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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 thirteen weeks ended March 26, 2005
( ) 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 8,161,698
(Title of Class) (No. of Shares Outstanding
as of March 26, 2005)
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TASTY BAKING COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 26, 2005 and December 25, 2004............................3
Consolidated Statements of Operations
Thirteen weeks ended March 26, 2005 and March 27, 2004..........4
Consolidated Statements of Cash Flows
Thirteen weeks ended March 26, 2005 and March 27, 2004..........5
Notes to Consolidated Financial Statements...................6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................13-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk16
Item 4. Controls and Procedures.....................................17-18
Item 5. Other Information .............................................18
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and use of Proceeds....19
Item 6. Exhibits.......................................................19
Signature ...............................................................20
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(000's)
- ------------------------------------------------------------------------------------------------------------
March 26, 2005 December 25, 2004
- ------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 247 $ 320
Receivables, less allowance of $5,581and $4,848, respectively 22,607 20,049
Inventories 5,759 5,412
Deferred income taxes 3,367 3,280
Prepayments and other 1,140 1,092
------------------------------------------
Total current assets 33,120 30,153
------------------------------------------
Property, plant and equipment:
Land 1,033 1,033
Buildings and improvements 41,249 41,327
Machinery and equipment 139,967 166,449
------------------------------------------
182,249 208,809
Less accumulated depreciation 118,751 143,774
------------------------------------------
63,498 65,035
------------------------------------------
Other assets:
Long-term receivables from independent sales distributors 11,514 11,185
Deferred income taxes 10,337 10,337
Other 1,767 1,792
------------------------------------------
23,618 23,314
------------------------------------------
Total assets $120,236 $118,502
==========================================
Liabilities
Current liabilities:
Current obligations under capital leases $ 720 $ 713
Notes payable, banks 6,800 2,700
Accounts payable 7,550 9,083
Accrued payroll and employee benefits 7,103 7,145
Reserve for restructures 568 436
Other 1,847 3,307
------------------------------------------
Total current liabilities 24,588 23,384
Long-term obligations under capital leases, less current portion 3,974 4,159
Long-term debt 10,000 9,000
Reserve for restructures, less current portion 283 601
Accrued pensions and other liabilities 23,893 23,824
Postretirement benefits other than pensions 16,674 16,747
------------------------------------------
Total liabilities 79,412 77,715
------------------------------------------
Shareholders' equity
Common stock 4,558 4,558
Capital in excess of par value of stock 29,281 29,292
Retained earnings 22,331 22,261
------------------------------------------
56,170 56,111
Less:
Accumulated other comprehensive loss 2,398 2,398
Treasury stock, at cost 12,873 12,823
Management Stock Purchase Plan receivables and deferrals 75 103
------------------------------------------
40,824 40,787
------------------------------------------
Total liabilities and shareholders' equity $120,236 $118,502
==========================================
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
March 26, 2005 March 27, 2004 (a)
- --------------------------------------------------------------------------------
Gross Sales $ 65,946 $ 68,360
Less discounts and allowances (24,792) (27,882)
------------------------------------
Net Sales 41,154 40,478
------------------------------------
Costs and expenses:
Cost of sales 26,024 26,325
Depreciation 1,801 1,730
Selling, general and administrative 12,654 11,577
Interest expense 321 303
Other income, net (238) (226)
------------------------------------
40,562 39,709
------------------------------------
Income before provision for
income taxes 592 769
Provision for income taxes 113 286
------------------------------------
Net income $ 479 $ 483
====================================
Average common shares outstanding:
Basic 8,064 8,096
Diluted 8,167 8,113
Per share of common stock:
Net income:
Basic and Diluted $ 0.06 $ 0.06
============== ==============
Cash dividend $ 0.05 $ 0.05
============== ==============
(a) Amounts have been reclassified for comparative purposes.
