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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 26, 2004
--------------
( ) 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
------
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
- --------------------------------------------------------------------------------
(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 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 8,080,769
- --------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of July 23, 2004)
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TASTY BAKING COMPANY AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 26, 2004 and December 27, 2003....................................3
Consolidated Statements of Operations
Thirteen and Twenty-six weeks ended June 26, 2004 and June 28, 2003....4
Consolidated Statements of Cash Flows
Thirteen and Twenty-six weeks ended June 26, 2004 and June 28, 2003....5
Notes to Consolidated Financial Statements...........................6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................10-12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ....................................................13
Item 4. Controls and Procedures...............................................13
PART II.OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............................14
Item 4. Submission of Matters to a Vote of Security Holders...................14
Item 6. Exhibits and Reports on Form 8-K...................................14-15
Signature ....................................................................16
2 of 16
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(000's)
- ------------------------------------------------------------------------------------------------------------------------------
June 26, 2004 December 27, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 99 $ 33
Receivables, less allowance of $4,073
and $3,648, respectively 19,107 19,503
Inventories 5,387 5,730
Deferred income taxes 3,222 3,902
Prepayments and other 3,446 3,271
----------------------------------------------------
Total current assets 31,261 32,439
----------------------------------------------------
Property, plant and equipment:
Land 1,033 1,098
Buildings and improvements 40,274 40,288
Machinery and equipment 162,988 158,286
----------------------------------------------------
204,295 199,672
Less accumulated depreciation 139,709 136,156
----------------------------------------------------
64,586 63,516
----------------------------------------------------
Other assets:
Long-term receivables from sales distributors 11,081 11,253
Deferred income taxes 9,215 9,267
Other 1,731 768
----------------------------------------------------
22,027 21,288
----------------------------------------------------
Total assets $ 117,874 $ 117,243
====================================================
Liabilities
Current liabilities:
Current obligations under capital leases $ 689 $ 634
Notes payable, banks 3,600 4,900
Accounts payable 7,527 9,261
Accrued payroll and employee benefits 7,430 6,013
Reserve for restructures 718 1,331
Other 2,167 2,280
----------------------------------------------------
Total current liabilities 22,131 24,419
Long-term debt 10,000 8,000
Long-term obligations under capital leases,
less current portion 4,482 4,705
Reserve for restructures, less current portion 814 1,044
Accrued pensions and other liabilities 20,820 19,938
Postretirement benefits other than pensions 16,869 16,718
----------------------------------------------------
Total liabilities 75,116 74,824
----------------------------------------------------
Shareholders' equity
Common stock 4,558 4,558
Capital in excess of par value of stock 29,327 29,393
Retained earnings 22,969 22,641
----------------------------------------------------
56,854 56,592
Less:
Accumulated other comprehensive loss 1,236 1,236
Treasury stock, at cost 12,697 12,545
Management Stock Purchase Plan
receivables and deferrals 163 392
----------------------------------------------------
42,758 42,419
----------------------------------------------------
Total liabilities and shareholders' equity $ 117,874 $ 117,243
====================================================
See 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 26, 2004 June 28, 2003 June 26, 2004 June 28, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Sales $ 64,837 $ 62,944 $ 133,197 $ 127,316
Less discounts and allowances (24,782) (22,753) (52,664) (46,141)
-----------------------------------------------------------------------------
Net Sales 40,055 40,191 80,533 81,175
-----------------------------------------------------------------------------
Costs and expenses:
Cost of sales 25,680 26,970 51,910 54,955
Depreciation 1,825 1,738 3,555 3,477
Selling, general and administrative 11,519 11,010 23,191 21,798
Restructure charge net of reversals - (95) - (315)
Interest expense 326 220 629 421
Gain on sale of routes (75) - (75) -
Other income, net (258) (241) (484) (492)
-----------------------------------------------------------------------------
39,017 39,602 78,726 79,844
-----------------------------------------------------------------------------
Income before provision for
income taxes 1,038 589 1,807 1,331
Provision for income taxes 384 199 670 459
-----------------------------------------------------------------------------
Net income $ 654 $ 390 $ 1,137 $ 872
=============================================================================
Average common shares outstanding:
Basic 8,092 8,098 8,094 8,099
Diluted 8,099 8,101 8,106 8,100
Per share of common stock:
Net income:
Basic and Diluted $0.08 $0.05 $0.14 $0.11
=============== ============ ========== ==========
Cash dividend $0.05 $0.05 $0.10 $0.10
=============== ============ ========== ==========
See Notes to Consolidated Financial Statements.
