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| OFI > SEC Filings for OFI > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our condensed financial statements and notes to condensed financial statements included elsewhere in this report. This report, and our condensed financial statements and notes to our condensed financial statements, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements are based on current expectations or beliefs. For this purpose, statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as "continue," "efforts," "expects," "anticipates," "intends," "plans," "believes," "estimates," "projects," "forecasts," "strategy," "will," "goal," "target," "prospects," "optimistic," "confident" or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), on-going business strategies or prospects, and possible future company actions, which may be provided by management, are also forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including, among others:
· the impact of competitive products and pricing;
· fulfillment by suppliers of existing raw material contracts;
· market conditions that may affect the costs and/or availability of raw materials, fuels, energy, logistics and labor as well as the market for our products, including our customers' ability to pay and consumer demand;
· changes in our business environment, including actions of competitors and changes in customer preferences, as well as disruptions to our customers' businesses;
· seasonality in the retail category;
· loss of key customers due to competitive environment or production being moved in-house by customers;
· natural disasters that can impact, among other things, costs of fuel and raw materials;
· the occurrence of acts of terrorism, such as the events of September 11, 2001, or acts of war;
· changes in governmental laws and regulations, including income taxes;
· change in control due to takeover or other significant changes in ownership;
· financial viability of our customers during deep recessionary periods;
· ability to obtain additional financing as and when needed, and rising costs of credit that may be associated with new borrowings;
· voluntary or government-mandated food recalls; and
· other factors as may be discussed in this report and other reports we file with the Securities and Exchange Commission ("Commission"), including those described in Item 1A of Part I of our annual report on Form 10-K for the fiscal year ended September 28, 2008 and any updates thereto.
We do not undertake to update, revise or correct any forward-looking statements, except as otherwise required by law.
Overview
We are a leading value-added manufacturer of high quality, prepared frozen food products for branded retail, private label, foodservice and airline customers. Our product line includes entrées, plated meals, bulk-packed meal components, pastas, soups, sauces, poultry, meat and fish specialties, and organic and vegetarian offerings. Our extensive research and development efforts, combined with our extensive catalogue of recipes and flexible manufacturing capabilities, provide customers with a one-stop solution for new product ideas, formulations and product manufacturing, as well as precise replication of existing recipes. Our capabilities allow customers to outsource product development, product manufacturing and packaging, thereby avoiding significant fixed-cost and variable investments in resources and equipment. Our customers include prominent nationally recognized names such as Jenny Craig, Inc., Safeway Inc., Panda Restaurant Group, Inc., H. J. Heinz Company, Pinnacle Foods Group LLC, and American Airlines, Inc.
Our goal is to be a leading developer and manufacturer of value-added food products and provider of custom prepared frozen foods. We intend to create superior value for our stockholders by continuing to execute our growth and operating strategies, including:
· diversifying and expanding our customer base by focusing on sectors we believe have attractive growth characteristics, such as foodservice and retail;
· investing in and operating efficient production facilities;
· providing value-added ancillary support services to customers;
· offering a broad range of products to customers in multiple channels of distribution; and
· continuing to pursue growth through strategic acquisitions and investments.
The current economic downturn, coupled with the impact of the previously announced reduction in sales to one of our retail accounts, adversely impacted our business during the second fiscal quarter of 2009, which ended March 29, 2009. Net revenues for January and February of 2009 were well below net revenues for the same months in 2008. In March 2009, we received increased orders resulting from a contract extension with higher volume commitments from an existing foodservice account, as was previously anticipated and disclosed in our first quarter Form 10-Q. The delay in sales contributed to the quarterly shortfall in net revenues, as these increased sales were anticipated to begin in January 2009 but were delayed until March 2009 while the customer depleted its inventory from its other suppliers. In addition, sales increased from new accounts and from existing accounts as customers replenished inventories that were reduced beginning in December 2008. While we continue to monitor the effects of the economy, we remain confident that, based on our customer sales data and the recent and anticipated acquisition of new business, our order volumes and product introductions will normalize over the balance of the fiscal year.
