Thorn Apple Valley, Inc.

views updated Jun 27 2018

Thorn Apple Valley, Inc.

26999 Central Park, Suite 300
Southfield, Michigan 48076
U.S.A.
(248) 213-1000
Fax: (248) 213-1104
Web site: http://www.tavi.com

Public Company
Incorporated: 1959 as Frederick Packing Company Employees: 4,274 Sales: $955.8 million (1997) Stock Exchanges: NASDAQ
SICs: 2011 Meat Packing Plants; 2013 Sausages & Other Prepared Meats

Thorn Apple Valley, Inc. is a major producer of consumer packaged meat and poultry products in the United States. The company manufactures bacon, hot dogs, luncheon meats, hams, smoked sausages, and turkey products as well as numerous other products, marketing them under premium and other proprietary brand labels. The products are sold nationally to wholesalers, supermarkets, and food service operators. Thorn Apple also is one of the nation’s largest slaughterers of hogs and sells fresh pork to other manufacturers of meat and poultry products throughout the United States.

Early History

The founder of Thorn Apple, Henry Dorfman, emigrated to the United States from Poland after World War II. He and his father escaped the Treblinka concentration camp that held many of his family members and other Polish Jews by jumping from a train. For the next three years, the two men hid in tunnels in central Poland. A master butcher by trade, Dorfman found work after the war selling meat to the U.S. government for officials living in Germany.

In 1949 Dorfman emigrated to the United States, settled in Detroit, and opened a butcher shop. Ten years later he and a partner bought Frederick Packing Company, a small hog slaughtering facility in Detroit. Dorfman was the primary owner of the company and the operation’s driving force. The company purchased, butchered, and sold pork to consumers and wholesalers.

In less than two years, Dorfman had repaid his purchase loan for Frederick Packing. He then began to expand the operation by acquiring other small slaughterhouses and meat processing plants located in the East and Midwest. Following additional acquisitions—including the purchase of Herrud and Company of Grand Rapids, Michigan, in 1969—Dorfman changed the company’s name to Frederick and Herrud to better reflect the diversification of its operations into manufacturing and processing, in addition to packing. The former Herrud later became Thorn Apple’s Grand Rapids Division, which manufactured smoked sausages, hot dogs, and luncheon meats. In the early 1970s, Dorfman acquired meat businesses in North Carolina that produced deli products, smoked meat products, and bacon; these companies eventually became a part of Thorn Apple’s Carolina Division in Holly Ridge, North Carolina.

Went Public in 1971

In 1971 the company reincorporated in Delaware to take advantage of the tax and business benefits offered by that state’s incorporation laws. Also that year, Dorfman took his company public and began trading stocks on the NASDAQ. In the initial public offering, his family retained 70 percent of the shares. With some of the capital proceeds from the $16 per share purchase price, Dorfman bought two meat processing companies in Michigan and one in North Carolina. His expansion strategy involved acquiring small regional competitors that had achieved strong brand identities and consumer awareness and improving operating efficiencies by consolidating production into his existing plants. One of the company’s next purchases was the Colonial hot dog brand in Massachusetts. Colonial’s Boston plant was closed, and production was moved to plants in Michigan and North Carolina. In 1977 the company reincorporated again in Michigan because of changes in the state’s business laws and to reflect the location of the corporate headquarters in the Detroit suburb of Southfield.

In the early 1980s many large food conglomerates were taking over independent meatpackers to increase their market shares. Dorfman, by contrast, believed that future success depended on producing meats more cheaply than the conglomerates and giving consumers a better product. Despite a soft economy and a stagnant meatpacking industry, he increased capital expenditures for plant modernization and improvements and devoted resources to product development and production. While this strategy resulted in several lean years for the company, Dorfman accepted the limited financial return as the cost of building a strong corporate infrastructure.

Repositioned As Supplier of Premium Products in the Mid-1980s

Also during this period, the company changed its image to a producer of high quality and premium brand products. To reflect this change, in 1984 Dorfman renamed the company Thorn Apple Valley, which was one of its marketing names for premium products. Later that same year, the company expanded to become vertically integrated and began operation of National Food Express, Inc., a transportation subsidiary intended to ensure prompt delivery of perishable products from its Grand Rapids Division to its customers.

