 31, 2012
(Unaudited, in thousands, except shares)
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Shares | Paid-In | Retained | Comprehensive | Shareholders | ||||||||||||||||||||
Issued | Amount | Capital | Earnings | Income | Equity | |||||||||||||||||||
Balance at December 31, 2011 |
100 | $ | 0 | $ | 411,162 | $ | 12,338 | $ | 463 | $ | 423,963 | |||||||||||||
Stock option compensation |
524 | 524 | ||||||||||||||||||||||
Capital invested by parent |
214 | 214 | ||||||||||||||||||||||
Dividend to parent |
(769 | ) | (769 | ) | ||||||||||||||||||||
Net earnings |
9,352 | 9,352 | ||||||||||||||||||||||
Foreign currency translation adjustment |
222 | 222 | ||||||||||||||||||||||
Change in fair value of derivatives, net of tax |
410 | 410 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2012 |
100 | $ | 0 | $ | 411,900 | $ | 20,921 | $ | 1,095 | $ | 433,916 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
MICHAEL FOODS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2012 and April 2, 2011
(Unaudited, in thousands)
2012 | 2011 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings (loss) |
$ | 9,352 | $ | (435 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
16,947 | 16,774 | ||||||
Amortization of intangibles |
7,700 | 7,700 | ||||||
Amortization of deferred financing costs |
1,919 | 2,031 | ||||||
Write-off of deferred financing costs |
0 | 1,845 | ||||||
Amortization of original issue discount on long-term debt |
508 | 580 | ||||||
Write-off of original issue discount on long-term debt |
0 | 1,123 | ||||||
Deferred income taxes |
(6,911 | ) | 64 | |||||
Non-cash stock option compensation |
524 | 525 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(2,969 | ) | (10,632 | ) | ||||
Inventories |
5,314 | (12,640 | ) | |||||
Prepaid expenses, income taxes and other |
1,163 | (3,132 | ) | |||||
Accounts payable |
(18,458 | ) | (73 | ) | ||||
Accrued liabilities |
3,813 | (20,623 | ) | |||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
18,902 | (16,893 | ) | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(4,637 | ) | (9,608 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(4,637 | ) | (9,608 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on long-term debt |
(2,330 | ) | (782,249 | ) | ||||
Proceeds from long-term debt |
0 | 840,000 | ||||||
Dividend to parent |
(769 | ) | (65,000 | ) | ||||
Deferred financing costs |
(38 | ) | (7,160 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(3,137 | ) | (14,409 | ) | ||||
Effect of exchange rate changes on cash |
(10 | ) | 1 | |||||
|
|
|
|
|||||
Net increase (decrease) in cash and equivalents |
11,118 | (40,909 | ) | |||||
Cash and equivalents at beginning of period |
68,118 | 44,805 | ||||||
|
|
|
|
|||||
Cash and equivalents at end of period |
$ | 79,236 | $ | 3,896 | ||||
|
|
|
|
|||||
Supplemental disclosures of cash flow information: |
||||||||
Non-cash capital investment by parent (see Note D) |
$ | 214 | $ | 265 | ||||
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
MICHAEL FOODS GROUP, INC.
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE AGENERAL
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with Regulation S-X of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
We utilize a 52/53 week fiscal year ending on the Saturday nearest to December 31 each year. The quarterly periods ended March 31, 2012 and April 2, 2011 were 13-week periods.
In the opinion of management, the unaudited financial statements contain all adjustments necessary to present fairly the results of operations for the periods indicated and are of normal, recurring nature. Our results of operations and cash flows for the three-month periods ended March 31, 2012 and April 2, 2011 are not necessarily indicative of the results expected for the full year, primarily due to the impacts of seasonality on our fourth quarter resulting from increased holiday demand.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued an update to accounting guidance for improved fair value measurement and disclosures. The update represents converged guidance between U.S. GAAP and International Financial Reporting Standards (IFRS) resulting in common requirements for measuring fair value and for disclosing information about fair value measurements. This new guidance was effective for our fiscal year beginning January 1, 2012 and the adoption of this guidance did not have an impact on our financial position, results of operations or cash flows.
In September 2011, the FASB issued guidance on goodwill impairment testing that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test. The assessment examines qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is or is not less than its carrying amount. This new guidance was effective for our fiscal year beginning January 1, 2012 and the adoption of this guidance did not have an impact on our financial position, results of operations or cash flows.
In June 2011, the FASB issued guidance on presentation of comprehensive income that requires us to present components of other comprehensive income and of net income in one continuous statement of comprehensive income, or in two separate but consecutive statements. In December 2011, the FASB issued a deferral of the effective date for presentations of reclassifications of items out of accumulated other comprehensive income (loss). The option to report other comprehensive income within the statement of equity has been removed. This new presentation of comprehensive income was effective for our fiscal year beginning January 1, 2012 and the adoption of this guidance did not have an impact on our financial position, results of operations or cash flows.
There was no other accounting pronouncement adopted during the three-month period ended March 31, 2012 that had a material impact on our financial position, operating results or disclosures.
Recent Accounting Pronouncements to be Adopted
There were no new accounting pronouncements issued during the three-month period ended March 31, 2012 that are expected to have material impacts on our financial position, operating results or disclosures.
Financial Instruments and Fair Value Measurements
We are exposed to market risks from changes in commodity prices, which may adversely affect our operating results and financial position. When appropriate, we seek to minimize our risks from commodity price fluctuations through the use of derivative financial instruments, such as commodity purchase contracts, which are classified as derivatives, along with other instruments relating primarily to corn, soybean meal, cheese and energy-related needs. We estimate fair values based on exchange-quoted prices, adjusted as appropriate for differences in local markets. These differences are generally valued using inputs from broker or dealer quotations, or market transactions in either the listed or over-the-counter commodity markets. In such cases, these derivative contracts are classified within Level 2 of the fair value hierarchy. Changes in the fair values of these contracts are recognized in the consolidated financial statements as a component of cost of sales or other comprehensive income (loss). The hedging-related financial instruments measured at fair value on a recurring basis are included in current assets, under prepaid expenses and other.
6
In addition, we seek to minimize our risks from interest rate fluctuations through the use of interest rate swap contracts. These instruments are valued using standard calculations and models with inputs other than quoted market prices provided by our banking partners. The fair value of instruments may be impacted by the Companys nonperformance risk, which is estimated based upon the unsecured borrowing rates available to the Company. The borrowing rates available to the Company are considered a significant unobservable input used in the fair value measurement of such instruments. As such, they were included in the Level 3 fair value measurements as of March 31, 2012 and December 31, 2011. A 1% change in the unobservable input would have an approximately $156,000 effect on interest expense. Management has elected to not account for these instruments as hedges so changes in the fair values of these instruments are recognized in the consolidated financial statements as a component of interest expense. The interest rate swap contract liability is measured at fair value on a recurring basis and the current portion of the liability is included in other accrued liabilities and the long-term portion is included in other long-term liabilities.
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used Level 3, significant unobservable inputs (in thousands):
Interest Rate | ||||
Swap | ||||
Contracts | ||||
Balance at December 31, 2011 |
$ | 6,500 | ||
Unrealized loss included in interest expense |
694 | |||
|
|
|||
Balance at March 31, 2012 |
$ | 7,194 | ||
|
|
The following tables set forth our hedging-related financial assets and liabilities measured on a recurring basis as of the periods ended March 31, 2012 and December 31, 2011 (in thousands):
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Derivatives: |
||||||||||||||||
Assets: |
||||||||||||||||
As of March 31, 2012 |
||||||||||||||||
Commodity contractsGrain |
$ | 1,986 | $ | 0 | $ | 1,986 | $ | 0 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2011 |
||||||||||||||||
Commodity contractsGrain |
$ | 2,906 | $ | 0 | $ | 2,906 | $ | 0 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
As of March 31, 2012 |
||||||||||||||||
Commodity contractsEnergy |
$ | 183 | $ | 0 | $ | 183 | $ | 0 | ||||||||
Interest rate swap contracts |
7,194 | 0 | 0 | 7,194 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 7,377 | $ | 0 | $ | 183 | $ | 7,194 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2011 |
||||||||||||||||
Commodity contractsEnergy |
$ | 618 | $ | 0 | $ | 618 | $ | 0 | ||||||||
Interest rate swap contracts |
6,500 | 0 | 0 | 6,500 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 7,118 | $ | 0 | $ | 618 | $ | 6,500 | |||||||||
|
|
|
|
|
|
|
|
We have six financial debt instruments, two of which are traded in the public debt securities market. For the two traded instruments, we utilize Level 1 valuation inputs (based upon each instruments market trading price) to compute the fair value of financial debt owed to our lenders. The first debt instrument is our credit agreement facility that includes a term B loan. The fair value of the term B loan was $793.9 million compared to its carrying value of $794.9 million (outstanding balance of $806.8 million, less $11.9 million of unamortized original issue discount). The second debt instrument is our senior notes. The fair value of our senior notes was $470.3 million compared to the carrying value of $430.0 million. Our other debt instruments are not available for trading and fair value approximates their carrying value.