For the quarter ended March 29, 2009, net revenues of $51.6 million reflected a 22.3% decrease compared to the quarter ended March 30, 2008. More than one-half of the decrease in net revenues was due to the anticipated reduced volume from one retail customer, H.J. Heinz Company, who moved a large portion of its production to its own facilities. Softness in the airline industry, as well as in retail markets, offset partially by an increase in foodservice net revenues, made up the balance of the reduction. As reported earlier, we expected an increase in foodservice net revenues to offset the loss in net revenues from H.J. Heinz Company. This increase in net revenues did not occur until the end of March 2009 as the foodservice customer depleted its inventory from its other suppliers.
For the six months ended March 29, 2009, net revenues of $106.9 million reflected a 13.3% decrease compared to the six months ended March 30, 2008. The decrease in net revenues was due to the anticipated reduced volume from one retail customer, as well as declines in foodservice and airline sales resulting from reduced volume to one foodservice customer and softness in the airline industry caused by a slowing economy.
Gross profit was $5.8 million for the quarter ended March 29, 2009, compared to $8.4 million for the quarter ended March 30, 2008. Gross profit as a percentage of net revenues decreased to 11.2% for the quarter ended March 29, 2009 from 12.7% for the quarter ended March 30, 2008 due largely to lower absorption of overhead costs due to lower sales volume.
Gross profit was $13.3 million for the six months ended March 29, 2009, compared to $14.4 million for the six months ended March 30, 2008. Although gross profit decreased due to lower revenues, it increased as a percentage of net revenues to 12.4% for the six months ended March 29, 2009 from 11.7% for the six months ended March 30, 2008. Gross profit as a percentage of net revenues increased due to higher margin sales along with on-going manufacturing improvements, increased efficiencies and yields, improved and increased financial reviews and controls and modest increases in sales prices to several customers, offset partially by new product development costs. As previously disclosed, in order to improve our gross profit margins, we continue to analyze our lower margin accounts in order to increase margins or change to more profitable business.
Operating income for the quarter ended March 29, 2009 was $3.5 million (6.8% of net revenues), compared to $6.4 million (9.6% of net revenues) for the quarter ended March 30, 2008. The decrease was due to lower revenues, increased total brokerage fees stemming from higher sales to Safeway Inc. and increased professional fees.
Operating income for the six months ended March 29, 2009 was $8.4 million (7.9% of net revenues), compared to $10.1 million (8.2% of net revenues) for the six months ended March 30, 2008. The decrease was due to lower revenues, increased total brokerage fees stemming from higher sales to Safeway Inc. and increased professional fees.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See note 2 to the financial statements contained in our 2008 annual report on Form 10-K for the year ended September 28, 2008 for a summary of our significant accounting policies. Management believes the following critical accounting policies are related to our more significant estimates and assumptions used in the preparation of our financial statements.
Inventories. Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost, which approximates the first-in, first-out ("FIFO") method, or market. We use a standard costing system to estimate our FIFO cost of inventory at the end of each reporting period. Historically, standard costs have been materially consistent with actual costs. We periodically review our inventory for excess items, and write it down based upon the age of specific items in inventory and the expected recovery from the disposition of the items.
We write-down our inventory for the estimated aged surplus, spoiled or damaged products and discontinued items and components. We determine the amount of the write-down by analyzing inventory composition, expected usage, historical and projected sales information and other factors. Changes in sales volume due to unexpected economic or competitive conditions are among the factors that could result in material increases in the write-down of our inventory.
Property and Equipment. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, which range from three to ten years. Leasehold improvements to our Plant No. 1 in Vernon, California are amortized over the lesser of the initial lease term plus one lease extension period, initially totaling 15 years, or the estimated useful lives of the assets. Other leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. Depreciation is generally computed using the straight-line method.
We assess property and equipment for impairment whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable.
