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EX-31.2 - EX-31.2 - BOB EVANS FARMS INC | l42037exv31w2.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended January 28, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission file number 0-1667
Bob Evans Farms, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 31-4421866 | |
(State or other jurisdiction of incorporation | (I.R.S. Employer | |
or organization) | Identification No.) |
3776 South High Street Columbus, Ohio 43207
(Address of principal executive offices)
(Zip Code)
(614) 491-2225
(Registrants telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of February 25, 2011, the registrant had 30,304,416 common shares outstanding.
TABLE OF CONTENTS
Table of Contents
BOB EVANS FARMS, INC.
PART I FINANCIAL INFORMATION
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) | ||||||||
Unaudited | ||||||||
Jan. 28, 2011 | April 30, 2010 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and equivalents |
$ | 29,417 | $ | 17,803 | ||||
Accounts receivable |
25,394 | 19,857 | ||||||
Inventories |
24,572 | 25,920 | ||||||
Deferred income taxes |
11,175 | 11,175 | ||||||
Prepaid expenses |
2,891 | 2,169 | ||||||
Total Current Assets |
93,449 | 76,924 | ||||||
Property, Plant and Equipment |
1,669,038 | 1,664,639 | ||||||
Less accumulated depreciation |
751,302 | 702,665 | ||||||
Net Property, Plant and Equipment |
917,736 | 961,974 | ||||||
Other Assets |
||||||||
Deposits and other |
3,889 | 4,143 | ||||||
Long-term investments |
26,509 | 23,032 | ||||||
Goodwill |
1,567 | 1,567 | ||||||
Other intangible assets |
40,902 | 41,517 | ||||||
Total Other Assets |
72,867 | 70,259 | ||||||
$ | 1,084,052 | $ | 1,109,157 | |||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities |
||||||||
Lines of credit |
$ | | $ | 14,000 | ||||
Current maturities of long-term debt |
13,571 | 26,905 | ||||||
Accounts payable |
28,816 | 29,322 | ||||||
Federal and state income taxes |
1,605 | 8,708 | ||||||
Accrued nonincome taxes |
19,485 | 21,085 | ||||||
Accrued wages and related liabilities |
28,586 | 39,545 | ||||||
Self-insurance |
24,564 | 24,165 | ||||||
Deferred revenue |
23,593 | 14,447 | ||||||
Other accrued expenses |
22,555 | 15,279 | ||||||
Total Current Liabilities |
162,775 | 193,456 | ||||||
Long-Term Liabilities |
||||||||
Deferred compensation |
29,046 | 26,396 | ||||||
Federal and state income taxes |
10,873 | 10,050 | ||||||
Deferred income taxes |
67,447 | 67,538 | ||||||
Deferred rent |
24,461 | 24,273 | ||||||
Long-term debt |
135,716 | 149,287 | ||||||
Total Long-Term Liabilities |
267,543 | 277,544 | ||||||
Stockholders Equity |
||||||||
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 42,638,118 shares at Jan. 28, 2011, and April 30, 2010 |
426 | 426 | ||||||
Capital in excess of par value |
187,021 | 180,476 | ||||||
Retained earnings |
806,268 | 788,049 | ||||||
Treasury stock, 12,318,454 shares at Jan. 28, 2011, and 12,265,865 shares at April 30, 2010, at
cost |
(339,981 | ) | (330,794 | ) | ||||
Total Stockholders Equity |
653,734 | 638,157 | ||||||
$ | 1,084,052 | $ | 1,109,157 | |||||
The accompanying notes are an integral part of the financial statements.
- 2 -
Table of Contents
BOB EVANS FARMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
UNAUDITED
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Jan. 28, 2011 | Jan. 22, 2010 | Jan. 28, 2011 | Jan. 22, 2010 | |||||||||||||
Net Sales |
$ | 428,594 | $ | 429,823 | $ | 1,258,206 | $ | 1,284,150 | ||||||||
Cost of sales |
135,001 | 134,241 | 381,301 | 383,045 | ||||||||||||
Operating wage and fringe benefit expenses |
141,282 | 146,046 | 425,463 | 447,527 | ||||||||||||
Other operating expenses |
68,840 | 68,020 | 205,553 | 208,198 | ||||||||||||
Selling, general and administrative expenses |
37,460 | 32,011 | 122,698 | 104,168 | ||||||||||||
Depreciation and amortization expense |
20,577 | 21,112 | 62,461 | 62,773 | ||||||||||||
Operating Income |
25,434 | 28,393 | 60,730 | 78,439 | ||||||||||||
Net interest expense |
2,098 | 2,511 | 6,800 | 7,788 | ||||||||||||
Income Before Income Taxes |
23,336 | 25,882 | 53,930 | 70,651 | ||||||||||||
Provision for income taxes |
7,870 | 7,915 | 18,125 | 21,087 | ||||||||||||
Net Income |
$ | 15,466 | $ | 17,967 | $ | 35,805 | $ | 49,564 | ||||||||
Earnings Per Share Basic |
$ | 0.51 | $ | 0.58 | $ | 1.18 | $ | 1.60 | ||||||||
Earnings Per Share Diluted |
$ | 0.51 | $ | 0.58 | $ | 1.18 | $ | 1.60 | ||||||||
Cash Dividends Paid Per Share |
$ | 0.20 | $ | 0.18 | $ | 0.58 | $ | 0.50 | ||||||||
The accompanying notes are an integral part of the financial statements.
- 3 -
Table of Contents
BOB EVANS FARMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
UNAUDITED
(Dollars in thousands) | ||||||||
Nine Months Ended | ||||||||
Jan. 28, 2011 | Jan. 22, 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 35,805 | $ | 49,564 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Depreciation and amortization |
62,461 | 62,773 | ||||||
Loss on disposal/impairment of long-term assets |
11,628 | 1,486 | ||||||
Gain on long-term investments |
(1,502 | ) | (4,589 | ) | ||||
Deferred compensation |
2,650 | 4,820 | ||||||
Compensation expense attributable to stock plans |
6,423 | 6,309 | ||||||
Deferred income taxes |
(91 | ) | 7,243 | |||||
Deferred rent |
188 | 541 | ||||||
Cash provided by (used for) current assets and current liabilities: |
||||||||
Accounts receivable |
(5,537 | ) | (901 | ) | ||||
Inventories |
1,087 | 4,994 | ||||||
Prepaid expenses |
(722 | ) | (1,336 | ) | ||||
Accounts payable |
(506 | ) | (859 | ) | ||||
Federal and state income taxes |
(6,449 | ) | (6,918 | ) | ||||
Accrued wages and related liabilities |
(10,959 | ) | (4,332 | ) | ||||
Self-insurance |
399 | 2,008 | ||||||
Accrued nonincome taxes |
(1,600 | ) | 291 | |||||
Deferred revenue |
9,146 | 7,358 | ||||||
Other accrued expenses |
6,925 | 1,111 | ||||||
Net cash provided by operating activities |
109,346 | 129,563 | ||||||
Investing activities: |
||||||||
Purchase of property, plant and equipment |
(31,451 | ) | (41,603 | ) | ||||
Proceeds from sale of property, plant and equipment |
2,830 | 385 | ||||||
Purchase of long-term investments |
(1,978 | ) | (1,521 | ) | ||||
Other |
254 | (183 | ) | |||||
Net cash used in investing activities |
(30,345 | ) | (42,922 | ) | ||||
Financing activities: |
||||||||
Cash dividends paid |
(17,591 | ) | (15,457 | ) | ||||
Payments on lines of credit |
(14,000 | ) | (42,246 | ) | ||||
Principal payments on long-term debt |
(26,905 | ) | (26,904 | ) | ||||
Purchase of treasury stock |
(15,089 | ) | (15,600 | ) | ||||
Proceeds from issuance of treasury stock |
7,180 | 3,017 | ||||||
Net share settlement of stock-based awards |
(1,272 | ) | | |||||
Excess tax benefits from stock-based compensation |
290 | 197 | ||||||
Net cash used in financing activities |
(67,387 | ) | (96,993 | ) | ||||
Increase (decrease) in cash and equivalents |
11,614 | (10,352 | ) | |||||
Cash and equivalents at the beginning of the period |
17,803 | 30,134 | ||||||
Cash and equivalents at the end of the period |
$ | 29,417 | $ | 19,782 | ||||
The accompanying notes are an integral part of the financial statements.
