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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 28, 2005
OR
[ ] 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.
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(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
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(Address of principal executive offices)
(Zip Code)
(614) 491-2225
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(Registrant's telephone number, including area code)
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(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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of February 25, 2005, the registrant had issued 42,638,118 common
shares, of which 35,362,095 were outstanding.
-1-
BOB EVANS FARMS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Jan. 28, 2005 April 30, 2004
Unaudited Audited
------------- --------------
ASSETS
Current assets
Cash and equivalents $ 12,365 $ 3,986
Accounts receivable 17,857 13,413
Inventories 24,581 19,540
Deferred income taxes 8,869 8,869
Prepaid expenses 2,925 1,664
----------- ----------
TOTAL CURRENT ASSETS 66,597 47,472
Property, plant and equipment 1,321,708 1,152,461
Less accumulated depreciation 403,944 369,064
----------- ----------
NET PROPERTY, PLANT AND EQUIPMENT 917,764 783,397
Other assets
Deposits and other 2,673 3,075
Long-term investments 19,150 17,791
Deferred income taxes 14,931 14,931
Goodwill 105,087 1,567
----------- ----------
TOTAL OTHER ASSETS 141,841 37,364
----------- ----------
$ 1,126,202 $ 868,233
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 38,600 $ 34,620
Current maturities of long-term debt 4,000 4,000
Accounts payable 21,770 12,390
Dividends payable 4,243 4,229
Federal and state income taxes 26,248 11,375
Accrued wages and related liabilities 19,717 20,887
Self insurance 22,281 17,441
Other accrued expenses 54,800 40,905
----------- ----------
TOTAL CURRENT LIABILITIES 191,659 145,847
Long-term liabilities
Deferred compensation 16,391 13,519
Deferred income taxes 56,361 54,371
Long-term debt 211,334 24,333
----------- ----------
TOTAL LONG-TERM LIABILITIES 284,086 92,223
Stockholders' equity
Common stock, $.01 par value; authorized 100,000,000
shares; issued 42,638,118 shares at Jan. 28, 2005,
and April 30, 2004 426 426
Preferred stock, authorized 1,200 shares; issued 120
shares at Jan. 28, 2005, and April 30, 2004 60 60
Capital in excess of par value 149,322 149,967
Retained earnings 632,095 613,371
Treasury stock, 7,277,065 shares at Jan. 28, 2005
and 7,397,219 shares at April 30, 2004, at cost (131,446) (133,661)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 650,457 630,163
----------- ----------
$ 1,126,202 $ 868,233
=========== ==========
The accompanying notes are an integral part of the financial statements.
-2-
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
Jan. 28, 2005 Jan. 23, 2004 Jan. 28, 2005 Jan. 23, 2004
------------- ------------- ------------- -------------
NET SALES $ 380,976 $ 291,397 $ 1,077,611 $ 884,129
Cost of sales 119,305 84,049 325,824 249,791
Operating wage and fringe benefit expenses 139,969 102,094 389,194 307,161
Other operating expenses 62,051 42,884 173,704 130,751
Selling, general and administrative expenses 30,002 25,180 86,947 76,436
Depreciation and amortization expense 16,530 12,733 46,555 36,909
----------- ----------- ----------- -----------
OPERATING INCOME 13,119 24,457 55,387 83,081
Net interest expense 2,766 210 6,337 1,064
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 10,353 24,247 49,050 82,017
PROVISIONS FOR INCOME TAXES 3,717 8,656 17,609 29,280
----------- ----------- ----------- -----------
NET INCOME $ 6,636 $ 15,591 $ 31,441 $ 52,737
=========== =========== =========== ===========
EARNINGS PER SHARE - BASIC $ 0.19 $ 0.45 $ 0.89 $ 1.52
=========== =========== =========== ===========
EARNINGS PER SHARE - DILUTED $ 0.19 $ 0.44 $ 0.88 $ 1.49
=========== =========== =========== ===========
CASH DIVIDENDS PER SHARE $ 0.12 $ 0.12 $ 0.36 $ 0.36
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements
-3-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in thousands)
Nine Months Ended
-----------------
Jan. 28, 2005 Jan. 23, 2004
------------- -------------
OPERATING ACTIVITIES:
Net income $ 31,441 $ 52,737
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 46,555 36,909
(Gain) loss on sale of assets 361 (352)
Gain on long-term investments (502) (1,711)
