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EX-32.1 - EX-32.1 - BOB EVANS FARMS INC | l41212exv32w1.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission
file number 0-1667
Bob Evans Farms, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 31-4421866 | |
(State or other jurisdiction of incorporation | (I.R.S. Employer | |
or organization) | Identification No.) |
3776 South High Street Columbus, Ohio 43207
(Address of principal executive offices)
(Zip Code)
(614) 491-2225
(Registrants telephone number, including area code)
(Former name, former address and formal 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 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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, 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). Yes þ No o
Indicate by
check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a 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 o No þ
As of November 26, 2010, the registrant had 30,242,577 common shares outstanding.
TABLE OF CONTENTS
Table of Contents
BOB EVANS FARMS, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Dollars in thousands | ||||||||
Unaudited | ||||||||
Oct. 29, 2010 | April 30, 2010 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and equivalents |
$ | 17,452 | $ | 17,803 | ||||
Accounts receivable |
24,918 | 19,857 | ||||||
Inventories |
26,046 | 25,920 | ||||||
Deferred income taxes |
11,175 | 11,175 | ||||||
Federal and state income taxes |
4,502 | | ||||||
Prepaid expenses |
3,435 | 2,169 | ||||||
Total Current Assets |
87,528 | 76,924 | ||||||
Property, Plant and Equipment |
1,662,533 | 1,664,639 | ||||||
Less accumulated depreciation |
734,963 | 702,665 | ||||||
Net Property, Plant and Equipment |
927,570 | 961,974 | ||||||
Other Assets |
||||||||
Deposits and other |
4,436 | 4,143 | ||||||
Long-term investments |
24,797 | 23,032 | ||||||
Goodwill |
1,567 | 1,567 | ||||||
Other intangible assets |
41,107 | 41,517 | ||||||
Total Other Assets |
71,907 | 70,259 | ||||||
$ | 1,087,005 | $ | 1,109,157 | |||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities |
||||||||
Lines of credit |
$ | 23,000 | $ | 14,000 | ||||
Current maturities of long-term debt |
13,571 | 26,905 | ||||||
Accounts payable |
33,383 | 29,322 | ||||||
Federal and state income taxes |
| 8,708 | ||||||
Accrued nonincome taxes |
21,478 | 21,085 | ||||||
Accrued wages and related liabilities |
32,701 | 39,545 | ||||||
Self-insurance |
24,629 | 24,165 | ||||||
Deferred revenue |
12,353 | 14,447 | ||||||
Other accrued expenses |
20,858 | 15,279 | ||||||
Total Current Liabilities |
181,973 | 193,456 | ||||||
Long-Term Liabilities |
||||||||
Deferred compensation |
28,156 | 26,396 | ||||||
Federal and state income taxes |
10,585 | 10,050 | ||||||
Deferred income taxes |
67,447 | 67,538 | ||||||
Deferred rent |
24,406 | 24,273 | ||||||
Long-term debt |
135,716 | 149,287 | ||||||
Total Long-Term Liabilities |
266,310 | 277,544 | ||||||
Stockholders Equity |
||||||||
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 42,638,118 shares at Oct. 29, 2010, and April 30, 2010 |
426 | 426 | ||||||
Capital in excess of par value |
181,880 | 180,476 | ||||||
Retained earnings |
796,851 | 788,049 | ||||||
Treasury stock, 12,441,397 shares at Oct. 29, 2010, and 12,265,865 shares at April 30, 2010, at
cost |
(340,435 | ) | (330,794 | ) | ||||
Total Stockholders Equity |
638,722 | 638,157 | ||||||
$ | 1,087,005 | $ | 1,109,157 | |||||
The accompanying notes are an integral part of the financial statements.
-2-
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
UNAUDITED
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
Oct. 29, 2010 | Oct. 23, 2009 | Oct. 29, 2010 | Oct. 23, 2009 | |||||||||||||
Net Sales |
$ | 417,046 | $ | 424,847 | $ | 829,612 | $ | 854,327 | ||||||||
Cost of sales |
124,131 | 123,310 | 246,300 | 248,804 | ||||||||||||
Operating wage and fringe benefit expenses |
140,083 | 149,813 | 284,181 | 301,481 | ||||||||||||
Other operating expenses |
68,339 | 70,727 | 136,713 | 140,178 | ||||||||||||
Selling, general and administrative expenses |
49,661 | 35,412 | 85,238 | 72,157 | ||||||||||||
Depreciation and amortization expense |
20,922 | 20,678 | 41,884 | 41,661 | ||||||||||||
Operating Income |
13,910 | 24,907 | 35,296 | 50,046 | ||||||||||||
Net interest expense |
2,204 | 2,537 | 4,702 | 5,277 | ||||||||||||
Income Before Income Taxes |
11,706 | 22,370 | 30,594 | 44,769 | ||||||||||||
Provision for income taxes |
3,916 | 6,888 | 10,255 | 13,172 | ||||||||||||
Net Income |
$ | 7,790 | $ | 15,482 | $ | 20,339 | $ | 31,597 | ||||||||
Earnings Per Share Basic |
$ | 0.26 | $ | 0.50 | $ | 0.67 | $ | 1.02 | ||||||||
Earnings Per Share Diluted |
$ | 0.26 | $ | 0.50 | $ | 0.67 | $ | 1.02 | ||||||||
Cash Dividends Paid Per Share |
$ | 0.20 | $ | 0.16 | $ | 0.38 | $ | 0.32 | ||||||||
The accompanying notes are an integral part of the financial statements.
-3-
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
UNAUDITED
(Dollars in thousands) | ||||||||
Six Months Ended | ||||||||
Oct. 29, 2010 | Oct. 23, 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 20,339 | $ | 31,597 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Depreciation and amortization |
41,884 | 41,661 | ||||||
Loss on disposal/impairment of long-term assets |
11,620 | 1,772 | ||||||
Gain on long-term investments |
(130 | ) | (4,042 | ) | ||||
Deferred compensation |
1,760 | 4,621 | ||||||
Compensation expense attributable to stock plans |
4,630 | 5,097 | ||||||
Deferred income taxes |
(91 | ) | (66 | ) | ||||
Deferred rent |
133 | 421 | ||||||
Cash provided by (used for) current assets and
current liabilities: |
||||||||
Accounts receivable |
(5,061 | ) | (4,116 | ) | ||||
Inventories |
(387 | ) | 1,881 | |||||
Prepaid expenses |
(1,266 | ) | (2,010 | ) | ||||
Accounts payable |
4,061 | (9,782 | ) | |||||
Federal and state income taxes |
(12,844 | ) | (3,214 | ) | ||||
Accrued wages and related liabilities |
(6,844 | ) | (4,370 | ) | ||||
Self-insurance |
464 | 719 | ||||||
Accrued nonincome taxes |
393 | 1,929 | ||||||
Deferred revenue |
(2,094 | ) | (2,063 | ) | ||||
Other accrued expenses |
4,735 | 3,164 | ||||||
Net cash provided by operating activities |
61,302 | 63,199 | ||||||
Investing activities: |
||||||||
Purchase of property, plant and equipment |
(19,746 | ) | (30,865 | ) | ||||
Proceeds from sale of property, plant and equipment |
2,164 | 381 | ||||||
Purchase of long-term investments |
(1,638 | ) | (1,381 | ) | ||||
Other |
(293 | ) | (314 | ) | ||||
Net cash used in investing activities |
(19,513 | ) | (32,179 | ) | ||||
Financing activities: |
||||||||
Cash dividends paid |
(11,542 | ) | (9,874 | ) | ||||
Proceeds from lines of credit |
9,000 | | ||||||
Payments on lines of credit |
| (3,000 | ) | |||||
Principal payments on long-term debt |
(26,905 | ) | (26,904 | ) | ||||
Purchase of treasury stock |
(13,296 | ) | | |||||
Proceeds from issuance of treasury stock |
1,824 | 2,706 | ||||||
Net share settlement of equity awards |
(1,234 | ) | | |||||
Excess tax benefits from stock-based compensation |
13 | 194 | ||||||
Net cash used in financing activities |
(42,140 | ) | (36,878 | ) | ||||
Decrease in cash and equivalents |
(351 | ) | (5,858 | ) | ||||
Cash and equivalents at the beginning of the period |
17,803 | 30,133 | ||||||
Cash and equivalents at the end of the period |
$ | 17,452 | $ | 24,275 | ||||
The accompanying notes are an integral part of the financial statements.