See Notes to Consolidated Financial Statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(000's)
- ---------------------------------------------------------------------------------------------------
For the Thirteen Weeks Ended
March 26, 2005 March 27, 2004
- ---------------------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
Net income $ 479 $ 483
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,801 1,730
Restructure payments (186) (528)
Pension expense 84 527
Deferred taxes (87) --
Other 264 89
Changes in assets and liabilities:
Increase in receivables (2,778) (1,002)
Increase in inventories (347) (122)
Increase in prepayments and other (24) (359)
Decrease in accounts payable, accrued
payroll and other current liabilities (3,036) (91)
----------------------------------------
Net cash from (used for) operating activities (3,830) 727
----------------------------------------
Cash flows from (used for) investing activities
Purchase of property, plant and equipment (392) (2,148)
Proceeds from independent sales distributor
loan repayments 1,814 741
Loans to independent sales distributors (2,142) (573)
Other 1 9
----------------------------------------
Net cash used for investing activities (719) (1,971)
----------------------------------------
Cash flows from (used for) financing activities
Dividends paid (409) (405)
Payment of long-term debt (177) (155)
Net increase (decrease) in short-term debt 4,100 (200)
Additional long-term debt 1,000 2,000
Purchase of treasury stock (38) --
----------------------------------------
Net cash from financing activities 4,476 1,240
----------------------------------------
Net decrease in cash (73) (4)
Cash, beginning of year 320 33
----------------------------------------
Cash, end of period $ 247 $ 29
========================================
Supplemental Cash Flow Information Cash paid
(refunded) during the period for:
Interest $ 320 $ 325
========================================
Income taxes $ (47) $ 7
========================================
See Notes to Consolidated Financial Statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's, except share and per share amounts)
1. Significant Accounting Policies
Nature of the Business
Tasty Baking Company is a leading producer of sweet baked goods and one
of the nation's oldest and largest independent baking companies, in
operation since 1914. It has two manufacturing facilities, one in
Philadelphia, PA, and a second facility in Oxford, PA.
Fiscal Year
The company and its subsidiaries operate on a 52-53 week fiscal year,
ending on the last Saturday of December. Fiscal year 2005 is a 53-week
year.
Basis of Consolidation
The consolidated financial statements include the accounts of the company
and its subsidiaries. Inter-company transactions are eliminated.
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 March 26, 2005 and December 25, 2004, the
results of its operations for the thirteen weeks ended March 26, 2005 and
March 27, 2004, and cash flows for the thirteen week period ended March
26, 2005 and March 27, 2004, respectively. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto in the company's 2004 Annual
Report to Shareholders. In addition, the results of operations for the
thirteen weeks ended March 26, 2005 are not necessarily indicative of the
results to be expected for the full year.
Use of Estimates
Certain amounts included in the accompanying consolidated financial
statements and related footnotes reflect the use of estimates based on
assumptions made by management. These estimates are made using all
information available to management, and management believes that these
estimates are as accurate as possible as of the dates and for the periods
that the financial statements are presented. Actual amounts could differ
from these estimates. Significant estimates for the company include
receivable's allowance, inventory reserves, reserve for product returns,
and pension plan assumptions for plan asset return and discount rate.
Revenue Recognition
Revenue is recognized when title and risk of loss pass, which is
generally upon receipt of goods by the customer. For route area sales,
the company sells to independent sales distributors who, in turn, sell to
retail customers. Provisions for estimated discounts, product returns and
other adjustments are provided in the same period that the related sales
are recorded based upon promotional calendars and historical trends.
Cash and Cash Equivalents
The company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents.
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Inventory Valuation
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out ("FIFO") method.
Property and Depreciation
Property, plant and equipment are carried at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
the assets. Buildings and improvements are depreciated over thirty-nine
years. The principal manufacturing plant is leased from the company's
pension plan and is amortized over twenty years. Leasehold improvements
are generally depreciated over thirty-nine years. Machinery and equipment
are depreciated over a range of seven to fifteen years. Spare parts are
capitalized as part of machinery and equipment and are expensed as
utilized. The new enterprise resource planning system is being
depreciated over five years.