Deferred compensation 740 4,191
Compensation expense attributable to stock plans 845 931
Cash provided by (used for) current assets
and current liabilities:
Accounts receivable (3,141) (2,602)
Inventories (1,654) (886)
Prepaid expenses (212) (570)
Accounts payable 1,314 1,462
Federal and state income taxes 15,586 15,164
Accrued wages and related liabilities (4,503) (242)
Self insurance 2,153 2,768
Other accrued expenses 5,037 4,984
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 94,020 112,783
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (90,692) (102,240)
Acquisition of business (178,893) -
Purchase of long-term investments (1,183) (1,602)
Proceeds from sale of property, plant and equipment 4,521 3,367
Other 758 (681)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (265,489) (101,156)
FINANCING ACTIVITIES:
Cash dividends paid (12,703) (12,150)
Line of credit 3,980 195
Proceeds from debt issuance 372,775 -
Principal payments on debt (185,774) (3,000)
Proceeds from issuance of treasury stock 1,570 8,098
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 179,848 (6,857)
----------- -----------
Increase in cash and equivalents 8,379 4,770
Cash and equivalents at the beginning of the period 3,986 9,066
----------- -----------
Cash and equivalents at the end of the period $ 12,365 $ 13,836
=========== ===========
The accompanying notes are an integral part of the financial statements.
-4-
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Unaudited Financial Statements
The accompanying unaudited consolidated financial statements of Bob
Evans Farms, Inc. ("Bob Evans") and its subsidiaries (collectively, Bob
Evans and its subsidiaries are referred to as the "company") 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 the company's Form 10-K
filing. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
of the company's financial position and results of operations have been
included. The financial statements are not necessarily indicative of the
results of operations for a full fiscal year. No significant changes have
occurred in the disclosures made in Bob Evans' Form 10-K for the fiscal
year ended April 30, 2004 (refer to the 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 is reported net income. The denominator is based on
the following weighted-average number of common shares outstanding:
(in thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
Jan. 28, 2005 Jan. 23, 2004 Jan. 28, 2005 Jan. 23, 2004
------------- ------------- ------------- -------------
Basic 35,326 34,990 35,296 34,750
Effect of dilutive
stock options 320 682 358 637
------ ------ ------ ------
Diluted 35,646 35,672 35,654 35,387
====== ====== ====== ======
-5-
3. Stock-Based Employee Compensation
The company accounts for its stock-based employee compensation plans
under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, no compensation expense has been
recognized for stock options when the exercise price of the options is
equal to or greater than the fair market value of the stock at the grant
date.
The following table illustrates the effect on net income and
earnings per share if the company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock based employee
compensation:
(in thousands, except per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
Jan. 28, 2005 Jan. 23, 2004 Jan. 28, 2005 Jan. 23, 2004
------------- ------------- ------------- -------------
NET INCOME, AS REPORTED $ 6,636 $ 15,591 $ 31,441 $ 52,737
DEDUCT: Stock-based employee
compensation cost, net of related tax
effects, determined under the fair value
method for all awards (1,111) (1,151) (4,236) (3,116)
-------- --------- --------- ---------
NET INCOME, PRO FORMA $ 5,525 $ 14,440 $ 27,205 $ 49,621
-------- --------- --------- ---------
EARNINGS PER SHARE - BASIC
As reported $ 0.19 $ 0.45 $ 0.89 $ 1.52
Pro forma $ 0.16 $ 0.41 $ 0.77 $ 1.43
EARNINGS PER SHARE - DILUTED
As reported $ 0.19 $ 0.44 $ 0.88 $ 1.49
Pro forma $ 0.15 $ 0.41 $ 0.76 $ 1.40
-6-
4. Goodwill
Goodwill, which represents the cost in excess of net assets
acquired, was $105,087,000 and $1,567,000 at January 28, 2005 and April
30, 2004, respectively. The increase in goodwill is due to the acquisition
of SWH Corporation (d/b/a Mimi's Cafe) (see note 6 below) in the first
quarter of fiscal 2005. SFAS No. 142, Goodwill and Other Intangible
Assets, requires an annual impairment test instead of amortization of
goodwill. The company performs the annual test at the end of the fourth
quarter.