- 4 -
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
UNAUDITED
1. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of Bob Evans Farms, Inc., a
Delaware corporation, (Bob Evans) and its subsidiaries (collectively, Bob Evans and its
subsidiaries are referred to as the Company, we, us and our) are presented in accordance
with the requirements of Form 10-Q and, consequently, do not include all of the
disclosures normally required by generally accepted accounting principles or those normally made in
our Form 10-K filing. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of our financial position and
results of operations have been included. The consolidated financial statements are not necessarily
indicative of the results of operations for a full fiscal year. Except as described in this Form
10-Q, no significant changes have occurred in the financial disclosures made in our Form 10-K for
the fiscal year ended April 30, 2010 (refer to our Form 10-K for a summary of significant
accounting policies followed in the preparation of the consolidated financial statements).
2. Earnings Per Share
Basic earnings-per-share computations are based on the
weighted-average number of shares of common stock outstanding during the period presented. Diluted
earnings-per-share calculations reflect the assumed exercise and conversion of employee stock
options.
The numerator in calculating both basic and diluted earnings per share
for each period was net income. The denominator was based on the following weighted-average number
of common shares outstanding:
(In thousands) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Jan. 28, 2011 | Jan. 22, 2010 | Jan. 28, 2011 | Jan. 22, 2010 | |||||||||||||
Basic |
30,258 | 30,843 | 30,348 | 30,896 | ||||||||||||
Effect of dilutive stock options |
146 | 93 | 89 | 98 | ||||||||||||
Diluted |
30,404 | 30,936 | 30,437 | 30,994 | ||||||||||||
3. Stock-Based Compensation
We account for stock-based compensation in accordance with the Compensation Stock
Compensation Topic of the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC). Accordingly, stock-based compensation is measured based on the fair value of
the award on the grant date and is recognized over the vesting period of the award on a
straight-line basis. Awards to retirement-eligible employees (as determined under the terms of the
compensation plan under which the award is granted) are subject to immediate expensing in full upon
grant. Total stock-based compensation expense of $1.8 million and $1.2 million for the third
quarters of fiscal 2011 and 2010, respectively, and $6.4 million and $6.3 million for the first
nine months of fiscal 2011 and 2010, respectively, is included in the Consolidated Statements of
Income.
4. Industry Segments
Our business includes two segments, restaurant operations and the processing, distribution
and sale of food products. The revenues from these two segments include both sales to
unaffiliated customers and intersegment sales, which are accounted for on a basis consistent
with sales to unaffiliated customers. Intersegment sales and other intersegment transactions
have been eliminated in the consolidated financial statements. Information on our operating
segments is summarized as follows:
- 5 -
Table of Contents
(In thousands) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Jan. 28, 2011 | Jan. 22, 2010 | Jan. 28, 2011 | Jan. 22, 2010 | |||||||||||||
Net sales |
||||||||||||||||
Restaurant operations |
$ | 337,694 | $ | 343,037 | $ | 1,018,858 | $ | 1,048,237 | ||||||||
Food products |
94,572 | 89,631 | 249,713 | 245,087 | ||||||||||||
432,266 | 432,668 | 1,268,571 | 1,293,324 | |||||||||||||
Intersegment sales of food products |
(3,672 | ) | (2,845 | ) | (10,365 | ) | (9,174 | ) | ||||||||
Total |
$ | 428,594 | $ | 429,823 | $ | 1,258,206 | $ | 1,284,150 | ||||||||
Operating income |
||||||||||||||||
Restaurant operations |
$ | 14,728 | $ | 24,893 | $ | 45,287 | $ | 61,605 | ||||||||
Food products |
10,706 | 3,500 | 15,443 | 16,834 | ||||||||||||
Total |
$ | 25,434 | $ | 28,393 | $ | 60,730 | $ | 78,439 | ||||||||
5. Income Taxes
The combined federal and state income tax rates were 33.7% in the third quarter of fiscal 2011
and 33.6% through nine months of fiscal 2011, compared to 30.6% and 29.9% in the corresponding
periods a year ago. The fiscal 2010 tax rate benefitted from the favorable tax treatment of
certain insurance items, specifically proceeds from corporate-owned life insurance policies of $1.3
million received in the third quarter of fiscal 2010 and $2.5 million received through nine months
of fiscal 2010.
Our effective income tax rate is evaluated each quarter. The effective income tax rate for
the quarter may or may not represent the expected annual effective tax rate for the entire fiscal
year and includes the impact of discrete items for the quarter.
6. Financial Instruments
The fair values of our financial instruments (other than long-term debt) approximate their
carrying values at January 28, 2011. At January 28, 2011, the estimated fair value of our
long-term debt was $161.3 million compared to a carrying amount of $149.3 million. We estimate the
fair value of our long-term debt based on the current interest rates offered for debt of the same
maturities. We do not use derivative financial instruments for speculative purposes.
7. Impairment, Restructuring and Severance Charges
During the second quarter of fiscal 2011, we recorded pretax impairment, restructuring and
severance charges totaling $13.9 million (reflected in selling, general and administrative
expenses). In the restaurant segment, this included $9.2 million related to five underperforming
Mimis Café restaurants and one underperforming Bob Evans restaurant, $1.1 million related to other
property, plant and equipment and $0.8 million of severance/retirement costs. Also during the
second quarter of fiscal 2011, we recorded pretax restructuring charges of $2.8 million in the food
products segment, related to the closure of our fresh sausage operations at our plant in Bidwell,
Ohio, and our food production facility in Galva, Illinois. As of January 28, 2011, all amounts
related to the restaurant and food products segments restructuring and severance charges have been
settled.
During the second quarter of fiscal 2010, we recorded a pretax impairment charge of $1.5
million (reflected in the restaurant segments selling, general and administrative expenses) for
certain property, plant and equipment related to previously closed Bob Evans restaurants.
In accordance with the Property, Plant and Equipment Topic of the FASB ASC, we wrote down the
carrying value of the underlying assets to their estimated fair value, which resulted in the above
impairment charges. The estimated fair value was determined based on independent appraisals, which
we deemed to be Level 3 inputs under the Fair Value Measurements and Disclosures Topic of the FASB
ASC. We did not record any impairment charges in the third quarters of fiscal 2011 or fiscal 2010.
- 6 -
Table of Contents
8. Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2011
classification.