4 of 16
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(000's)
- ----------------------------------------------------------------------------------------------------------------------------------
For the Twenty-six Weeks Ended
June 26, 2004 June 28, 2003 (a)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
Net income $ 1,137 $ 872
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,555 3,477
Gain on sale of route (75) -
Restructure charge net of reversals - (315)
Restructure payments (843) (1,410)
Pension expense 1,055 1,040
Deferred taxes 733 (89)
Other 42 (367)
Changes in assets and liabilities:
Decrease (increase) in receivables 395 (483)
Decrease in inventories 343 686
Decrease (increase) in prepayments and other (1,139) 2,270
Increase (decrease) in accrued payroll, accrued income
taxes, accounts payable and other current liabilities (431) 1,055
--------------------------------------------------
Net cash from operating activities 4,772 6,736
--------------------------------------------------
Cash flows from (used for) investing activities
Proceeds from sale of property, plant and equipment 67 -
Purchase of property, plant and equipment (4,730) (2,342)
Proceeds from independent sales distributor loan repayments 1,930 1,747
Loans to independent sales distributors (1,683) (1,847)
Other (14) 8
--------------------------------------------------
Net cash used for investing activities (4,430) (2,434)
--------------------------------------------------
Cash flows from (used for) financing activities
Dividends paid (809) (810)
Payment of long-term debt (167) (1,092)
Net decrease in short-term debt (1,300) (2,600)
Additional long-term debt 2,000 -
--------------------------------------------------
Net cash used for financing activities (276) (4,502)
--------------------------------------------------
Net increase (decrease) in cash 66 (200)
Cash, beginning of year 33 282
--------------------------------------------------
Cash, end of period $ 99 $ 82
==================================================
Supplemental Cash Flow Information
Cash paid during the period for:
Interest $ 615 $ 363
==================================================
Income taxes $ 43 $ 55
==================================================
Noncash investing and financing activities:
Capital leases $ 155 $ -
==================================================
Loans to independent sales distributors $ 73 $ -
==================================================
(a) Amounts have been reclassified for the twenty-six weeks ended June 28, 2003, for comparative purposes.
See Notes to Consolidated Financial Statements.
5 of 16
TASTY BAKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's, except share and per share amounts)
1. Significant Accounting Policies
-------------------------------
Interim Financial Information
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
and recurring adjustments, necessary to present fairly the financial
position of the company as of June 26, 2004, and December 27, 2003, the
results of its operations for the thirteen and twenty-six weeks ended
June 26, 2004, and June 28, 2003, and cash flows for the twenty-six weeks
ended June 26, 2004, and June 28, 2003. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto in the company's 2003 Annual
Report to Shareholders. In addition, the results of operations for the
thirteen and twenty-six weeks ended June 26, 2004, are not necessarily
indicative of the results to be expected for the full year.
Property and Depreciation
During the first quarter of 2004, the company performed a comprehensive
review of the estimated useful lives of all asset classes. As a result,
the company evaluated the utilization of certain machinery and equipment
and determined that its useful lives should be extended to 15 years from
7 years, consistent with similar assets already being depreciated over 15
years. The useful lives of buildings and improvements were standardized
at 39 years from 15 to 35 years. These changes in estimates resulted in a
decrease of depreciation expense of $804 for the twenty-six weeks ended
June 26, 2004. Also, depreciation expense increased by $762 during the
twenty-six weeks ended June 26, 2004, due to a change in estimated useful
lives of certain machinery, leasehold improvements and the current
Enterprise Resource Planning (ERP) system which is expected to be
replaced within the next year. The company is currently evaluating the
scope, timeline and specific implementation date for the new ERP system
and anticipates implementation in the fourth quarter of 2004.