7
Accounting for Hedging Activities
Certain of our operating segments enter into derivative instruments, such as corn and soybean meal futures, which we believe provide an economic hedge on future transactions and are designated as cash flow hedges. As the commodities being hedged are grain ingredients fed to our flocks, the changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of these items.
We actively monitor exposure to commodity price risks and use derivative commodity instruments to manage the impact of certain of these risks. We use derivatives, primarily futures contracts, only for the purpose of managing risks associated with underlying commodity exposures. Our futures contracts for grains are cash flow hedges of firm purchase commitments and anticipated production requirements, as they reduce our exposure to changes in the cash price of the respective items and generally extend for less than one year. We expect that within the next twelve months we will reclassify, as earnings or losses, substantially all of the amount recorded in accumulated other comprehensive income.
In addition, we use derivative instruments to mitigate some of the risk associated with our energy-related needs and interest costs. We do not treat those futures contracts as hedging instruments and, therefore, record the gains or losses related to them as a component of earnings in the period of change. We do not trade or use instruments with the objective of earning financial gains on the commodity price, nor do we use instruments where there is no underlying exposure. All derivatives are recognized at their fair value. For derivative instruments designated and qualifying as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or (loss) (AOCI or AOCL) in the equity section of our balance sheet and a corresponding amount is recorded in prepaid expenses and other current assets, other accrued liabilities or other long-term liabilities, as appropriate. The amounts carried in cash, when appropriate, represent the fair value of our positions in excess of the margin requirements. We offset certain derivative asset and liability amounts where a legal right of offset exists. The amounts deferred are subsequently recognized in cost of sales when the associated products are sold. The cost or benefit of contracts closed prior to the execution of the underlying purchase is deferred until the anticipated purchase occurs. As a result of the volatility of the markets, deferred gains and losses in AOCI or AOCL may fluctuate until the related contract is closed. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings. We do not exclude any items from our assessment of ineffectiveness. During the three-month period ended March 31, 2012, we did not discontinue any cash flow hedges; therefore no reclassification of gains or losses into earnings was made during the period.
We had the following outstanding commodity-forward contracts for hedging of forecasted purchases of grain, as of the periods ended:
March 31, | December 31, | |||||||
Commodity |
2012 | 2011 | ||||||
Corn (bushels) |
2,700,000 | 6,375,000 | ||||||
Soybean Meal (tons) |
26,700 | 71,800 |
Information on location and amounts of derivative fair values in the condensed consolidated balance sheets is presented below (in thousands):
Fair Value (1) | ||||||||||||||||||
March 31, 2012 | December 31, 2011 | |||||||||||||||||
Balance Sheet Location |
Asset | Liability | Asset | Liability | ||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||
Commodity contracts Grain |
Prepaid expenses and other | $ | 2,305 | $ | (319 | ) | $ | 3,788 | $ | (882 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||
Commodity contracts Energy |
Prepaid expenses and other | $ | 502 | $ | (685 | ) | $ | 30 | $ | (648 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||||
Interest rate swap contracts |
Other accrued liabilities and other long-term liabilities | $ | 0 | $ | (7,194 | ) | $ | 0 | $ | (6,500 | ) | |||||||
|
|
|
|
|
|
|
|
(1) | Amounts represent the gross fair value of derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the derivative in the condensed consolidated balance sheets. The gross fair value of the commodity grain contracts is exclusive of cash collateral receivable of $0 and $223 as of March 31, 2012 and December 31, 2011. The gross fair value of the commodity energy contracts is exclusive of cash collateral receivable of $915 and $925 as of March 31, 2012 and December 31, 2011. |
8
The following tables represent the effect of derivative instruments on our Condensed Consolidated Statements of Operations and Comprehensive Income for the three-month periods ended March 31, 2012 and April 2, 2011 (in thousands):
Derivatives in Cash Flow Hedging Relationships, net of tax:
(Effective Portion) | (Ineffective Portion) | |||||||||||||||||||
Gain (Loss) Recognized in AOCI on Derivative |
Location of Gain (Loss) Reclassified from AOCI into Earnings |
Gain (Loss) Reclassified from AOCI into Earnings |
Location of Gain (Loss) Recognized in Earnings on Derivative |
Gain (Loss) Recognized in Earnings on Derivative |
||||||||||||||||
For the three months ended March 31, 2012 |
||||||||||||||||||||
Commodity contracts Grain |
$ | 1,091 | Cost of sales | $ | 681 | Cost of sales | $ | (143 | ) | |||||||||||
|
|
|
|
|
|
|||||||||||||||
For the three months ended April 2, 2011 |
||||||||||||||||||||
Commodity contracts Grain |
$ | 1,546 | Cost of sales | $ | 995 | Cost of sales | $ | (10 | ) | |||||||||||
|
|
|
|
|
|
Derivatives not designated as hedging instruments for the three-month periods ended March 31, 2012 and April 2, 2011:
Locations of | ||||||||||
Gain (Loss) | ||||||||||
Recognized in | ||||||||||
Earnings on | ||||||||||
Derivative | 2012 | 2011 | ||||||||
|
Gain (Loss) Recognized in Earnings on Derivative |
| ||||||||
Commodity contracts Energy |
Cost of sales | $ | 128 | $ | 21 | |||||
|
|
|
|
|||||||
Interest rate swap contracts |
Interest expense | $ | (694 | ) | $ | (678 | ) | |||
|
|
|
|
Currency Translation
Our Egg Products Division includes a subsidiary in Canada (MFI Food Canada Ltd.). Its financial statements are included in our consolidated financial statements. The financial statements for the Canadian entity are measured in the local currency and then translated into U.S. dollars. The balance sheet accounts, with the exception of retained earnings accounts, are translated using the current exchange rate at the balance sheet date and the operating results are translated using the average rates prevailing throughout the reporting period. The retained earnings equity accounts are translated at historical average rates. Accumulated translation gains or losses are recorded in AOCI or AOCL and are included as a component of comprehensive income. Transactional gains and losses are reported in the statements of operations and comprehensive income. Michael Foods, Inc. holds a Canadian dollar-denominated note receivable from the Canadian subsidiary. As a result, we record the exchange-rate impact on that note as a component of earnings (loss) in the period of change.
9
Joint Venture
In 2010, we funded $1.5 million, our 50% share of the initial capital funding of a joint venture, to MFOSI, LLC, a Delaware LLC (MFOSI). MFOSI owns 100% of its subsidiary, Lang Fang MK Food Company Ltd., a Chinese egg products company. In November 2011, we and our joint venture partner each invested an additional $500,000. The Chinese company began producing product samples in late 2011 with production for customer sales beginning in early 2012. Under the equity method of accounting, losses were recorded for the unconsolidated subsidiary in an amount of $193,000 and $119,000 during the three-month periods ended March 31, 2012 and April 2, 2011.
2011 Debt Refinancing
On February 25, 2011, we completed a refinancing of our credit agreement. The new amended and restated credit agreement, with Bank of America, N.A. as administrative agent, provided availability of up to $915 million, in the form of an $840 million term B loan and $75 million revolving line of credit. In accordance with the provisions of the June 29, 2010 credit agreement, we paid a 1% soft-call premium of approximately $8 million to term B loan lenders. We capitalized approximately $7 million of the premium paid to lenders, whose term debt was modified, which is being amortized using the effective interest rate method over the term of the credit agreement. We incurred debt issuance costs of approximately $4.6 million paid to third parties related to the term B loan refinancing, including arranger fees, attorney fees and rating agency fees which were expensed during the three-month period ended April 2, 2011 as the term B loan refinancing was determined to be a modification and not a debt extinguishment. Also, included in early extinguishment of debt costs of $3.5 million for the three-month period ended April 2, 2011 were approximately $600,000 of the 1% soft-call costs, the non-cash write-off of approximately $1.8 million of unamortized deferred financing costs and approximately $1.1 million original issue discount associated with the extinguishment of debt owed to those lenders who did not participate in the amended and restated credit agreement.