Expenditures for maintenance and repairs are charged to expense as incurred. The cost of materials purchased and labor expended in betterments and major renewals are capitalized. Costs and related accumulated depreciation of properties sold or otherwise retired are eliminated from the accounts, and gains or losses on disposals are included in operating income.
Goodwill. We evaluate goodwill at least annually for impairment in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." We have one reporting unit and estimate fair value based on a variety of market factors, including discounted cash flow analysis, market capitalization, and other market-based data. At March 29, 2009, we had goodwill of $12.2 million. A deterioration of our operating results and the related cash flow effect could decrease the estimated fair value of our business and, thus, cause our goodwill to become impaired and cause us to record a charge against operations in an amount representing the impairment.
Income Taxes. We evaluate the need for a valuation allowance on our deferred tax assets based on whether we believe that it is more likely than not that all deferred tax assets will be realized. We consider future taxable income and on-going prudent and feasible tax planning strategies in assessing the need for valuation allowances. In the event we were to determine that we would not be able to realize all or part of our deferred tax assets, we would record an adjustment to the deferred tax asset and a charge to income at that time.
We adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty of Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN 48") on October 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, we recorded no increase in the liability for unrecognized tax benefits, and the balance of unrecognized tax benefits was zero at March 29, 2009.
We have also adopted the accounting policy that interest recognized in accordance with Paragraph 15 of FIN 48 and penalties recognized in accordance with Paragraph 16 of FIN 48 are classified as part of income taxes. No interest and penalties were recognized in the statement of income for the first six months of fiscal year 2009.
Concentrations of Credit Risk
Our financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. We perform on-going credit evaluations of each customer's financial condition and generally require no collateral from our customers. A bankruptcy or other significant financial deterioration of any customer could impact its future ability to satisfy its receivables with us. Our allowance for doubtful accounts is calculated based primarily upon historical bad debt experience and current market conditions. For the six months ended March 29, 2009 and March 30, 2008, our write-offs, net of recoveries, to the allowance for doubtful accounts were immaterial.
A significant portion of our total net revenues during the first six months of fiscal years 2009 and 2008 was derived from five customers. Jenny Craig, Inc., Safeway Inc., Panda Restaurant Group, Inc., H. J. Heinz Company and Pinnacle Foods Group LLC accounted for approximately 24%, 17%, 17%, 15% and 9%, respectively, of our total net revenues for the six months ended March 29, 2009 and approximately 24%, 11%, 18%, 19% and 5%, respectively, of our total net revenues for the six months ended March 30, 2008. Receivables related to Panda Restaurant Group, Inc. (through its distributors), Jenny Craig, Inc., Pinnacle Foods Group LLC, Safeway Inc. and H. J. Heinz Company accounted for approximately 22%, 18%, 16%, 15% and 8%, respectively, of our total accounts receivable balance as of March 29, 2009 and approximately 15%, 24%, 10%, 10% and 22%, respectively, of our total accounts receivable balance as of March 30, 2008.
Cash used primarily for working capital purposes is maintained in two accounts with one major financial institution. Account balances as of March 29, 2009 exceeded the Federal Deposit Insurance Corporation insurance limits. If the financial banking markets experience disruption, we may need to temporarily rely on other forms of liquidity, including borrowing under our credit facility.