Costs of major additions, replacements and betterments are capitalized,
while maintenance and repairs, which do not improve or extend the life of
the respective assets, are expensed as incurred.
The company capitalizes interest and labor costs associated with the
construction and installation of plant and equipment and significant
information technology development projects.
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. If this review indicates that the expected future
undiscounted net cash flows of the related asset is less than the asset's
carrying value, an impairment loss is recognized.
Pension Plan
The company's funding policy for the pension plan ("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. In 1987 the company elected to immediately recognize
all gains and losses in excess of the pension corridor.
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.
The company amended the Pension Plan to freeze benefit accruals effective
March 26, 2005. Participants will be credited for service after March 26,
2005 solely for vesting purposes pursuant to the terms of the Pension
Plan. Each vested participant will receive their total pension benefit
accrued through March 26, 2005, upon retirement from the company.
Effective March 27, 2005 the company adopted a new company funded
retirement plan, which is a defined contribution benefit that replaces
the benefit provided in the Pension Plan. In the new company funded
retirement plan, the company will make cash contributions into individual
accounts for eligible employees. These contributions will be equal to a
percentage of an employee's eligible compensation and will increase with
the employee's age and years of credited service.
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Stock-Based Compensation
In December of 2002, the Financial Accounting Standards Board (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. See Recent Accounting Statements regarding
a change effective in 2006.
Thirteen Weeks Ended
March 26, 2005 March 27, 2004
--------------- ----------------
Net income as reported $ 479 $ 483
Deduct: Total stock-based employee
compensation expense determined under
fair-value net of related tax effects (62) (61)
--------------- ----------------
Pro forma net income $ 417 $ 422
=============== ================
Earnings per share:
Basic and Diluted - as reported $ 0.06 $ 0.06
--------------- ----------------
Basic and Diluted - pro forma $ 0.05 $ 0.05
=============== ================
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the FIFO method.
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 including outstanding stock options and
restricted shares.
Recent Accounting Statements
In December 2004, the FASB issued FASB Statement No. 123(R), Share-Based
Payment (FAS 123(R)), which requires companies to expense the fair-value
of employee stock options and other forms of stock-based compensation. In
April 2005, the SEC approved a new rule that makes FAS 123(R) effective
for annual periods that begin after June 15, 2005. The company expects to
adopt FAS 123(R) in January 2006. The company expects to select the
Modified Prospective Application (MPA), without restatement of prior
interim periods in the year of adoption. The company is currently
evaluating the impact of the adoption of this standard, but does not
expect a material impact compared to the pro forma amounts.
8 of 20
2. Restructure Charges
In the fourth quarter 2004, the company settled certain thrift store
lease contracts for a gain of $35. The gain was offset by reversals of
previously settled contracts, and other adjustments related to the
estimated expenses for maintaining the thrift stores still under
contract, which resulted in a net charge of $9.
The company recognized net restructure charge reversal in 2003 of $500.
These reversals resulted from favorable settlements of certain thrift
store lease contracts reversal in the 2002 restructuring.
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 obligations Severance Other Total
----------------- ----------- ----------- -----------
Balance December 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
Q3 2004 Payments (88) (176) (16) (280)
----------- ----------- ----------- -----------
Balance September 25, 2004 488 735 29 1,252
Q4 2004 Reversal of reserve,
net of adjustments 4 - 5 9
Q4 2004 Payments (85) (143) 4 (224)
----------- ----------- ----------- -----------
Balance December 25, 2004 407 592 38 1,037
Q1 2005 Payments (116) (58) (12) (186)
----------- ----------- ----------- -----------
Balance March 26, 2005 $ 291 $ 534 $ 26 $ 851
=========== =========== =========== ===========
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.
