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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the twenty-six weeks ended June 28, 2003
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-5084
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TASTY BAKING COMPANY
(Exact name of company as specified in its charter)
Pennsylvania 23-1145880
- --------------------------------------------------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
2801 Hunting Park Avenue, Philadelphia, Pennsylvania 19129
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 221-8500
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(Company's Telephone Number, including area code)
Indicate by check mark whether the company (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 company 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
--- --------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.50 8,098,250
- -------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of August 1, 2003)
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TASTY BAKING COMPANY AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 28, 2003 and December 28, 2002.....................................................................3
Consolidated Statements of Operations
Thirteen and Twenty-six weeks ended June 28, 2003 and June 29, 2002.....................................4
Consolidated Statements of Cash Flows
Twenty-six weeks ended June 28, 2003 and June 29, 2002..................................................5
Notes to Consolidated Financial Statements............................................................6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................................8-9
Item 3. Quantitative and Qualitative Disclosure
About Market Risk10
Item 4. Controls and Procedures................................................................................10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................................11
Item 6. Exhibits and Reports on Form 8-K.......................................................................11
Signature .......................................................................................................12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(000's)
- -----------------------------------------------------------------------------------------------------------------------------
June 28, 2003 December 28, 2002
- -----------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash $ 82 $ 282
Receivables, less allowance of $3,541
and $3,606 respectively 21,365 20,881
Inventories 5,945 6,777
Deferred income taxes 4,786 5,214
Prepayments and other 1,099 2,941
--------------------------------------------------------
Total current assets 33,277 36,095
--------------------------------------------------------
Property, plant and equipment:
Land 1,098 1,098
Buildings and improvements 37,889 37,832
Machinery and equipment 151,112 148,990
--------------------------------------------------------
190,099 187,920
Less accumulated depreciation 132,844 129,529
--------------------------------------------------------
57,255 58,391
--------------------------------------------------------
Long-term receivables from owner/operators 10,195 10,095
Deferred income taxes 8,319 8,230
Spare parts inventory 3,961 3,699
Other 50 50
--------------------------------------------------------
22,525 22,074
--------------------------------------------------------
Total assets $113,057 $116,560
========================================================
Current liabilities:
Current obligations under capital leases $ 177 $ 176
Notes payable, banks 1,900 4,500
Accounts payable 7,949 6,074
Accrued payroll and employee benefits 5,510 5,159
Reserve for restructures 1,774 2,417
Other 138 981
--------------------------------------------------------
Total current liabilities 17,448 19,307
Long-term debt 8,000 9,000
Long-term obligations under capital leases,
less current portion 3,393 3,486
Reserve for restructures-less current portion 2,160 3,568
Accrued pensions and other liabilities 16,564 15,923
Postretirement benefits other than pensions 17,832 17,751
--------------------------------------------------------
Total liabilities 65,397 69,035
--------------------------------------------------------
Shareholders' equity:
Common stock 4,558 4,558
Capital in excess of par value of stock 29,400 29,433
Retained earnings 26,684 26,622
--------------------------------------------------------
60,642 60,613
Less:
Treasury stock, at cost 12,540 12,539
Management Stock Purchase Plan
receivables and deferrals 442 549
--------------------------------------------------------
47,660 47,525
--------------------------------------------------------
Total liabilities and shareholders' equity $113,057 $116,560
========================================================
See accompanying notes to consolidated financial statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(000's, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
For the Thirteen Weeks Ended For the Twenty-six Weeks Ended
June 28, 2003 June 29, 2002 (a) June 28, 2003 June 29, 2002 (b)
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Sales $ 62,944 $ 65,617 $ 127,316 $ 129,656
Less discounts and allowances (22,753) (23,531) (46,141) (46,911)
----------------------------------------------------------------------------------------
Net Sales 40,191 42,086 81,175 82,745
----------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 26,970 27,047 54,955 53,076
Depreciation 1,738 1,640 3,477 3,375
Selling, general and administrative 11,010 10,769 21,798 21,678
Restructure charge (reversal) (95) 1,405 (314) 1,405
Interest expense 220 188 421 556
Other income, net (241) (295) (493) (575)
----------------------------------------------------------------------------------------
39,602 40,754 79,844 79,515
----------------------------------------------------------------------------------------
Income before provision for
income taxes 589 1,332 1,331 3,230
Provision for income taxes 199 453 459 1,146
----------------------------------------------------------------------------------------
Net income $ 390 $ 879 $ 872 $ 2,084
========================================================================================
Average common shares outstanding:
Basic 8,098 8,070 8,099 8,060
Diluted 8,101 8,181 8,100 8,184
Per share of common stock:
Net income:
Basic $0.05 $0.11 $0.11 $0.26
================== ================= ================= ==================
Diluted $0.05 $0.11 $0.11 $0.25
================== ================= ================= ==================
Cash dividend $0.05 $0.12 $0.10 $0.24
================== ================= ================= ==================
(a) An amount of $140 has been reclassified to reflect a correction of
certain expenses recorded in cost of sales and selling, general and
administrative expense.