9. Risks and Uncertainties
At January 28, 2011, we had intangible assets totaling $40.9 million on our consolidated
balance sheet related to our acquisition of Mimis Café. Specifically, this amount includes $34.0
million for the unamortized Mimis Café trade name and $6.9 million for the Mimis Café restaurant
concept, which is amortized over a 15-year life. We are required to perform annual impairment
tests of our intangible assets (or more frequently if events or changes in circumstances indicate
the asset might be impaired), which we perform in the fourth quarter of the fiscal year. Impairment
testing of the Mimis Café trade name requires that we determine its fair value. If the fair value
of the asset is less than its $34.0 million carrying value, an impairment charge would be
recognized in an amount equal to the difference. The impairment test for the $6.9 million
restaurant concept asset involves a three-step process, whereby we first consider whether
indicators of impairment are present. If indicators are present, the second step is to compare the
sum of the undiscounted future cash flows attributable to the asset to its carrying value. In the
event that the undiscounted cash flows are less than the carrying value, the third step is to
determine the fair value of the restaurant concept. If the fair value is less than its carrying
value, an impairment charge would be recognized for the difference. We use the relief-from-royalty
method, which is an income approach to valuation, to determine the fair values of the trade name
and restaurant concept intangible assets. Using the relief-from-royalty method, the fair values
are impacted by projected sales, including plans for new restaurant development and same-store
sales trends.
In the fourth quarter of fiscal 2010, we completed our annual impairment tests of intangible
assets. The assumptions we used for projected sales were based on our current five-year
development and financial forecasts for Mimis Café. Using these assumptions, the fair values of
the Mimis Café trade name and restaurant concept exceeded their carrying values, and as a result,
no impairment charges were recorded. Although we believe our current plans and forecasts to be
achievable, there is the potential that our actual future results could differ from these
forecasts, especially given Mimis Cafés prolonged negative same-store sales trend. No impairment
indicators were identified related to the Mimis Café trade name or restaurant concept in the third
quarter of fiscal 2011. If Mimis Cafés performance falls below expectations in future periods,
impairment charges related to the Mimis Café trade name and restaurant concept could arise.
- 7 -
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General Overview
In this Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A), we use the terms Bob Evans, Company, we, us and our to collectively refer to
Bob Evans Farms, Inc., a Delaware corporation, and its subsidiaries. The following terms used
herein are registered trademarks or service marks of Bob Evans: Bob Evans®,
Bob Evans Restaurants®, Bob Evans Special Touch®,
Best Brand BuildersSM, Mimis® , Mimis
Café®, Owens® and Taste of the
Farm®.
As of January 28, 2011, we owned and operated 714 full-service restaurants, including 569 Bob
Evans Restaurants in 18 states and 145 Mimis Cafés (Mimis) in 24 states. Bob Evans Restaurants
are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States.
Mimis are primarily located in California and other western states. Revenue in the restaurant
segment is recognized at the point of sale. We also produce and distribute pork sausage products
and a variety of complementary homestyle convenience food items under the Bob Evans
and Owens brand names. These food products are distributed primarily to warehouses
that distribute to grocery retailers throughout the United States. Revenue in the food products
segment is recognized when products are shipped to our customers warehouses.
The Securities and Exchange Commission (SEC) encourages companies to disclose
forward-looking information so that investors can better understand a companys future prospects
and make informed investment decisions. This MD&A and other written or oral statements that we
make from time to time may contain forward-looking statements that set forth anticipated results
based on managements plans and assumptions. Statements in this MD&A that are not historical facts
are forward-looking statements. These statements are often indicated by words such as expects,
anticipates, believes, estimates, intends and plans. Forward-looking statements involve
various important assumptions, risks and uncertainties. Actual results may differ materially from
those predicted by the forward-looking statements because of various factors and possible events,
including the assumptions, risks and uncertainties discussed in our Annual Report on Form 10-K for
the fiscal year ended April 30, 2010, under the heading Item 1A Risk Factors and in Part II of
our Form 10-Q for the quarterly period ended October 29, 2010, under the heading Item 1A. Risk
Factors. We note these risk factors for investors as contemplated by the Private Securities
Litigation Reform Act of 1995. It is impossible to predict or identify all of the risk factors
that we face. Consequently, you should not consider any such list to be a complete set of all
potential assumptions, risks or uncertainties. Forward-looking statements speak only as of the
date on which they are made, and we undertake no obligation to update any forward-looking statement
for circumstances or events that occur after the date on which the statement is made. Any further
disclosures we make in our filings with the SEC should also be consulted.
The following table reflects data for our third fiscal quarter ended January 28, 2011,
compared to the prior years third fiscal quarter ended January 22, 2010. The consolidated
information is derived from the accompanying Consolidated Statements of Income. The table also
includes data for our two industry segments restaurant operations and food products. The ratios
presented reflect the underlying dollar values expressed as a percentage of the applicable net
sales amount.
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Table of Contents
Three Months Ended | ||||||||||||||||||||||||
Jan. 28, 2011 | Jan. 22, 2010 | Jan. 28, 2011 | Jan. 22, 2010 | Jan. 28, 2011 | Jan. 22, 2010 | |||||||||||||||||||
(In thousands) | Consolidated Results | Restaurant Segment | Food Products Segment | |||||||||||||||||||||
Net sales |
$ | 428,594 | $ | 429,823 | $ | 337,694 | $ | 343,037 | $ | 90,900 | $ | 86,786 | ||||||||||||
Operating income |
$ | 25,434 | $ | 28,393 | $ | 14,728 | $ | 24,893 | $ | 10,706 | $ | 3,500 | ||||||||||||
Cost of sales |
31.5 | % | 31.2 | % | 25.4 | % | 24.4 | % | 54.3 | % | 58.3 | % | ||||||||||||
Operating wages |
33.0 | % | 34.0 | % | 39.3 | % | 39.5 | % | 9.3 | % | 12.3 | % | ||||||||||||
Other operating |
16.1 | % | 15.8 | % | 19.1 | % | 18.4 | % | 4.4 | % | 5.5 | % | ||||||||||||
S,G&A* |
8.7 | % | 7.5 | % | 6.4 | % | 5.0 | % | 17.4 | % | 17.0 | % | ||||||||||||
Depr. & amort. |
4.8 | % | 4.9 | % | 5.4 | % | 5.4 | % | 2.8 | % | 2.9 | % | ||||||||||||
Operating income |
5.9 | % | 6.6 | % | 4.4 | % | 7.3 | % | 11.8 | % | 4.0 | % |
* | Selling, general and administrative expenses (S,G&A) |
Restaurant Segment Overview
The ongoing industry-wide factors most relevant to our restaurant segment include: the
economy, sales trends, labor and fringe benefit expenses, commodity prices, energy prices,
competition, consumer acceptance, restaurant openings and closings, governmental initiatives, food
safety and weather. For the third quarter of fiscal 2011, the factor that had the greatest
positive impact on our restaurant segment performance was sequential quarterly improvement in
same-store sales. The factors that had the greatest negative impact were adverse weather
conditions and commodity cost pressures.
In the third quarter of fiscal 2011, same-store sales decreased 0.5% at Bob Evans Restaurants
and decreased 3.2% at Mimis compared to the corresponding period last year. Through nine months
of fiscal 2011, same-store sales decreased 1.7% at Bob Evans Restaurants and decreased 5.5% at
Mimis compared to the corresponding period last year. Restaurant segment operating income
decreased $10.2 million in the third quarter, and decreased $16.3 million through nine months of
fiscal 2011, compared to the corresponding periods last year. Although same-store sales remained
negative, we are encouraged by the sequential improvement in same-store sales during the third
quarter of fiscal 2011 and are focused on continuing that sales momentum. We are also intensifying
our efforts to control labor and food costs, especially given the current environment of rising
commodity costs.