Despite the company’s expanded market penetration, Thorn Apple’s stock performed poorly, due in large part to the company’s significant reliance on the unstable hog market. In 1987 the stock had declined to three dollars per share, a reduction of approximately three quarters of the original offering price three years earlier. Dorfman’s son Joel wanted to take over the business and implement some new business practices to which he believed the market would react positively, but Dorfman was reluctant to step aside. However, when one of the nation’s largest meat processing companies, Smithfield Foods, initiated a stock purchase for Thorn Apple at $10 a share in 1987, both Dorfmans agreed that something needed to be done. They declined Smithfield’s purchase offer and set out to change the company’s organizational structure and strategic posture.

Under the leadership of Joel Dorfman as president, the company operated according to a motto that was engraved on a plaque in the corporate conference room: “We are through just surviving.” Because the company’s decentralized structure resulted in duplicated efforts among the various Thorn Apple divisions, Joel reorganized the divisions into a centralized structure. He also made fundamental changes in plant utilization, production, marketing, and advertising.

Acquisitions continued, and in 1988 Thorn Apple began to expand into the western part of the United States with the purchase of the Tri-Miller Packing Company, a regional meat processing company in Hyrum, Utah. Tri-Miller was a successful full-line pork processor with slaughtering and production activities at its plant. Shortly thereafter Thorn Apple acquired another transportation company, Miller’s Transport, Inc., to handle distribution and delivery service in the western United States.

Marketing was changed to emphasize premium products with a higher profit margin and newer items, such as turkey products, that reflected consumer preferences for leaner meats. By 1991 Thorn Apple’s sales of premium products accounted for 40 percent of the company’s manufactured products, up significantly from 28 percent in 1990.

The company’s stock began to improve. Further changes included a tightening of the management structure, continued alterations to the marketing plan, and the establishment of a central distribution warehouse in Detroit. Plant operations were revised to eliminate plant managers, and renovations to the plants were designed to give each employee more room and time to work. Significant gains were made in the production yields of fresh pork. Yields, or the amount of meat from the hog that is able to be sold, improved three percent per hog to 59 percent between 1989 and 1991. This improved efficiency directly affected the company’s bottom line; for every one percent of additional meat salvaged, revenues increased $6 million.

Improved Financial Performance in Early 1990s

By December 1991 Thorn Apple completed a public offering of 300,000 shares of common stock. The net proceeds of approximately $9 million were used to reduce short-term debt, finance working capital needs, and make acquisitions. In July 1992 the company spent $3.8 million to acquire the assets of Suzannah Farms, a meat processor in Pennsauken, New Jersey, that had net sales in 1991 of $38 million. Production of the Suzannah line of products was moved to Thorn Apple’s Deli and Smoked Meats Division plant in Detroit. At the same time, the company contracted with Atlanta Corporation of Elizabeth, New Jersey, the license holder for Suzannah Farms’ brand name, to make hams and related meat products under the trademark Krakus. This acquisition and licensing agreement helped position Thorn Apple to improve the company’s penetration in the deli market and food service.

Company Perspectives:

Thorn Apple Valley has become a leading meat producer with a broad range of both private label and branded products in all of the major product categories. Our product portfolio includes several #1-selling national branded products. We have substantially increased our market coverage, and we are poised to experience the benefits of our aggressive facility expansion and renovation program. We are well positioned for significant growth, and we plan to leverage our reputation as a provider of premium quality products and service to return to profitability and grow the Company in the years ahead.

Financially, Thorn Apple performed well in the early 1990s. It was among the top U.S. food and beverage companies despite posted losses in 1990. In 1991 the company had the highest percentage of return on invested capital at 38.4 percent and the fourth best percentage sales gains, bettering such companies as Coca-Cola, Kellogg, and General Mills. Thorn Apple ranked 17th in sales among U.S. meatpackers in 1991. The company achieved average annual rates of 6.7 percent growth in sales, 89.8 percent growth in earnings per share, and an improvement of 1.2 percent in net income to net sales from 1988 to 1992. Management attributed the increases to improved marketing efforts, streamlined operations, and a reduction in the volatility of fresh meat margins, which was in large part due to advances in purchasing strategies and the company’s overall reduction of fresh meat in its total production mix.