Voluntary Product Recall
On January 26, 2012, we voluntarily recalled certain hardcooked egg products manufactured in late December 2011 at our Wakefield, Nebraska plant. During the three-month period ended March 31, 2012, we recorded approximately $1 million in costs primarily within cost of goods sold, associated with the related products sold to customers. We do not expect any significant additional costs.
NOTE BINVENTORIES
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. The costs included in our flock inventory include the costs of the chicks, the feed fed to the birds, and the labor and overhead costs incurred to operate the pullet facilities until the birds are transferred into the laying facilities at 16-18 weeks, at which time their cost is amortized to operations over their expected useful lives of generally one to two years.
Inventories consisted of the following as of the periods ended (in thousands):
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Raw materials and supplies |
$ | 25,573 | $ | 25,488 | ||||
Work in process and finished goods |
84,780 | 90,590 | ||||||
Flocks |
34,032 | 33,429 | ||||||
|
|
|
|
|||||
Total inventories |
$ | 144,385 | $ | 149,507 | ||||
|
|
|
|
10
NOTE CCOMMITMENTS AND CONTINGENCIES
Legal Matters
Antitrust claims: In late 2008 and early 2009, some 22 class-action lawsuits were filed in various federal courts against Michael Foods, Inc. and approximately 20 other defendants (producers of shell eggs, manufacturers of processed egg products, and egg industry organizations) alleging violations of federal and state antitrust laws in connection with the production and sale of shell eggs and processed-egg products. Plaintiffs seek to represent nationwide classes of direct and indirect purchasers, and allege that defendants conspired to reduce the supply of eggs by participating in animal husbandry, egg-export and other programs of various egg-industry associations. In December 2008, the Judicial Panel on Multidistrict Litigation ordered the transfer of all cases to the Eastern District of Pennsylvania for coordinated and/or consolidated pretrial proceedings. Between late 2010 and early 2012, a number of companies, each of which would be part of the purported class in the antitrust action, brought separate actions against defendants. These tag-along cases, brought primarily by various grocery chains and food companies, assert essentially the same allegations as the Second Consolidated Amended Complaint in the main action. All but one of the tag-along cases were either filed in or transferred to the Eastern District of Pennsylvania where they are being treated as related to the main action; the one tag-along case where pretrial proceedings are not under the jurisdiction of the Eastern District of Pennsylvania was brought by a retail grocery chain in Kansas state court.
On September 26, 2011, the Court denied our motion to dismiss the direct-purchaser plaintiffs claims, and on April 24, 2012, the Court denied our motion to dismiss the indirect-purchaser plaintiffs claims. A discovery stay that had been in place since the cases were filed was lifted on April 25, 2012.
We received a Civil Investigative Demand (CID) issued by the Florida Attorney General on November 17, 2008, regarding an investigation of possible anticompetitive activities relating to the production and sale of eggs or egg products. The CID requested information and documents related to the pricing and supply of shell eggs and egg products, as well as our participation in various programs of United Egg Producers. We have fully cooperated with the Florida Attorney Generals Office to date. Further compliance is suspended pending discovery in the civil antitrust litigation referenced above.
Patent infringement claims: On October 27, 2010, National Pasteurized Eggs, Inc. and National Pasteurized Eggs, LLC (collectively NPE) commenced litigation against Michael Foods, Inc. and several of its subsidiaries in U.S. District Court for the Western District of Wisconsin. NPE alleges that our pasteurized shell egg products infringe on patents and trademarks that NPE owns or licenses. NPE seeks unspecified damages, profits from our sales of pasteurized shell eggs, attorneys fees, and an injunction preventing the Michael Foods defendants from future infringement. We deny NPEs allegations and are seeking declarations that NPEs patents are invalid and not infringed, and that NPEs trademarks are not infringed. Though there has been no quantification of claimed damages, pasteurized shell eggs constitute a very modest portion of sales in the Egg Products Division.
On April 15, 2011, Michael Foods, Inc. commenced litigation against National Pasteurized Eggs, Inc. in U.S. District Court for the District of Minnesota. We allege that National Pasteurized Eggs, Inc.s production and sale of pasteurized shell eggs infringes three patents, each owned by the University of Missouri and exclusively licensed to Michael Foods, Inc. We seek unspecified damages and injunctive relief preventing National Pasteurized Eggs, Inc. from future infringement. On July 27, 2011, our case was transferred to the U.S. District Court for the Western District of Wisconsin for consolidated handling with NPEs case.
Both Michael Foods, Inc. and NPE have moved for summary judgment on several claims. Jury trial in the consolidated cases is scheduled for June 4, 2012.
Lawsuit against the City of Elizabeth and Liberty Water Co.: On January 28, 2010, our subsidiary Papettis Hygrade Egg Products, Inc. commenced suit in New Jersey Superior Court against the City of Elizabeth, N.J. and Liberty Water Company. The suit alleges that City sewer charges, which are billed by Liberty Water, are arbitrary and inequitable. Papettis seeks a declaration that its sewer bills have been inaccurate at least since 2002, and seeks invalidation of certain sewer-related charges and surcharges. In responding to the suit, the City of Elizabeth counterclaimed on May 7, 2010 that Papettis has not been charged the full and proper amount of sewage charges due to billing mistakes of Defendant Liberty Water Company, but did not allege any undercharged amount. On June 1, 2011, Liberty Water gave notice of its belief that from 2004 to present, it underbilled Papettis by some $6.5 million. In November of 2011, Liberty Water issued invoices totaling $6.2 million to Papettis in connection with the alleged underbilling. We have not recorded a liability for the alleged underbilling as we believe there is no merit in this claim.
We do not believe it is possible to estimate any possible loss in connection with these litigated matters. Accordingly, we cannot predict what impact, if any, these matters and any results from such matters could have on our future results of operations.
Other: In addition, we are from time to time party to litigation, administrative proceedings and union grievances that arise in the ordinary course of business, and occasionally pay non-material amounts to resolve claims and alleged violations of regulatory requirements. There are no pending ordinary course matters that, separately or in the aggregate, would, in the opinion of management, have a material adverse effect on our operations, financial condition or cash flow.
11
NOTE DSHAREHOLDERS EQUITY
Additional Paid-in Capital
We recorded non-cash capital investments from our parent, MFI Midco Corporation (Midco), of $214,000 and $265,000 in the three-month periods ended March 31, 2012 and April 2, 2011 related to the tax benefit the Company receives on Midcos tax amortization deduction due to filing a consolidated Federal tax return.
Dividend
During March 2012, the Company issued a dividend to its ultimate parent, MFI Holding Corporation, to repurchase certain of its shares of a terminated employee.
NOTE EBUSINESS SEGMENTS
We are a diversified producer and distributor of food products in three segments egg products, refrigerated potato products and cheese and other dairy case products. We produce and distribute egg products to the foodservice, retail and food ingredient markets. We process and distribute refrigerated potato products to the foodservice and retail grocery markets in North America. We market a broad line of refrigerated grocery products to U.S. retail grocery outlets, including branded and private-label cheese, bagels, butter, muffins and ethnic foods. Beginning January 1, 2012, we changed our internal reporting of segment information reported to our President and Chief Executive Officer who is our Chief Operating Decision Maker (CODM). We now report all sales of shell egg and egg products and refrigerated potato products in their respective segments and the balance of our retail distributed products, cheese and other dairy-case products, as our third segment. This change increased the amount of external net sales and operating profit reported for prior periods for both the egg products and refrigerated potato products segments as we reclassified the egg and refrigerated potato products previously reported under the Crystal Farms segment. The April 2, 2011 period has been restated to reflect the new internal reporting to the CODM. This change had no impact on the assets of the segments as none of the underlying business unit operations were affected by this reporting change.