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3. Inventories
Inventories are classified as follows:
March 26, 2005 December 25, 2004
-------------- -----------------
Finished goods $ 1,550 $ 1,481
Work in progress 175 135
Raw materials and supplies 4,034 3,796
--------------- ---------------
$ 5,759 $ 5,412
=============== ===============
4. Credit Facility
On January 31, 2002, the company entered into a new $40 million Credit
Facility (Facility) with two banks (the Bank Group) to replace its
short-term lines of credit and the former Revolving Credit Agreement. The
agreement was subsequently amended on January 23, 2004 to reduce the
commitments under the Facility to $30 million. The Facility, as amended,
provides $10 million for short-term borrowings under a 364-day line and
$20 million for long-term borrowings under a three year revolving line.
The 364-day line contains a $6 million sub-limit for overnight borrowings
and the revolving line allows for the issuance of Standby Letters of
Credit up to $6 million, which reduce the availability under the
Facility. Upon approval of the Bank Group, the terms of both the 364-day
line and the revolving line may be extended for an additional 364-day or
annual period, respectively. Interest rates in the Facility are indexed
to LIBOR or the Prime Rate based upon the company's ratio of debt to
EBITDA and rates may change up to 1.5% based on that ratio. Commitment
fees are charged on the unused portion of the Facility and range from 30
to 45 basis points based upon the same ratio used to determine interest
rates. The Facility, as amended, contains restrictive covenants that
require the maintenance of minimum Tangible Net Worth, that limit the
amount of capital expenditures and that limit the ratios of EBITDA to
certain fixed charges and total indebtedness. The Facility also provides
the Bank Group with a security interest in all unencumbered assets of the
company including certain real property through the second quarter of
2005. After that date, the security interest may be terminated if certain
objective measures are met.
In the first quarter of 2005, the company and the Bank Group amended the
Facility 1) to waive certain covenant violations that existed on December
25, 2004; 2) to amend the Facility's definitions to exclude the effects
of the company's 2004 pension expense in excess of its 10% corridor; 3)
to amend the limit on capital expenditures for 2005 to $10 million; 4) to
amend the minimum Tangible Net Worth required; and 5) to extend the
maturity of the 364-day line to March 20, 2006. The waivers obtained
cured the company's covenant violations for its 2004 capital expenditures
and its required minimum Tangible Net Worth.
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5. Defined Benefit Retirement Plans
The company maintains a partially funded noncontributory Pension Plan
providing retirement benefits for substantially all employees. Benefits
under this Pension Plan generally are based on the employees' years of
service and compensation during the years preceding retirement. The
company maintains an unfunded Supplemental Executive Retirement Plan
("SERP") providing retirement benefits for key employees designated by
the Board of Directors. Benefits under the SERP generally are based on
the key employees' years of service and compensation during the years
preceding retirement. The company also maintains an unfunded Directors'
Retirement Plan. The benefit amount is the annual retainer in the year of
retirement.
In December 2004, upon approval by the Board of Directors, the company
announced to its employees that it was amending the Pension Plan to
freeze benefit accruals effective March 26, 2005. Participants will be
credited for service after March 26, 2005, solely for vesting purposes
pursuant to the terms of the Pension Plan. Each vested participant will
receive their total pension benefit accrued through March 26, 2005, upon
retirement from the company.
Effective at the beginning of the second quarter 2005, the company
adopted a new company funded retirement plan which is a defined
contribution benefit that replaces the benefit provided in the Pension
Plan. In the new company funded retirement plan, the company will make
cash contributions into individual accounts for all eligible employees.
These contributions will be equal to a percentage of an employee's
eligible compensation and will increase with the employee's age and years
of credited service.
Effective October 2004, the SERP for all active employees was converted
from a defined benefit to a defined contribution plan to be consistent
with the changes made to the Pension Plan.
The components of the Pension, SERP, and Directors' Retirement plans are
summarized as follows:
Thirteen Weeks Ended
March 26, 2005 March 27, 2004
Service cost $ 131 $ 352
Interest cost 1,209 1,287
Expected return on plan assets (1,266) (1,124)
Amortization of prior service costs (4) (1)
Amortization of net loss 14 13
---------------- -----------------
Net pension amount charged to income $ 84 $ 527
================ =================
There is no minimum cash contribution to the Pension Plan in 2005. The
company is expecting to make a cash contribution in 2005 but has not
determined the amount.