In 1992 Thorn Apple enhanced profitability by maintaining its position as a low-cost producer of consumer packaged meat and poultry products and high-quality fresh pork. The company improved its manufactured product mix of consumer packaged higher-margin products such as turkey and smoked sausage and increased its capacity and sales of higher-margin value-added items such as boneless products and shelf-ready products. Sales of high-quality products were enhanced late in 1991 with the acquisition of Cavanaugh Lakeview Farms in Chelsea, Michigan, a seller of gourmet meat products under the Cavanaugh name. Thorn Apple’s other premium brand products were marketed under the following labels: Thorn Apple Valley, Colonial, Triple M, Herrud, Bar H, Royal Crown, and Ole Virginie.

The majority of earnings in the early 1990s came from the company’s manufactured products division, where strong earnings growth is dependent upon manufacturing efficiencies and increased sales volume of premium product lines. Generally, manufactured meat and poultry products have a profit margin that is three times higher than fresh pork and related byproducts, which are heavily influenced by market conditions. Specifically, hog prices are cyclical and determined by supply and demand; these in turn directly affect the cost and profit margin of fresh pork and related products.

Improved operating efficiencies in manufactured products were achieved through increasing capacity and reducing ineffective production processes. Sausage and related products production at the Grand Rapids Division increased from 150,000 pounds per week to approximately 2.5 million pounds weekly in the 1990s. The Deli and Smoked Meats Division in Detroit increased from 200,000 pounds weekly to over three million pounds weekly, and bacon production was increased to over two million pounds weekly from 300,000 pounds per week at the Carolina Division. Annual hog slaughtering averaged 5,000 at the Tri-Miller Packing Company subsidiary. Production of various processed meats increased to 700,000 pounds weekly since Thorn Apple’s purchase of the Utah company in 1988.

In the early 1990s, Thorn Apple sold its fresh pork and manufacturing products to more than 900 customers in the United States, Canada, and several Pacific Rim countries. No single customer was responsible for more than 10 percent of the company’s sales, and the 10 largest customers represented less than 30 percent of total sales. International sales for fiscal year 1992 were 1.5 percent of the company’s total sales. Management expected additional opportunities for increased sales of fresh pork and processed meat in Korea, Japan, and Mexico in the mid to late 1990s to increase that total percentage.

Thorn Apple paid its first quarterly cash dividend to shareholders in 1992, which reflected a slight decline in the company’s perceived need for capital. Marketing enhancements focused on customer-oriented satisfaction through the introduction of value-added products such as vacuum packaged boneless pork, which is distributed to retail outlets and exported to Japan. The company also continued to develop strong wholesaler and retailer loyalty through dependable service and delivery of consistently high quality products.

Restructuring Efforts Highlighted Mid-1990s

Thorn Apple’s performance in the mid-1990s lagged behind that of the early 1990s, as net sales stagnated from fiscal 1992 through fiscal 1995 and net income fell each year, from the high of $21.1 million in 1992 to just $5.3 million in 1995. Although net sales increased dramatically in fiscal 1996, the increase was largely attributable to a major acquisition and meanwhile the company posted a net loss of $21.7 million. These financial travails were not, however, a harbinger of a long-term decline but rather reflected a company in transition, restructuring and repositioning itself for future growth.

Among the main aims of Thorn Apple’s restructuring were the modernizing of its plants, the lowering of costs as a byproduct of this modernization, and the shifting and adding to production and distribution facilities to make them more strategically located. In an early move in the restructuring, Thorn Apple in early 1995 recorded a $7.9 million restructuring charge to close Tri-Miller Packing, whose facilities were considered redundant after the expansion of the company’s Grand Rapids, Michigan, plant, and to move and consolidate the corporate headquarters.