Certain financial information on operating segments is as follows (in thousands):
Egg Products | Refrigerated Potato Products |
Cheese & Other Dairy-Case Products |
Corporate & Eliminations |
Total | ||||||||||||||||
Three months ended March 31, 2012 |
||||||||||||||||||||
External net sales |
$ | 310,615 | $ | 36,820 | $ | 97,391 | $ | 0 | $ | 444,826 | ||||||||||
Operating profit (loss) |
29,935 | 5,236 | 5,653 | (4,103 | ) | 36,721 | ||||||||||||||
Depreciation and amortization |
20,018 | 2,817 | 1,810 | 2 | 24,647 | |||||||||||||||
Three months ended April 2, 2011 |
||||||||||||||||||||
External net sales |
$ | 297,463 | $ | 32,894 | $ | 86,744 | $ | 0 | $ | 417,101 | ||||||||||
Operating profit (loss) |
28,035 | 3,259 | 4,555 | (8,257 | ) | 27,592 | ||||||||||||||
Depreciation and amortization |
19,641 | 2,851 | 1,981 | 1 | 24,474 |
12
NOTE FSUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
We and our 100% owned domestic subsidiaries, jointly and severally, and fully and unconditionally, guarantee the amended and restated credit agreement and senior notes.
The following condensed consolidating financial information presents our consolidated balance sheets as of March 31, 2012 and as of December 31, 2011, and the condensed consolidating statements of operations and comprehensive income and cash flows for the three-month periods ended March 31, 2012 and April 2, 2011. The financial statements reflect Michael Foods Group, Inc. (Corporate), the wholly owned guarantor subsidiaries (on a combined basis), the non-guarantor subsidiary (MFI Food Canada Ltd.), and elimination entries necessary to combine such entities on a consolidated basis.
13
Condensed Consolidating Balance Sheets
March 31, 2012
(Unaudited, in thousands)
Corporate | Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets |
||||||||||||||||||||
Cash and equivalents |
$ | 0 | $ | 79,219 | $ | 17 | $ | 0 | $ | 79,236 | ||||||||||
Accounts receivable, less allowances |
0 | 150,828 | 5,323 | 0 | 156,151 | |||||||||||||||
Intercompany receivable (payable) |
(6,768 | ) | 9,789 | (3,021 | ) | 0 | 0 | |||||||||||||
Inventories |
0 | 135,665 | 8,720 | 0 | 144,385 | |||||||||||||||
Prepaid expenses and other |
0 | 11,173 | 47 | 0 | 11,220 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
(6,768 | ) | 386,674 | 11,086 | 0 | 390,992 | ||||||||||||||
Property, Plant and Equipmentnet |
0 | 269,708 | 7,117 | 0 | 276,825 | |||||||||||||||
Goodwill |
0 | 822,960 | 7,043 | 0 | 830,003 | |||||||||||||||
Intangibles and other assets |
850,947 | 604,451 | 0 | (824,853 | ) | 630,545 | ||||||||||||||
Investment in subsidiaries |
853,357 | 1,771 | 0 | (855,128 | ) | 0 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 1,697,536 | $ | 2,085,564 | $ | 25,246 | $ | (1,679,981 | ) | $ | 2,128,365 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||
Current Liabilities |
||||||||||||||||||||
Current maturities of long-term debt |
$ | 2,000 | $ | 7,026 | $ | 936 | $ | 0 | $ | 9,962 | ||||||||||
Accounts payable |
0 | 70,882 | 1,658 | 0 | 72,540 | |||||||||||||||
Accrued liabilities |
19,960 | 70,787 | 1,914 | 0 | 92,661 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
21,960 | 148,695 | 4,508 | 0 | 175,163 | |||||||||||||||
Long-term debt, less current maturities |
1,222,873 | 822,180 | 19,154 | (824,853 | ) | 1,239,354 | ||||||||||||||
Deferred income taxes |
8,353 | 261,055 | 90 | 0 | 269,498 | |||||||||||||||
Other long-term liabilities |
10,434 | 0 | 0 | 0 | 10,434 | |||||||||||||||
Shareholders equity |
433,916 | 853,634 | 1,494 | (855,128 | ) | 433,916 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 1,697,536 | $ | 2,085,564 | $ | 25,246 | $ | (1,679,981 | ) | $ | 2,128,365 | |||||||||
|
|
|
|
|
|
|
|
|
|
14
Condensed Consolidating Balance Sheets
December 31, 2011
(Unaudited, in thousands)
Corporate | Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets |
||||||||||||||||||||
Cash and equivalents |
$ | 0 | $ | 68,118 | $ | 0 | $ | 0 | $ | 68,118 | ||||||||||
Accounts receivable, less allowances |
0 | 149,089 | 4,977 | (1,007 | ) | 153,059 | ||||||||||||||
Inventories |
0 | 141,990 | 7,517 | 0 | 149,507 | |||||||||||||||
Prepaid expenses and other |
774 | 11,131 | 111 | 0 | 12,016 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
774 | 370,328 | 12,605 | (1,007 | ) | 382,700 | ||||||||||||||
Property, Plant and Equipmentnet |
0 | 281,214 | 7,750 | 0 | 288,964 | |||||||||||||||
Goodwill |
0 | 822,960 | 6,886 | 0 | 829,846 | |||||||||||||||
Intangibles and other assets |
852,828 | 612,040 | 0 | (824,549 | ) | 640,319 | ||||||||||||||
Investment in subsidiaries |
834,643 | 2,644 | 0 | (837,287 | ) | 0 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 1,688,245 | $ | 2,089,186 | $ | 27,241 | $ | (1,662,843 | ) | $ | 2,141,829 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||
Current Liabilities |
||||||||||||||||||||
Current maturities of long-term debt |
$ | 2,000 | $ | 6,959 | $ | 1,137 | $ | 0 | $ | 10,096 | ||||||||||
Accounts payable |
0 | 88,825 | 3,088 | (1,007 | ) | 90,906 | ||||||||||||||
Accrued liabilities |
20,212 | 66,864 | 1,710 | 0 | 88,786 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
22,212 | 162,648 | 5,935 | (1,007 | ) | 189,788 | ||||||||||||||
Long-term debt, less current maturities |
1,222,365 | 824,351 | 18,826 | (824,549 | ) | 1,240,993 | ||||||||||||||
Deferred income taxes |
9,084 | 267,380 | 0 | 0 | 276,464 | |||||||||||||||
Other long-term liabilities |
10,621 | 0 | 0 | 0 | 10,621 | |||||||||||||||
Shareholders equity |
423,963 | 834,807 | 2,480 | (837,287 | ) | 423,963 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 1,688,245 | $ | 2,089,186 | $ | 27,241 | $ | (1,662,843 | ) | $ | 2,141,829 | |||||||||
|
|
|
|
|
|
|
|
|
|
15
Condensed Consolidating Statements of Operations
And Comprehensive Income
Three months ended March 31, 2012
(Unaudited, in thousands)
Corporate | Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 0 | $ | 435,327 | $ | 10,644 | $ | (1,145 | ) | $ | 444,826 | |||||||||
Cost of sales |
0 | 356,087 | 10,483 | (1,145 | ) | 365,425 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
0 | 79,240 | 161 | 0 | 79,401 | |||||||||||||||
Selling, general and administrative expenses |
0 | 41,956 | 724 | 0 | 42,680 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating profit (loss) |
0 | 37,284 | (563 | ) | 0 | 36,721 | ||||||||||||||
Interest expense, net |
13,803 | 8,597 | 369 | 0 | 22,769 | |||||||||||||||
Unrealized gain on currency transactions |
0 | (403 | ) | 0 | 0 | (403 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings (loss) before equity in earnings (loss) of subsidiaries, income taxes and equity in losses of unconsolidated subsidiary |
(13,803 | ) | 29,090 | (932 | ) | 0 | 14,355 | |||||||||||||
Equity in earnings (loss) of subsidiaries |
18,083 | (943 | ) | 0 | (17,140 | ) | 0 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings (loss) before income taxes and equity in losses of unconsolidated subsidiary |
4,280 | 28,147 | (932 | ) | (17,140 | ) | 14,355 | |||||||||||||
Income tax expense (benefit) |
(5,072 | ) | 9,871 | 11 | 0 | 4,810 | ||||||||||||||
Equity in losses of unconsolidated subsidary |
0 | 193 | 0 | 0 | 193 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net earnings (loss) |
$ | 9,352 | $ | 18,083 | $ | (943 | ) | $ | (17,140 | ) | $ | 9,352 | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | 9,352 | $ | 18,829 | $ | (1,057 | ) | $ | (17,140 | ) | $ | 9,984 | ||||||||
|
|
|
|
|
|
|
|
|
|
16
Condensed Consolidating Statements of Operations
And Comprehensive Income
Three months ended April 2, 2011
(Unaudited, in thousands)
Corporate | Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 0 | $ | 408,847 | $ | 11,787 | $ | (3,533 | ) | $ | 417,101 | |||||||||
Cost of sales |
0 | 337,118 | 10,903 | (3,533 | ) | 344,488 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
0 | 71,729 | 884 | 0 | 72,613 | |||||||||||||||
Selling, general and administrative expenses |
4,545 | 39,606 | 870 | 0 | 45,021 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating profit (loss) |
(4,545 | ) | 32,123 | 14 | 0 | 27,592 | ||||||||||||||
Interest expense, net |
24,789 | 20 | 396 | 0 | 25,205 | |||||||||||||||
Unrealized gain on currency transactions |
0 | (579 | ) | 0 | 0 | (579 | ) | |||||||||||||
Loss on early extinguishment of debt |
3,527 | 0 | 0 | 0 | 3,527 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings (loss) before equity in earnings (loss) of subsidiaries, income taxes and equity in losses of unconsolidated subsidiary |
(32,861 | ) | 32,682 | (382 | ) | 0 | (561 | ) | ||||||||||||
Equity in earnings (loss) of subsidiaries |