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.
6 of 16
Stock-Based Compensation
In December of 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
FASB Statement No. 123 (FAS 148)." The provisions of this statement are
effective for fiscal years beginning after December 15, 2003. The company
measures stock-based compensation and reports the calculated differences
between the reported and pro forma impact of the fair-value method on the
interim and annual financial reports as required.
Thirteen Weeks Ended Twenty-Six Weeks Ended
6/26/04 6/28/03 6/26/04 6/28/03
------- ------- ------- -------
Net income as reported $ 654 $ 390 $ 1,137 $ 872
Deduct: Total stock-based employee
compensation expense determined under
fair-value net of related tax effects (66) (24) (127) (45)
----------------------------- ----------------------------
Pro forma net income $ 588 $ 366 $ 1,010 $ 827
============================= ============================
Earnings per share:
Basic and Diluted - as reported $ 0.08 $ 0.05 $ 0.14 $ 0.11
============================= ============================
Basic and Diluted - pro forma $ 0.07 $ 0.05 $ 0.12 $ 0.10
============================= ============================
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, "Employers' Accounting for Pensions." 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 of each year.
Recent Accounting Statements
In April 2004, the FASB released FASB Staff Position (FSP) No. FAS 106-2
to address the accounting and disclosure requirements of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"),
which was signed into law on December 8, 2003. The Act established a
prescription drug benefit under Medicare Part D, and a Federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that
is at least actuarially equivalent to Medicare Part D. The company
sponsors medical programs for certain of its retirees and expects that
this legislation may reduce the costs for some of these programs. The FSP
is effective for interim or annual periods beginning after June 15, 2004.
The expected effects of the Act will be factored into the company's 2004
year-end measurement of postretirement medical obligations and related
expense calculation for 2005. The company is currently evaluating the
impact of FSP 106-2, but does not expect a material impact on the
financial statements.
7 of 16
2. Restructure Charges
-------------------
During the fourth quarter of 2003, the company incurred a $429 pre-tax
restructure charge related to specific arrangements made with senior
executives who departed the company.
During the fourth quarter of 2002, the company incurred a $4,936 pre-tax
restructure charge related to the closing of twelve thrift stores and the
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 pre-tax restructure charge of $1,405.
During the fourth quarter of 2001, the company closed its Dutch Mill
Baking Company production facility. In addition, the company closed two
thrift stores. Costs related to these events were included in a pre-tax
restructure charge of $1,728.