(b) An amount of $214 has been reclassified to reflect a correction of
certain expenses recorded in cost of sales and selling, general and
administrative expense.
See accompanying notes to consolidated financial statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(000's)
- ----------------------------------------------------------------------------------------------------------------------
For the Twenty-six Weeks Ended
June 28, 2003 June 29, 2002
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
Net income $ 872 $ 2,084
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,477 3,375
Restructure charge (reversal) (314) 1,405
Pension expense 741 540
Deferred taxes (89) -
Restructure payments and other (1,628) 1
Changes in assets and liabilities:
Increase in receivables (479) (1,153)
Decrease in inventories 833 781
Decrease (increase) in prepayments and other 2,270 (649)
Increase in accrued payroll, accrued income taxes,
accounts payable and other current liabilities 1,054 404
--------------------------------------------------------
Net cash from operating activities 6,737 6,788
--------------------------------------------------------
Cash flows from (used for) investing activities
Purchase of property, plant and equipment (2,343) (3,394)
Proceeds from owner/operators' loan repayments 1,747 2,153
Loans to owner/operators (1,847) (2,251)
Other 8 71
--------------------------------------------------------
Net cash used for investing activities (2,435) (3,421)
--------------------------------------------------------
Cash flows from (used for) financing activities
Dividends paid (810) (1,934)
Payment of long-term debt (1,092) (119)
Net decrease in short-term debt (2,600) (1,400)
Net proceeds from sale of common stock - 218
--------------------------------------------------------
Net cash used for financing activities (4,502) (3,235)
--------------------------------------------------------
Net increase (decrease) in cash (200) 132
Cash, beginning of year 282 367
--------------------------------------------------------
Cash, end of period $ 82 $ 499
========================================================
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 363 $ 427
========================================================
Income taxes $ 55 $ 902
========================================================
See accompanying notes to consolidated financial statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts are in (000's)
1. Significant Accounting Policies
-------------------------------
Interim Financial Information
-----------------------------
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position of the company as of June 28, 2003 and
December 28, 2002, the results of its operations for the thirteen and
twenty-six weeks ended June 28, 2003 and June 29, 2002 and cash flows
for the twenty-six weeks ended June 28, 2003 and June 29, 2002. These
unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto in the company's 2002 Annual Report to Shareholders. In
addition, the results of operations for the thirteen and twenty-six
weeks ended June 28, 2003 are not necessarily indicative of the
results to be expected for the full year.
Net Income Per Common Share
---------------------------
Net income per common share is presented as basic and diluted earnings
per share. Net income per common share - Basic is based on the
weighted average number of common shares outstanding during the year.
Net income per common share - Diluted is based on the weighted average
number of common shares and dilutive potential common shares
outstanding during the year. Dilution is the result of outstanding
stock options.