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6. Postretirement Benefits Other than Pensions
Components of Net Periodic Postretirement Benefit Cost:
Thirteen Weeks Ended
March 26, 2005 March 27, 2004
Service cost $ 97 $ 104
Interest cost 202 236
Net amortization and deferral (a) (105) -
---------------- -----------------
Net periodic benefit cost $ 194 $ 340
================ =================
(a) Reflects an estimate of changes in the cost of
postretirement life insurance to retirees. Amounts shown
assume that the changes will reduce the company's share
of this cost by approximately 34%.
Employer Contributions:
Estimated company contributions for the thirteen weeks ended March 26,
2005, are $309.
The Medicare Prescription Drug Improvement and Modernization Act of 2003
was signed into law on December 8, 2003. In accordance with FASB Staff
Position FAS 106-1, the company has made a one-time election to defer
recognition of the effects of the law in the accounting for its plan
under FAS 106 and in providing disclosures related to the plan. In
accordance with FASB Staff Position 106-2, any measures of the
Accumulated Postretirement Benefit Obligation or Net Periodic
Postretirement Benefit Cost do not reflect any amount associated with the
subsidy because the company has not yet concluded whether the benefits
provided by the plan are actuarially equivalent to Medicare Part D under
the Act.
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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 first quarter of 2005 was $479 or $.06 per diluted share. Net
income for the first quarter of 2004 was $483 or $.06 per diluted share.
Sales
Net sales increased by 1.7% in the first quarter of 2005 compared to the same
quarter in 2004. Gross sales decreased 3.5% in the first quarter versus the same
quarter a year ago driven by a 3.6% sales volume decline. This decline in gross
sales was offset by a decrease of 11.1% in discounts and allowances for the
first quarter 2005 versus 2004. The decline in discounts and allowances was
driven by lower promotional expense year-over-year due to higher promoted price
points in the route geographies. In addition, the cost of product returns
decreased for route sales.
Route net sales were up 1.1% in the first quarter 2005 versus 2004, driven
primarily by the lower promotional expense, as mentioned above, and an increase
in sales from the Tastykake Sensables product line, which launched in the third
quarter 2004. These improvements were partially offset by a decline in Family
Pack volume due to the higher promoted price points in the first quarter 2005
versus the first quarter a year ago. Non-route net sales were up 3.8% for the
first quarter 2005 compared to the same period in 2004 due to an increase in
sales to certain existing direct sales customers.
Cost of Sales
Cost of sales, excluding depreciation, for the first quarter of 2005 decreased
by 1.1%. This decrease in cost of sales dollars was driven by the 3.6% sales
volume decline in the first quarter 2005 compared to 2004. This decrease was
partially offset by significant increases in utility expenses in the first
quarter 2005 compared to same quarter a year ago. As a percentage of gross
sales, cost of sales increased 1.0 percentage point to 39.5% in the first
quarter 2005 from 38.5% in the first quarter of 2004.
Gross Margin
Gross margin after depreciation, was 32.4% of net sales for the first quarter of
2005 compared to 30.7% in the first quarter 2004. The 1.7 percentage point
improvement resulted from the improved price realization on net sales, partially
offset by the cost of sales increases.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2005
increased $1,077, or 9.3%, compared to the first quarter in 2004. This change is
attributed to increased investment in the sales and information technology
organizations, as well as increased marketing expense compared to last year. The
increase was also attributed to consultant costs incurred to assist with the
completion of internal control testing required by Section 404 of the
Sarbanes-Oxley Act of 2002, as amended. In addition, there were higher
consulting costs associated with enhanced Enterprise Resource Planning support
in the month of January 2005. These increases were partially offset by a first
quarter reduction in pension expense during the conversion of the defined
benefit pension plan to a defined contribution pension plan.