20,054 | (375 | ) | 0 | (19,679 | ) | 0 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings (loss) before income taxes and equity in losses of unconsolidated subsidiary |
(12,807 | ) | 32,307 | (382 | ) | (19,679 | ) | (561 | ) | |||||||||||
Income tax expense (benefit) |
(12,372 | ) | 12,134 | (7 | ) | 0 | (245 | ) | ||||||||||||
Equity in losses of unconsolidated subsidary |
0 | 119 | 0 | 0 | 119 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net earnings (loss) |
$ | (435 | ) | $ | 20,054 | $ | (375 | ) | $ | (19,679 | ) | $ | (435 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | (435 | ) | $ | 20,656 | $ | (495 | ) | $ | (19,679 | ) | $ | 47 | |||||||
|
|
|
|
|
|
|
|
|
|
17
Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2012
(Unaudited, in thousands)
Corporate | Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Consolidated | |||||||||||||
Net cash provided by (used in) operating activities |
$ | (5,961 | ) | $ | 24,402 | $ | 461 | $ | 18,902 | |||||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
0 | (4,557 | ) | (80 | ) | (4,637 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
0 | (4,557 | ) | (80 | ) | (4,637 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Payments on long-term debt |
0 | (2,105 | ) | (225 | ) | (2,330 | ) | |||||||||
Proceeds from issuance of debt |
0 | 0 | 0 | 0 | ||||||||||||
Deferred financing costs |
(38 | ) | 0 | 0 | (38 | ) | ||||||||||
Dividend to parent |
(769 | ) | 0 | 0 | (769 | ) | ||||||||||
Dividend from subsidiaries |
6,768 | (6,639 | ) | (129 | ) | 0 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash provided by (used in) financing activities |
5,961 | (8,744 | ) | (354 | ) | (3,137 | ) | |||||||||
Effect of exchange rate changes on cash |
0 | 0 | (10 | ) | (10 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net increase in cash and equivalents |
0 | 11,101 | 17 | 11,118 | ||||||||||||
Cash and equivalents at beginning of period |
0 | 68,118 | 0 | 68,118 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and equivalents at end of period |
$ | 0 | $ | 79,219 | $ | 17 | $ | 79,236 | ||||||||
|
|
|
|
|
|
|
|
18
Condensed Consolidating Statements of Cash Flows
Three months ended April 2, 2011
(Unaudited, in thousands)
Corporate | Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Consolidated | |||||||||||||
Net cash provided by (used in) operating activities |
$ | (27,770 | ) | $ | 11,814 | $ | (937 | ) | $ | (16,893 | ) | |||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
0 | (9,565 | ) | (43 | ) | (9,608 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
0 | (9,565 | ) | (43 | ) | (9,608 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Payments on long-term debt |
(780,025 | ) | (2,008 | ) | (216 | ) | (782,249 | ) | ||||||||
Proceeds from issuance of debt |
840,000 | 0 | 0 | 840,000 | ||||||||||||
Deferred financing costs |
(7,160 | ) | 0 | 0 | (7,160 | ) | ||||||||||
Dividend to parent |
(65,000 | ) | 0 | 0 | (65,000 | ) | ||||||||||
Dividend from subsidiaries |
39,955 | (39,955 | ) | 0 | 0 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash provided by (used in) financing activities |
27,770 | (41,963 | ) | (216 | ) | (14,409 | ) | |||||||||
Effect of exchange rate changes on cash |
0 | 0 | 1 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net decrease in cash and equivalents |
0 | (39,714 | ) | (1,195 | ) | (40,909 | ) | |||||||||
Cash and equivalents at beginning of period |
0 | 43,610 | 1,195 | 44,805 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and equivalents at end of period |
$ | 0 | $ | 3,896 | $ | 0 | $ | 3,896 | ||||||||
|
|
|
|
|
|
|
|
19
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a producer and distributor of egg products to the foodservice, retail and food ingredient markets. We are also a producer and distributor of refrigerated potato products to the foodservice and retail grocery markets. Additionally, we distribute refrigerated food items, primarily cheese and other products sold in the dairy case, to the retail grocery market, predominantly in the central United States. We focus our growth efforts on the specialty sectors within our food categories and strive to be a market leader in product innovation and efficient production. We have a strategic focus on value-added processing of food products, which is designed to capitalize on key food industry trends, such as (i) the desire for improved safety and convenience, (ii) the focus by foodservice operators on reducing labor and waste, and (iii) the long-term trend toward food consumption away from home, which continues to be slowed somewhat by the recent economic conditions. We believe our operational scale, product breadth and geographic scope make us an attractive and important strategic partner for our customers, which include foodservice distributors, major restaurant chains, food ingredient companies and the retail grocery market.
Commodities and Product Pricing
Our principal exposure to market risks that may adversely affect our results of operations and financial position include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of commodity futures contracts, when appropriate. We do not trade or use instruments with the objective of earning financial gains on commodity prices, nor do we use instruments where there are not underlying exposures.
The profit margins we earn on many of our products are sensitive to changes in commodity prices. Generally, approximately 70% of the Egg Products Divisions annual net sales come from higher value-added egg products, such as extended shelf-life liquid and precooked products, with the remainder coming from products mainly used in the food ingredients market or shell eggs. Gross profit margins for certain higher value-added egg products are generally less sensitive to commodity price fluctuations, which impact the input costs of our egg supply, than are other egg products or shell eggs; however, because of agreements with customers we are sometimes unable to adjust product pricing for value-added products as quickly as we are for other egg products and shell eggs when our costs change. Margins for our food ingredient egg products and shell eggs are more commodity price-sensitive than are higher value-added product sales. 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 market costs were approximately 11% higher in the first three months of 2012 than in the comparable 2011 period (as measured by Urner Barry Publications). Prices (as measured by the Chicago Board of Trade) for corn and soybean meal used in our feed, decreased approximately 5% and 8%, respectively, in the first three months of 2012 as compared to the comparable 2011 period.
The Cheese & Other Dairy-Case Products Division derives a majority of its net sales from refrigerated products produced by others. A majority of those sales are represented by cheese and butter, for which the costs fluctuate with national dairy markets. Time lags between cost changes for these lines and wholesale/retail pricing changes can result in significant margin changes. Commodity block cheese prices in the first three months of 2012 were down 11% year-over-year.
The Refrigerated Potato Products Division typically purchases approximately 90% of its annual raw potato requirements from contract producers. 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 the Refrigerated Potato Products Divisions operating results.
Results of Operations
Beginning January 1, 2012, we changed our internal reporting of segment information reported to our President and Chief Executive Officer who is our Chief Operating Decision Maker (CODM). We now report all sales of shell egg and egg products and refrigerated potato products in their respective segments and the balance of our retail distributed products, cheese and other dairy-case products, as our third segment. This change increased the amount of external net sales and operating profit reported for prior periods for both the egg products and refrigerated potato products segments as we reclassified the egg and refrigerated potato products previously reported under the Crystal Farms segment. The comparative discussion below reflects, and the amounts for the April 2, 2011 period have been restated to reflect, the new internal reporting to the CODM. This change had no impact on the assets of the segments as none of the underlying business unit operations were affected by this reporting change. Readers are directed to Note EBusiness Segments for data on the unaudited financial results of our business segments for the three-month periods ended March 31, 2012 and April 2, 2011.