Food Products Segment Overview
The ongoing industry-wide factors most relevant to our food products segment include: sow
availability and cost, other commodity costs, transportation and energy costs, governmental
regulations, food safety, the economy and consumer acceptance. Production costs and promotional
discounts also have a significant impact on the profitability of our food products segment. For
the third quarter of fiscal 2011, net sales increased $4.1 million, or 4.7%, compared to the
corresponding period last year. Through nine months of fiscal 2011, net sales increased $3.4
million, or 1.5%, compared to the corresponding period last year. For the third quarter of fiscal
2011 and through nine months of fiscal 2011 pounds sold of comparable products decreased 9%. The
financial impact of the volume decrease in comparable pounds sold was more than offset by a
significant decrease in promotional discounts, which enhanced profitability. Promotional discounts
decreased $10.4 million, or 40.9%, in the third quarter of fiscal 2011 and $24.3 million, or 44.1%,
through nine months of fiscal 2011, compared to the same periods a year ago. Promotional discounts
are recorded as a reduction of net sales in the Consolidated Statements of Income.
Operating income in the food products segment increased significantly, $7.2 million, in the
third quarter of fiscal 2011, and decreased $1.4 million through nine months of fiscal 2011
compared to the corresponding periods last year. Sow costs represent a significant part of the
food products segments cost of sales, and the volatile nature of sow costs greatly impacts the
profitability of the segment. In the third quarter of fiscal 2011, average sow costs increased
27.5% and increased 48.3% through nine months of fiscal 2011, compared with the corresponding
periods last year.
However, this sow cost increase was more than offset by the significant decrease in
promotional expenses, price
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increases on retail food products and reductions in operating costs.
We anticipate that average sow costs for the remainder of fiscal 2011 will be higher than sow costs
experienced during the third quarter of 2011.
Net Sales
Consolidated net sales decreased 0.3% to $428.6 million in the third quarter of fiscal 2011
compared to $429.8 million in the corresponding period last year. The decrease was comprised of a
sales decrease in the restaurant segment of $5.3 million partly offset by an increase in the food
products segment of $4.1 million. Restaurant sales accounted for 78.8% of consolidated net sales
in the third quarter of fiscal 2011. For the nine-month period ended January 28, 2011,
consolidated net sales decreased $25.9 million, or 2.0%, compared to the corresponding period last
year.
Restaurant segment net sales decreased $5.3 million, or 1.6%, in the third quarter of fiscal
2011 and $29.4 million, or 2.8%, through nine months of fiscal 2011, compared to the corresponding
periods last year. The sales decreases were primarily due to negative same-store sales at both of
our restaurant concepts.
Bob Evans Restaurants experienced a same-store sales decrease of 0.5% in the third quarter of
fiscal 2011, which included an average menu price increase of 1.8%. Through nine months of fiscal
2011, Bob Evans Restaurants experienced a same-store sales decrease of 1.7%, which included an
average menu price increase of 1.9%. Mimis experienced a same-store sales decrease of 3.2% in the
third quarter of fiscal 2011, which included an average menu price increase of 2.1%. Through nine
months of fiscal 2011, Mimis experienced a same-store sales decrease of 5.5%, which included an
average menu price increase of 2.4%. We estimate that the adverse weather conditions in the third
quarter of fiscal 2011 had a 0.8% to 1.0% negative impact on our combined same-store sales for the
quarter. See the BEST Brand Builders section for a discussion of initiatives to build sales.
Same-store sales computations for a given fiscal year are based on net sales of stores that
are open for at least two years prior to the start of that year. Sales of stores to be rebuilt are
excluded for all periods in the computation when construction commences on the replacement
building. Sales of closed stores are excluded for all periods in the computation.
The following chart summarizes the restaurant openings and closings during the last seven
quarters for Bob Evans Restaurants and Mimis:
Bob Evans Restaurants:
Beginning | Opened | Closed | Ending | |||||||||||||||
Fiscal 2011 |
||||||||||||||||||
1st quarter |
569 | | | 569 | ||||||||||||||
2nd quarter |
569 | | | 569 | ||||||||||||||
3rd quarter |
569 | | | 569 | ||||||||||||||
Fiscal 2010 |
||||||||||||||||||
1st quarter |
570 | | 1 | 569 | ||||||||||||||
2nd quarter |
569 | | | 569 | ||||||||||||||
3rd quarter |
569 | | | 569 | ||||||||||||||
4th quarter |
569 | | | 569 |
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Mimis:
Beginning | Opened | Closed | Ending | |||||||||||||
Fiscal 2011 |
||||||||||||||||
1st quarter |
146 | | 1 | 145 | ||||||||||||
2nd quarter |
145 | | | 145 | ||||||||||||
3rd quarter |
145 | | | 145 | ||||||||||||
Fiscal 2010 |
||||||||||||||||
1st quarter |
144 | | | 144 | ||||||||||||
2nd quarter |
144 | 1 | | 145 | ||||||||||||
3rd quarter |
145 | 1 | | 146 | ||||||||||||
4th quarter |
146 | | | 146 |
In the third quarter of fiscal 2011, we did not open any new Bob Evans Restaurants or
Mimis. We expect to open two new Bob Evans Restaurants during the fourth quarter of fiscal 2011.
We rebuilt one and remodeled 12 Bob Evans Restaurants in the third quarter of fiscal 2011. We have
completed a total of 17 Bob Evans Restaurant remodels so far in fiscal 2011. We also plan to
rebuild one and remodel 17 existing Bob Evans Restaurants in the fourth quarter of fiscal 2011. We
closed one Mimis in the first quarter of fiscal 2011 in connection with the expiration of the
restaurants lease. We do not plan to open or rebuild any new Mimis restaurants in fiscal 2011.
We have remodeled two and plan to remodel one more existing Mimis in the fourth quarter of fiscal
2011. We need to improve our restaurant-level economics at both restaurant brands to enable us to
begin building Mimis restaurants again and to increase the rate of new Bob Evans Restaurants, as
development is an important part of our long-term growth strategy.
The food products segment experienced a sales increase of $4.1 million, or 4.7%, in the third
quarter of fiscal 2011 and a sales increase of $3.4 million, or 1.5%, through nine months of fiscal
2011 compared to the corresponding periods a year ago. In the third quarter and through nine
months of fiscal 2011, we experienced a 9% decrease in pounds sold of comparable products. Pounds sold of
comparable products is calculated using the same products in both periods and excludes new
products. We believe the decrease in the volume of pounds sold was due to our decision to reduce
the amount of promotional discounts provided to retailers. This $10.4 million, or 40.9%,
year-over-year decrease in the amount of promotional discounts in the third quarter of fiscal 2011
more than offset the financial impact of the decrease in pounds sold of comparable products.
Through nine months of fiscal 2011, promotional discounts decreased $24.3 million, or 44.1%,
compared to the corresponding period last year. We implemented a price increase on nearly all of
our retail products early in the second quarter of fiscal 2011 to partially offset the negative
impact of the historically high sow costs we anticipated for fiscal 2011. We plan to continue our
strategy of growing our food products business through successful product introductions and
additional points of distribution.
Cost of Sales
Consolidated cost of sales (cost of materials) was 31.5% of net sales in the third quarter of
fiscal 2011 and 30.3% through nine months of fiscal 2011, compared to 31.2% and 29.8%,
respectively, in the corresponding periods a year ago.
Restaurant segment cost of sales (predominantly food cost) was 25.4% of net sales in the third
quarter of fiscal 2011 and 24.6% through nine months of fiscal 2011 compared to 24.4% in both the
corresponding periods last year. The increase in restaurant segment cost of sales as a percent of
net sales in fiscal 2011 was attributable to higher commodity costs, partially offset by the
implementation of an actual-versus-theoretical food cost program at Bob Evans Restaurants in the
fourth quarter last year and at Mimis in the second quarter of this year. See the BEST Brand
Builders section for a further discussion of our productivity initiatives.