-4-
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of Bob Evans Farms, Inc., a
Delaware corporation, (Bob Evans) and its subsidiaries (collectively, Bob Evans and its
subsidiaries are referred to as the Company, we, us and our) are presented in accordance
with the requirements of Form 10-Q and, consequently, do not include all of the
disclosures normally required by generally accepted accounting principles or those normally made in
our Form 10-K filing. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of our financial position and
results of operations have been included. The consolidated financial statements are not necessarily
indicative of the results of operations for a full fiscal year. Except as described in this Form
10-Q, no significant changes have occurred in the financial disclosures made in our Form 10-K for
the fiscal year ended April 30, 2010 (refer to our Form 10-K for a summary of significant
accounting policies followed in the preparation of the consolidated financial statements).
2. Earnings Per Share
Basic earnings-per-share computations are based on the
weighted-average number of shares of common stock outstanding during the period presented. Diluted
earnings-per-share calculations reflect the assumed exercise and conversion of employee stock
options.
The numerator in calculating both basic and diluted earnings per share
for each period was reported net income. The denominator was based on the following
weighted-average number of common shares outstanding:
(in thousands) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
Oct. 29, 2010 | Oct. 23, 2009 | Oct. 29, 2010 | Oct. 23, 2009 | |||||||||||||
Basic |
30,341 | 31,005 | 30,393 | 30,923 | ||||||||||||
Effect of dilutive stock options |
62 | 113 | 60 | 112 | ||||||||||||
Diluted |
30,403 | 31,118 | 30,453 | 31,035 | ||||||||||||
3. Stock-Based Compensation
We account for stock-based compensation in accordance with the Compensation-Stock Compensation
Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC). Accordingly, stock-based compensation is measured based on the fair value of the award on
the grant date and is recognized over the vesting period of the award on a straight-line basis.
Awards to retirement-eligible employees (as determined under the terms of the compensation plan
under which the award is granted) are subject to immediate expensing in full upon grant. Total
stock-based compensation expense of $1.4 million and $1.2 million for the second quarters of fiscal
2011 and 2010, respectively, and $4.6 million and $5.1 million for the first six months of fiscal
2011 and 2010, respectively, is included in the Consolidated Statements of Income.
4. Industry Segments
Our business includes two segments, restaurant operations and the processing, distribution
and sale of food products. The revenues from these two segments include both sales to
unaffiliated customers and intersegment sales, which are accounted for on a basis consistent
with sales to unaffiliated customers. Intersegment sales and other intersegment transactions
have been eliminated in the consolidated financial statements. Information on our operating
segments is summarized as follows:
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Table of Contents
(in thousands) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
Oct. 29, 2010 | Oct. 23, 2009 | Oct. 29, 2010 | Oct. 23, 2009 | |||||||||||||
Sales |
||||||||||||||||
Restaurant operations |
$ | 338,079 | $ | 345,385 | $ | 681,164 | $ | 705,200 | ||||||||
Food products |
82,530 | 82,630 | 155,141 | 155,456 | ||||||||||||
420,609 | 428,015 | 836,305 | 860,656 | |||||||||||||
Intersegment sales of food products |
(3,563 | ) | (3,168 | ) | (6,693 | ) | (6,329 | ) | ||||||||
Total |
$ | 417,046 | $ | 424,847 | $ | 829,612 | $ | 854,327 | ||||||||
Operating income |
||||||||||||||||
Restaurant operations |
$ | 9,202 | $ | 16,324 | $ | 30,559 | $ | 36,712 | ||||||||
Food products |
4,708 | 8,583 | 4,737 | 13,334 | ||||||||||||
Total |
$ | 13,910 | $ | 24,907 | $ | 35,296 | $ | 50,046 | ||||||||
5. Taxes
The combined federal and state income tax rates were 33.5% in the second quarter of fiscal
2011 versus 30.8% in the corresponding period a year ago.
Our effective income tax rate is evaluated each quarter. The effective income tax rate for
the quarter may or may not represent the expected annual effective tax rate for the entire fiscal
year and includes the impact of discrete items for the quarter. The prior year tax rate benefitted
from the favorable tax treatment of certain insurance items, including proceeds of $1.2 million we
received from corporate-owned life insurance policies.
6. Financial Instruments
The fair values of our financial instruments (other than long-term debt) approximate their
carrying values at October 29, 2010. At October 29, 2010, the estimated fair value of our
long-term debt approximated $163.6 million compared to a carrying amount of $149.3 million. We
estimate the fair value of our long-term debt based on the current interest rates offered for debt
of the same maturities. We do not use derivative financial instruments for speculative purposes.
7. Impairment, Restructuring and Severance Charges
During the second quarter of fiscal 2011, we recorded pretax impairment, restructuring and
severance charges totaling $13.9 million (reflected in selling, general and administrative
expenses). In the restaurant segment, this included $9.2 million related to five underperforming
Mimis Cafés and one underperforming Bob Evans Restaurant, $1.1 million related to other restaurant
property, plant and equipment and $0.8 million of restaurant severance/retirement costs. In the
food products segment, we recorded pretax restructuring charges of $2.8 million related to the
closure of our fresh sausage operations at our plant in Bidwell, Ohio, and our food production
facility in Galva, Illinois. As of October 29, 2010, $1.0 million was paid related to the food
products segment restructuring charges.
During the second quarter of fiscal 2010, we recorded a pretax impairment charge of $1.5
million (reflected in the restaurant segments selling, general and administrative expenses) for
certain property, plant and equipment related to previously closed Bob Evans Restaurants.
In accordance with the Property, Plant and Equipment Topic of the FASB ASC, we wrote down the
carrying value of the underlying assets to their estimated fair value, which resulted in the above
impairment charges. The estimated fair value was determined based on independent appraisals, which
we deemed to be Level 3 inputs under the Fair Value Measurements and Disclosures Topic of the FASB
ASC.
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Table of Contents
8. Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2011
classification.
9. Risks and Uncertainties
At October 29, 2010, we had intangible assets totaling $41.1 million on our consolidated
balance sheet related to our acquisition of Mimis Café. Specifically, this amount includes $34.0
million for the unamortized Mimis Café trade name and $7.1 million for the Mimis Café restaurant
concept, which is amortized over a 15-year life. We are required to perform annual impairment
tests of our intangible assets (or more frequently if events or changes in circumstances indicate
the asset might be impaired), which we perform in the fourth quarter of the fiscal year. Impairment
testing of the Mimis Café trade name requires that we determine its fair value. If the fair value
of the asset is less than its $34.0 million carrying value, an impairment charge would be
recognized in an amount equal to the difference. The impairment test for the $7.1 million
restaurant concept asset involves a three-step process, whereby we first consider whether
indicators of impairment are present. If indicators are present, the second step is to compare the
sum of the undiscounted future cash flows attributable to the asset to its carrying value. In the
event that the undiscounted cash flows are less than the carrying value, the third step is to
determine the fair value of the restaurant concept. If the fair value is less than its carrying
value, an impairment charge would be recognized for the difference. We use the relief-from-royalty
method, which is an income approach to valuation, to determine the fair values of the trade name
and restaurant concept intangible assets. Using the relief-from-royalty method, the fair values
are impacted by projected sales, including plans for new restaurant development and same-store
sales trends.
In the fourth quarter of fiscal 2010, we completed our annual impairment tests of intangible
assets. The assumptions we used for projected sales were based on our current five-year
development and financial forecasts for Mimis Café. Using these assumptions, the fair values of
the Mimis Café trade name and restaurant concept exceeded their carrying values, and as a result,
no impairment charges were recorded. Although we believe our current plans and forecasts to be
achievable, there is the potential that our actual future results could differ from these
forecasts, especially given Mimis Cafés prolonged negative same-store sales trend. While we
identified certain underperforming restaurants that required an impairment charge in the second
quarter of fiscal 2011, overall year to date results for Mimis Café continue to meet performance expectations. Accordingly, no impairment indicators were identified related to the
Mimis Café trade name or restaurant concept as of the second quarter of fiscal 2011. If Mimis
Cafés performance falls below expectations in future periods, impairment charges related to the
Mimis Café trade name and restaurant concept could arise.