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Depreciation
Depreciation expense in the first quarter of 2005 increased 4.1% compared to the
same period a year ago. This is a result of the increase in depreciation from
the new Enterprise Resource Planning system implemented in the fourth quarter of
2004, partially offset by assets related to the previous Enterprise Resource
Planning system that became fully depreciated at the end of 2004.
Non-Operating Items
Interest expense increased by $19 or 6.2%, in the first quarter of 2005 compared
to the first quarter of 2004. This is due to increased average interest rates,
partially offset by a decrease in the average borrowing levels in the first
quarter 2005 versus the same period a year ago. 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 $40, pre-tax.
The effective income tax rate was 19.0% and 37.2% for the thirteen weeks ended
March 26, 2005 and March 27, 2004, respectively. These rates compare to a
federal statutory rate of 34%. In 2005, the difference between the effective
rate and the statutory rate is the result of estimated state tax benefits
generated from state tax losses as well as state and federal tax credits and
adjustments related to prior year estimates. In 2004, the difference between the
effective tax rate and the statutory tax rate is principally due to the effect
of state income taxes. For the balance of 2005, the company expects an effective
income tax rate of 34.0%.
Liquidity and Capital Resources
Current assets at March 26, 2005 were $33,120 compared to $30,153 at December
25, 2004, and current liabilities at March 26, 2005, were $24,588 compared to
$23,384 at December 25, 2004. The increase in current assets is primarily
related to a seasonal increase in accounts receivable, net of the allowance. The
accounts receivable allowance increased by $733 which can be attributed to a
reserve for customer credits not yet issued for certain promotional deals. The
increase in current liabilities in the first quarter of 2005 was principally
related to an increase in short term notes payable, partially offset by a
decrease in accounts payable and other accrued expenses.
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.
On January 31, 2002, the company entered into a new $40 million Credit Facility
(Facility) with two banks (the Bank Group) to replace its short-term lines of
credit and the former Revolving Credit Agreement. The agreement was subsequently
amended on January 23, 2004 to reduce the commitments under the Facility to $30
million. The Facility, as amended, provides $10 million for short-term
borrowings under a 364-day line and $20 million for long-term borrowings under a
three year revolving line. The 364-day line contains a $6 million sub-limit for
overnight borrowings and the revolving line allows for the issuance of Standby
Letters of Credit up to $6 million, which reduce the availability under the
Facility. Upon approval of the Bank Group, the terms of both the 364-day line
and the revolving line may be extended for an additional 364-day or annual
period, respectively. Interest rates in the Facility are indexed to LIBOR or the
Prime Rate based upon the company's ratio of debt to EBITDA and rates may change
up to 1.5% based on that ratio. Commitment fees are charged on the unused
portion of the Facility and range from 30 to 45 basis points based upon the same
ratio used to determine interest rates. The Facility, as amended, contains
restrictive covenants that require the maintenance of minimum Tangible Net
Worth, that limit the amount of capital expenditures and that limit the ratios
of EBITDA to certain fixed charges and total indebtedness. The Facility also
provides the Bank Group with a security interest in all unencumbered assets of
the company including certain real property through the second quarter of 2005.
After that date, the security interest may be terminated if certain objective
measures are met.
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In the first quarter of 2005, the company and the Bank Group amended the
Facility 1) to waive certain covenant violations that existed on December 25,
2004; 2) to amend the Facility's definitions to exclude the effects of the
company's 2004 pension expense in excess of its 10% corridor; 3) to amend the
limit on capital expenditures for 2005 to $10 million; 4) to amend the minimum
Tangible Net Worth required; and 5) to extend the maturity of the 364-day line
to March 20, 2006. The waivers obtained cured the company's covenant violations
for its 2004 capital expenditures and its required minimum Tangible Net Worth.