The food products segment cost of sales ratio was 54.3% of net sales in the third quarter of
2011 and 54.8% through nine months of fiscal 2011 compared to 58.3% and 53.8% in the corresponding
periods a year ago. The decrease in the food products segment cost of sales ratio was due
primarily to a significant decrease in promotional
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discounts of $10.4 million, or 40.9%, in the third quarter of fiscal 2011 and $24.3 million, or
44.1%, through nine months of fiscal 2011, which reduce net sales. The decrease in promotional
discounts resulted in higher net sales, which partly offset the increase in sow costs of 27.5% in
the third quarter of fiscal 2011 and 48.3% through nine months of fiscal 2011, compared to the
corresponding periods last year. Sow costs averaged $51.16 per hundredweight in the third quarter,
and $56.60 through nine months of fiscal 2011, compared to $40.14 and $38.17 in the corresponding
periods last year.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses (operating wages) were 33.0% of net
sales in the third quarter of fiscal 2011 and 33.8% through nine months of fiscal 2011 compared to
34.0% and 34.9%, respectively, in the corresponding periods last year.
In the restaurant segment, operating wages were 39.3% of net sales in the third quarter of
fiscal 2011 and 39.2% through nine months of fiscal 2011 compared to 39.5% and 39.8%, respectively,
in the corresponding periods last year. The decrease in the operating wage ratio in the third
quarter and through nine months of fiscal 2011 was due to a reduction in labor hours and lower
health insurance costs, partially offset by weather-related inefficiencies during the third quarter
and negative leverage due to same-store sales declines at both Bob Evans Restaurants and Mimis.
In the food products segment, operating wages were 9.3% of net sales in the third quarter of
fiscal 2011 and 10.9% through nine months of fiscal 2011 compared to 12.3% and 12.7%, respectively,
in the corresponding periods last year. The decrease in the operating wage ratio was primarily due
to headcount reductions resulting from our manufacturing productivity initiatives, including the
closure of the Galva, Illinois, manufacturing facility and our fresh sausage operations in Bidwell,
Ohio.
Other Operating Expenses
Approximately 94% of other operating expenses occurred in the restaurant segment in the third
quarter of fiscal 2011 compared to 93% in the third quarter of fiscal 2010. The most significant
components of other operating expenses were utilities, restaurant advertising, restaurant supplies,
repair and maintenance, rent, nonincome based taxes and credit/debit card processing fees.
Consolidated other operating expenses were 16.1% of net sales in the third quarter of fiscal 2011
and 16.3% through nine months of fiscal 2011, compared to 15.8% and 16.2%, respectively, in the
corresponding periods last year.
In the restaurant segment, other operating expenses were 19.1% of net sales in the third
quarter of fiscal 2011 and 19.0% through nine months of fiscal 2011 compared to 18.4% and 18.6%,
respectively, in the corresponding periods last year. The increase in the other operating expenses
ratio in the third quarter of fiscal 2011 was primarily the result of increased advertising and
increased credit/debit card processing fees due to higher usage. Through nine months of fiscal
2011, the increase in the other operating expenses ratio was primarily the result of increased
advertising, higher utility costs and higher credit/debit card processing fees, partly offset by a
reduction in restaurant supplies.
In the food products segment, the other operating expenses ratio was 4.4% of net sales in the
third quarter of fiscal 2011 and 4.9% through nine months of fiscal 2011 compared to 5.5% in both
the corresponding periods last year. The decrease in the other operating expenses ratio in fiscal
2011 was a result of efficiencies gained from our manufacturing productivity initiatives and lower
repair and maintenance expenses, which also benefitted from the closure of the Galva, Illinois,
manufacturing facility and our fresh sausage operations in Bidwell, Ohio.
Selling, General and Administrative Expenses
Consolidated S,G&A expenses were 8.7% of net sales in the third quarter of fiscal 2011 and
9.8% through nine months of fiscal 2011, compared to 7.5% and 8.1%, respectively, in the
corresponding periods last year. The most significant components of S,G&A expenses are wages and
fringe benefits, food products advertising expense and food products transportation costs.
In the restaurant segment, S,G&A expenses were 6.4% of net sales in the third quarter
of fiscal 2011 and 7.4% through nine months of fiscal 2011, which included impairment,
restructuring and severance charges recorded in the
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second quarter, compared to 5.0% and 5.9%, respectively, in the corresponding periods last
year. The increase in the S,G&A ratio in the third quarter, and through nine months of fiscal
2011, was primarily due to an increase in administrative salary expense, as well as deleverage due
to same-store sales declines. The fiscal 2010 ratios also benefitted from life insurance proceeds
in the third quarter and through nine months of $1.3 million and $2.5 million, respectively, in the
restaurant segment.
In the food products segment, S,G&A expenses were 17.4% of net sales in the third quarter of
fiscal 2011 and 19.8% through nine months of fiscal 2011, compared to 17.0% and 18.0%,
respectively, in the corresponding periods last year. The increases in the S,G&A expense ratio in
the third quarter and through nine months of fiscal 2011 were primarily a result of consulting
expenses of $0.8 million and $2.0 million, respectively, associated with manufacturing productivity
initiatives, and higher administrative salary expense.
Interest
Net interest expense was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | Jan. 28, 2011 | Jan. 22, 2010 | Jan. 28, 2011 | Jan. 22, 2010 | ||||||||||||
Gross interest expense: |
||||||||||||||||
Fixed-rate debt |
$ | 2,053 | $ | 2,414 | $ | 6,622 | $ | 7,399 | ||||||||
Variable-rate debt |
46 | 99 | 179 | 401 | ||||||||||||
2,099 | 2,513 | 6,801 | 7,800 | |||||||||||||
Gross interest income |
(1 | ) | (2 | ) | (1 | ) | (12 | ) | ||||||||
Net interest expense |
$ | 2,098 | $ | 2,511 | $ | 6,800 | $ | 7,788 | ||||||||
At January 28, 2011, we did not have any outstanding debt on our variable-rate revolving lines
of credit and had $149.3 million outstanding on our fixed-rate unsecured senior notes. The
decrease in interest expense was primarily the result of lower average borrowings in fiscal 2011
partly offset by a $0.2 million year-over-year reduction in capitalized interest. We reduced our
total debt by $79.9 million during fiscal 2010 and by an additional $40.9 million through nine
months of fiscal 2011.
Provision for Income Taxes
The combined federal and state income tax rate was 33.7% in the third quarter of
fiscal 2011 and 33.6% through nine months of fiscal 2011, compared to 30.6% and 29.9% in the
corresponding periods a year ago.
The lower fiscal 2010 rate was primarily due to the favorable tax treatment of certain
insurance items. We received proceeds from corporate-owned life insurance policies of $1.3 million
in the third quarter of fiscal 2010 and $2.5 million through nine months of fiscal 2010. We
anticipate the annual effective tax rate for the entire year of fiscal 2011 to approximate 34.0%.
We reevaluate the combined federal and state income tax rates each quarter. Therefore, the current
projected effective tax rate for the entire year may change.
Liquidity and Capital Resources
Cash generated from operations and our bank lines of credit were the main sources of funds for
working capital, capital expenditures, debt repayments, dividends and share repurchases in the
third quarter of fiscal 2011 and through nine months of fiscal 2011. Cash and equivalents totaled
$29.4 million at January 28, 2011. Our bank lines of credit, which renew on an annual basis in
December ($45.0 million) and April ($75.0 million), total $120.0 million, of which $12.3 million is
reserved for certain standby letters-of-credit. The remaining $107.7 million of our bank lines of
credit is available for liquidity needs, capital expansion and share repurchases. At January 28,
2011, we did not have any outstanding balances on these lines of credit.