Stock-Based Compensation
------------------------
The company measures stock-based compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and has
calculated the pro-forma impact of the fair-value method in accordance
with Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation." The calculated difference between the
reported and pro-forma net income amounts is not material for the
second quarter of 2003 and the second quarter of 2002.
Pension Plan
------------
The company's funding policy for its pension plan is to contribute
amounts deductible for federal income tax purposes plus such
additional amounts, if any, as the company's actuarial consultants
advise to be appropriate. The company accrues normal periodic pension
expense or income during the year based upon certain assumptions and
estimates from its actuarial consultants in accordance with Statement
of Financial Accounting Standard No. 87. These estimates and
assumptions include discount rate, rate of return on plan assets,
compensation increases, mortality and employee turnover. In addition,
the rate of return on plan assets is directly related to changes in
the equity and credit markets, which can be very volatile. The use of
the above estimates and assumptions, market volatility and the
company's election to immediately recognize all gains and losses in
excess of its pension corridor in the current year may cause the
company to experience significant changes in its pension expense or
income from year to year. Expenses or income that fall outside the
corridor are recognized only in the fourth quarter.
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2. Restructure Charges
-------------------
The company recognized a net restructure charge reversal of $95 in the
second quarter of 2003 and $220 in the first quarter of 2003. This
reversal resulted from favorable settlements of certain thrift store
lease contracts. These settlements relate to the restructure charges
taken during 2002 and 2001.
During the fourth quarter of 2002, the company incurred a $4,936
restructure charge related to the closing of twelve thrift stores
which represented the remaining company owned thrift stores. This
restructure charge also included specific arrangements made with
senior executives who departed the company in the fourth quarter of
2002. There were 29 employees terminated as a result of this
restructure, of which 25 were thrift store employees and 4 were
corporate executives.
During the second quarter of 2002, the company closed six thrift
stores and eliminated certain manufacturing and administrative
positions. There were 67 employees terminated as a result of this
restructure, of which 42 were temporary employees, 13 were thrift
store employees and 12 were corporate and administrative employees.
Costs related to these events were included in a restructure charge of
$1,405.
During the fourth quarter of 2001, the company closed its Dutch Mill
plant in Wyckoff, New Jersey. In addition, the company closed two
thrift stores. Costs related to these events were included in a
restructure charge of $1,728.
RESTRUCTURE RESERVE ACTIVITY (000's)
Balance Reversal Balance
3/29/03 Payments of Reserve 6/28/03
------------------------------------------------------------------------
Lease obligations $ 1,693 $ 229 $ 95 $ 1,369
Severance 2,928 460 - 2,468
Other 137 40 - 97
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Total $ 4,758 $ 729 $ 95 $ 3,934
=======================================================================
The balance of the severance charges is expected to be paid as of
December 2005 and the balance of the lease obligations and other
charges is expected to be paid as of November 2006.
3. Inventories
-----------
Inventories are classified as follows (000's):
June 28, 2003 December 28, 2002
-----------------------------------------------------
Finished Goods $ 2,227 $ 2,731
Work in progress 707 862
Raw materials and supplies 3,011 3,184
-----------------------------------------------------
$ 5,945 $ 6,777
=====================================================
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TASTY BAKING COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
--------------------------------------------------------------
Results of Operations
- ---------------------
Net income for the second quarter of 2003 was $390 or $.05 per diluted share
which included a $95 pre-tax restructure charge reversal due to the favorable
settlement of certain thrift store lease contracts. Net income for the second
quarter of 2002 was $879 or $.11 per diluted share. Included in the net income
for 2002 was a pre-tax restructure charge in the amount of $1,405.
Net income for the twenty-six weeks ended June 28, 2003 was $872 or $.11 per
diluted share which included a $314 pre-tax restructure charge reversal due to
the favorable settlement of certain thrift store lease contracts. Net income for
the twenty-six weeks ended June 29, 2002 was $2,084 or $.25 per diluted share.