Net cash from operating activities for the thirteen weeks ended March 26, 2005
decreased by $4,557 compared to the same period in 2004. This decrease was
driven by an unfavorable change in assets and liabilities in the first quarter
of 2005 compared to the change in first quarter of 2004. The unfavorable change
in assets and liabilities resulted from an increase in accounts receivable that
was greater than the increase in the prior year. There was also a significant
decrease in accounts payable that was larger than the decrease during the
comparable period last year. Non-cash adjustments decreased for the thirteen
weeks ended March 26, 2005 compared to the same period in 2004. This was
partially offset by lower cash restructure payments in the first quarter of 2005
compared to the same period in 2004.
Net cash used for investing activities for the thirteen weeks ended March 26,
2005 decreased by $1,252 relative to the same period in 2004. In the first
quarter of 2005, there was a $1,756 decrease in capital expenditures relative to
the prior year. During the first quarter in 2004, the company began the
implementation of its new Enterprise Resource Planning system. Partially
offsetting this decrease in capital expenditures was an increase of $496 in the
net expenditures for financing activity to the independent sales distributors
relative to the same period last year, which is due to the timing of settlements
for independent sales distributor financing.
Net cash from financing activities for the thirteen weeks ended March 26, 2005
increased by $3,236 relative to the comparable period in 2004 due primarily to a
$4,300 increase in the short-term borrowing position offset by a $1,000 decrease
in additional long-term debt.
For the remainder of 2005, the company anticipates that cash flow from
operations, along with the continued availability of credit under the Amended
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 can be identified
by the use of such words as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," " predict," "project," "should," "would," "is
likely to," or "is expected to" and other similar terms. They include comments
about competition in the baking industry, concentration of customers, commodity
prices, consumer preferences, long-term receivables, inability to develop brand
recognition in the company's expanded market, production and inventory concerns,
loss of one or both of the company's production facilities, availability of
capital, fluctuation in interest rates, governmental regulations, legal
proceedings, pension expense, protection of the company's intellectual property
and trade secrets 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, including, but not
limited to, 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 2004 Annual Report
to Shareholders and in the company's annual report on Form 10-K for the year
ended December 25, 2004, 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 $40. 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. For a more detailed explanation see
the company's 2004 Annual Report on Form 10-K "Quantitative and Qualitative
Disclosure about Market Risk," page 16.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The company maintains a system of disclosure controls and procedures designed to
provide reasonable assurance that information required to be disclosed in the
company's reports filed or submitted pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission ("SEC"). Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
such information is accumulated and communicated to the company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
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 were not effective at March 26, 2005 because of the material
weaknesses in internal control over financial reporting related to accounting
for income taxes and payroll as fully described in our Annual Report on Form
10-K for the year ended December 25, 2004.
We performed additional analysis and other post-closing procedures to provide
assurances that our Consolidated Financial Statements are prepared in accordance
with generally accepted accounting principles. Accordingly, management believes
that the financial statements included in this report fairly present in all
material respects our financial condition, results of operations and cash flows
for the periods presented.
(b) Changes in Internal Control over Financial Reporting
The company has made changes in its internal control over financial reporting
during the period covered by this report that have materially affected the
company's internal control over financial reporting. In particular, the company
implemented the following enhancements to its internal control over financial
reporting related to the material weaknesses described in the company's Form
10-K for the year ended December 25, 2004:
1. Accounting for Income Taxes: The company has i) implemented additional
monitoring controls through increased documented management review;
ii) fully documented the methodology and tools for calculating and
reporting tax related transactions; iii) enhanced the formality and
rigor of controls for reconciliation procedures; and iv) increased use
of a third party service provider for the more complex areas of the
company's income tax compliance efforts. The enhancements have not
been in place for a sufficient length of time to allow management to
obtain a large enough sample size to complete remediation testing on
these controls. Nevertheless, the enhancements have allowed us to
maintain a reasonable level of assurance regarding the amount of taxes
recorded in this report.