10. Subsequent Events
In November 2010, we announced the closure of the fresh sausage production line at our plant
in Bidwell, Ohio. The decision to close this production line was due to excess capacity,
diminishing supply in the live sow market and high production costs. The Bidwell plant also
produces precooked sausage links and patties for our Express line and for our restaurants. These
ready-to-eat operations will not be impacted by the closure of the fresh sausage production line.
We recorded a charge of $1.4 million in the second quarter of fiscal 2011 resulting from asset
impairments, severance and other costs related to closing the Bidwell plants fresh sausage
operations (reflected in selling, general and administrative expenses). At October 29, 2010, $0.6
million of restructuring reserves remained in other accrued expenses, which will be paid by
December 31, 2010.
On December 1, 2010, we entered into an unsecured Line of Credit Note underlying a $45 million
line of credit with a bank. This line of credit is a renewal and replacement of the $45 million
line of credit promissory note entered into on December 1, 2009. The Line of Credit Note becomes
due and payable on December 1, 2011, subject to acceleration upon the occurrence of certain
specified events of default which are customary for transactions of this type. The line of credit
is short-term debt and will be used for general corporate purposes.
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Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General Overview
In this Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A), we use the terms Bob Evans, Company, we, us and our to collectively refer to
Bob Evans Farms, Inc., a Delaware corporation, and its subsidiaries. The following terms used
herein are registered trademarks or service marks of Bob Evans: Bob Evans®,
Bob Evans Restaurants®, Bob Evans Special Touch®,
Best Brand BuildersSM, Mimis® , Mimis
Café®, Owens® and Taste of the
Farm®.
As of October 29, 2010, we owned and operated 714 full-service restaurants, including 569 Bob
Evans Restaurants in 18 states and 145 Mimis Cafés (Mimis) in 24 states. Bob Evans Restaurants
are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States.
Mimis are primarily located in California and other western states. Revenue in the restaurant
segment is recognized at the point of sale. We also produce and distribute pork sausage products
and a variety of complementary homestyle convenience food items under the Bob Evans
and Owens brand names. These food products are distributed primarily to warehouses
that distribute to grocery stores throughout the United States. Revenue in the food products
segment is recognized when products are delivered to our customers warehouses.
The Securities and Exchange Commission (SEC) encourages companies to disclose
forward-looking information so that investors can better understand a companys future prospects
and make informed investment decisions. This MD&A and other written or oral statements that we
make from time to time may contain forward-looking statements that set forth anticipated results
based on managements plans and assumptions. Statements in this MD&A that are not historical facts
are forward-looking statements. These statements are often indicated by words such as expects,
anticipates, believes, estimates, intends and plans. Forward-looking statements involve
various important assumptions, risks and uncertainties. Actual results may differ materially from
those predicted by the forward-looking statements because of various factors and possible events,
including the assumptions, risks and uncertainties discussed in our Annual Report on Form 10-K for
the fiscal year ended April 30, 2010, under the heading Item 1A Risk Factors and in Part II of
this Form 10-Q under the heading Item 1A. Risk Factors. We note these risk factors for investors
as contemplated by the Private Securities Litigation Reform Act of 1995. It is impossible to
predict or identify all of the risk factors that we face. Consequently, you should not consider
any such list to be a complete set of all potential assumptions, risks or uncertainties.
Forward-looking statements speak only as of the date on which they are made, and we undertake no
obligation to update any forward-looking statement for circumstances or events that occur after the
date on which the statement is made. Any further disclosures we make in our filings with the SEC
should also be consulted.
The following table reflects data for our second fiscal quarter ended October 29, 2010,
compared to the prior years second fiscal quarter ended October 23, 2009. The consolidated
information is derived from the accompanying Consolidated Statements of Income. The table also
includes data for our two industry segments restaurant operations and food products. The ratios
presented reflect the underlying dollar values expressed as a percentage of the applicable net
sales amount.
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Table of Contents
Consolidated Results | Restaurant Segment | Food Products Segment | ||||||||||||||||||||||
(dollars in thousands) | Q2 2011 | Q2 2010 | Q2 2011 | Q2 2010 | Q2 2011 | Q2 2010 | ||||||||||||||||||
Net sales |
$ | 417,046 | $ | 424,847 | $ | 338,079 | $ | 345,385 | $ | 78,967 | $ | 79,462 | ||||||||||||
Operating income |
$ | 13,910 | $ | 24,907 | $ | 9,202 | $ | 16,324 | $ | 4,708 | $ | 8,583 | ||||||||||||
Cost of sales |
29.8 | % | 29.0 | % | 24.3 | % | 24.5 | % | 53.1 | % | 49.0 | % | ||||||||||||
Operating wages |
33.6 | % | 35.3 | % | 38.9 | % | 40.4 | % | 10.8 | % | 12.9 | % | ||||||||||||
Other operating |
16.4 | % | 16.6 | % | 19.1 | % | 19.2 | % | 4.8 | % | 5.5 | % | ||||||||||||
S,G&A |
11.9 | % | 8.3 | % | 9.6 | % | 5.9 | % | 22.0 | % | 18.9 | % | ||||||||||||
Depr. & amort. |
5.0 | % | 4.9 | % | 5.4 | % | 5.3 | % | 3.3 | % | 2.9 | % | ||||||||||||
Operating income |
3.3 | % | 5.9 | % | 2.7 | % | 4.7 | % | 6.0 | % | 10.8 | % |
Restaurant Segment Overview
The ongoing industry-wide factors most relevant to our restaurant segment include: the
economy, sales trends, labor and fringe benefit expenses, commodity prices, energy prices,
competition, consumer acceptance, restaurant openings and closings, governmental initiatives, food
safety and weather. For the second quarter of fiscal 2011, the factors that had the greatest
positive impact on our restaurant segment performance were improvement of cost of sales and
operating wages. The factors that had the greatest negative impact were impairment charges of
$10.3 million recorded in selling, general and administrative expenses (S,G&A) and lower
same-store sales at Bob Evans Restaurants and Mimis.
In the second quarter of fiscal 2011, same-store sales decreased 0.9% at Bob Evans Restaurants
and decreased 5.6% at Mimis compared to the corresponding period last year. Restaurant segment
operating income decreased $7.1 million in the second quarter of fiscal 2011 compared to the
corresponding period last year. We remain focused on improving same-store sales at Bob Evans
Restaurants and Mimis in a challenging economic environment and are encouraged by the gradual
sequential improvement in sales that we began to see in the second quarter of fiscal 2011. We are
also continuing our efforts to control labor and food costs, which have been effective in
mitigating the impact of negative leverage from lower same-store sales.
Food Products Segment Overview
The ongoing industry-wide factors most relevant to our food products segment include: sow
availability and cost, other commodity costs, transportation and energy costs, governmental
regulations, food safety, the economy and consumer acceptance. Production costs and promotional
discounts also have a significant impact on the profitability of our food products segment. In the
second quarter of fiscal 2011, the food products segment recorded restructuring charges of $2.8
million related to the closure of the fresh sausage production line at our plant in Bidwell, Ohio,
and our food production facility in Galva, Illinois. For the second quarter of fiscal 2011, net
sales decreased $0.5 million, or 0.6%, and pounds sold of comparable products decreased 16%
compared to the corresponding period last year. The financial impact of the volume decrease in
comparable pounds sold was largely offset by a significant decrease in promotional discounts, which
enhanced profitability. Promotional discounts decreased $10.8 million, or 60.4%, in the
second quarter of fiscal 2011 and $13.9 million, or 46.8%, through six months of fiscal 2011,
compared to the same periods a year ago. Promotional discounts are recorded as a reduction of net
sales in the Consolidated Statements of Income.
Operating income in the food products segment decreased $3.9 million, or 45.1%, in the second
quarter of fiscal 2011 compared to the corresponding period last year. Sow costs represent a
significant part of the food products segments cost of sales, and the volatile nature of sow costs
greatly impacts the profitability of the segment. In the second quarter of fiscal 2011, average
sow costs increased 83.9% compared with the corresponding period last year. The decrease in
operating income is mainly due to the significant increase in sow costs and the restructuring
charges related to both fresh sausage operations closures, largely offset by a significant decrease
in promotional expenses, price
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increases on retail food products and reductions in operating costs. We anticipate that sow
costs for all of fiscal 2011 to average at the high end of our guidance range of $55 to $60 per
hundredweight, historically high rates.