Included in the net income for 2002 was a pre-tax restructure charge in the
amount of $1,405.
Gross sales decreased by 4.1% in the second quarter of 2003 relative to the
comparable quarter in 2002. Gross sales in the core routes in the second quarter
of 2003 were equal to gross sales in the same period last year. During the
second quarter of 2003, price increases instituted on certain product lines were
offset by the effect of decreases in promotional spending, the discontinuation
of certain Classic Baked Goods varieties and an increase in the mix of products
sold at lower wholesale selling prices. Gross sales outside the core routes
decreased by 14% in the second quarter of 2003 versus 2002. Most of the decline
in the sales outside the core routes was related to the company's decision to
discontinue sales to certain west coast accounts that were deemed unprofitable.
The company continues to examine margins on all lines of business and is focused
on improving profitability.
In the second quarter of 2003, net sales decreased by 4.5% compared to the same
period last year. This decrease resulted primarily from the decrease in gross
sales. Discounts and allowances decreased by 3.4%. The difference between the
percentage change in discounts and allowances and gross sales was due to the
effect of the thrift store sales in 2002 partially offset by a favorable shift
in the sales markets toward our core routes in 2003. Cost of sales for the
second quarter of 2003 was equal to cost of sales for the same quarter in 2002.
As a percentage of gross sales, cost of sales increased to 42.8% in the second
quarter from 41.2% in the same quarter last year. Case volume sold in the second
quarter of 2003 was equal to the volume sold in the same period last year
although gross sales dollars decreased by 4.1%. The decrease in gross sales
dollars was due to an increase in the mix of products sold at lower wholesale
selling prices relative to the prior year's quarter. The 42.8% for the current
quarter represents a .7 percentage point improvement over the first quarter of
2003 because of price increases on certain products instituted in the last two
months of the second quarter of 2003.
Selling, general and administrative expenses for the second quarter of 2003
increased by $240 or 2.2% compared to the second quarter of 2002. The increase
was primarily due to investment in personnel to fill key positions in the
company and increased marketing expenditures that offset the savings from the
fourth quarter closing of the company's thrift stores and the departure of
certain executives.
The effective tax rate was 33.8% for the quarter ended June 28, 2003 and 34.0%
for the quarter ended June 29, 2002, which compares to a federal statutory rate
of 34%. Differences between the effective rates and the statutory rate arise
from the effect of state income taxes.
8 of 12
Financial Condition
- -------------------
The company has consistently demonstrated the ability to generate sufficient
cash flow from operations. Bank borrowings, under the company's credit facility,
are used to supplement cash flow from operations during periods of cyclical
shortages.
Net cash from operating activities for the twenty-six weeks ended June 28, 2003
remained the same as the comparable period in 2002 despite a decrease in net
income and the timing of restructure payments. Certain favorable changes
resulted from working capital improvements by way of inventory utilization and
accounts receivable turnover. In addition, there was a reduction in cash
payments for income tax.
Net cash used for investing activities for the twenty-six weeks ended June 28,
2003 decreased by $986 relative to the same period in 2002 principally due to
lower capital expenditures.
Net cash used for financing activities for the twenty-six weeks ended June 28,
2003 increased by $1,267 relative to the comparable period in 2002, due to a
larger decrease in short-term debt and repayments of long-term debt in the
current year partially offset by a reduction of dividends paid in the current
year. The company reduced its quarterly dividend to $.05 per share in the first
quarter of 2003. The dividend had been $.12 per share since 1997.
For the remainder of 2003, the company anticipates that cash flow from
operations, along with the continued availability of credit under the credit
facility, will provide sufficient cash to meet operating and financing
requirements.