Restructure Reserve Activity
Lease Fixed
Obligations Severance Assets Other Total
----------- --------- ------ ----- -----
Balance Dec. 28, 2002 $ 2,078 $ 3,403 $326 $178 $ 5,985
Q1 2003 Reclass of PP&E - - (326) - (326)
Q1 2003 Reversal of Reserve (220) - - - (220)
Q1 2003 Payments (165) (475) - (41) (681)
-------- -------- -------- -------- --------
Balance March 29, 2003 1,693 2,928 - 137 4,758
Q2 2003 Reversal of Reserve (95) - - - (95)
Q2 2003 Payments (229) (460) - (40) (729)
-------- -------- -------- -------- --------
Balance June 28, 2003 1,369 2,468 - 97 3,934
Q3 2003 Reversal of Reserve (129) - - - (129)
Q3 2003 Payments (154) (363) - (18) (535)
-------- -------- -------- -------- --------
Balance Sept. 27, 2003 1,086 2,105 - 79 3,270
Q4 2003 Restructure Charges - 429 - - 429
Q4 2003 Reclass of SERP - (683) - - (683)
Q4 2003 Reversal of Reserve (56) - - - (56)
Q4 2003 Payments (217) (366) - (2) (585)
-------- -------- -------- -------- --------
Balance Dec. 27, 2003 813 1,485 - 77 2,375
Q1 2004 Payments (125) (387) - (16) (528)
-------- -------- -------- -------- --------
Balance March 27, 2004 688 1,098 - 61 1,847
Q2 2004 Payments (112) (187) - (16) (315)
-------- -------- -------- -------- --------
Balance June 26, 2004 $ 576 $ 911 $ - $ 45 $ 1,532
======== ======== ======== ======== ========
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:
6/26/04 12/27/03
-------------------------------------
Finished goods $ 1,786 $ 2,397
Work in progress 623 740
Raw materials and supplies 2,978 2,593
-------------------------------------
$ 5,387 $ 5,730
=====================================
8 of 16
4. Stock Option Plans
------------------
On May 7, 2004, 8,000 options were granted to an employee of the company
under the 2003 Long Term Incentive Plan. Under this grant, the options
vest in three equal installments beginning on the first anniversary date
with a five year retention period from the date of grant. The option
price is determined by the Compensation Committee of the Board and, in
the case of incentive stock options, will be no less than the fair market
value of the shares on the date of grant. Options lapse at the earlier of
the expiration date of the option term specified by the Compensation
Committee of the Board (not more than ten years from the date of grant in
the case of incentive stock options) or three months following the date
on which employment with the company terminates.
5. Pension and Supplemental Retirement Costs
-----------------------------------------
In December 2003, the FASB issued a revised SFAS No. 132 R, "Employers'
Disclosure about Pensions and Other Postretirement Benefits," which
requires additional disclosures for benefits plans. The standard requires
interim disclosure of the various components of net periodic pension cost
and expanded annual disclosures, such as describing the types of plan
assets, investment strategy and plan obligations. The required interim
disclosure is included below. Annual disclosures will be provided in the
2004 Form 10-K.
Components of Net Periodic Cost
Twenty-Six Weeks Ended
6/26/04 6/28/03
------- -------
Service cost $ 705 $ 668
Interest cost 2,574 2,430
Expected return on plan assets (2,248) (2,086)
Amortization of prior service costs (2) (4)
Amortization of net (gain) loss 26 32
------------------------------
Net periodic benefit cost $ 1,055 $ 1,040
==============================
Employer Contributions
The company previously disclosed in its financial statement for the year
ended December 27, 2003, that it was not required to make contributions
to its pension plan in 2004. As of June 26, 2004, no contributions have
been made. The company will evaluate whether or not to make a
contribution to the plan before September 15, 2004.
6. Postretirement Benefits Other than Pensions
-------------------------------------------
Components of Net Periodic Postretirement Benefit Cost
Twenty-Six Weeks Ended
6/26/04 6/28/03
------- -------
Service cost $ 208 $ 168
Interest cost 471 494
Net amortization and deferral - (65)
------------------------------
Net periodic benefit cost $ 679 $ 597
==============================
Employer Contributions
Estimated company contributions for the twenty-six weeks ended June 26,
2004, are $579.
9 of 16
TASTY BAKING COMPANY AND SUBSIDIARIES
(000's, except share and per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Results of Operations
Overview
Net income for the second quarter of 2004 was $654 or $.08 per diluted share,
which included a $75 gain from the sale of one route to a sales distributor in
Maryland. 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 twenty-six weeks ended June 26, 2004, was $1,137 or $.14 per
diluted share, which included a $75 gain from the sale of one route to a sales
distributor in Maryland. Net income for the twenty-six weeks ended June 28,
2003, was $872 or $.11 per diluted share, which included a $315 pre-tax
restructure charge reversal due to the favorable settlement of certain thrift
store lease contracts.