Sales
Consolidated net sales decreased 1.8% to $417.0 million in the second quarter of fiscal 2011
compared to $424.8 million in the corresponding period last year. The decrease was comprised of
sales decreases in the restaurant segment and food products segment of $7.3 million and $0.5
million, respectively. Restaurant sales accounted for 81.1% of consolidated net sales in the
second quarter of fiscal 2011. For the six-month period ended October 29, 2010, consolidated net
sales decreased $24.7 million, or 2.9%, compared to the corresponding period last year.
Restaurant sales decreased $7.3 million, or 2.1%, in the second quarter of fiscal 2011 and
$24.0 million, or 3.4%, through six months of fiscal 2011 compared to the corresponding periods
last year. The sales decreases were primarily due to negative same-store sales at both of our
restaurant concepts.
Bob Evans Restaurants experienced a same-store sales decrease of 0.9% in the second quarter of
fiscal 2011, which included an average menu price increase of 1.9%. The planned phase-out of
certain retail inventory accounted for the entire 0.9% decrease in same-store sales at Bob Evans
Restaurants. We phased out this inventory to improve our selection of retail items by shifting the
assortment to food and other branded items consistent with our Taste of the Farm brand
positioning. Mimis experienced a same-store sales decrease of 5.6% in the second quarter of
fiscal 2011, which included an average menu price increase of 2.6%. See the BEST Brand
Builders section for a discussion of initiatives to build sales.
Same-store sales computations for a given fiscal year are based on net sales of stores that
are open for at least two years prior to the start of that year. Sales of stores to be rebuilt are
excluded for all periods in the computation when construction commences on the replacement
building. Sales of closed stores are excluded for all periods in the computation.
The following chart summarizes the restaurant openings and closings during the last six
quarters for Bob Evans Restaurants and Mimis:
Bob Evans Restaurants:
Beginning | Opened | Closed | Ending | |||||||||||||
Fiscal 2011 |
||||||||||||||||
1st quarter |
569 | | | 569 | ||||||||||||
2nd quarter |
569 | | | 569 | ||||||||||||
Fiscal 2010 |
||||||||||||||||
1st quarter |
570 | | 1 | 569 | ||||||||||||
2nd quarter |
569 | | | 569 | ||||||||||||
3rd quarter |
569 | | | 569 | ||||||||||||
4th quarter |
569 | | | 569 |
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Mimis:
Beginning | Opened | Closed | Ending | |||||||||||||
Fiscal 2011 |
||||||||||||||||
1st quarter |
146 | | 1 | 145 | ||||||||||||
2nd quarter |
145 | | | 145 | ||||||||||||
Fiscal 2010 |
||||||||||||||||
1st quarter |
144 | | | 144 | ||||||||||||
2nd quarter |
144 | 1 | | 145 | ||||||||||||
3rd quarter |
145 | 1 | | 146 | ||||||||||||
4th quarter |
146 | | | 146 |
Consolidated Restaurants:
Beginning | Opened | Closed | Ending | |||||||||||||
Fiscal 2011 |
||||||||||||||||
1st quarter |
715 | | 1 | 714 | ||||||||||||
2nd quarter |
714 | | | 714 | ||||||||||||
Fiscal 2010 |
||||||||||||||||
1st quarter |
714 | | 1 | 713 | ||||||||||||
2nd quarter |
713 | 1 | | 714 | ||||||||||||
3rd quarter |
714 | 1 | | 715 | ||||||||||||
4th quarter |
715 | | | 715 |
In the second quarter of fiscal 2011, we did not open any new Bob Evans Restaurants or Mimis.
We expect to open three new Bob Evans Restaurants in fiscal 2011. We also plan to rebuild 2 and
remodel 30 to 35 existing Bob Evans Restaurants in fiscal 2011. We have completed five Bob Evans
Restaurants remodels so far in fiscal 2011. We closed one Mimis in the first quarter of fiscal
2011 in connection with the expiration of the restaurants lease. We do not expect to open or
rebuild any new Mimis restaurants in fiscal 2011, but we plan to remodel three existing Mimis
restaurants. We need to improve our restaurant-level economics at both restaurant brands to enable
us to begin building Mimis restaurants again and to increase the rate of new Bob Evans
Restaurants, as development is an important part of our long-term growth strategy.
The food products segment experienced a sales decrease of $0.5 million, or 0.6%, in the second
quarter of fiscal 2011 and a sales decrease of $0.7 million, or 0.5%, through six months of fiscal
2011 compared to the corresponding periods a year ago. In the second quarter of fiscal 2011, we
experienced a 16% decrease in comparable pounds sold. Comparable pounds sold is calculated using
the same products in both periods and excludes new products. We believe the decrease in the volume
of pounds sold was due to our decision to reduce the amount of promotional discounts on pork
sausage products provided to retailers. This $10.8 million, or 60.4%, year-over-year decrease in
the amount of promotional discounts in the second quarter of fiscal 2011 largely offset the
financial impact of the decrease in comparable pounds sold. We implemented a price increase on
nearly all of our retail products early in the second quarter of fiscal 2011 to partially offset
the negative impact of the historically high sow costs we anticipated for fiscal 2011. We
anticipate sow costs for all of fiscal 2011 to average at the high end of our guidance range of $55
to $60 per hundredweight. We plan to continue our strategy of growing our food products business
through successful product introductions and additional points of distribution. See the BEST
Brand Builders section for a further discussion of these growth strategies.
Cost of Sales
Consolidated cost of sales (cost of materials) was 29.8% of sales in the second quarter of
fiscal 2011 and 29.7% through six months of fiscal 2011 compared to 29.0% and 29.1% of sales,
respectively, in the corresponding periods a year ago.
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In fiscal 2011, restaurant segment cost of sales (predominantly food cost) was 24.3% of sales
in the second quarter (24.2% year-to-date) compared to 24.5% of sales in both the corresponding
periods last year. The improvement in restaurant segment cost of sales as a percent of sales in
fiscal 2011 was attributable to lower costs resulting from effective supply chain management and
the implementation of an actual-versus-theoretical food cost program at Bob Evans Restaurants in
the fourth quarter last year and at Mimis in the second quarter of this year. See the BEST Brand
Builders section for a further discussion of our productivity initiatives.
The food products segment cost of sales ratio was 53.1% of sales in the second quarter of 2011
(55.1% year-to-date) versus 49.0% of sales (51.2% year-to-date) in the corresponding periods a year
ago. The increase in the food products segment cost of sales ratio in the second quarter was due
primarily to an 83.9% (61.4% year-to-date) increase in sow costs this quarter versus the
corresponding period last year. Sow costs averaged $60.47 per hundredweight in the second quarter
of fiscal 2011 compared to $32.88 per hundredweight in the second quarter of fiscal 2010.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses (operating wages) were 33.6% of
sales in the second quarter of fiscal 2011 and 34.3% of sales through six months of fiscal 2011
compared to 35.3% of sales in both the corresponding periods last year. In the second quarter of
fiscal 2011, the operating wage ratio decreased in both the restaurant segment and the food
products segment compared to the corresponding period last year.
In the restaurant segment, operating wages were 38.9% of sales in the second quarter of fiscal
2011 and 39.1% of sales through six months of fiscal 2011 compared to 40.4% and 40.0% of sales,
respectively, in the corresponding periods last year. The decrease in the operating wage ratio in
the second quarter and through six months was due to a reduction in labor hours, lower health
insurance and workers compensation claims and lower performance-based incentive compensation,
partially offset by the negative leverage due to same-store sales declines at both Bob Evans
Restaurants and Mimis. See the BEST Brand Builders section for a further discussion of labor
management.
In the food products segment, operating wages were 10.8% of sales in the second quarter of
fiscal 2011 and 11.9% of sales through six months of fiscal 2011 compared to 12.9% of sales in both
the corresponding periods last year. The decrease in the operating wage ratio was due to
efficiencies gained from our manufacturing productivity initiatives and the closure of our fresh
sausage plant in Galva, Illinois.