5. Industry Segments
The company's operations include restaurant operations and the
processing and sale of food and related products. The revenues from these
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 the company's operating segments is summarized
as follows:
(in thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
Jan. 28, 2005 Jan. 23, 2004 Jan. 28, 2005 Jan. 23, 2004
------------- ------------- ------------- -------------
Sales
Restaurant Operations $ 316,205 $ 233,159 $ 905,990 $ 727,090
Food Products 75,342 67,059 201,527 182,452
--------- --------- ---------- ---------
391,547 300,218 1,107,517 909,542
Intersegment sales of food products (10,571) (8,821) (29,906) (25,413)
--------- --------- ---------- ---------
Total $ 380,976 $ 291,397 $1,077,611 $ 884,129
========= ========= ========== =========
Operating Income
Restaurant Operations $ 9,949 $ 17,894 $ 51,246 $ 70,314
Food Products 3,170 6,563 4,141 12,767
--------- --------- ---------- ---------
Total $ 13,119 $ 24,457 $ 55,387 $ 83,081
========= ========= ========== =========
6. Acquisition and Debt Issuance
On July 7, 2004, the company acquired all of the stock of SWH
Corporation (d/b/a Mimi's Cafe) for approximately $103 million in cash,
plus the assumption of approximately $79 million in outstanding
indebtedness.
SWH Corporation, based in Tustin, California, operates 84
company-owned Mimi's Cafe restaurants in 10 states, with most locations in
California and other western states. The restaurants are open for
breakfast, lunch and dinner, and offer a wide variety of freshly prepared
food in an atmosphere reminiscent of a New Orleans cafe or European
bistro.
-7-
The transaction was accounted for using the purchase method of
accounting as required by SFAS No. 141, Business Combinations, and
accordingly, the results of operations of SWH Corporation have been
included in the company's consolidated financial statements from the date
of acquisition.
The primary reason for the acquisition was to add a complementary
growth vehicle in the casual segment of the restaurant industry. The
company attributes the goodwill associated with the transaction to the
long-term historical financial performance and the anticipated future
performance of SWH Corporation.
The company is in the process of obtaining third-party valuations of
certain intangible assets of SWH Corporation; thus, the purchase price
allocation required by SFAS No. 141 has not yet been finalized.
The acquisition was financed through a committed credit facility of
approximately $183 million; the proceeds of which were used to purchase
all of the outstanding stock of SWH Corporation, repay existing
indebtedness of SWH Corporation and pay certain transaction expenses. The
credit facility was refinanced on July 28, 2004 through a private
placement of $190 million in unsecured senior notes. Maturities range from
3 to 12 years, with a weighted average interest rate of 4.9%.
The following table illustrates the pro-forma impact on certain
financial results if the acquisition had occurred at the beginning of
fiscal 2004. The pro-forma financial information does not purport to be
indicative of the operating results that would have been achieved had the
acquisition been consummated at the beginning of fiscal 2004, and should
not be construed as representative of future operating results.
(in thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
Jan. 28, 2005 Jan. 23, 2004 Jan. 28, 2005 Jan. 23, 2004
------------- ------------- ------------- -------------
Net Sales $ 380,976 $ 359,903 $1,128,280 $ 1,072,610
Net Income $ 6,636 $ 15,847 $ 31,741 $ 52,191
Earnings Per Share:
Basic $ 0.19 $ 0.45 $ 0.90 $ 1.50
Diluted $ 0.19 $ 0.44 $ 0.89 $ 1.47
7. New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board
issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for
-8-
Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
SFAS 123 (R) must be adopted no later than July 30, 2005. Early
adoption will be permitted in periods in which the financial statements
have not yet been issued. The company expects to adopt SFAS 123(R) on
April 30, 2005 (the beginning of fiscal 2006).