Sales
Gross sales increased by 3.0% in the second quarter of 2004 relative to the
comparable quarter in 2003. Route sales increased by 2.5%, primarily driven by
the impact of the new route territories in Pittsburgh and Cleveland. Without the
increase from the new route territories, same route sales decreased 0.1%
compared to the second quarter of 2003. Gross sales in non-route areas increased
in the second quarter of 2004 by 4.6% compared to 2003.
Gross sales increased by 4.6% in the twenty-six weeks ended June 26, 2004,
compared to the same period in 2003. Year to date route sales increased by 7.3%
compared to the same period in 2003, primarily driven by the impact of the new
route territories in Pittsburgh and Cleveland in 2004 and list price increases
instituted on the Family Pack and single-serve pie product lines. Without the
increase from the new route territories, year to date same route sales increased
4.5% compared to the same period of 2003. Year to date gross sales in non-route
areas decreased during the twenty-six weeks ended June 26, 2004, by 2.7% as
compared to the same period in 2003, primarily due to the exit from business on
the West Coast during the first quarter of 2003.
In the second quarter of 2004, net sales decreased by 0.3% compared to the
second quarter of 2003. For the twenty-six weeks ended June 26, 2004, net sales
decreased by 0.8% compared to the same period in 2003. The decreases in net
sales were due to increased price promotion spending in the route areas offset
partially by the positive impact of list price increases instituted on Family
Pack product lines. The decreases in net sales also were impacted by increased
product returns in the route territories and discounts associated with the new
markets in Pittsburgh and Cleveland.
Cost of Sales
Cost of sales for the second quarter of 2004 decreased by 4.8%. As a percentage
of gross sales, cost of sales decreased 3.2 percentage points to 39.6% in the
second quarter from 42.8% in the second quarter of 2003. Cost of sales for the
twenty-six weeks ended June 26, 2004, decreased by 5.5%. As a percentage of
gross sales, cost of sales year to date decreased 4.2 percentage points to 39.0%
from 43.2% in the same period in 2003. These decreases are primarily the result
of sales volume reductions along with packaging and productivity initiatives,
partially offset by the increased cost of eggs, oils, and butter.
10 of 16
Gross Margin
Gross margin after depreciation, as a percentage of net sales, was 31.3% and
28.6% for the second quarters of 2004 and 2003, respectively. The 2.7 percentage
point improvement resulted from the combined effect of the Family Pack price
increase and the decrease in cost of sales resulting from the company's
productivity initiatives. These positive improvements were partially offset by
increased price promotion spending and increased product returns.
Gross margin after depreciation, as a percentage of net sales, was 31.1% and
28.0% for the twenty-six weeks ended June 26, 2004, and June 28, 2003,
respectively. The 3.1 percentage point improvement resulted from the combined
effect of the Family Pack price increase and the decrease in cost of sales
resulting from the company's productivity initiatives. These positive
improvements were partially offset by increased price promotion spending and
increased product returns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 2004
increased by $509 or 4.6% compared to the second quarter of 2003. Selling,
general and administrative expenses for the twenty-six weeks ended June 26,
2004, increased by $1,393 or 6.4% compared to the same period in 2003. These
increases were due to investments in personnel to fill key positions and
increases in selling expenses related to the expansion of the direct store
delivery system into the Pittsburgh and Cleveland markets.
Depreciation
Depreciation expense in the second quarter of 2004 increased 5.0% compared to
the second quarter of 2003. This increase is primarily due to the amortization
of new handheld equipment implemented during the second quarter of 2004.
Depreciation expense for the twenty-six weeks ended June 26, 2004, increased
2.2% compared to the same period in 2003. During the first quarter, the company
performed a comprehensive review of the estimated useful lives of all asset
classes. As a result, the company evaluated the utilization of certain machinery
and equipment and determined that its useful lives should be extended to 15
years from 7 years, consistent with similar assets already being depreciated
over 15 years. The useful lives of buildings and improvements were standardized
at 39 years from 15 to 35 years. These changes in estimates resulted in a
decrease in depreciation expense of $804 for the twenty-six weeks ended June 26,
2004. Also, depreciation expense increased by $762 during the twenty-six weeks
ended June 26, 2004, due to a change in estimated useful lives of certain
machinery, leasehold improvements and the current Enterprise Resource Planning
(ERP) system which is expected to be replaced within the next year. The company
is currently evaluating the scope, timeline and specific implementation date for
the new ERP system and anticipates implementation in the fourth quarter of 2004.