Other Operating Expenses
Approximately 94% of other operating expenses occurred in the restaurant segment in the second
quarters of fiscal 2011 and fiscal 2010. The most significant components of other operating
expenses were utilities, restaurant advertising, restaurant supplies, repair and maintenance, rent,
nonincome based taxes and credit/debit card processing fees. Consolidated other operating expenses
were 16.4% of sales in the second quarter of fiscal 2011 and 16.5% through six months of fiscal
2011, compared to 16.6% and 16.4% of sales, respectively, in the corresponding periods last year.
In the restaurant segment, other operating expenses were 19.1% of sales in the second quarter
of fiscal 2011 and 19.0% of sales through six months of fiscal 2011 compared to 19.2% and 18.7% of
sales, respectively, in the corresponding periods last year. The decrease in the other operating
expense ratio in the second quarter of fiscal 2011 was a result of lower preopening expenses,
partially offset by deleverage caused by negative same-store sales.
In the food products segment, the other operating expenses ratio was 4.8% of sales in the
second quarter of fiscal 2011 and 5.2% of sales through six months of fiscal 2011 compared to 5.5%
of sales in both the corresponding periods last year. The decrease in the other operating expense
ratio in fiscal 2011 was a result of efficiencies gained from our manufacturing productivity
initiatives, the closure of our fresh sausage plant in Galva, Illinois, and lower repair and
maintenance expenses.
Selling, General and Administrative Expenses
Consolidated S,G&A expenses were 11.9% of sales in the second quarter of fiscal 2011 and 10.3%
of sales through six months of fiscal 2011 compared to 8.3% and 8.4% of sales, respectively, in the
corresponding periods last
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year. The most significant components of S,G&A expenses are wages and fringe benefits, food
products advertising expense and food products transportation costs.
In the restaurant segment, S,G&A expenses were 9.6% of sales in the second quarter of
fiscal 2011 and 7.9% of sales through six months of fiscal 2011 compared to 5.9% and 6.3% of sales,
respectively, in the corresponding periods last year. The increase in the S,G&A ratio in the
second quarter of fiscal 2011 was primarily due to $10.3 million of impairment charges on certain
property, plant and equipment and severance/retirement costs of $0.8 million. An increase in
administrative salary expense and deleverage due to same-store sales declines also contributed to
the increase in S,G&A. In the second quarter of fiscal 2010, we recognized impairment charges of
$1.5 million on certain property, plant and equipment, severance/retirement charges of $0.2 million
and a gain from life insurance proceeds of $1.2 million in the restaurant segment.
In the food products segment, S,G&A expenses were 22.0% of sales in the second quarter of
fiscal 2011 and 21.3% of sales through six months compared to 18.9% and 18.5% of sales,
respectively, in the corresponding periods last year. The increases in the S,G&A expense ratio in
the second quarter and through six months of fiscal 2011 were a result of additional costs
associated with manufacturing productivity initiatives, primarily the $2.8 million in restructuring
charges related to the closure of fresh sausage operations in Galva, Illinois, and Bidwell, Ohio.
Interest
Net interest expense for the second quarter of fiscal 2011 and through six months of fiscal 2011,
compared to the
corresponding periods last year, was as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
(dollars in thousands) | Oct. 29, 2010 | Oct. 23, 2009 | Oct. 29, 2010 | Oct. 23, 2009 | ||||||||||||
Gross interest expense: |
||||||||||||||||
Fixed-rate debt |
$ | 2,116 | $ | 2,398 | $ | 4,569 | $ | 4,985 | ||||||||
Variable-rate debt |
88 | 144 | 133 | 302 | ||||||||||||
2,204 | 2,542 | 4,702 | 5,287 | |||||||||||||
Gross interest income |
| (5 | ) | | (10 | ) | ||||||||||
Net interest expense |
$ | 2,204 | $ | 2,537 | $ | 4,702 | $ | 5,277 | ||||||||
At October 29, 2010, our outstanding debt included $23.0 million on our variable-rate
revolving lines of credit and $149.3 million on our fixed-rate unsecured senior notes. The
decrease in interest expense was primarily the result of lower average borrowings in fiscal 2011
partly offset by a $0.3 million year-over-year reduction in capitalized interest. We reduced our
total debt by $79.9 million during fiscal 2010 and by an additional $17.9 million through the first
six months of fiscal 2011. A change in market interest rates will not impact interest expense
associated with our fixed-rate debt, but will impact our variable-rate debt. For example, a 1%
increase in the benchmark rate used for our revolving lines of credit would increase our annual
interest expense by approximately $0.2 million assuming the $23.0 million outstanding at the end of
the second quarter of fiscal 2011 was outstanding for the entire year.
Taxes
The combined federal and state income tax rate was 33.5% in the second quarter of fiscal 2011
versus 30.8% a year ago.
The lower fiscal 2010 rate was primarily due to the favorable tax treatment of certain
insurance items, including proceeds of $1.2 million we received from corporate-owned life insurance
policies. We anticipate the annual effective tax rate for the entire year of fiscal 2011 to
approximate 34.0%. We reevaluate the combined federal and state income tax rates each quarter.
Therefore, the current projected effective tax rate for the entire year may change.
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Liquidity and Capital Resources
Cash generated from operations and our bank lines of credit were the main sources of funds for
working capital, capital expenditures, debt repayments and share repurchases in the second quarter
of fiscal 2011. Cash and equivalents totaled $17.5 million at October 29, 2010. Our bank lines of
credit total $120.0 million, of which $12.3 million is reserved for certain standby
letters-of-credit. The remaining $107.7 million of our bank lines of credit is available for
liquidity needs, capital expansion and repurchases of Bob Evans common stock. At October 29, 2010,
$23.0 million was outstanding on these lines of credit. During the second quarter of fiscal 2011,
we repurchased 325,000 shares of our outstanding common stock at a cost of $8.9 million. For the
first half of fiscal 2011, we repurchased 495,000 shares of our outstanding common stock at a cost
of $13.3 million. Our Board of Directors has authorized a share repurchase program of up to $25
million for the full year in fiscal 2011.
Capital expenditures consist of purchases of land for future restaurant sites, new and rebuilt
restaurants, production plant improvements, purchases of new and replacement furniture and
equipment, and ongoing remodeling programs. Capital expenditures were $19.7 million through six
months of fiscal 2011 compared to $30.9 million in the corresponding period last year. We expect
to open three new Bob Evans Restaurants in fiscal 2011. We also plan to rebuild 2 and remodel 30
to 35 existing Bob Evans Restaurants in fiscal 2011. We do not plan to open or rebuild any new
Mimis in fiscal 2011, but we plan to remodel three existing Mimis. The majority of capital
expenditures related to the remodels will occur in the second half of fiscal 2011. We expect
capital spending to approximate between $60.0 and $65.0 million for all of fiscal 2011. Capital
expenditures for all of fiscal 2010 were $51.3 million.
We believe that our cash flow from operations, as well as our existing bank lines of credit,
will be sufficient to fund future capital expenditures, working capital requirements, debt
repayments and share repurchases.
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BEST Brand Builders
In fiscal 2011, we continue to focus on the BEST (Bob Evans Special Touch) Brand Builders.
The Brand Builders represent an overall internal approach to managing the company. The five Brand
Builders are:
| Win together as a team | ||
| Consistently drive sales growth | ||
| Improve margins with an eye on customer satisfaction | ||
| Be the BEST at operations execution | ||
| Increase returns on invested capital |
Winning together as a team means focusing on the development of our people. We recognize that
tangible assets alone are not going to transform our business. In order to drive organizational
effectiveness, we need an organizational structure that supports our growth initiatives, rewards
results, and has high-visibility leadership and coaching. We need the right talent in the right
jobs and to prioritize people development at all levels of the organization.
In keeping with these goals, we have restructured our marketing and field operations teams at
the local level. We now have a sales manager in every Mimis, along with assistant managers
dedicated solely to driving sales. These field marketing leaders report directly to the marketing
department.