20
Three Months Ended March 31, 2012 as Compared to Three Months Ended April 2, 2011
Net Sales. Net sales for 2012 increased approximately $27.7 million, or 6.6%, to $444.8 million from $417.1 million in 2011. The increased net sales reflected volume increases of 3.8%. Increases were seen across all of our business segments. A lag in pricing pass-through of higher commodity costs contributed to the net sales increases exceeding volume growth.
Egg Products Division Net Sales. External net sales for 2012 increased approximately $13.2 million, or 4.4%. The net sales increase is primarily due to a 1.8% increase in volume, the larger sales dollar increase was due to the higher egg market effect on certain egg product sales and a lag in pricing pass-through of higher commodity costs.
Refrigerated Potato Products Division Net Sales. External net sales for 2012 increased approximately $3.9 million, or 11.9%. The net sales increase is primarily due to a 10.8% increase in volume, a portion of which is attributable to the timing of retail Easter holiday promotions between years.
Cheese & Other Dairy-Case Products Division Net Sales. External net sales for 2012 increased approximately $10.6 million, or 12.3%. The net sales increase is primarily due to a 9.3% increase in volume, a portion of which is attributable to the timing of retail Easter holiday promotions between years.
Gross Profit. Gross profit for 2012 increased $6.8 million, or 9.3%, to $79.4 million from $72.6 million in 2011. Our gross profit margin increased to 17.8% in 2012 as compared to 17.4% in 2011. The main driver for the increase was an improved alignment of pricing with our input costs for the quarter.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (SG&A) for 2012 decreased $2.3 million, or 5%, to $42.7 million from $45 million in 2011. The main driver for the decrease was that the 2011 period included $4.6 million of costs associated with the February 2011 refinancing of the credit agreement. Factoring out those refinancing costs, our SG&A is up year-over-year mainly due to legal and compensation costs, primarily incentive compensation accruals.
Operating Profit. Operating profit for 2012 increased approximately $9.1 million or 33.1% to $36.7 million from $27.6 million in 2011. The increase in operating profit for 2012 is due to the factors described above.
Egg Products Division Operating Profit. Operating profit for 2012 increased approximately $1.9 million, or 6.8%, to $29.9 million from $28 million in 2011. The increase was mainly a result of volume growth and the improved alignment of pricing with input costs.
Refrigerated Potato Products Division Operating Profit. Operating profit for 2012 increased approximately $1.9 million, or 60.6%, to $5.2 million from $3.3 million in 2011. The increase was mainly a result of volume growth, a portion of which is attributable to the timing of retail Easter holiday promotions between years and improved plant operations.
Cheese & Other Dairy-Case Products Division Operating Profit. Operating profit for 2012 increased approximately $1.1 million, or 24.1%, to $5.7 million from $4.6 million in 2011. The increase was mainly a result of volume growth, a portion of which is attributable to the timing of retail Easter holiday promotions between years and improved alignment of pricing with input costs.
Interest Expense. Interest expense decreased to $22.8 million in 2012 from approximately $25.2 million in 2011 mainly due to the reduced interest rates resulting from the late February 2011 refinancing and reduced amortization of deferred financing costs and original issue discount.
Unrealized gain on currency transactions. We recorded the change in exchange rates impacting an intercompany Canadian currency-denominated note receivable due from our Canadian subsidiary, MFI Food Canada Ltd.
Loss on early extinguishment of debt. In conjunction with the February 2011 refinancing of our credit agreement, we recorded a $3.5 million loss on extinguishment of debt for those lenders who did not participate in the amended and restated credit agreement.
Income Taxes. Our effective tax rate on earnings (losses) before income taxes was approximately 33.5% for 2012 compared to approximately 43.7% in 2011. The effective tax rate was affected by the level of income and losses between periods, the amount of permanent differences (primarily the qualified production activities deduction) between book and taxable income, actual tax expense payable at the state level and by the results in our Canadian subsidiary, which impacted the valuation allowance against its deferred tax assets and effective rate.
Liquidity and Capital Resources
Historically, we have financed our liquidity requirements through internally generated funds, bank borrowings and the issuance of other indebtedness. We believe such sources remain viable financing alternatives to meet our anticipated needs. Our investments in acquisitions, joint ventures and capital expenditures have been a significant use of capital. We plan to continue to invest in advanced production facilities to maintain our competitive position.
21
The cash flow of approximately $18.9 million provided by operating activities in the three-month period ended March 31, 2012 reflects cash earnings generation and a decrease in the use of working capital due to the lower commodity cost impacts on accounts receivable and inventory values and the lower payout of incentive compensation. The cash flow of approximately $16.9 million used in operating activities in the three-month period ended April 2, 2011 primarily reflects increased working capital due to higher commodity costs in that period and costs associated with the February 2011 refinancing.
The cash flow of approximately $4.6 million and $9.6 million used in investing activities in the three-month periods ended March 31, 2012 and April 2, 2011 is all capital expenditures. The investments in capital spending were lower in the three-month period ended March 31, 2012, compared to 2011 due to the timing of projects between years.
The cash flow of approximately $3.1 million used in financing activities for the three-month period ended March 31, 2012 reflects debt payments and cash dividend to parent for the repurchase of certain of its shares of a terminated employee. The cash flow of approximately $14.4 million used in financing activities for the three-month period ended April 2, 2011 reflects proceeds of the February 2011 refinancing, payment of the associated deferred financing costs, and a dividend paid to our parent.
On June 29, 2010, the Company was acquired by MFI Holding Corporation (MFI Holding), which is owned by GS Capital Partners VI Fund, L.P. and its affiliates (approximately 74%); affiliates and co-investors of Thomas H. Lee Partners, L.P. (approximately 21%); and certain current and former members of management (approximately 5%). As a result of the $1.675 billion 2010 merger, Michael Foods Group, Inc. entered into a credit agreement, with Bank of America, N.A. as administrative agent, which provided for availability up to $865 million and consisted of a $75 million revolving line of credit and a $790 million term B loan. On February 25, 2011, the Company completed a refinancing of the credit agreement. The amended and restated credit agreement, with Bank of America, N.A. as administrative agent, provided availability up to $915 million and consists of the following:
| $75 million revolving line of credit, of which approximately $17.5 million matures June 29, 2015 with the remaining $57.5 million expiring February 25, 2016. The line bears interest at the greater of LIBOR or 1.75%, plus 4.5% margin for Eurodollar loans and the greater of base rate or 2.75%, plus 3.5% margin for base rate loans; and |
| $840 million term B loan maturing February 25, 2018, amortizing at 1% per year, and bearing interest at the greater of LIBOR or 1.25%, plus 3% margin for Eurodollar loans and the greater of base rate or 2.25%, plus 2% margin for base rate loans; and |
| In addition, the credit agreement permits us to incur incremental term and revolving loans in an aggregate amount not to exceed $200 million, subject to certain conditions. |
On March 3, 2011, the Company used the proceeds from the expansion of the term B loan to pay a cash dividend of $65 million to its parent MFI Midco Corporation, which paid a dividend to its parent, MFI Holding, which subsequently distributed the dividend to its shareholders.
Concurrently with the June 2010 merger, the Company issued $430 million of 9.75% senior notes maturing on July 15, 2018, with Wells Fargo Bank, National Association as Trustee.
The amended and restated credit agreement requires the Company to meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the credit agreement and the indenture relating to the 9.75% senior notes due 2018, contain certain restrictive covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in these agreements. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could have a material adverse effect on our results of operations, financial position and cash flow. In general, the debt covenants limit discretion in the operation of our businesses. We were in compliance with all of the covenants under the credit agreement and senior notes as of March 31, 2012.
We use adjusted EBITDA as a measurement of our financial results because we believe it is indicative of the relative strength of our operating performance; it is used to determine incentive compensation levels and it is a key measurement contained in the financial covenants of our indebtedness.