Shortly thereafter, in May 1995, Thorn Apple paid $64.6 million to acquire the Wilson Foods Retail Division from Foodbrands America, Inc. In the process, the company gained three production facilities—in Forrest City, Arkansas; Shreve-port, Louisiana; and Concordia, Missouri (the last two of these were shut down within a year of the acquisition to further consolidate production)—and two premium brands, Wilson and Corn King, used for hot dogs, luncheon meats, ham products, and specialty sausage items. The addition of Wilson certified boneless hams gave Thorn Apple Valley five number-one selling national branded products, building on the company’s top-selling bun-sized skinless smoked sausage and its three top-selling premium sliced luncheon meats: ham, turkey breast, and turkey ham. The Wilson Foods acquisition was also of strategic importance geographically because it provided Thorn Apple with a larger presence in the Midwest, where its hot dog brands were weak while Wilson and Corn King hot dogs were top sellers. Nevertheless, the size of Wilson Foods, which had annual sales of about $220 million, made the integration of the new brands, products, and facilities difficult to manage, leading to the fiscal 1996 net loss of $21.7 million. Joel Dorfman told Crain’s Detroit Business: ’ The Wilson and Corn King acquisition may have been at the wrong time. All combined, it has been a management problem for us.”

Meanwhile, Thorn Apple Valley was also making significant capital investments in its existing plants as well as building a plant from the ground up for the first time. The company’s fresh-pork slaughterhouse in Detroit was renovated, although problems with a sophisticated hydraulic system that powered 500 conveyors took a year to resolve. At its peak, the upgraded plant was expected to be able to slaughter and process 1,800 hogs an hour, which was more than double the capacity of any competitor’s plant. In October 1995, Thorn Apple opened its $40-million state-of-the-art pork and turkey processing plant in Ponca City, Oklahoma. The new plant was slated to eventually have capacity to produce 75 to 125 million pounds of meat products a year. In April of the following year, the company opened a new distribution center in Edwardsville, Kansas, and closed a small distribution facility in Clearfield, Utah.

In March 1997 Smithfield Foods once again attempted to take over Thorn Apple Valley but was again rebuffed. About Smithfield’s proposal for an “alliance” between the two companies, Joel Dorfman told the Wall Street Journal: “We have not positioned this company strategically for it to be acquired in the near-term.” By this time, the Dorfmans were confident that the company’s restructuring efforts were beginning to pay off. Financial results for the fiscal year ending May 30, 1997, backed up this confidence as Thorn Apple posted a net loss of just $3.2 million, which even took into account a $5 million restructuring charge for costs associated with suspending a joint production agreement at a production facility located in Council Bluffs, Iowa. Although net sales fell slightly to $955.8 million, full-year cash flow amounted to $24.3 million, a vast improvement over the negative $10.7 million of fiscal 1996.

After suffering through a painful period of restructuring, Thorn Apple Valley seemed to have placed itself in a more competitive position than ever. Joel Dorfman summarized in a July 1997 press release: “As a result of our three-year strategic repositioning program, we now have a product lineup that includes five number-one selling items produced at some of the most modern, strategically located, low-cost facilities in the industry.” Dorfman intended to continue to increase the portion of company revenues that derived from processed meats (relative to that of fresh pork). And, he also aimed to more aggressively target overseas sales opportunities, with the opening of a sales office in Moscow in mid-1997, and through sales in Mexico, the Caribbean, and Korea, where the top hot dog brand was Corn King.

Principal Subsidiaries

Coast Refrigerated Trucking Company Inc.; Miller’s Transport, Inc.; National Food Express, Inc.

Principal Divisions

Carolina Division; Deli & Smoked Meats Division; Dixie Foods Division; Fresh Pork Division; Grand Rapids Division; Ponca City Division; Transportation Division.

Thorn Apple Valley, Inc.

views updated May 21 2018

Thorn Apple Valley, Inc.