As permitted by SFAS 123, the company currently accounts for
share-based payments to employees using APB Opinion No. 25's intrinsic
value method and, as such, generally recognizes no compensation cost for
employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair
value method will have a significant impact on our results of operations,
although it will have no impact on the company's overall financial
position. The impact of adoption of SFAS 123(R) cannot be predicted at
this time because it will depend on levels of share-based payments granted
in the future. However, had the company adopted SFAS 123(R) in prior
periods, the impact of that standard would have approximated the impact of
SFAS 123 as described in the disclosure of pro forma net income and
earnings per share in Note 3 above.
8. Contingencies
In January 2005, the company received an assessment from the State
of Ohio related to corporate franchise tax for fiscal years 1998-2003. The
company is petitioning the State of Ohio for a reassessment as the company
believes its positions on tax returns filed are correct. However, in the
event that the company does not ultimately prevail, management believes
that recorded reserves are adequate to meet any future tax-related
payments to the State of Ohio.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL OVERVIEW
As of January 28, 2005, the company owned and operated 675 full-service
restaurants, including 587 Bob Evans Restaurants in 21 states and 88 Mimi's Cafe
restaurants in 12 states. Bob Evans Restaurants are primarily located in the
Midwest, Mid-Atlantic, and Southeast regions of the United States. Mimi's Cafe
restaurants are primarily located in California and other western states. The
company acquired SWH Corporation (d/b/a Mimi's Cafe) ("Mimi's") in the first
quarter of fiscal 2005 (see Note 6 of the consolidated financial statements).
Revenue in the restaurant segment is recognized at the point of sale. The
company also produces and distributes fresh and fully cooked pork products and
other complementary food products primarily to grocery stores in the East North
Central, Mid-Atlantic, Southern and Southwestern United States. Frozen rolls,
biscuits and entrees are distributed primarily to grocery stores in Ohio and
various surrounding areas. Revenue in the food products segment is recognized
when products are delivered to the retailer.
The following table reflects data for the company's third fiscal quarter
ended January 28, 2005, compared to the prior year's third fiscal quarter ended
January 23, 2004. The consolidated information is derived from the accompanying
consolidated statements of income. Also included is data for the company's 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.
-10-
(DOLLARS IN CONSOLIDATED RESTAURANT FOOD PRODUCTS
THOUSANDS) RESULTS SEGMENT SEGMENT
------- ------- -------
Q3 Q3 Q3 Q3 Q3 Q3
2005 2004 2005 2004 2005 2004
--------- --------- --------- --------- -------- --------
Net sales $ 380,976 $ 291,397 $ 316,205 $ 233,159 $ 64,771 $ 58,238
Operating income $ 13,119 $ 24,457 $ 9,949 $ 17,894 $ 3,170 $ 6,563
Cost of sales 31.3% 28.9% 26.5% 24.7% 54.7% 45.6%
Operating wages 36.8% 35.0% 41.8% 40.5% 11.9% 13.0%
Other operating 16.3% 14.7% 18.6% 17.2% 5.3% 5.0%
S.G.&A. 7.9% 8.6% 5.4% 5.3% 20.1% 21.8%
Depr. & amort. 4.3% 4.4% 4.6% 4.6% 3.1% 3.3%
--------- --------- --------- --------- -------- --------
Operating income 3.4% 8.4% 3.1% 7.7% 4.9% 11.3%
RESTAURANT SEGMENT OVERVIEW
The ongoing economic and industry-wide factors relevant to the restaurant
segment include: competition, same-store sales (defined in the "Sales" section
below), labor and fringe benefit expenses, commodity prices, energy prices,
restaurant openings and closings, governmental initiatives, food safety and
other risks such as the economy, weather and consumer acceptance. For the third
quarter of fiscal 2005, the greatest impact on restaurant segment profitability
was the lower same-store sales at Bob Evans Restaurants and to a lesser extent -
the higher food cost at Bob Evans Restaurants and Mimi's.
Third quarter same-store sales at Bob Evans Restaurants decreased 3.9%
compared to the corresponding period last year. Management believes that
economic pressures on core customers and a lagging economic recovery in the
Midwest negatively impacted same-store sales. The third quarter comparison was
also affected by unfavorable shifts in the timing of the year-end holidays and
severe winter weather in December 2004 and January 2005.