Other Matters
We manufactured for one of our customers, American Pie, LLC, who distributes products under the name "Claim Jumper," pursuant to a written manufacturing agreement that expired on April 30, 2007. Thereafter, we manufactured for the customer on a purchase order basis pursuant to increased prices for some products. During the first quarter of fiscal year 2008, we informed the customer that we intended to discontinue production for them. The decision was based on our evaluation of the overall economics of that account. The customer represented it would pay price increases for continued manufacturing during a transition period to a new manufacturer. After completing production for the customer in June
2008, the customer withheld payment of approximately $1.9 million for product produced and shipped pursuant to the customer's purchase orders. After several discussions and subsequent to the closing of our third quarter of fiscal year 2008, the customer made a partial payment of approximately $1.0 million against the outstanding receivable balance. However, prior to fiscal year end, the customer still refused payment of the remaining outstanding receivable balance and we filed a lawsuit against the customer as of September 23, 2008 (Overhill Farms, Inc. v. American Pie (United States District Court for the Central District of California, Case No. CV 0806268 R (CTx))). This action involves a complaint by us against customer American Pie and two of its officers, William R. Collins and Robert G. Blume (collectively, "defendants"). The complaint asserts claims for: 1) breach of contract; 2) breach of implied covenant of good faith and fair dealing; 3) fraud; 4) unfair business practices; and 5) declaratory relief to recover amounts American Pie refused to pay for goods delivered by us pursuant to purchase orders and invoices reflecting price increases effective December 9, 2007 and thereafter. On November 4, 2008, the defendants filed a motion to dismiss our third and fourth claims for fraud and unfair business practices for failure to state a claim. On December 1, 2008, the United States District Court denied the defendants' motion to dismiss our claims for fraud and unfair business practices. The defendants responded to the complaint on December 10, 2008, and also filed a counterclaim against us. The counterclaim alleges: 1) breach of an oral contract; 2) breach of a written contract; and 3) breach of implied warranties of merchantability and fitness for an intended purpose to recover price increases, compensation for products not produced by us, and for purportedly contaminated product. Discovery in the litigation is expected to commence in our third quarter of fiscal year 2009. We and the defendants are pursuing settlement discussions prior to initiating discovery and proceeding to trial, which Judge Manuel L. Real set for August 4, 2009. Based on the information now available, we believe the customer's claims lack merit and that the balance is collectible once the complaint and counterclaim are resolved.
Results of Operations
While we operate as a single business unit, manufacturing various products on common production lines, revenues from similar customers are grouped into the following natural categories: retail, foodservice and airlines.
Quarter Ended March 29, 2009 Compared to Quarter Ended March 30, 2008
The quarters ended March 29, 2009 and March 30, 2008 were both 13-week periods.
Net Revenues. Net revenues for the quarter ended March 29, 2009 decreased $14.8 million (22.3%) to $51.6 million from $66.4 million for the quarter ended March 30, 2008 due to a decrease in airline and retail net revenues.
Retail net revenues decreased $14.0 million (27.6%) to $36.8 million for the quarter ended March 29, 2009 from $50.8 million for the quarter ended March 30, 2008. More than one-half of the decrease in retail net revenues was due to the anticipated reduced volume from one retail customer, H.J. Heinz Company, who moved a large portion of its production to its own facilities, which we previously projected could result in a revenue reduction of approximately $19 million for the current fiscal year, beginning in our second quarter.
Foodservice net revenues increased $1.4 million (13.1%) to $12.1 million for the quarter ended March 29, 2009 from $10.7 million for the quarter ended March 30, 2008. The increase was attributable to sales from a new customer and increased volume from an existing customer in the latter part of the quarter, as was previously anticipated and disclosed in our first quarter Form 10-Q. We expect foodservice revenues to increase as we manufacture full quarters of anticipated volume from new and existing customers.
Airline net revenues decreased $2.3 million (46.9%) to $2.6 million for the quarter ended March 29, 2009 from $4.9 million for the quarter ended March 30, 2008. Due to the current economic downturn and airline initiatives to cut costs, airline net revenues may continue to decrease in subsequent periods.
Gross Profit. Gross profit for the quarter ended March 29, 2009 decreased by $2.6 million (31.0%) to $5.8 million from $8.4 million for the quarter ended March 30, 2008. Gross profit as a percentage of net revenues decreased to 11.2% for the quarter ended March 29, 2009 from 12.7% for the quarter ended March 30, 2008 due largely to lower absorption of overhead costs due to lower sales volume partially offset by favorable commodity prices and lower fuel surcharges.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $200,000 (9.5%) to $2.3 million (4.5% of net revenues) for the quarter ended March 29, 2009 from $2.1 million (3.2% of net revenues) for the quarter ended March 28, 2008. SG&A expenses were driven by higher brokerage fees stemming from higher sales to Safeway Inc., and higher professional fees.