The last twelve months adjusted EBITDA (earnings before interest expense, taxes, depreciation, amortization and other adjustments) as calculated under the amended and restated credit agreement follows. The Adjusted EBITDA in the column for the twelve months ended April 2, 2011 includes operations for periods under two bases of accounting due to the June 29, 2010 merger and results in a non-GAAP presentation of that period. However, because of the nature of the add-back items in the computation of adjusted EBITDA displayed below, we believe the combined amount provides an accurate representation of adjusted EBITDA for that period and is in accordance with the credit agreement definitions. The following is a calculation of the minimum interest coverage and maximum leverage ratios under the amended and restated credit agreement:
22
Twelve Months Ended | ||||||||
March 31, | April 2, | |||||||
2012 | 2011 | |||||||
(Unaudited, in thousands) | ||||||||
Calculation of Interest Coverage Ratio: |
||||||||
Adjusted EBITDA (2) |
$ | 235,397 | $ | 226,996 | ||||
Consolidated Interest Charges (3) |
81,344 | 93,547 | ||||||
Interest Coverage Ratio |
2.89x | 2.43x | ||||||
Minimum Permitted Interest Coverage Ratio |
1.85x | 1.80x | ||||||
Calculation of Leverage Ratio: |
||||||||
Funded Indebtedness (4) |
$ | 1,265,397 | $ | 1,308,188 | ||||
Less: Cash and equivalents (Maximum $75,000) (1) |
(75,000 | ) | (3,896 | ) | ||||
|
|
|
|
|||||
$ | 1,190,397 | $ | 1,304,292 | |||||
Adjusted EBITDA (2) |
235,397 | 226,996 | ||||||
Leverage Ratio |
5.06x | 5.75x | ||||||
Maximum Permitted Leverage Ratio |
7.00x | 7.00x |
(1) | Our actual net debt is $1,186,161 (using cash and equivalents of $79,236) and the actual leverage ratio is 5.04x as of March 31, 2012. |
(2) | Adjusted EBITDA (earnings before interest expense, taxes, depreciation, amortization and other adjustments) is defined in the credit agreement as follows: |
Twelve Months Ended | ||||||||
March 31, | April 2, | |||||||
2012 | 2011 | |||||||
(Unaudited, in thousands) | ||||||||
Net earnings (loss) |
$ | 24,076 | $ | (46,463 | ) | |||
Unrealized (gain) loss on currency transactions (a) |
566 | (1,317 | ) | |||||
|
|
|
|
|||||
Consolidated net earnings (loss) |
24,642 | (47,780 | ) | |||||
Interest expense |
95,777 | 93,712 | ||||||
Income tax expense (benefit) |
4,340 | (22,289 | ) | |||||
Depreciation and amortization |
97,419 | 93,118 | ||||||
Non-cash and stock option compensation |
1,946 | 37,238 | ||||||
Cash expenses incurred in connection with the transaction |
264 | 19,226 | ||||||
Business optimization project expense |
2,830 | 0 | ||||||
Realized (gain) loss upon the disposition of property not in the ordinary course of business |
58 | (711 | ) | |||||
Equity sponsor management fee |
2,305 | 2,243 | ||||||
Non-cash purchase accounting adjustments |
0 | 17,928 | ||||||
Fees and expenses in connection with the exchange of the 9.75% senior notes |
301 | 50 | ||||||
Expenses related to industrial revenue bonds guaranteed by certain of our subsidiaries |
660 | 603 | ||||||
Non-cash other expenses (b) |
3,275 | 0 | ||||||
Unrealized (gain) loss on swap contracts |
1,580 | (1,106 | ) | |||||
Loss attributable to the early extinguishment of indebtedness |
0 | 34,764 | ||||||
|
|
|
|
|||||
Adjusted EBITDA, as defined in the credit agreement |
$ | 235,397 | $ | 226,996 | ||||
|
|
|
|
23
(a) | The unrealized (gain) loss on currency transactions relates to an intercompany note receivable denominated in Canadian currency and due from our Canadian subsidiary, MFI Food Canada Ltd. |
(b) | The non-cash other expenses reflects an adjustment of inventory related to prior period activity, which was recorded in December 2011 as it was not material to any prior period impacted or to the 2011 period. |
(3) | Consolidated interest charges, as calculated in the credit agreement, were as follows: |
Twelve | Nine | |||||||
Months | Months | |||||||
Ended | Ended | |||||||
March 31, | April 2, | |||||||
2012 | 2011 | |||||||
(Unaudited, in thousands) | ||||||||
Gross interest expense |
$ | 96,153 | $ | 78,468 | ||||
Minus: |
||||||||
Amortization of financing costs |
8,293 | 8,308 | ||||||
Non-cash mark-to-market on interest rate swaps |
6,516 | 0 | ||||||
|
|
|
|
|||||
Consolidated interest charges |
$ | 81,344 | 70,160 | |||||
|
|
|||||||
For the period ending April 2, 2011, use nine month period multiplied by four-thirds |
1.333 | |||||||
|
|
|||||||
Consolidated interest charges |
$ | 93,547 | ||||||
|
|
(4) | Funded Indebtedness was as follows: |
March 31, | April 2, | |||||||
2012 | 2011 | |||||||
(Unaudited, in thousands) | ||||||||
Revolving line of credit |
$ | 0 | $ | 0 | ||||
Term loans |
806,800 | 840,000 | ||||||
Senior notes |
430,000 | 430,000 | ||||||
Insurance bonds |
1,275 | 1,629 | ||||||
Guarantee obligations (see discussion below) |
11,798 | 14,223 | ||||||
Capital leases |
9,172 | 14,016 | ||||||
Standby letters of credit |
350 | 350 | ||||||
MFI Food Canada Ltd. note payable |
1,652 | 2,270 | ||||||
Northern Star Co. note payable |
4,350 | 5,700 | ||||||
|
|
|
|
|||||
$ | 1,265,397 | $ | 1,308,188 | |||||
|
|
|
|
|||||
Reconciling items to |
||||||||
Long-term debt, including current maturities: |
||||||||
Insurance bonds |
$ | (1,275 | ) | $ | (1,629 | ) | ||
Guarantee obligations (see discussion below) |
(2,529 | ) | (3,441 | ) | ||||
Standby letters of credit |
(350 | ) | (350 | ) | ||||
Original issue discount on term B loan |
(11,927 | ) | (14,019 | ) | ||||
|
|
|
|
|||||
(16,081 | ) | (19,439 | ) | |||||
|
|
|
|
|||||
Long-term debt, including current maturities |
$ | 1,249,316 | $ | 1,288,749 | ||||
|
|
|
|
24
We have guaranteed, through our M.G. Waldbaum Company subsidiary, the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of three municipalities where we have food processing facilities. In May 2007, a $6.0 million bond financing was completed by one of the three municipalities, the City of Wakefield, Nebraska, at an annual interest rate of 8.22%, with such proceeds used for the construction of the wastewater treatment facility. The wastewater treatment facility became operational in early 2008. We are required to pay the principal and interest payments related to these bonds, which mature September 15, 2017. These bonds, along with the original $10.25 million (annual rate of interest of 7.6%) guaranteed in September 2005, are included in current maturities of long-term debt and long-term debt. The remaining principal balance for all guaranteed bonds at March 31, 2012 was approximately $11.8 million.
In December 2008, we entered into a $15.6 million variable-rate lease agreement to fund a portion of the equipment purchases at our new refrigerated potato products facility. The lease agreement matures on December 30, 2014. As of March 31, 2012, the outstanding balance was $8.8 million and the lease had an effective interest rate of 3.8%. On November 25, 2009, we entered into a variable-rate note for up to $7.5 million for additional financing for equipment for the new refrigerated potato products facility. The $7.5 million note is due November 25, 2014. As of March 31, 2012, the outstanding balance was $4.4 million and it had an effective interest rate of 3.7%.
Our ability to make payments on and to refinance our debt, including the senior notes, to fund planned capital expenditures and otherwise satisfy our obligations will depend on our ability to generate sufficient cash in the future. This, to some extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We believe that, based on current levels of operations, we will be able to meet our debt service and other obligations when due. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital, or restructure or refinance all or a portion of our debt, including the senior notes, on or before maturity. We cannot assure our investors that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness, including the senior notes and the credit agreement, may limit our ability to pursue any of these alternatives.
To manage exposure to counterparty credit risk, we enter into agreements with highly rated institutions that can be expected to fully perform under the terms of such agreements. Frequently, these institutions are members of the lender group providing our credit facility, which management believes further minimizes the risk of non-performance.