During the third quarter of fiscal 2011, we repurchased 60,200 shares of our outstanding
common stock at a cost of $1.8 million. Through nine months of fiscal 2011, we repurchased 555,200
shares of our outstanding common
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stock at a cost of $15.1 million. Our Board of Directors has authorized a share repurchase program
of up to $25 million for fiscal 2011.
Capital expenditures consist of purchases of land for future restaurant sites, new and rebuilt
restaurants, production plant improvements, purchases of new and replacement furniture and
equipment, and ongoing remodeling programs. Capital expenditures were $31.5 million through nine
months of fiscal 2011 compared to $41.6 million in the corresponding period last year. We expect
to open two new Bob Evans Restaurants during the fourth quarter of fiscal 2011. We rebuilt one and
remodeled 12 Bob Evans Restaurants in the third quarter of fiscal 2011. We have completed a total
of 17 Bob Evans Restaurant remodels so far in fiscal 2011. We also plan to rebuild one and remodel
17 existing Bob Evans Restaurants in the fourth quarter of fiscal 2011. We closed one Mimis in
the first quarter of fiscal 2011 in connection with the expiration of the restaurants lease. We
do not plan to open or rebuild any new Mimis restaurants in fiscal 2011. We have remodeled two
and plan to remodel one more existing Mimis in the fourth quarter of fiscal 2011. We need to
improve our restaurant-level economics at both restaurant brands to enable us to begin building
Mimis restaurants again and to increase the rate of new Bob Evans Restaurants, as development is
an important part of our long-term growth strategy. We expect capital spending to approximate
between $45.0 and $50.0 million for all of fiscal 2011, as compared to capital expenditures of
$51.3 million in fiscal 2010.
Dividends are paid at the discretion of our Board of Directors. Through nine months of fiscal
2011, we have paid cash dividends of $17.6 million (equivalent to $0.18 per share in the first
quarter, and $0.20 per share in the second and third quarters). In February 2011, our Board of
Directors authorized the payment of dividends of $0.20 per share on March 21, 2011, to shareholders
of record as of March 7, 2011.
We believe that our cash flow from operations, as well as our existing bank lines of credit,
will be sufficient to fund future capital expenditures, working capital requirements, debt
repayments, dividend payments and share repurchases.
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BEST Brand Builders
In fiscal 2011, we continue to focus on the BEST (Bob Evans Special Touch) Brand Builders.
The Brand Builders represent an overall internal approach to managing the company. The five Brand
Builders are:
| Win together as a team | ||
| Consistently drive sales growth | ||
| Improve margins with an eye on customer satisfaction | ||
| Be the BEST at operations execution | ||
| Increase returns on invested capital |
Winning together as a team means focusing on the development of our people. We recognize that
tangible assets alone are not going to transform our business. In order to drive organizational
effectiveness, we need an organizational structure that supports our growth initiatives, rewards
results, and has high-visibility leadership and coaching. We need the right talent in the right
jobs and to prioritize people development at all levels of the organization.
In keeping with these goals, we recently announced the hiring of a new chief financial officer
and the internal promotion of a new senior vice president of marketing for Bob Evans Restaurants.
The second Brand Builder is to consistently drive sales growth. Despite weather challenges in
some of our key markets, our quarterly sequential same-store sales trend is improving at both our
restaurant concepts, so we believe our new sales-building programs are yielding positive results.
During the third quarter of fiscal 2011, at Bob Evans Restaurants, we introduced our new Big
Farm Burgers, featuring a half-pound of 100 percent Black Angus beef, seasoned with our signature
spice blend, then stacked with farm-fresh toppings on a wheat-dusted brioche bun. Available in
seven different varieties, the Big Farm Burgers range in price from $6.99 to $9.99, and we have
been pleased with the consumer response. Other products introduced at Bob Evans Restaurants during
the third quarter of fiscal 2011 include tomato basil soup, fried zucchini sticks and cranberry
grape juice.
One of our current strategies at Bob Evans Restaurants is to focus on growth in off-premise
sales (which includes carryout and catering). Off-premise sales now account for nearly 11.0% of Bob
Evans Restaurants sales, and through nine months of fiscal 2011, off-premise sales are up 13.7%,
compared to the corresponding period last year. We continue to offer our new family meals, under
the tag line, 10 Family Meals Under $20. We will strive to grow our off-premise sales, as it
provides a value-added benefit to our family-first Mom target.
Bob Evans Restaurants is also continuing with the planned phase-out of retail inventory
designed to shift the product offering toward items consistent with our Taste of the Farm brand
positioning. We will implement our new program throughout the fourth quarter of fiscal 2011, and
expect this area to again become a positive contributor to same-store sales in fiscal 2012, after
the transition is complete.
More than one year ago, we started to invest in digital marketing, and today, our e-club at
Mimis continues to grow, with a current membership of about 745,000. This is an increase from only
100,000 members less than two years ago. This type of marketing is advantageous compared to
free-standing inserts or direct mail, because e-club offers do not carry distribution or placement
costs.
In our food products segment, we shifted our trade spending strategy away from offering deep
discounts to driving new authorizations of our top 20 items in the top 20 retail accounts. This
strategy is paying off, as we picked up additional distribution with key retailers.
During the third quarter of fiscal 2011, the food products segment introduced three new
top-bake side dishes: scalloped potatoes, hash brown bake and macaroni and cheese. We also
introduced our first-ever Mimis Café-brand product for retail distribution a slow-roasted,
precooked, skinless chicken breast in white gravy. This product was introduced to the Texas
division of Costco Wholesale Clubs late in the third quarter of fiscal 2011.
The third Brand Builder is to improve margins with an eye on customer satisfaction. We
completed implementation of a new actual-versus-theoretical food cost program at Bob Evans
Restaurants and Mimis. We believe this program will help us minimize our sequential
fourth-quarter 2011 food cost increase, which we estimate at
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about 2.5 to 3.5 percent, due to inflation in such items as produce, pork, poultry, oil based
products, dairy, bakery, and liquid eggs. We have also designed Mimis new streamlined menu with
lower food costs in mind and will focus future promotions on higher-margin items such as our
seasonal features.
In our food products segment, we reduced promotional spending by $10.4 million and $24.3
million in the third quarter and through nine months of fiscal 2011, respectively, compared to the
corresponding periods last year, due to the record-high sow costs. The reduction in promotional
spending contributed to the improvement in our year-over-year operating margin results.
In addition, we began a productivity study with a consultant nearly two years ago and have
implemented several manufacturing productivity initiatives that are showing favorable results, as
evidenced by the improvement in the food products segment operating expenses in the third quarter
of fiscal 2011. Two of these initiatives were the closings of our fresh sausage manufacturing
operations in Galva, Illinois, and Bidwell, Ohio, in the second quarter of fiscal 2011, due to
overcapacity in our fresh sausage processing plants.
Prior to closing the Galva and Bidwell fresh sausage operations, we utilized only about 50% of
our total fresh sausage capacity. We believe we have more-than-sufficient capacity to absorb the
work from both Galva and Bidwell due to the lean manufacturing improvements we have made at our
existing plants in Hillsdale, Michigan, Xenia, Ohio and Richardson, Texas. We believe that our
current capacity is appropriate for the present state of our business, with enough room to
accommodate our growth plans for the foreseeable future.
Our fourth Brand Builder is to be the BEST at operations execution. Our January consumer
satisfaction scores were near two-year highs at both our restaurant brands, which shows we are
making progress with our process-improvement efforts. We recently introduced new TRED station
guides at Bob Evans Restaurants, and we are in the process of implementing a similar program at
Mimis. TRED, which stands for Target Setting, Rush Ready, Equipment and Technology, and
Deployment, provides the model for what we call BEST for the Guest. The ultimate goal of BEST
for the Guest is to improve food quality, drive speed of service and enhance our hospitality.