Operating Income. Operating income decreased $2.9 million (45.3%) to $3.5 million for the quarter ended March 29, 2009 from $6.4 million for the quarter ended March 30, 2008. The decrease in operating income was the result of the decrease in gross profit as noted above.
Total Interest Expense. Total interest expense for the quarter ended March 29, 2009 was $526,000, compared to $976,000 for the quarter ended March 30, 2008. The decrease in interest expense is due to lower debt balances and lower variable interest rates.
Income Tax Provision. Income tax expense was $1.2 million for the quarter ended March 29, 2009, compared to $2.2 million for the quarter ended March 30, 2008. The difference was a result of income before taxes decreasing $2.5 million from $5.4 million for the quarter ended March 30, 2008 to $2.9 million for the quarter ended March 29, 2009. The effective tax rates were 39.1% for the quarter ended March 29, 2009 and 41.1% for the quarter ended March 30, 2008. The effective tax rates for the quarters ended March 29, 2009 and March 30, 2008 did not materially differ from the statutory rate.
Net Income. Net income for the quarter ended March 29, 2009 was $1.8 million, or $0.11 per basic and diluted share, compared to net income of $3.2 million, or $0.20 per basic and diluted share, for the quarter ended March 30, 2008.
Six Months Ended March 29, 2009 Compared to Six Months Ended March 30, 2008
The six month periods ended March 29, 2009 and March 30, 2008 were both 26-week periods.
Net Revenues. Net revenues decreased $16.4 million (13.3%) to $106.9 million for the six months ended March 29, 2009 from $123.3 million for the six months ended March 30, 2008, due to a decrease in retail, airline and foodservice net revenues.
Retail net revenues decreased $8.0 million (9.2%) to $79.3 million for the six months ended March 29, 2009 from $87.3 million for the six months ended March 30, 2008. The decrease in retail net revenues was largely due to the anticipated reduced volume from one retail customer, H.J. Heinz Company, who moved a large portion of its production to its own facilities, as previously discussed.
Foodservice net revenues decreased $3.8 million (14.7%) to $21.6 million for the six months ended March 29, 2009 from $25.4 million for the six months ended March 30, 2008. The decrease was largely due to anticipated reduced volume from one customer for the first three months of the fiscal year and softness in the foodservice industry caused by a slowing economy, partially offset by sales from a new customer. For the six months ended March 29, 2009, the foodservice category as a percentage of net revenues decreased to 20% from 21%. However, we continue our sales efforts in this category and continue to believe that foodservice represents a significant opportunity for us.
Airline net revenues decreased $4.7 million (44.3%) to $5.9 million for the six months ended March 29, 2009 from $10.6 million for the six months ended March 30, 2008. Given record high fuel costs in 2008, the current economic downturn and airline initiatives to cut costs, going forward we expect a further decrease in airline net revenues.
Gross Profit. Gross profit decreased by $1.1 million (7.6%) to $13.3 million for the six months ended March 29, 2009 from $14.4 million for the six months ended March 30, 2008. However, gross profit as a percentage of revenues increased to 12.4% for the six months ended March 29, 2009 from 11.7% for the six months ended March 30, 2008 due to on-going manufacturing improvements, increased efficiencies and yields, improved and increased financial reviews and controls and modest increases in sales prices to several customers, offset partially by costs incurred for new product development and lower absorption of overhead costs due to lower volume.
Selling, General and Administrative Expenses. SG&A expenses increased $500,000 (11.6%) to $4.8 million (4.5% of net revenues) for the six months ended March 29, 2009 from $4.3 million (3.5% of net revenues) for the six months ended March 28, 2008. SG&A expenses were driven by higher brokerage fees stemming from higher sales to Safeway Inc., and higher professional fees.
Operating Income. Operating income decreased $1.7 million (16.8%) to $8.4 million for the six months ended March 29, 2009 from $10.1 million for the six months ended March 30, 2008. The decrease in operating income was the result of the decrease in gross profit as noted above.
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