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| OFI > SEC Filings for OFI > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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," "likely," "probable" 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 and resulting effect on revenues and collectibility of accounts receivable 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.
For the quarter ended June 28, 2009, net revenues of $54.5 million reflected a 12.7% decrease compared to the quarter ended June 29, 2008. More than one-half of the decrease in net revenues was due to the previously disclosed reduced volume from one retail customer, H.J. Heinz Company, who moved a large portion of its production to its own facilities. In addition, we chose to discontinue production for one of our retail customers that did not meet our profitability requirements. The decision to discontinue that business frees capacity for new and more profitable accounts that we believe are available in the short term. During the quarter, retail sales and sales to airlines continued to be affected by the weak economy. Lower retail sales were partially offset by increases in foodservice sales. We expect this trend to continue as retail customers have historically decreased orders on frozen food in the summer months. With our increased penetration into the grocery segment, we expect to see some increased seasonality in the retail category of our business. Traditionally, the summer months of June, July and August see slightly diminished frozen grocery sales. Sales volume may be highest in the winter periods (our second quarter) and lowest in the warmer months (our third and fourth quarters).
For the nine months ended June 28, 2009, net revenues of $161.4 million reflected a 13.1% decrease compared to the nine months ended June 29, 2008. The decrease in net revenues was due to the previously disclosed reduced volume from one retail customer, H.J. Heinz Company, as well as declines in airline sales resulting from softness in the airline industry caused by a slowing economy offset partially by a slight increase in foodservice net revenues.
Gross profit was $7.4 million for the quarter ended June 28, 2009, compared to $8.4 million for the quarter ended June 29, 2008. The decrease in gross profit dollars was due to decreased sales as noted above. Gross profit as a percentage of net revenues increased to 13.6% for the quarter ended June 28, 2009 from 13.5% for the quarter ended June 29, 2008 due largely to favorable commodity prices, lower product development costs and lower freight charges offset partially by higher overhead costs as a percentage of net revenues on lower sales volume. Although we expect continued lower commodity prices and lower freight charges for the rest of the fiscal year, we may also see continued higher overhead costs as a percentage of net revenues as sales volume is typically lowest in the warmer months (our third and fourth quarters).
Gross profit was $20.7 million for the nine months ended June 28, 2009, compared to $22.8 million for the nine months ended June 29, 2008. Although gross profit decreased due to lower revenues, it increased as a percentage of net revenues to 12.8% for the nine months ended June 28, 2009 from 12.3% for the nine months ended June 29, 2008. Gross profit as a percentage of net revenues increased due to higher margin sales mix along with increased efficiencies and yields, favorable commodity prices, lower freight charges, lower product development costs and modest increases in sales prices to several customers, offset partially by higher overhead costs as a percentage of net revenues on lower sales volume. 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 June 28, 2009 was $4.7 million (8.6% of net revenues), compared to $6.2 million (9.9% of net revenues) for the quarter ended June 29, 2008. The decrease was due to lower revenues, increased total brokerage fees stemming from higher sales to Safeway Inc. and increased professional fees relating to litigation described in footnote 9 to our most recent financial statements, which are contained in Part I, Item 1 of this report.
Operating income for the nine months ended June 28, 2009 was $13.2 million (8.2% of net revenues), compared to $16.3 million (8.8% of net revenues) for the nine months ended June 29, 2008. The decrease was due to lower revenues, increased total brokerage fees stemming from higher sales to Safeway Inc. and increased professional fees relating to litigation described in footnote 9 to our most recent financial statements.
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 costs 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 June 28, 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 June 28, 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 nine 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 nine months ended June 28, 2009 and June 29, 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 nine months of fiscal years 2009 and 2008 was derived from four customers. Jenny Craig, Inc., Panda Restaurant Group, Inc., Safeway Inc. and H. J. Heinz Company, and accounted for approximately 25%, 18%, 17% and 13%, respectively, of our total net revenues for the nine months ended June 28, 2009 and approximately 25%, 16%, 12% and 18%, respectively, of our total net revenues for the nine months ended June 29, 2008. Receivables related to Jenny Craig, Inc., Panda Restaurant Group, Inc. (through its distributors), Safeway Inc. and H. J. Heinz Company and accounted for approximately 21%, 32%, 14% and 11%, respectively, of our total accounts receivable balance as of June 28, 2009 and approximately 26%, 15%, 14% and 14%, respectively, of our total accounts receivable balance as of June 29, 2008.
Cash used primarily for working capital purposes is maintained in two accounts with one major financial institution. Account balances as of June 28, 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.
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 June 28, 2009 Compared to Quarter Ended June 29, 2008
The quarters ended June 28, 2009 and June 29, 2008 were both 13-week periods.
Net Revenues. Net revenues for the quarter ended June 28, 2009 decreased $7.9 million (12.7%) to $54.5 million from $62.4 million for the quarter ended June 29, 2008 due to a decrease in airline and retail net revenues.