We are also realigning the structure of Mimis operations team by moving from two territories
to three regions: West, Central and East. We are adding seven additional area coach positions,
going from 15 to 22 area coaches by the end of this fiscal year to reduce the span of control in
our larger markets. This will allow the area coaches to visit their restaurants more often, where
they can conduct more effective restaurant visits, building the capability of the entire management
team and teammates. We will implement the new alignment gradually to allow for appropriate training
and transitioning of our new leaders. As part of this plan, we are also moving some of our
best-performing operations leaders from Bob Evans Restaurant operations to the Mimis Café field
operations team.
The second Brand Builder is to consistently drive sales growth. Our same-store sales trend is
showing sequential improvement at Bob Evans Restaurants. We are beginning to see results from some
of the new sales-building programs under way at both restaurant concepts.
Our strategy at Bob Evans Restaurants is to focus on growth in off-premise sales (which
includes carryout and catering) and phase out off-brand retail items, which consisted of more than
500 items, but contributed less than 2% of total annual sales for Bob
Evans Restaurants. By the end of the
second quarter of fiscal 2011, off-premise sales were accounting for nearly 11% of Bob Evans Restaurants
sales, up almost three points, and year-to-date off-premise sales are up 11%. For the past quarter, we
have promoted our new family meals, which provide food for three to four people under the tag line, 10 Family Meals Under $20. The family meal promotion comprises one
of the incremental layers of sales at Bob Evans Restaurants that has helped us to improve our sales
trend.
We are now allocating advertising funds for Bob Evans Restaurants based on market
contribution, instead of spending disproportionate amounts in underperforming markets, as we had in
the first quarter. This is another change that has helped us demonstrate sequential improvement in
same-store sales.
In early November 2010, we introduced our new Big Farm Burger platters at Bob Evans
Restaurants, featuring a half-pound of 100% Black Angus beef, seasoned with our signature spice
blend, then stacked with farm-fresh toppings on a wheat-dusted brioche bun. Available in seven
different varieties, the Big Farm Burger platters range in price from $6.99 to $9.99. We are
pleased with the sales of the Big Farm Burgers thus far.
As noted in the Sales section above, the entire same-store sales decline at Bob Evans
Restaurants was due to the planned phase-out of off-brand inventory items designed to shift the
offering toward items consistent with our Taste of the Farm brand positioning. We will be
implementing our new program throughout fiscal 2011, and we expect that retail sales will become a
positive contributor to same-store sales again after the transition is complete at the end of
fiscal 2011.
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The Taste of the Farm consists of food and food-related items, which are much more
consistent with our brand image than retail items sold in the previous Corner Cupboard retail
sales area. In addition, we also plan to allocate more space in our Bob Evans Restaurants to
enhance off-premise sales. In the second quarter of 2011, we launched online ordering at Bob Evans
Restaurants and those orders now represent 5% of the brands total off-premise sales.
At Mimis, we are focusing on driving off-premise sales. Last year, off-premise sales
comprised about 4% of Mimis total sales, compared to 8% of total sales at Bob Evans Restaurants.
Our goal is to increase Mimis off-premise sales to be more in line with those of Bob Evans
Restaurants, and we are going to focus our off-premise menu on a fixed-price strategy similar to
the approach at Bob Evans Restaurants, which now offers 10 family meals for less than $20.
We are also striving to grow Mimis sales through online marketing. Mimis e-club continues
to grow, with a current membership of 600,000 and a goal of reaching 750,000 members by the end of
the calendar year. This is an increase from only 100,000 members just 18 months ago. We have seen
positive same-store sales on days when we have offered online promotions through the e-club,
including free muffin offers and buy-one, get-one free breakfast offers. Mimis breakfast business
comprises more than 20% of sales, and breakfast same-store sales are now trending positive.
We are working to drive sales in our food products business. During the second quarter, we
introduced two new retail products: beef gravy and chicken gravy, which are perfect complements to
our top-selling mashed potatoes. We have also introduced two new larger sizes of our sausage gravy
products.
We have also shifted our sales strategy by focusing on driving new authorizations of our top
20 items in the top 20 retail accounts rather than offering deep discounts to customers. We
believe the new approach will enable us to build sustained sales growth, rather than offering
temporary price reductions for limited-time business. We are achieving success with this strategy,
as we have increased frozen products distribution in more than 1,000 Walmart stores and added new
sausage distribution in more than 800 Food Lion locations in the Southeast and Mid-Atlantic
regions.
The third Brand Builder is to improve margins with an eye on customer satisfaction. We
completed implementation of a new actual-versus-theoretical food cost program at Bob Evans
Restaurants and Mimis Café. We believe this program will help us be more precise in our
commodities purchasing and aid our efforts to reduce food costs.
In our food products segment, we reduced promotional spending by $10.8 million and $13.9
million in the second quarter and through six months of fiscal 2011, respectively, due to our shift
from offering deep discounts to driving new authorizations described in the second Brand Builder.
This resulted in an operating margin in the second quarter that was much better than the previous
quarters breakeven results.
We are also improving margins in our food products segment by improving operating efficiency
in our manufacturing plants. We implemented several manufacturing productivity initiatives that
are already beginning to lower manufacturing costs. Two such initiatives were the closings of the
fresh sausage production line at our plant in Bidwell, Ohio, and our food production facility in
Galva, Illinois, in the second quarter, due to overcapacity in our fresh sausage processing plants.
See Note 7 to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for
additional disclosures. We closed these fresh sausage operations because we could not achieve our
traditional operating margins with our previous cost structure and sow costs at record highs, and
we also could not pass on the full impact of the sow-cost increase to our customers.
With the lean manufacturing improvements we have made at our existing plants in Hillsdale,
Michigan, Xenia, Ohio, and Richardson, Texas, we now have more-than-sufficient capacity to absorb
fresh sausage manufacturing work from both Galva and Bidwell. We also anticipate flexing our
capacity to grow our business as we gain new authorizations.
Our fourth Brand Builder is to be the BEST at operations execution. We recently introduced
new TRED station guides at Bob Evans Restaurants, and we are in the process of implementing a
similar program at Mimis.
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TRED, which stands for Target Setting, Rush Ready, Equipment and Technology, and Deployment,
provides the model for what we call BEST for the Guest. The ultimate goal of BEST for the Guest
is to improve food quality, drive speed of service and enhance our hospitality.
One
of Mimis BEST for the Guest initiatives is to reduce menu complexity. We cancelled the
planned introduction of several new menu items and we also plan to eliminate approximately 20% of
the current menu items. We believe this will reduce menu complexity and improve our food quality,
speed of service and hospitality at Mimis.
Our fifth and final Brand Builder is to increase returns on invested capital. We plan to
spend approximately $60 to $65 million on capital expenditures during fiscal 2011. As previously
stated in this MD&A, capital expenditures in the restaurant segment will be focused on remodeling
existing restaurants. We have remodeled five Bob Evans Restaurants so far in fiscal 2011. These
remodeled restaurants include an updated concept look as well as a bakery and enhanced carryout and
retail areas designed to drive incremental sales layers. The initial sales results from these five
remodeled Bob Evans Restaurants are encouraging. We plan to remodel 30 to 35 Bob Evans Restaurants
during fiscal 2011, including an entire model market, which we will use to assess the performance
of the updated concept look and incremental sales layers.
We remain committed to our current quarterly dividend rate of $0.20 per share. The solid
overall financial position of our Company gives us the confidence to pay dividends to our
stockholders while we continue to repurchase shares and reduce debt.
Our Board of Directors has authorized a share repurchase program of up to $25 million for this
fiscal year, and we have utilized $13.3 million of this authorization during the first half of
fiscal 2011 by purchasing 495,000 shares.
We continue to strengthen our balance sheet as part of our prudent capital allocation strategy
as total debt has been reduced by $17.9 million in the first half of fiscal 2011, on top of our
$79.9 million debt reduction last year.
In summary, we remain focused on the five BEST Brand Builders and continue to implement them
with a sense of urgency.