The inclusion of Mimi's results in the third quarter of fiscal 2005 had a
significant impact on the cost of sales ratio in the restaurant segment. Mimi's
restaurants traditionally have a higher food cost average than Bob Evans
Restaurants due primarily to a higher concentration on lunch and dinner.
-11-
Current initiatives to enhance customers' value perceptions and overall
satisfaction levels at Bob Evans Restaurants increased costs in the third
quarter compared to the corresponding quarter last year. This impact was
reflected in cost of sales and operating wages.
These factors are discussed further in the detailed sections that follow.
However, the end result is that restaurant operating income declined $7.9
million, or 44.4%, in the third quarter this year compared to a year ago.
Furthermore, the segment's operating income margin fell to 3.1% from 7.7% in the
same periods.
FOOD PRODUCTS SEGMENT OVERVIEW
The ongoing economic and industry-wide factors relevant to the food
products segment include: hog costs, governmental initiatives, food safety and
other risks such as the economy, weather and consumer acceptance. For the third
quarter of fiscal 2005, the two factors that had the greatest impact on food
products segment profitability were:
1) higher than planned sales growth; and
2) the dramatic increase in hog costs.
Food products segment net sales increased 11.2% in the third quarter of
fiscal 2005 compared to the same period last year. The higher net sales were
driven by a combination of a 7.8% increase in pounds sold of comparable products
(principally sausage and refrigerated potatoes), an approximate 5.0% price
increase of manufactured products, and less discounting (via promotional
spending). Promotional spending represents sales incentives in the form of
"off-invoice" deductions, cooperative advertising programs and coupons, which
are all classified as a reduction of net sales.
Hog costs represent the majority of food products segment cost of sales,
and the volatile nature of hog costs greatly impacts the profitability of the
segment. For the third quarter, average hog costs increased 48.9% compared with
the quarter a year ago. This increase caused cost of sales in the food products
segment to increase from 45.6% to 54.7% of sales in the corresponding periods.
The increase in net sales was offset by the significant increase in cost
of sales, resulting in a decrease in operating income of $3.4 million, or 51.7%,
compared to a the corresponding period last year.
-12-
SALES
Consolidated net sales increased 30.7% to $381.0 million in the third
quarter of fiscal 2005 compared to the corresponding quarter last year. The
increase was comprised of sales increases in the restaurant segment and food
products segment of $83.1 million and $6.5 million, respectively. Restaurant
sales, which included Mimi's sales for the entire third quarter, accounted for
83.0% of consolidated sales in the third quarter. For the nine-month period
ended January 28, 2005, consolidated net sales (including Mimi's sales for the
period after July 7, 2004 only) increased $193.5 million, or 21.9%, compared to
the previous year.
Restaurant sales increased $83.1 million, or 35.6%, in the third quarter
of fiscal 2005 and $178.9 million, or 24.6%, through nine months of fiscal 2005
compared to the corresponding periods a year ago. The third quarter increase was
mostly the result of the inclusion of Mimi's ($75.6 million in sales in the
third quarter of fiscal 2005) as well as more restaurants in operation (587 Bob
Evans Restaurants and 88 Mimi's restaurants at quarter end versus 547 Bob Evans
Restaurants a year ago), partially offset by a decrease in same-store sales at
Bob Evans Restaurants. Bob Evans Restaurants experienced a same-store sales
decline of 3.9% in the quarter, which included an average menu price increase of
1.8%. Bob Evans Restaurant same-store sales computations are based on net sales
of stores open two full fiscal years as of the beginning of the fiscal year and
are measured in comparison to the corresponding period in the prior year. Sales
of stores to be rebuilt are excluded from the computation beginning in the
period that construction commences on the replacement building. Sales of closed
stores are excluded from the computation beginning in the period of closure.