We expect the rollout at Mimis to be complete in the fourth quarter of fiscal 2011.
One of Mimis BEST for the Guest initiatives is to reduce menu complexity. We cancelled the
planned introduction of several new menu items and we also plan to eliminate approximately 20% of
the current menu items. We believe this will reduce menu complexity and improve our food quality,
speed of service and hospitality at Mimis.
Our fifth and final Brand Builder is to increase returns on invested capital. Our capital
expenditures budget this year is now $45.0 to $50.0 million. This reflects our expectation for lower
remodel costs in the fourth quarter of fiscal 2011, which we now estimate at $75,000 to $250,000
per restaurant. This is the result of successful cost engineering based on insights we gained in
the first phase of the program. In the third quarter of fiscal 2011, we started an endeavor to
remodel 29 Bob Evans Restaurants in the Dayton, Ohio, area (Model Market). The purpose of the
Model Market is to gain economies of scale in both construction costs, as well as in marketing
expenditures. The remodeled restaurants include an updated concept look, as well as a bakery and
enhanced carryout and retail areas designed to drive incremental sales layers. We expect to open
two new Bob Evans Restaurants during the fourth quarter of fiscal 2011. We rebuilt one and
remodeled 12 Bob Evans Restaurants in the third quarter of fiscal 2011. We have completed a total
of 17 Bob Evans Restaurant remodels so far in fiscal 2011. We also plan to rebuild one and remodel
17 existing Bob Evans Restaurants in the fourth quarter of fiscal 2011. We closed one Mimis in
the first quarter of fiscal 2011 in connection with the expiration of the restaurants lease. We
do not plan to open or rebuild any new Mimis restaurants in fiscal 2011. We have remodeled two
and plan to remodel one more existing Mimis in the fourth quarter of fiscal 2011. We need to
improve our restaurant-level economics at both restaurant brands to enable us to begin building
Mimis restaurants again and to increase the rate of new Bob Evans Restaurants, as development is
an important part of our long-term growth strategy.
We expect to incur about $0.5 million in incremental start-up costs and initial operating
inefficiencies in the fourth quarter of fiscal 2011 due to the Bob Evans Restaurant remodel
program. This is significantly higher than the impact in the third quarter of fiscal 2011 due to
the fact that we completed most of the remodels late in the third quarter. We also believe the
remodel program will have a negative impact of about 0.1% on same-store sales in the fourth quarter
of fiscal 2011 due to temporary store closures.
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In summary, we remain focused on the five BEST Brand Builders and continue to implement them
with a sense of urgency.
Business Outlook
Our outlook for fiscal 2011 relies on a number of assumptions, as well as the risk factors
included in our SEC filings. We anticipate consolidated net sales to remain relatively flat in
fiscal 2011 at about $1.7 billion. We reaffirmed our previously issued outlook for fiscal 2011
operating income of $108.0 to $112.0 million, excluding the pretax charges of $13.9 million, shown
in the GAAP to non-GAAP reconciliation table below. We expect Bob Evans Restaurants to experience
full-year same-store sales of negative 2.0% to flat including a negative impact of 0.1% from
temporary store closures related to the remodel program in the fourth quarter of fiscal 2011.
Mimis is expected to experience full-year same-store sales of negative 5.0% to negative 2.0%. We
expect total net sales to approximate $975.0 to $985.0 million at Bob Evans Restaurants and $380.0
to $390.0 million at Mimis. We expect an adjusted restaurant segment operating margin
of approximately 5.7% to 6.1%, down from our previous estimate of approximately 6.0% to 6.5% for
the full fiscal year, excluding the pretax charges of $11.1 million shown in the GAAP to non-GAAP
reconciliation table below. We expect margin pressure from increasing commodity costs, offset by
the benefit of our actual-versus-theoretical food cost program, increased sales of higher margin
items, effective supply chain management and improving operating wages through expected labor
efficiencies.
In the food products segment, we expect overall net sales of $320.0 to $330.0 million for the
full fiscal year. We anticipate that sow costs will average approximately $55 to $60 per
hundredweight in fiscal 2011 with the full-year average at the high end of this range. We expect
the food products segments fiscal 2011 operating income margin to be approximately 8.2% and 8.8%,
up from our previous estimate of approximately 7.0% to 8.0%, excluding the pretax charges of $2.8
million shown in the GAAP to non-GAAP reconciliation table below. We expect the food products
segment operating income margin will continue to be positively impacted by the implementation of
price increases, better management of promotional discounts and continued cost savings related to
manufacturing productivity initiatives. We expect to incur manufacturing productivity consulting
expenses of $0.9 million and $3.0 million in the fourth quarter and full fiscal year of 2011,
respectively.
We are projecting net interest expense of approximately $9.0 to $9.5 million for fiscal 2011.
We estimate that our effective tax rate will approximate 34.0% for all of fiscal 2011. We
project weighted-average diluted shares outstanding to be approximately 30.5 million shares for the
fiscal year.
We expect capital expenditures to approximate $45.0 million to $50.0 million, down from our
previous estimate of approximately $60.0 to $65.0 million in fiscal 2011 due primarily to lower
estimated costs to remodel Bob Evans Restaurants in the Dayton, Ohio market. Our capital spending
was $51.3 million in fiscal 2010. Depreciation and amortization expense for fiscal 2011 is
expected to approximate $84.0 to $86.0 million.
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Below is a reconciliation of fiscal 2011 estimated reported consolidated operating income to estimated adjusted
operating income:
Fiscal 2011 estimated reported operating income |
$ | 94.1 to $98.1 million | ||
Fiscal 2011 2Q fixed asset impairment |
10.3 million | |||
Fiscal 2011 2Q manufacturing productivity initiatives |
2.8 million | |||
Fiscal 2011 2Q retirement / severance |
0.8 million | |||
Fiscal 2011 estimated adjusted operating income |
$ | 108 to $112 million |
Below is a reconciliation of fiscal 2011 estimated reported restaurant segment operating margin to estimated
adjusted restaurant segment operating margin:
Fiscal 2011 estimated reported operating margin |
4.8 to 5.3 percent | |||
Fiscal 2011 2Q fixed asset impairment ($10.3 million) |
0.7 to 0.8 percent | |||
Fiscal 2011 2Q retirement / severance ($0.8 million) |
0.1 percent | |||
Fiscal 2011 estimated adjusted operating margin |
5.7 to 6.1 percent |
Below is a reconciliation of fiscal 2011 estimated reported food products segment operating margin to estimated
adjusted food products segment operating margin:
Fiscal 2011 estimated reported operating margin |
7.3 to 8.0 percent | |||
Fiscal 2011 2Q mfg. productivity initiatives ($2.8 million) |
0.8 to 0.9 percent | |||
Fiscal 2011 estimated adjusted operating margin |
8.2 to 8.8 percent |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments for speculative or hedging purposes.
At January 28, 2011, our outstanding debt included no outstanding balance on our variable-rate
revolving lines of credit and $149.3 million of fixed-rate unsecured senior notes. A change in
market interest rates will not impact interest expense associated with our fixed-rate debt.