Our longer-term planning is focused on growing our sales, earnings and cash flows primarily by focusing on our existing business lines, expanding product offerings, increasing production capacity for value-added products and broadening customer bases. We believe our financial resources are sufficient to meet the working capital and capital spending necessary to execute our longer-term plans. In executing these plans, we expect to reduce debt over the coming years. However, possible significant acquisition activity could result in us seeking additional financing resources, which we would expect would be available to us if they are sought. At March 31, 2012, we had $75 million of funds available on our revolving line of credit.
We invested approximately $4.6 million in capital expenditures in the three-month period ended March 31, 2012. Our spending continues to be focused on expanding capacity for higher value-added egg products, maintaining existing production facilities, and replacing tractors and trailers, among other projects. Further capital spending in the remainder of 2012 is expected to be funded by operating cash flows. We expect these investments to improve manufacturing efficiencies, customer service and product quality.
Seasonality
Our consolidated quarterly operating results are affected by the seasonal fluctuations of net sales. For example, shell egg prices typically rise seasonally in the first and fourth quarters of the year due to increased demand during holiday periods. Consequently, net sales in the Egg Products Division may increase in the first and fourth quarters. Generally, the Cheese & Other Dairy-Case Products Division has higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. Operating profits from the Refrigerated Potato Products Division are less seasonal, but tend to be higher in the second half of the year, coinciding with the potato harvest and incremental consumer demand.
Recent Accounting Pronouncements
There were no accounting pronouncements issued during the period ended March 31, 2012 that are expected to have a material impact on our financial position, operating results or disclosures. See Note A to the condensed consolidated financial statements for discussion on recently issued accounting pronouncements.
25
Forward-looking Statements
Certain items in this Form 10-Q are forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future sales or performance, capital expenditures, financing needs, ability to fund our operations, intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and economies in which we operate and other information that is not historical information and, in particular, appear under the heading, Managements Discussion and Analysis of Financial Condition and Results of Operations. When used herein, the words may, should, estimates, expects, anticipates, projects, plans, intends, believes and variations of such words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance. All forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but there can be no assurance that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q, including the factors described under Risk Factors in our Form 10-K filed with the SEC on March 30, 2012. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-Q include changes in national or global economic conditions. Additional risks and uncertainties include variances in the demand for our products due to consumer and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg, feed, potato and cheese costs. You should not place undue reliance on our forward-looking statements. If any of these risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to publicly update or revise these forward-looking statements to reflect future events or circumstances except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our market risk during the three-month period ended March 31, 2012.
26
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures.
Our management evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of March 31, 2012. Based on these evaluations, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of March 31, 2012.
b. Changes in internal controls
There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Matters
Antitrust claims: In late 2008 and early 2009, some 22 class-action lawsuits were filed in various federal courts against Michael Foods, Inc. and approximately 20 other defendants (producers of shell eggs, manufacturers of processed egg products, and egg industry organizations) alleging violations of federal and state antitrust laws in connection with the production and sale of shell eggs and processed-egg products. Plaintiffs seek to represent nationwide classes of direct and indirect purchasers, and allege that defendants conspired to reduce the supply of eggs by participating in animal husbandry, egg-export and other programs of various egg-industry associations. In December 2008, the Judicial Panel on Multidistrict Litigation ordered the transfer of all cases to the Eastern District of Pennsylvania for coordinated and/or consolidated pretrial proceedings. Between late 2010 and early 2012, a number of companies, each of which would be part of the purported class in the antitrust action, brought separate actions against defendants. These tag-along cases, brought primarily by various grocery chains and food companies, assert essentially the same allegations as the Second Consolidated Amended Complaint in the main action. All but one of the tag-along cases were either filed in or transferred to the Eastern District of Pennsylvania where they are being treated as related to the main action; the one tag-along case where pretrial proceedings are not under the jurisdiction of the Eastern District of Pennsylvania was brought by a retail grocery chain in Kansas state court.
On September 26, 2011, the Court denied our motion to dismiss the direct-purchaser plaintiffs claims, and on April 24, 2012, the Court denied our motion to dismiss the indirect-purchaser plaintiffs claims. A discovery stay that had been in place since the cases were filed was lifted on April 25, 2012.
We received a Civil Investigative Demand (CID) issued by the Florida Attorney General on November 17, 2008, regarding an investigation of possible anticompetitive activities relating to the production and sale of eggs or egg products. The CID requested information and documents related to the pricing and supply of shell eggs and egg products, as well as our participation in various programs of United Egg Producers. We have fully cooperated with the Florida Attorney Generals Office to date. Further compliance is suspended pending discovery in the civil antitrust litigation referenced above.
Patent infringement claims: On October 27, 2010, National Pasteurized Eggs, Inc. and National Pasteurized Eggs, LLC (collectively NPE) commenced litigation against Michael Foods, Inc. and several of its subsidiaries in U.S. District Court for the Western District of Wisconsin. NPE alleges that our pasteurized shell egg products infringe on patents and trademarks that NPE owns or licenses. NPE seeks unspecified damages, profits from our sales of pasteurized shell eggs, attorneys fees, and an injunction preventing the Michael Foods defendants from future infringement. We deny NPEs allegations and are seeking declarations that NPEs patents are invalid and not infringed, and that NPEs trademarks are not infringed. Though there has been no quantification of claimed damages, pasteurized shell eggs constitute a very modest portion of sales in the Egg Products Division.
On April 15, 2011, Michael Foods, Inc. commenced litigation against National Pasteurized Eggs, Inc. in U.S. District Court for the District of Minnesota. We allege that National Pasteurized Eggs, Inc.s production and sale of pasteurized shell eggs infringes three patents, each owned by the University of Missouri and exclusively licensed to Michael Foods, Inc. We seek unspecified damages and injunctive relief preventing National Pasteurized Eggs, Inc. from future infringement. On July 27, 2011, our case was transferred to the U.S. District Court for the Western District of Wisconsin for consolidated handling with NPEs case.
Both Michael Foods, Inc. and NPE have moved for summary judgment on several claims. Jury trial in the consolidated cases is scheduled for June 4, 2012.
Lawsuit against the City of Elizabeth and Liberty Water Co.: On January 28, 2010, our subsidiary Papettis Hygrade Egg Products, Inc. commenced suit in New Jersey Superior Court against the City of Elizabeth, N.J. and Liberty Water Company. The suit alleges that City sewer charges, which are billed by Liberty Water, are arbitrary and inequitable. Papettis seeks a declaration that its sewer bills have been inaccurate at least since 2002, and seeks invalidation of certain sewer-related charges and surcharges. In
27
responding to the suit, the City of Elizabeth counterclaimed on May 7, 2010 that Papettis has not been charged the full and proper amount of sewage charges due to billing mistakes of Defendant Liberty Water Company, but did not allege any undercharged amount. On June 1, 2011, Liberty Water gave notice of its belief that from 2004 to present, it underbilled Papettis by some $6.5 million. In November of 2011, Liberty Water issued invoices totaling $6.2 million to Papettis in connection with the alleged underbilling. We have not recorded a liability for the alleged underbilling as we believe there is no merit in this claim.
We do not believe it is possible to estimate any possible loss in connection with these litigated matters. Accordingly, we cannot predict what impact, if any, these matters and any results from such matters could have on our future results of operations.
Other: In addition, we are from time to time party to litigation, administrative proceedings and union grievances that arise in the ordinary course of business, and occasionally pay non-material amounts to resolve claims and alleged violations of regulatory requirements. There are no pending ordinary course matters that, separately or in the aggregate, would, in the opinion of management, have a material adverse effect on our operations, financial condition or cash flow.
ITEM 1A. RISK FACTORS
Readers are directed to our Annual Report on Form 10-K filed March 30, 2012, for a discussion of Risk Factors. We do not believe there have been any material changes to our Risk Factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
28
EXHIBIT INDEX
Exhibit No. | Description | |
31.1 | Certification of Chief Executive Officer | |
31.2 | Certification of Chief Financial Officer | |
32.1 | Certification of Chief Executive Officer | |
32.2 | Certification of Chief Financial Officer | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MICHAEL FOODS GROUP, INC. | ||||||
Date: May 15, 2012 | By: | /s/ James E. Dwyer, Jr. | ||||
James E. Dwyer, Jr. (Chief Executive Officer and President) | ||||||
By: | /s/ Mark W. Westphal | |||||
Mark W. Westphal (Chief Financial Officer and Senior Vice President) |
30