Forward-Looking Statements
- --------------------------
Certain matters discussed in this Report, including those under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to the safe
harbor created by that Act. These forward-looking statements may include
comments about legal proceedings, competition within the baking industry,
availability and pricing of raw materials and capital, improvements in
efficiency expected from plant modernization programs, sales growth by
distribution through existing and other channels of distribution, the
Registrant's business strategies and other statements contained herein that are
not historical facts. Because such forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements which include changes in general economic or business conditions, the
availability of capital upon terms acceptable to the Registrant, the
availability and prices of raw materials, the level of demand for the
Registrant's products, the outcome of legal proceedings to which the Registrant
is or may become a party, the actions of competitors within the packaged food
industry, changes in consumer tastes or eating habits, the success of plant
modernization and business strategies implemented by the Registrant to meet
future challenges, and the ability to develop and market in a timely and
efficient manner new products which are accepted by consumers. The reader should
review "Management's Discussion and Analysis" in the company's annual report on
Form 10-K for the year ended December 28, 2002 for a more complete discussion of
other risk factors which may affect the company's financial position or
operating performance.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
The company has certain floating rate debt notes. Under current market
conditions, the company believes that changes in interest rates would not have a
material impact on the financial statements of the company. The company also has
notes receivable from owner operators with rates that adjust every three years,
and, therefore, would partially offset the fluctuations in the company's
interest rates on its notes payable. The company also has the right to sell
these notes receivable, and could use these proceeds to liquidate a
corresponding amount of the notes payable.
Item 4. Controls and Procedures
------------------------
The company maintains a system of disclosure controls and procedures designed to
provide reasonable assurance as to the reliability of its consolidated financial
statements and other disclosures included in this report. The company
established a disclosure controls committee, which consists of certain members
of management. During the second quarter of 2003, the company hired a Director
of Internal Control and Analysis who has been actively involved in the
evaluation of the disclosure controls and procedures. Within 90 days prior to
the date of filing of this report, the company carried out an evaluation, under
the supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the design and operation of
the company's disclosure controls and procedures. Based on this evaluation, the
company's Chief Executive Officer and Chief Financial Officer concluded that the
company's disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information the company is required to disclose in
the reports it files pursuant to the Securities and Exchange Act of 1934, within
the time periods specified in the SEC's rules and forms. There have been no
significant changes in the company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of this
evaluation.
10 of 12
TASTY BAKING COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The company's annual meeting of shareholders was held on May 2, 2003.
(b) The directors elected at the meeting were: For Against Withheld
--- ------- --------
Ronald J. Kozich 6,612,793 --- 128,691
James E. Ksansnak 6,615,174 --- 126,310
Charles P. Pizzi 6,615,137 --- 126,346
Other directors whose terms of office continued after the meeting are
as follows: Fred C. Aldridge, Jr., Philip J. Baur Jr., G. Fred DiBona,
Jr., John M. Pettine and Judith M. von Seldeneck.
(c) Other matters voted upon at the meeting and the results of those votes
were as follows:
For Against Abstain
--- ------- --------
Adoption of the Tasty Baking Company 4,468,052 1,961,748 311,683
2003 Long Term Incentive Plan
For Against Abstain
--- ------- --------
Approval of PricewaterhouseCoopers LLP, as 6,643,256 81,985 16,244
independent certified public accountants
The foregoing matters are described in detail in the company's proxy
statement dated March 31, 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3 - By-Laws of the company as amended on May 2, 2003
Exhibit 31.1 - Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The company filed the following reports on Form 8-K during the
thirteen weeks ended June 28, 2003:
On April 4, 2003, the company furnished a report on Form 8-K under
Item 9, Regulation FD Disclosure, attaching a press release announcing
its new management team's first meeting with investors and analysts
and anticipated earnings for the first quarter 2003.
On April 29, 2003, the company furnished a report on Form 8-K under
Item 5, Other Events and Required FD Disclosure, attaching a press
release announcing its first quarter 2003 financial results.
11 of 12
TASTY BAKING COMPANY AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TASTY BAKING COMPANY
----------------------------------------
(Company)
August 8, 2003 /s/David S. Marberger
- ---------------------------------- ---------------------------------------
(Date) DAVID S. MARBERGER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and
Accounting Officer)
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