16700 West Ten Mile Rd.
Southfield, Michigan 48075
U.S.A.
(313) 552-0700
Fax: (313) 552-0986

Public Company
Incorporated: 1959 in Michigan as Frederick Packing Company; 1971 in Delaware as Frederick & Herrud, Inc.: 1977 in Michigan as Frederick & Herrud, Inc.
Employees: 3,200
Sales: $739.7 million
Stock Exchanges: NASDAQ
SICs: 2011 Meat Packing Plants; 2013 Sausages & Other Prepared Meats

Thorn Apple Valley, Inc., is a major producer of consumer packaged meat and poultry products in the United States. The company manufactures bacon, hot dogs, luncheon meats, hams, smoked sausages, and turkey products as well as numerous other products, marketing them under premium and other proprietary brand labels. The products are sold nationally to wholesalers, supermarkets, and food service operators. Thorn Apple also is one of the nation’s largest slaughterers of hogs and sells fresh pork to other manufacturers of meat and poultry products throughout the United States.

In 1949 Dorfman emigrated to the United States, settled in Detroit, and opened a butcher shop. Ten years later he and a partner bought Frederick Packing Company, a small hog slaughtering facility in Detroit. Dorfman was the the primary owner of the company and the operation’s driving force. The company purchased, butchered, and sold pork to consumers and wholesalers.

In less than two years, Dorfman had repaid his purchase loan for Frederick Packing. He then began to expand the operation by acquiring other small slaughtering houses and meat processing plants located in the nation’s midwestern and eastern states. Following additional acquisitions—including the purchase of Herrud and Company of Grand Rapids, Michigan, in 1969—Dorfman changed the company’s name to Frederick and Herrud to better reflect the diversification of its operations into manufacturing and processing, in addition to packing. Today, the former Herrud is Thorn Apple’s Grand Rapids Division and manufactures smoked sausages, hot dogs, and luncheon meats. In the early 1970s, Dorfman acquired meat businesses in North Carolina that produced deli products, smoked meat products, and bacon; these companies today make up a portion of Thorn Apple’s Carolina Division in Holly Ridge, North Carolina.

In 1971 the company reincorporated in Delaware to take advantage of the tax and business benefits offered by that state’s incorporation laws. Also that year, Dorfman took his company public and began trading stocks on NASDAQ. In the initial public offering, his family retained 70 percent of the shares. With some of the capital proceeds from the $16 per share purchase price, Dorfman bought two meat processing companies in Michigan and one in North Carolina. His expansion strategy involved acquiring small regional competitors that had achieved strong brand identities and consumer awareness and improving operating efficiencies by consolidating production into his existing plants. One of the company’s next purchases was the Colonial hot dog brand in Massachusetts. Colonial’s Boston plant was closed, and production was moved to plants in Michigan and North Carolina. In 1977 the company reincorporated again in Michigan because of changes in the state’s business laws and to reflect the location of the corporate headquarters in the Detroit suburb of Southfield.

In the early 1980s many large food conglomerates were taking over independent meat packers to increase their market shares. Dorfman, by contrast, believed that future success depended on producing meats more cheaply than the conglomerates and giving consumers a better product. Despite a soft economy and a stagnant meat packing industry, he increased capital expenditures for plant modernization and improvements and devoted resources to product development and production. While this strategy resulted in several lean years for the company, Dorfman accepted the limited financial return as the cost of building a strong corporate infrastructure.

Also during this period, the company changed its image to a producer of high quality and premium brand products. To reflect this change, in 1984 Dorfman renamed the company Thorn Apple Valley, which was one of its marketing names for premium products. Later that same year, the company expanded to become vertically integrated and began operation of National Food Express, Inc., a transportation subsidiary intended to insure prompt delivery of perishable products from its Grand Rapids Division to its customers.

By December 1991 Thorn Apple completed a public offering of 300,000 shares of common stock. The net proceeds of approximately $9 million were used to reduce short-term debt, finance working capital needs, and make acquisitions. In July 1992 the company spent $3.8 million to acquire the assets of Suzannah Farms, a meat processor in Pennsauken, New Jersey, that had net sales in 1991 of $38 million. Production of the Suzannah line of products was moved to Thorn Apple’s Deli and Smoked Meats Division plant in Detroit. At the same time, the company contracted with Atlanta Corporation of Elizabeth, New Jersey, the license holder for Suzannah Farms’ brand name, to make hams and related meat products under the trademark Krakus. This acquisition and licensing agreement positioned Thorn Apple well to improve the company’s penetration in the deli market and food service.