Business Outlook
Our outlook for fiscal 2011 relies on a number of assumptions, as well as the risk factors
included in our SEC filings. We anticipate consolidated net sales to remain relatively flat in
fiscal 2011 at about $1.7 billion. We increased our previously issued outlook for fiscal 2011
operating income to $108.0 to $112.0 million, excluding the pretax charges of $13.9 million, shown
in the GAAP to non-GAAP reconciliation table below, from our previous outlook of $105.0 to $110.0
million. We expect Bob Evans Restaurants to experience full-year same-store sales of negative 2.0%
to flat and Mimis to experience full-year same-store sales of negative 5.0% to negative 2.0%. We
expect gradual sequential improvement in restaurant segment sales in the second half of fiscal 2011
with positive comparisons for Bob Evans Restaurants and flat
comparisons for Mimis in the final period of the fiscal year. We expect total net sales to approximate $975.0 to $985.0 million at Bob Evans
Restaurants and $380.0 to $390.0 million at Mimis. We expect the restaurant segments
operating margin to be approximately 6.0% to 6.5% for the full fiscal year, excluding the pretax
charges of $11.1 million shown in the GAAP to non-GAAP reconciliation table below. We expect
margin pressure from increasing commodity costs, offset by the benefit of our
actual-versus-theoretical food cost program, increased sales of higher margin items, effective
supply chain management and improving operating wages through expected labor efficiencies.
In the food products segment, we expect overall net sales of $320.0 to $330.0 million for the
full fiscal year. We anticipate that sow costs will average approximately $55 to $60 per
hundredweight in fiscal 2011 with the full-year average at the high end of this range. We expect
the food products segments fiscal 2011 operating income margin to be approximately 7.0% to 8.0%,
excluding the pretax charges of $2.8 million shown in the GAAP to non-GAAP reconciliation table
below. We expect the food products segment operating income margin to be positively impacted by
the implementation of price increases, better management of promotional discounts and cost savings
related to manufacturing productivity initiatives.
We are projecting net interest expense of approximately $9.0 to $9.5 million for fiscal 2011.
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We estimate that our effective tax rate will approximate 34.0% for all of fiscal 2011. We
project weighted-average diluted shares outstanding to be approximately 30.5 million shares for the
fiscal year.
We expect capital expenditures to approximate $60.0 to $65.0 million in fiscal 2011, an
increase in our capital spending from $51.3 million in fiscal 2010. The increase is largely due to
the greater number of Bob Evans Restaurants and Mimis remodels we expect to complete in fiscal
2011. At Bob Evans Restaurants we plan to open three new restaurants, rebuild 2 restaurants and
remodel 30 to 35 existing restaurants in fiscal 2011. The majority of capital expenditures related
to the remodels will take place in the second half of fiscal 2011. At Mimis, we do not plan to
open or rebuild any restaurants, but plan to remodel three existing restaurants in fiscal 2011.
Depreciation and amortization expense for fiscal 2011 should approximate $84.0 to $86.0 million.
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Below is a reconciliation of fiscal 2011 estimated reported consolidated operating income to estimated adjusted
operating income:
Fiscal 2011 estimated reported operating income: |
$ | 94.1 to 98.1 million | ||
Fiscal 2011 2Q fixed asset impairment: |
10.3 million | |||
Fiscal 2011 2Q manufacturing productivity initiatives: |
2.8 million | |||
Fiscal 2011 2Q retirement / severance: |
0.8 million | |||
Fiscal 2011 estimated adjusted operating income: |
$ | 108 to $112 million |
Below is a reconciliation of fiscal 2011 estimated reported restaurant segment operating margin to estimated
adjusted restaurant segment operating margin:
Fiscal 2011 estimated reported operating margin: |
5.1 to 5.7 percent | |||
Fiscal 2011 2Q fixed asset impairment ($10.3 million): |
0.7 to 0.8 percent | |||
Fiscal 2011 2Q retirement / severance ($0.8 million): |
0.1 percent | |||
Fiscal 2011 estimated adjusted operating margin: |
6.0 to 6.5 percent |
Below is a reconciliation of fiscal 2011 estimated reported food products segment operating margin to estimated
adjusted food products segment operating margin:
Fiscal 2011 estimated reported operating margin: |
6.1 to 7.2 percent | |||
Fiscal 2011 2Q mfg. productivity initiatives ($2.8
million): |
0.8 to 0.9 percent | |||
Fiscal 2011 estimated adjusted operating margin: |
7.0 to 8.0 percent |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments for speculative or hedging purposes.
We maintain our cash and cash equivalents in financial instruments with maturities of three months
or less when purchased.
At October 29, 2010, our outstanding debt included $23.0 million on our variable-rate
revolving lines of credit and $149.3 million of fixed-rate unsecured senior notes. A change in
market interest rates will not impact interest expense associated with our fixed-rate debt, but
will impact our variable-rate debt. For example, a 1.0% increase in the benchmark rate used for
our revolving lines of credit would increase our annual interest expense by $0.2 million, assuming
the $23.0 million outstanding at October 29, 2010, was outstanding for the entire fiscal year.
We purchase certain commodities such as beef, pork, poultry, seafood, produce and dairy
products. These commodities are generally purchased based upon market prices established with
suppliers. These purchase arrangements may contain contractual features that fix the price paid
for certain commodities. We do not use financial instruments to hedge commodity prices because
these purchase arrangements help control the ultimate cost paid and most commodity price
aberrations are generally short-term in nature.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of our management, including Bob Evans principal executive officer and
principal financial officer, we have evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, Bob Evans principal executive officer and principal financial officer have concluded
that:
information required to be disclosed by Bob Evans in this Quarterly Report on
Form 10-Q and other reports that Bob Evans files or submits under the Exchange Act would
be accumulated and communicated to Bob Evans management, including its principal
executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure;
information required to be disclosed by Bob Evans in this Quarterly Report on
Form 10-Q and other reports that Bob Evans files or submits under the Exchange Act would
be recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms; and
Bob Evans disclosure controls and procedures are effective as of the end of the
period covered by this Quarterly Report on Form 10-Q to ensure that material information
relating to Bob Evans and its consolidated subsidiaries is made known to them,
particularly during the period in which the periodic reports of Bob Evans, including
this Quarterly Report on Form 10-Q, are being prepared.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Like many restaurant companies and retail employers, SWH Corporation, a wholly owned indirect
subsidiary of Bob Evans, which does business as Mimis Café, has been faced with allegations of
purported class-wide wage and hour violations in California. The following is a brief description
of the current California class action matters pending against SWH Corporation.
On October 28, 2008, a class action complaint entitled Leonard Flores, et al. v. SWH
Corporation d/b/a Mimis Café was filed in Orange County California Superior Court. Mr. Flores was
employed as an assistant manager of Mimis Café until September 2006 and purports to represent a
class of assistant managers who are allegedly similarly situated. Mimis Café classified its
assistant managers as exempt employees until October 2009. The case involves claims that current
and former assistant managers working in California from October 2004 to October 2009 were
misclassified by Mimis Café as exempt employees. As a result, the complaint alleged that these
assistant managers were deprived of overtime pay, rest breaks and meal periods as required for
nonexempt employees under California wage and hour laws. The complaint sought injunctive relief,
equitable relief, unpaid benefits, penalties, interest and attorneys fees and costs. Although we
believe Mimis Café properly classified its assistant managers as exempt employees under California
law, we elected to resolve the Flores lawsuit through voluntary mediation. The Orange County
California Superior Court granted final approval of a settlement on June 10, 2010, and we funded
the settlement of $1,108,722 on July 14, 2010. Payment to class members was mailed in August and
the court dismissed the case.
On October 13, 2009, a class action complaint entitled Edder Diaz and Rosolyn Gray, et al. vs.
SWH Corporation d/b/a Mimis Café was filed in Alameda County California Superior Court. In a March
2010 amended complaint, Mr. Diaz and Ms. Gray purport to represent a class of servers, bartenders,
front-of-house trainers, to-go servers, shift managers, or shift manager expeditors, who are
allegedly similarly situated. In a second amended complaint filed in October 2010, Mr. Diaz and
Ms. Gray allege that current and former nonexempt employees working in these positions in
California from July 26, 2006, to August 31, 2010 (1) were not reimbursed for certain expenses
incurred in connection with the discharge of their duties, (2) were denied rest breaks and meal
periods as required for nonexempt employees under California wage and hour laws, (3) were not paid
minimum wage and overtime for time spent working off-the-clock during, or in connection with, a
meal period, and (4) were required to pay for cash shortages. The second amended complaint seeks
unspecified damages, penalties, interest and attorneys fees and costs.