The chart below summarizes the restaurant openings and closings during the
last seven quarters for Bob Evans Restaurants and three quarters for Mimi's
restaurants:
-13-
Bob Evans Restaurants:
Beginning Opened Closed Ending
--------- ------ ------ ------
Fiscal 2005
1st quarter 558 11 2 567
2nd quarter 567 12 1 578
3rd quarter 578 10 1 587
Fiscal 2004
1st quarter 523 3 2 524
2nd quarter 524 11 0 535
3rd quarter 535 12 0 547
4th quarter 547 11 0 558
Mimi's Restaurants:
Beginning Opened Closed Ending
--------- ------ ------ ------
Fiscal 2005
1st quarter 81 0 0 81
2nd quarter 81 3 0 84
3rd quarter 84 4 0 88
Consolidated Restaurants:
Beginning Opened Closed Ending
--------- ------ ------ ------
Fiscal 2005
1st quarter 639 11 2 648
2nd quarter 648 15 1 662
3rd quarter 662 14 1 675
In the third quarter of fiscal 2005, 10 new Bob Evans Restaurants opened,
compared to 12 in the corresponding period a year ago. For the nine-month period
ended January 28, 2005, 33 new Bob Evans Restaurants opened, compared to 26 in
the corresponding period a year ago. Mimi's opened 4 restaurants in the third
quarter of 2005. The company expects to open a total of 39 Bob Evans Restaurants
and 12 Mimi's restaurants, respectively, in fiscal 2005. One under-performing
Bob Evans Restaurant was closed in the third quarter of fiscal 2005. For fiscal
2006, the company plans to decrease the growth rate of Bob Evans
-14-
Restaurants (approximately 20 new locations) and at the same time accelerate the
remodeling and rebuilding programs for existing restaurants. In addition, the
company expects to increase the number of Mimi's restaurant openings to
approximately 15 in fiscal 2006.
The food products segment experienced a sales increase of $6.5 million, or
11.2%, in the third quarter of fiscal 2005 and $14.6 million, or 9.3%, through
nine months of fiscal 2005 compared to the corresponding periods a year ago. The
sales increase was partly due to a 7.8% increase in the volume of comparable
products sold (principally sausage products and refrigerated potatoes) in the
third quarter of fiscal 2005 versus fiscal 2004. Comparable pounds sold is
calculated using the same products in both periods and excludes new products. An
approximate 5.0% price increase of manufactured products implemented late in the
first quarter of fiscal 2005 and a decrease in promotional spending, which is
classified as a reduction of net sales, throughout fiscal 2005 also contributed
to the increase in sales.
COST OF SALES
Consolidated cost of sales (cost of materials) was 31.3% of sales in the
company's third quarter and 30.2% through nine months of fiscal 2005 compared to
28.9% and 28.3% in the corresponding periods a year ago.
In the third quarter of fiscal 2005, restaurant segment cost of sales
(predominantly food cost) increased to 26.5% of sales (25.6% year-to-date)
versus 24.7% (24.3% year-to-date) a year ago. The increase was partly due to the
inclusion of Mimi's cost of sales for the entire third quarter of 2005, as well
as a higher commodity price environment in the restaurant industry. Mimi's cost
of sales is traditionally higher than Bob Evans Restaurant's cost of sales
primarily as a result of a greater portion of sales that are derived from lunch
and dinner items, which carry higher food costs, as well as a different
positioning strategy (similar to casual theme restaurants) than Bob Evans
Restaurants. The cost of sales ratio increased at Bob Evans Restaurants
approximately 95 basis points in the third quarter of fiscal 2005 compared to
last year as a result of higher commodity prices as well as initiatives to
enhance customers' value perceptions through increased portion sizes.
-15-
The food products segment cost of sales ratio was 54.7% of sales in the
third quarter (54.5% year-to-date) compared to 45.6% (46.3% year-to-date) a year
ago. The increase in the food products segment cost of sales ratio was due to
higher hog costs, which averaged $51.73 per hundredweight for the third quarter
of fiscal 2005 compared to $34.75 per hundredweight in the corresponding period
last year - a 48.9% increase. The company expects that hog costs will remain at
these elevated levels for the remainder of the fiscal year.
OPERATING WAGE AND FRINGE BENEFIT EXPENSES
Consolidated operating wage and fringe benefit expenses ("operating
wages") were 36.8% of sales in the third quarter and 36.1% of sales through nine
months of fiscal 2005 compared to 35.0% and 34.7% in the corresponding periods a
year ago. The operating wage ratio increased in the restaurant segment and
decreased in the food products segment.