We purchase certain commodities such as beef, pork, poultry, seafood, produce and dairy
products. These commodities are generally purchased based upon market prices established with
suppliers. These purchase arrangements may contain contractual features that fix the price paid
for certain commodities. We do not use financial instruments to hedge commodity prices because
these purchase arrangements help control the ultimate cost paid and most commodity price
aberrations are generally short-term in nature.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
With the participation of our management, including Bob Evans principal executive officer and
principal financial officer, we have evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, Bob Evans principal executive officer and principal financial officer have concluded
that:
information required to be disclosed by Bob Evans in this Quarterly Report on Form 10-Q and other reports that Bob Evans files or submits under the Exchange Act would be accumulated and communicated to Bob Evans management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; | |||
information required to be disclosed by Bob Evans in this Quarterly Report on Form 10-Q and other reports that Bob Evans files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms; and | |||
Bob Evans disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to Bob Evans and its consolidated subsidiaries is made known to them, particularly during the period in which the periodic reports of Bob Evans, including this Quarterly Report on Form 10-Q, are being prepared. |
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
Like many restaurant companies and retail employers, SWH Corporation, a wholly owned indirect
subsidiary of Bob Evans, which does business as Mimis Café, has been faced with allegations of
purported class-wide wage and hour violations in California. The following is a brief description
of the current California class action matters pending against SWH Corporation.
On October 13, 2009, a class action complaint entitled Edder Diaz and Rosolyn Gray, et al. vs.
SWH Corporation d/b/a Mimis Café was filed in Alameda County California Superior Court. In a March
2010 amended complaint, Mr. Diaz and Ms. Gray purport to represent a class of servers, bartenders,
front-of-house trainers, to-go servers, shift managers, or shift manager expeditors, who are
allegedly similarly situated. In a second amended complaint filed in October 2010, Mr. Diaz and
Ms. Gray allege that current and former nonexempt employees working in these positions in
California from July 26, 2006, to August 31, 2010 (1) were not reimbursed for certain expenses
incurred in connection with the discharge of their duties, (2) were denied rest breaks and meal
periods as required for nonexempt employees under California wage and hour laws, (3) were not paid
minimum wage and overtime for time spent working off-the-clock during, or in connection with, a
meal period, and (4) were required to pay for cash shortages. The second amended complaint seeks
unspecified damages, penalties, interest and attorneys fees and costs.
Although we believe Mimis Café has complied with the California wage and hour laws at issue
in the Diaz lawsuit, we elected to resolve the lawsuit voluntarily. In October 2010, we entered
into a Memorandum of Understanding with the Diaz class representatives and their legal counsel to
settle the lawsuit for $340,000, inclusive of payments to class members, enhancements to the class
representatives, costs of administration, and plaintiffs attorney fees and costs related to the
lawsuit. The Alameda County California Superior Court granted preliminary approval of the
settlement on December 8, 2010. We are in the process of contacting the class members and
administering their claims.
We are from time-to-time involved in ordinary and routine litigation, typically involving
claims from customers, employees and others related to operational issues common to the restaurant
and food manufacturing industries. In addition to the class action lawsuits described above, we
are involved with a number of pending legal proceedings incidental to our business. Management
presently believes that the ultimate outcome of these proceedings, individually or in the
aggregate, will not have a material adverse effect on our financial position, cash flows or results
of operations.
ITEM 1A. | RISK FACTORS. |
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our
Annual Report on Form 10-K for the fiscal year ended April 30, 2010, and Part II, Item 1A, of our
Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2010.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
On May 26, 2010, the Board of Directors authorized a share repurchase program of up to $25.0
million for fiscal 2011. The program authorizes Bob Evans to repurchase its outstanding common
stock in the open market or through privately negotiated transactions.
The following table provides information on Bob Evans purchases of its common stock during
the three fiscal months ended January 28, 2011:
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Table of Contents
Total Value of | Maximum Value of | |||||||||||||||
Shares Purchased | Shares that May | |||||||||||||||
Average | as Part of Publicly | Yet be Purchased | ||||||||||||||
Total Value of | Price Paid | Announced Plans | Under the Plans or | |||||||||||||
Period | Shares Purchased | Per Share | or Programs | Programs | ||||||||||||
10/30/10-11/26/10 |
$ | 1,792,820 | $ | 29.78 | $ | 1,792,820 | $ | 9,911,046 | ||||||||
11/27/10-12/31/10 |
| | | 9,911,046 | ||||||||||||
1/1/11-1/28/11 |
| | | 9,911,046 | ||||||||||||
Total |
$ | 1,792,820 | $ | 29.78 | $ | 1,792,820 | $ | 9,911,046 | ||||||||
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
Not Applicable
ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION.
Not Applicable
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Table of Contents
ITEM 6. EXHIBITS
EXHIBIT NO. | DESCRIPTION | LOCATION | ||
10.1
|
$45.0 Million unsecured Line of Credit Note between Bob Evans Farms, Inc. and JPMorgan Chase Bank, N.A. dated December 1, 2010 | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the Commission on December 2, 2010 (File No. 0-01667) | ||
10.2
|
Reaffirmation of Guaranty between Bob Evans Farms, Inc. and JPMorgan Chase Bank, N.A., dated December 1, 2010 | Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Commission on December 2, 2010 (File No. 0-01667) | ||
10.3
|
Reaffirmation of Guaranty Agreement between Mimis Café LLC and JPMorgan Chase Bank, N.A., dated December 1, 2010 | Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed with the Commission on December 2, 2010 (File No. 0-01667) | ||
21
|
Subsidiaries of the Registrant as of January 1, 2011 | Filed herewith | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) | Filed herewith | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) | Filed herewith | ||
32.1
|
Section 1350 Certification (Principal Executive Officer) | Filed herewith | ||
32.2
|
Section 1350 Certification (Principal Financial Officer) | Filed herewith | ||
101.INS
|
XBRL Instance Document | * | ||
101.SCH
|
XBRL Taxonomy Extension Schema Document | * | ||
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | * | ||
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document | * | ||
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document | * | ||
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document | * |
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed herewith. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
BOB EVANS FARMS, INC. | ||||||
By: | /s/ Steven A. Davis
|
|||||
Steven A. Davis | ||||||
Chairman and Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
By: | /s/ Richard B. Green
|
|||||
Richard B. Green1 | ||||||
Chief Risk and Compliance Officer | ||||||
(Principal Financial Officer) |
March 9, 2011
Date
1 | Mr. Green also served as Interim Chief Financial Officer during the Companys third fiscal quarter ended January 28, 2011. |
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Table of Contents
INDEX TO EXHIBITS
Quarterly Report on Form 10-Q
Dated March 9, 2011
Quarterly Report on Form 10-Q
Dated March 9, 2011
Bob Evans Farms, Inc.
Exhibit No. | Description | Location | ||
10.1
|
$45.0 Million unsecured Line of Credit Note between Bob Evans Farms, Inc. and JPMorgan Chase Bank, N.A. dated December 1, 2010 | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the Commission on December 2, 2010 (File No. 0-01667) | ||
10.2
|
Reaffirmation of Guaranty between Bob Evans Farms, Inc. and JPMorgan Chase Bank, N.A., dated December 1, 2010 | Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Commission on December 2, 2010 (File No. 0-01667) | ||
10.3
|
Reaffirmation of Guaranty Agreement between Mimis Café LLC and JPMorgan Chase Bank, N.A., dated December 1, 2010 | Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed with the Commission on December 2, 2010 (File No. 0-01667) | ||
21
|
Subsidiaries of the Registrant as of January 1, 2011 | Filed herewith | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) | Filed herewith | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) | Filed herewith | ||
32.1
|
Section 1350 Certification (Principal Executive Officer) | Filed herewith | ||
32.2
|
Section 1350 Certification (Principal Financial Officer) | Filed herewith | ||
101.INS
|
XBRL Instance Document | * | ||
101.SCH
|
XBRL Taxonomy Extension Schema Document | * | ||
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | * | ||
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document | * | ||
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document | * | ||
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document | * |
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed herewith. |
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