Non-Operating Items
Interest expense increased by 48.3% in the second quarter of 2004 compared to
the second quarter of 2003. Interest expense increased by 49.4% in the
twenty-six weeks ended June 26, 2004, compared to the same period in 2003. These
increases are due to increased average borrowing levels and increased average
interest rates. The company is exposed to market risk relative to its interest
expense as its notes payable and long-term debt have floating interest rates
that vary with the conditions in the credit market. It is expected that a one
percentage point increase in interest rates would result in additional quarterly
expense of approximately $38.
The effective income tax rate was 37% for the twenty-six weeks ended June 26,
2004, and 35% for the same period in 2003, which compares to a federal statutory
rate of 34%. Differences between the effective tax rates and the statutory tax
rate arise from the effect of state income taxes.
11 of 16
Liquidity and Capital Resources
Historically, the company has been able to generate sufficient amounts of cash
from operations. Bank borrowings are used to supplement cash flow from
operations during periods of cyclical shortages. A credit facility is maintained
with two banks and certain capital and operating leases are utilized. Details of
the credit facility can be found in the company's Form 10-K for the year ended
December 27, 2003. The company expects to be in compliance with its Covenants
this year.
Net cash from operating activities for the twenty-six weeks ended June 26, 2004,
decreased by $1,964 compared to the same period in 2003. This decrease was
driven by an unfavorable change in assets and liabilities in 2004 compared to
2003. The unfavorable change in assets and liabilities resulted primarily from a
decrease in accounts payable during 2004 compared to a significant increase in
2003. Prepayments increased in 2004 relative to 2003 due to the payment of a
long-term maintenance contract and costs for new package designs across the
entire product line. These unfavorable changes were partially offset by an
increase in net income and a decrease in accounts receivable compared to an
increase in the prior year, due to increased management focus on cash
collections.
Net cash used for investing activities for the twenty-six weeks ended June 26,
2004, increased by $1,996 relative to the same period in 2003 principally due to
an increase of $2,388 in capital expenditures for the new ERP system and a new
production line at the company's Oxford manufacturing location.
Net cash used for financing activities for the twenty-six weeks ended June 26,
2004, decreased by $4,226 relative to the comparable period in 2003, due to a
$2,000 increase in long-term borrowing, a $1,300 decrease in repayments for
short-term borrowing, and $925 reduction in long-term repayments relative to the
prior year.
For the remainder of 2004, the company anticipates that cash flow from
operations, along with the continued availability of credit under the company's
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, sales growth by
distribution through direct sales programs, private label, institutional sales
and other channels of distribution, changes in the company's business strategies
and other statements contained herein that are not historical facts. Because
such forward-looking statements involve risks and uncertainties, various factors
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 nationally and in the company's primary markets, the
availability of capital upon terms acceptable to the company, the availability
and prices of raw materials, the level of demand for the company's products, the
outcome of legal proceedings to which the company 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 business strategies implemented by the
company 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" and "Risk Factors"
in the company's 2003 Annual Report to Shareholders and "Management's Discussion
and Analysis" in the company's annual report on Form 10-K for the year ended
December 27, 2003, 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 Disclosures About Market Risk
-----------------------------------------------------------
The company is exposed to market risk relative to its interest expense as its
notes payable and long-term debt have floating interest rates that vary with the
conditions in the credit markets and the company's financial performance. It is
expected that a one percentage point increase in interest rates would result in
additional quarterly expense of approximately $38. 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 independent sales distributors whose rates adjust every
three years, which 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. 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 as of the end of the period covered by this report.