In the restaurant segment, the increase in operating wages was
attributable to higher hourly and management wages. The higher wages were the
result of an increased focus on customer service initiatives and the fact that
wages were not as well leveraged (due to lower-than-expected same-store sales).
Restaurant operating wages were 40.5% of sales through nine months of fiscal
2005 versus 39.3% of sales last year.
In the food products segment, operating wages were 11.9% of sales in the
third quarter and 12.7% of sales through nine months of fiscal 2005 compared to
13.0% and 13.5%, respectively, of sales in the corresponding periods last year.
The decrease was due to better leveraging of costs as a result of increased
sales volume, a price increase in manufactured products, and a decrease in
promotional spending discussed in the "Sales" section above.
OTHER OPERATING EXPENSES
Over 94% of other operating expenses ("operating expenses") occurred in
the restaurant segment in the third quarter and through nine months of both
fiscal 2005 and fiscal 2004. The most significant components of operating
expenses were advertising, utilities, restaurant supplies, repair and
maintenance, taxes (other than federal and state income taxes), rent and credit
card processing fees. Consolidated operating expenses were 16.3% of sales in the
third quarter and 16.1% of sales through nine months of fiscal 2005 compared to
14.7% and 14.8% of sales in the corresponding periods last year.
In the restaurant segment, operating expenses increased to 18.6% of sales
in the third quarter and 18.1% of sales year-to-date in fiscal 2005. This
compares to 17.2% and 16.8% of sales, respectively, in the
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corresponding periods a year ago. The restaurant operating expense ratios were
impacted by the lower than expected same-store sales which resulted in a
negative leveraging of operating expenses, as well as the increased rent expense
associated with Mimi's, which leases all of its locations.
In the food products segment, the operating expense ratio fluctuated
slightly to 5.3% of sales in the third quarter and 5.5% of sales through nine
months of fiscal 2005 compared to 5.0% and 5.3% of sales, respectively, in the
corresponding periods last year. The increases in fiscal 2005 are due to the
inclusion of a new production plant in Sulphur Springs, TX.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses ("S, G & A
expenses") were 7.9% of sales in the third quarter and 8.1% of sales through
nine months of fiscal 2005 compared to 8.6% of sales in the corresponding
periods last year. The most significant components of S, G & A expenses were
wages, fringe benefits and food products segment advertising expenses. The
decrease in fiscal 2005 is due to lower bonus accruals as well as the inclusion
of Mimi's, which had an overall lower S,G&A expenses ratio than Bob Evans
Restaurants.
TAXES
The effective combined federal and state income tax rates were 35.9% in
fiscal 2005 versus 35.7% in fiscal 2004. The company anticipates the effective
tax rate for fiscal 2005 to remain at approximately 35.9%.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from both the restaurant and food products segments has
been used as the main source of funds for working capital and capital
expenditure requirements. Bank lines of credit are also used for liquidity
needs, capital expansion and repurchases of Bob Evans common stock. Bank lines
of credit available total $100.0 million, of which $38.6 million was outstanding
at January 28, 2005. Draws on the lines of credit are limited by the balance on
the company's standby letters-of-credit which totaled $2.8 million at January
28, 2005.
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Capital expenditures consist of purchases of land for future restaurant
sites, new restaurants under construction, purchases of new and replacement
furniture and equipment, and ongoing remodeling programs. Capital expenditures
were $90.7 million through nine months of fiscal 2005 compared to $102.2 million
for the corresponding period last year. The decrease was due primarily to more
land purchases for future restaurant sites in the first nine months of fiscal
2004 compared to fiscal 2005.
The company believes that the funds needed for capital expenditures and
working capital during the remainder of fiscal 2005 will be generated both
internally and from available bank lines of credit. Financing alternatives will
continue to be evaluated by the company as warranted.