Although we believe Mimis Café has complied with the California wage and hour laws at issue
in the Diaz lawsuit, we elected to resolve the lawsuit voluntarily. In October 2010, we entered
into a Memorandum of Understanding with the Diaz class representatives and their legal counsel to
settle the lawsuit for $340,000, inclusive of payments to class members, enhancements to the class
representatives, costs of administration, and plaintiffs attorney fees and costs related to the
lawsuit. The proposed settlement is subject to court approval. The joint motion for preliminary
approval of the settlement is pending before the Alameda County California Superior Court, and the
hearing is scheduled for December 8, 2010.
We are from time-to-time involved in ordinary and routine litigation, typically involving
claims from customers, employees and others related to operational issues common to the restaurant
and food manufacturing industries. In addition to the class action lawsuits described above, we
are involved with a number of pending legal proceedings incidental to our business. Management
presently believes that the ultimate outcome of these proceedings, individually or in the
aggregate, will not have a material adverse effect on our financial position, cash flows or results
of operations.
ITEM 1A. RISK FACTORS.
Except as set forth below, there have been no material changes from the risk factors disclosed
in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended April 30, 2010.
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If Mimis Cafés actual performance does not meet the forecasts contained in our five-year
strategic plan, we may need to take a noncash impairment charge related to the intangible assets
associated with the Mimis Café concept.
At October 29, 2010, we had intangible assets totaling $41.1 million on our balance sheet
related to our acquisition of Mimis Café. Specifically, this amount includes $34.0 million for
the unamortized Mimis Café trade name and $7.1 million for the Mimis Café restaurant concept,
which is amortized over a 15-year life. We are required to perform annual impairment tests of our
intangible assets (or more frequently if events or changes in circumstances indicate the asset
might be impaired). Impairment testing of the Mimis Café trade name requires that we determine its
fair value. If the fair value of the asset is less than its $34.0 million carrying value, an
impairment charge would be recognized in an amount equal to the difference. The impairment test
for the $7.1 million restaurant concept asset involves a three-step process, whereby we first
consider whether indicators of impairment are present. If indicators are present, the second step
is to compare the sum of the undiscounted future cash flows attributable to the asset to its
carrying value. In the event that the undiscounted cash flows are less than the carrying value,
the third step is to determine the fair value of the restaurant concept. If the fair value is less
than its carrying value, an impairment charge would be recognized for the difference. We use the
relief-from-royalty method, which is an income approach to valuation, to determine the fair values
of the trade name and restaurant concept intangible assets. Using the relief-from-royalty method,
the fair values are impacted by projected sales, including plans for new restaurant development and
same-store sales trends.
In the fourth quarter of fiscal 2010, we completed our annual impairment tests of intangible
assets. The assumptions we used for projected sales were based on our current five-year
development and financial forecasts for Mimis Café. Using these assumptions, the fair values of
the Mimis Café trade name and restaurant concept exceeded their carrying values, and as a result,
no impairment charges were recorded. Although we believe our current plans and forecasts to be
achievable, there is the potential that our actual future results could differ from these
forecasts, especially given Mimis Cafés prolonged negative same-store sales trend. While the
company identified certain underperforming restaurants that required an impairment charge in the
second quarter, overall year-to-date results for Mimis Café continue to meet performance
expectations. Accordingly, no impairment indicators were identified related to the Mimis trade
name or restaurant concept as of the second quarter of fiscal 2011. If Mimis Cafés performance
falls below expectations in future periods, impairment charges related to Mimis Café trade name
and restaurant concept could arise.
Compliance with new and changing regulations related to corporate governance and public disclosure
will result in additional expenses and pose challenges for our management team.
New as well as changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) and the rules and regulations promulgated and to be promulgated under the
Dodd-Frank Act, as well as under the Sarbanes-Oxley Act of 2002, and the rules and regulations of
the Securities and Exchange Commission and The NASDAQ Stock Market, have created uncertainty for
public companies and increased our costs and time that our Board of Directors and management must
devote to complying with these rules and regulations. Our Board of Directors and management team
will need to devote significant time and financial resources to comply with both existing and
evolving standards for corporate governance for public companies, which will lead to increased
general and administrative expenses and a diversion of management time and attention from revenue
generating activities.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On May 26, 2010, the Board of Directors authorized a share repurchase program of up to $25.0
million for fiscal 2011. The program authorizes Bob Evans to repurchase its outstanding common
stock in the open market or through privately negotiated transactions.
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The following table provides information on Bob Evans purchases of its common stock during the
three fiscal months ended October 29, 2010:
Total Value of | Maximum Value of | |||||||||||||||||||
Shares Purchased | Shares that May | |||||||||||||||||||
as Part of Publicly | Yet be Purchased | |||||||||||||||||||
Total Value of | Average Price Paid | Announced Plans | Under the Plans or | |||||||||||||||||
Period | Shares Purchased | Per Share | or Programs | Programs | ||||||||||||||||
7/31/10-8/27/10 | $ | 2,566,851 | (a) | $ | 25.64 | $ | 2,563,580 | $ | 18,081,010 | |||||||||||
8/28/10-9/24/10 | 2,754,093 | 27.54 | 2,754,093 | 15,326,917 | ||||||||||||||||
9/25/10-10/29/10 | 3,623,051 | 28.98 | 3,623,051 | 11,703,866 | ||||||||||||||||
Total | $ | 8,943,995 | (a) | $ | 27.51 | $ | 8,940,724 | $ | 11,703,866 | |||||||||||
(a) | Includes 123 shares of common stock repurchased by Bob Evans Farms, Inc. in connection with employee stock- for-stock exercises of stock options. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION.
Not Applicable
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Table of Contents
ITEM 6. EXHIBITS
EXHIBIT | ||||
NO. | DESCRIPTION | LOCATION | ||
10
|
Bob Evans Farms Executive Change in Control and Severance Plan. | Incorporated by reference to Exhibit 10 to the Companys Current Report on Form 8-K filed with the Commission on November 23, 2010 (File No. 0-01667)* | ||
21
|
Subsidiaries of the Registrant as of November 23, 2010. | Filed herewith | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) | Filed herewith | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) | Filed herewith | ||
32.1
|
Section 1350 Certification (Principal Executive Officer) | Filed herewith | ||
32.2
|
Section 1350 Certification (Principal Financial Officer) | Filed herewith | ||
101.INS
|
XBRL Instance Document | ** | ||
101.SCH
|
XBRL Taxonomy Extension Schema Document | ** | ||
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | ** | ||
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document | ** | ||
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document | ** | ||
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document | ** |
* | Denotes management contract or compensatory plan or agreement | |
** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed herewith. |
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Table of Contents
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.
BOB EVANS FARMS, INC. |
||||
By: | /s/ Steven A. Davis | |||
Steven A. Davis | ||||
Chairman and Chief Executive Officer (Principal Executive Officer) |
||||
By: | /s/ Tod P. Spornhauer | |||
Tod P. Spornhauer* | ||||
Chief Financial Officer (Principal Financial Officer) |
||||
December 8, 2010 | ||
Date |
* | Tod P. Spornhauer has been duly authorized to sign on behalf of the Registrant as its principal financial officer. |
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Table of Contents
INDEX TO EXHIBITS
Quarterly Report on Form 10-Q
Dated December 8, 2010
Dated December 8, 2010
Bob Evans Farms, Inc.
Exhibit | ||||
No. | Description | Location | ||
10
|
Bob Evans Farms Executive Change in Control and Severance Plan. | Incorporated by reference to Exhibit 10 to the Companys Current Report on Form 8-K filed with the Commission on November 23, 2010 (File No. 0-01667)* | ||
21
|
Subsidiaries of the Registrant as of November 23, 2010. | Filed herewith | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) | Filed herewith | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) | Filed herewith | ||
32.1
|
Section 1350 Certification (Principal Executive Officer) | Filed herewith | ||
32.2
|
Section 1350 Certification (Principal Financial Officer) | Filed herewith | ||
101.INS
|
XBRL Instance Document | ** | ||
101.SCH
|
XBRL Taxonomy Extension Schema Document | ** | ||
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | ** | ||
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document | ** | ||
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document | ** | ||
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document | ** |
* | Denotes management contract or compensatory plan or agreement | |
** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed herewith. |
-26-