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 at a reasonable level of assurance for gathering,
analyzing and disclosing material information the company is required to
disclose in the reports it files with the Securities and Exchange Commission
(SEC) pursuant to the Securities and Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms. In addition, the company
reviewed its internal control over financial reporting and there have been no
changes during the period covered by this report in the company's internal
control over financial reporting, to the extent that elements of internal
control over financial reporting are subsumed within disclosure controls and
procedures, that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
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TASTY BAKING COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
On May 7, 2004, shareholders approved the amendment of the company's articles of
incorporation to increase the number of authorized shares of common stock from
15,000,000 to 30,000,000. This increase in the number of authorized shares of
common stock provides the company with greater flexibility in connection with
raising additional capital through the issuance of common stock, financing
acquisitions with common stock, issuing common stock for stock dividends, stock
splits and employee incentive plans, and issuing common stock in the event the
rights under the company's shareholder rights plan, adopted July 30, 2003,
become exercisable. It is possible that the additional shares of common stock
could have an anti-takeover effect if used in conjunction with the shareholder
rights plan or otherwise to discourage an attempt to acquire or takeover the
company through dilution of the potential acquirer's stock ownership. Except as
required by applicable law or New York Stock Exchange listing standards, the
board of directors has the authority to issue the additional shares without
further action by shareholders. Any issuance of shares, other than on a pro-rata
basis to all shareholders, would reduce each shareholder's percentage interest
in the company.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The company's annual meeting of shareholders was held on May 7, 2004.
(b) The directors elected at the meeting were:
For Against Withheld
--- ------- --------
Philip J. Baur, Jr. 5,336,788 - 927,316
Judith M. von Seldeneck 5,763,256 - 500,849
David J. West 5,762,868 - 501,238
Other directors whose terms of office continued after the
meeting are as follows: James E. Ksansnak, Fred C. Aldridge,
Jr., G. Fred DiBona, Jr., Ronald J. Kozich, and Charles P.
Pizzi.
(c) Other matters voted upon at the meeting and the results of those votes
were as follows:
For Against Abstain
--- ------- -------
Approval of Amendment of Company's Articles Of Incorporation to
increase the number of authorized shares of common stock from
15,000,000 to 30,000,000 5,375,217 850,532 38,352
Ratification of PricewaterhouseCoopers LLP
as independent auditors 6,156,982 97,076 10,045
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 3 - By-Laws of the company as amended July 28, 2004
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
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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 26, 2004:
On April 27, 2004, the company furnished a report on Form 8-K under Item
12, Results of Operation and Financial Condition, attaching a press
release announcing its financial results for the first quarter ended
March 27, 2004.
On June 18, 2004, the company furnished a report on Form 8-K under Item
4, Changes in Registrant's Certifying Accountant. On June 14, 2004, the
Tasty Baking Company 401(k) Thrift Plan (the "Plan") dismissed
PricewaterhouseCoopers LLP (PwC) as the independent accountant for the
Tasty Baking Company 401(k) Thrift Plan. PwC was also dismissed as the
independent accountant for the Tasty Baking Company Pension Plan. On
June 14, 2004, the Plan engaged Mitchell & Titus, LLP to audit the Plan
for the year ended December 31, 2003. Mitchell & Titus, LLP was also
engaged to audit the Tasty Baking Company Pension Plan and the Tasty
Baking Oxford, Inc. 401(k) Savings Plan for the year ended December 31,
2003.
On June 28, 2004, the company furnished a report on Form 8-K/A to amend
Item 4, Changes in Registrant's Certifying Accountant, as originally
filed with the SEC, and to include Item 7, Financial Statements, Pro
Forma Financial Information and Exhibits. Item 7 included Exhibit 16.1,
which was a letter from PwC to the SEC dated June 25, 2004, confirming
PwC's agreement with the company's disclosures.
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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 4, 2004 /s/ David S. Marberger
- ---------------------- ----------------------------------------
(Date) DAVID S. MARBERGER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and
Accounting Officer)
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