CONTINGENCIES
In January 2005, the company received an assessment from the State of Ohio
related to corporate franchise tax for fiscal years 1998-2003. The company is
petitioning the State of Ohio for a reassessment as the company believes its
positions on tax returns filed are correct. However, in the event that the
company does not ultimately prevail, management believes that recorded reserves
are adequate to meet any future tax-related payments to the State of Ohio.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Quarterly Report on Form 10-Q which are not
statements of historical fact are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). In
addition, certain statements in future filings by the company with the SEC, in
press releases and in oral and written statements made by or with the approval
of the company which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include statements of plans and objectives of the
company or its management or board of directors; statements regarding future
economic performance; and statements of assumptions underlying such statements.
Words such as "plan," "believes," "anticipates," "expects" and "intends" and
similar expressions are intended to, but are not the exclusive means of,
identifying those statements.
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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, without limitation:
- Changes in hog costs
- The possibility of severe weather conditions where the company
operates its restaurants
- The availability and cost of acceptable new restaurant sites
- Shortages of restaurant labor
- Acceptance of the company's restaurant concepts into new geographic
areas
- Accurately assessing the value, future growth potential, strengths,
weaknesses, contingent and other liabilities and potential
profitability of Mimi's
- Unanticipated changes in business and economic conditions affecting
Mimi's
- Other risks disclosed from time to time in the company's securities
filings and press releases
There is also the risk that the company may incorrectly analyze these risks or
that the strategies developed by the company to address them will be
unsuccessful.
Forward-looking statements speak only as of the date on which they are made, and
the company undertakes no obligation to update any forward-looking statement to
reflect circumstances or events after the date on which the statement is made to
reflect unanticipated events. All subsequent written and oral forward-looking
statements attributable to the company or any person acting on behalf of the
company are qualified by the cautionary statements in this section.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Bob Evans does not currently use derivative financial instruments for
speculative or hedging purposes. Bob Evans maintains its cash and cash
equivalents in financial instruments with maturities of three months or less
when purchased.
ITEM 4. CONROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
With the participation of the company's management, including Bob Evans'
principal executive officer and principal financial officer, the company's
management has evaluated the effectiveness of the company's 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 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 would be recorded, processed, summarized and
reported within the time periods specified in the SEC's 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 the company's 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, the company's internal
control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no pending legal proceedings involving the company other than
routine litigation incidental to its business. In the opinion of the
company's management, these proceedings should not, individually or in the
aggregate, have a material adverse effect on the company's results of
operations or financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information on Bob Evans purchases of its common
stock during the three fiscal months ended January 28, 2005:
MAXIMUM
TOTAL NUMBER OF NUMBER OF SHARES
SHARES PURCHASED THAT MAY YET BE
AS PART OF PUBLICLY PURCHASED UNDER
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS THE PLANS OR
PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS PROGRAMS
- ----------------- ---------------- ---------------- ------------------- ----------------
10/30/04-11/26/04 0 -- 0 0
11/27/04-12/31/04 16,200 (a) $25.72 0 0
1/1/05-1/28/05 0 -- 0 0
------ ------ -- --
Total 16,200 $25.72 0 0
------ ------ -- --
(a) Represents 16,200 shares of common stock repurchased by Bob Evans in
connection with employee stock-for-stock exercises of stock options.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable
ITEM 5. OTHER INFORMATION. Not Applicable
ITEM 6. EXHIBITS.
Exhibit No. Description Location
----------- -------------------------------------- --------------
31.1 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
(Principal Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
(Principal Financial Officer)
32.1 Section 1350 Certification (Principal Filed herewith
Executive Officer)
32.2 Section 1350 Certification (Principal Filed herewith
Financial Officer)
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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/ Stewart K. Owens
------------------------------------
Stewart K. Owens
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Donald J. Radkoski
-------------------------------
Donald J. Radkoski*
Chief Financial Officer
(Principal Financial Officer)
March 8, 2005
-------------
Date
* Donald J. Radkoski has been duly authorized to sign on behalf of the
Registrant as its principal financial officer.
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INDEX TO EXHIBITS
Quarterly Report on Form 10-Q
Dated March 8, 2005
Bob Evans Farms, Inc.
Exhibit No. Description Location
- ----------- ------------------------------------------------- --------------
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Filed herewith
Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Filed herewith
Financial Officer)
32.1 Section 1350 Certification (Principal Executive Filed herewith
Officer)
32.2 Section 1350 Certification (Principal Financial Filed herewith
Officer)
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