Financially, Thorn Apple performed well in the early 1990s. It was among the top United States food and beverage companies despite posted losses in 1990. In 1991 the company had the highest percentage of return on invested capital at 38.4 percent and the fourth best percentage sales gains, bettering such companies as Coca-Cola, Kellogg, and General Mills. Thorn Apple ranked 17th in sales among U.S. meat packers in 1991. The company achieved average annual rates of 6.7 percent growth in sales, 89.8 percent growth in earnings per share, and an improvement of 1.2 percent in net income to net sales from 1988 to 1992. Management attributed the increases to improved marketing efforts, streamlined operations, and a reduction in the volatility of fresh meat margins, which was in large part due to advances in purchasing strategies and the company’s overall reduction of fresh meat in its total production mix.

In 1992 Thorn Apple enhanced profitability by maintaining its position as a low-cost producer of consumer packaged meat and poultry products and high-quality fresh pork. The company improved its manufactured product mix of consumer packaged higher-margin products such as turkey and smoked sausage and increased its capacity and sales of higher-margin value-added items such as boneless products and shelf-ready products. Sales of high-quality products were enhanced late in 1991 with the acquisition of Cavanaugh Lakeview Farms in Chelsea, Michigan, which sells gourmet meat products under the Cavanaugh name. The company’s other premium brand products are marketed under the following labels: Thorn Apple Valley, Colonial, Triple M, Herrud, Bar H, Royal Crown, and Ole Virginie.

Improved operating efficiencies in manufactured products were achieved through increasing capacity and reducing ineffective production processes. Sausage and related products production at the Grand Rapids Division increased from 150,000 pounds per week to approximately 2.5 million pounds weekly in the 1990s. The Deli and Smoked Meats Division in Detroit increased from 200,000 pounds weekly to over three million pounds weekly, and bacon production was increased to over two million pounds weekly from 300,000 pounds per week at the Carolina Division. Annual hog slaughtering averaged 5,000 at the Tri-Miller subsidiary. Production of various processed meats increased to 700,000 pounds weekly since Thorn Apple’s purchase of the Utah company in 1988.

Thorn Apple sells its fresh pork and manufacturing products to more than 900 customers in the United States, Canada, and several Pacific Rim countries. No single customer is responsible for more than 10 percent of the company’s sales, and the 10 largest customers represent less than 30 percent of total sales. International sales for fiscal year 1992 were 1.5 percent of the company’s total sales. Management expected additional opportunities for increased sales of fresh pork and processed meat in Korea, Japan, and Mexico in the mid to late 1990s to increase that total percentage.

Thorn Apple paid its first quarterly cash dividend to shareholders in 1992, which reflected a slight decline in the company’s perceived need for capital. Marketing enhancements focused on customer-oriented satisfaction through the introduction of value-added products like vacuum packaged boneless pork, which is distributed to retail outlets and exported to Japan. The company also continued to develop strong wholesaler and retailer loyalty through dependable service and delivery of consistently high quality products.

Management’s ultimate objective for Thorn Apple is to convince Wall Street that its cost structure and production are stable, especially in fresh pork, and that its financial performance is solid and predictable. Despite the company’s gains since the late 1980s in its stock price, Thorn Apple’s stock was significantly undervalued in a comparison of price-to-earnings ratios among some of the nation’s top meat packers and processors. Thorn Apple’s stock price relative to its net earnings per share was 8.4, which means that a share of stock is just over eight times more than a stockholder’s return of net earnings. Competitors with higher price-to-earnings ratios include ConAgra at 18.1, George Hormel at 18.6, IBP at 16.4, and Smith-field Foods at 10.6. Additional acquisitions in the Western United States, continued improvements in operating efficiencies, capacity advances, and further market penetration in selected international markets should help Thorn Apple’s stock to continue to improve as the company moves toward the 21st century.