2. Payroll: Effective March 2005, the company made improvements to
segregation of duties and formalized and implemented more rigorous
approval policies and procedures. The enhancements have not been in
place for a sufficient length of time to allow management to obtain a
large enough sample size to complete remediation testing on these
controls. Nevertheless, the enhancements have allowed us to maintain a
reasonable level of assurance regarding payroll expenses and
liabilities recorded in this report.
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3. Spare Parts Inventory: During the first quarter of 2005, the company
formalized and enhanced management's process for documenting and
executing cycle counts, performing analytical procedures surrounding
parts issues, and assuring authorization of price and use of parts on
a monthly basis. These enhancements have been in place long enough for
management to obtain a large enough sample size to complete
remediation testing. Remediation testing evidenced that these controls
give the company a reasonable level of assurance that expenses and
assets related to spare parts are properly reflected in this report.
There were no additional changes in the period covered by this report that
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
Item 5. Other Information
The company's definitive proxy statement for the 2005 Annual Meeting of
Shareholders (filed with the SEC on April 8, 2005) incorrectly reported that
283,106 shares of common stock were available for future grants under the 2003
Long Term Incentive Plan as of December 25, 2004. The actual number of shares
available was 4,894. Accordingly, the second paragraph on page 19 of the
definitive proxy statement should now read as follows: "As of December 25, 2004,
the 2003 Long Term Incentive Plan had 4,894 shares of common stock available for
future grants of stock options, restricted stock and other awards under the
Plan."
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TASTY BAKING COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On July 28, 2004, the Board of Directors renewed the company's stock repurchase
program originally adopted in July 2003. Under the program, the company may
acquire up to 400,000 shares of Tasty Baking Company common stock, which is
approximately 5% of the shares outstanding, through July 29, 2006. These
purchases may be commenced or suspended without prior notice depending on
then-existing business or market conditions and other factors. The following
chart sets forth the amounts of the company's common stock purchased on the open
market by the company during the first quarter of fiscal 2005 under the stock
repurchase plan.
- --------------------------------------------------------------------------------------------------------------------
Period (a) Total (b) Average (c) Total Number of Shares (d) Maximum Number (or
Number of Shares Price Paid (or Units) Purchased as Approximate Dollar Value) of
(or Units) per Part of Publicly Announced Shares (or Units) that may
Purchased Share Plans or Programs yet be purchased Under the
(or Unit) Plans or Programs
- --------------------------------------------------------------------------------------------------------------------
December 26 - - - - 388,600
January 29
- --------------------------------------------------------------------------------------------------------------------
January 30- - - - 388,600
February 26
- --------------------------------------------------------------------------------------------------------------------
February 27-
March 26 4,500 $8.43 4,500 384,100
- --------------------------------------------------------------------------------------------------------------------
Total 4,500 $8.43 4,500 384,100
- --------------------------------------------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3 - Bylaws of company, amended March 22, 2005 are
incorporated herein by reference to Exhibit 3(b) to Form 10-K for
the fiscal year ended December 25, 2004.
Exhibit 10.1 - Sixth Amendment to Credit Agreement, dated January
21, 2005, by and among the company and PNC Bank, N.A. and Citizens
Bank of Pennsylvania is incorporated herein by reference to
Exhibit 10(r) to Form 10-K for the fiscal year ended December 25,
2004.
Exhibit 10.2 -Waiver and Seventh Amendment to Credit Agreement,
dated February 28, 2005, by and among the company and PNC Bank,
N.A. and Citizens Bank of Pennsylvania is incorporated herein by
reference to Exhibit 10(s) to Form 10-K for the fiscal year ended
December 25, 2004.
Exhibit 10.3 - Eighth Amendment to the Credit Agreement, dated
March 21, 2005, by and among the company and PNC Bank, N.A. and
Citizens Bank of Pennsylvania is incorporated herein by reference
to Exhibit 10(t) to Form 10-K for the fiscal year ended December
25, 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
Exhibit 32 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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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)
May 5, 2005 /s/ David S. Marberger
------------ -------------------------------
(Date) DAVID S. MARBERGER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and
Accounting Officer)
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