Retail net revenues decreased $10.3 million (21.3%) to $38.0 million for the quarter ended June 28, 2009 from $48.3 million for the quarter ended June 29, 2008. More than one-half of the decrease in retail net revenues was due to the previously disclosed 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. The balance of the reduction in retail net revenues is due to the elimination of low profit accounts as well as lower sales to key customers as a result of the current economic downturn. As previously discussed, with our increased penetration into the grocery segment, we expect to see some increased seasonality in the retail category of our business. Traditionally, the summer months of June, July and August see slightly diminished frozen grocery sales. Sales volume may be highest in the winter periods (our second quarter) and lowest in the warmer months (our third and fourth quarters).
Foodservice net revenues increased $4.8 million (52.7%) to $13.9 million for the quarter ended June 28, 2009 from $9.1 million for the quarter ended June 29, 2008. The increase was attributable to sales from a new customer and increased volume from an existing customer, as was previously disclosed in our second quarter Form 10-Q. We expect foodservice revenues to increase as we continue to manufacture full quarters of anticipated volume from foodservice customers. We believe the anticipated increased revenues for the remainder of the fiscal year will partially offset the decreased revenue from H.J. Heinz Company noted above.
Airline net revenues decreased $2.4 million (48.0%) to $2.6 million for the quarter ended June 28, 2009 from $5.0 million for the quarter ended June 29, 2008. Due to airline industry initiatives to cut costs, airline net revenues may continue to decrease in future periods.
Gross Profit. Gross profit for the quarter ended June 28, 2009 decreased by $1.0 million (11.9%) to $7.4 million from $8.4 million for the quarter ended June 29, 2008. Gross profit as a percentage of net revenues increased slightly to 13.6% for the quarter ended June 28, 2009 from 13.5% for the quarter ended June 29, 2008 due largely to higher margin sales mix along with favorable commodity prices, lower product development costs and lower freight charges offset by higher overhead costs as a percentage of net revenues on lower sales volume. Although we expect continued lower commodity prices and lower freight charges for the rest of the fiscal year, we may also see continued higher overhead costs as a percentage of net revenues as sales volume is typically lowest in the warmer months (our third and fourth quarters).
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $500,000 (22.7%) to $2.7 million (5.0% of net revenues) for the quarter ended June 28, 2009 from $2.2 million (3.5% of net revenues) for the quarter ended June 29, 2008. SG&A expenses were driven by higher brokerage fees stemming from higher sales to Safeway Inc., and higher professional fees relating to litigation described in footnote 9 to our most recent financial statements.
Operating Income. Operating income decreased $1.5 million (24.2%) to $4.7 million for the quarter ended June 28, 2009 from $6.2 million for the quarter ended June 29, 2008. The decrease in operating income was the result of the decrease in gross profit and an increase in SG&A expenses as noted above.
Total Interest Expense. Total interest expense for the quarter ended June 28, 2009 was $491,000, compared to $838,000 for the quarter ended June 29, 2008. The decrease in interest expense is due to lower debt balances and lower variable interest rates.
Income Tax Provision. Income tax expense was $1.7 million for the quarter ended June 28, 2009, compared to $2.2 million for the quarter ended June 29, 2008. The effective tax rates were 39.1% for the quarter ended June 28, 2009 and 40.9% for the quarter ended June 29, 2008 and did not materially differ from the statutory rate.
Net Income. Net income for the quarter ended June 28, 2009 was $2.6 million, or $0.16 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 June 29, 2008.
Nine Months Ended June 28, 2009 Compared to Nine Months Ended June 29, 2008
The nine month periods ended June 28, 2009 and June 29, 2008 were both 39-week periods.
Net Revenues. Net revenues decreased $24.3 million (13.1%) to $161.4 million for the nine months ended June 28, 2009 from $185.7 million for the nine months ended June 29, 2008, due to a decrease in retail and airline net revenues.
Retail net revenues decreased $18.3 million (13.5%) to $117.3 million for the nine months ended June 28, 2009 from $135.6 million for the nine months ended June 29, 2008. The decrease in retail net revenues was largely due to the previously disclosed reduced volume from H.J. Heinz Company. This reduction in volume resulted in a decrease in revenues of approximately $12.9 million. The remaining decrease in retail net revenues is attributed to a $5.0 million decline in sales to Jenny Craig, Inc. due to the current economic downturn and their inventory management plans.
Foodservice net revenues increased $1.0 million (2.9%) to $35.5 million for the nine months ended June 28, 2009 from $34.5 million for the nine months ended June 29, 2008. The increase was largely due to sales from a new customer as well as the anticipated increased volume from an existing customer, primarily in the third quarter of the current fiscal year. For the nine months ended June 28, 2009, the foodservice category as a percentage of net revenues increased to 22% from 19%.
Airline net revenues decreased $7.0 million (44.9%) to $8.6 million for the nine months ended June 28, 2009 from $15.6 million for the nine months ended June 29, 2008. Due to the airline industry initiatives to cut costs, airline net revenues may continue to decrease in future periods.
Gross Profit. Gross profit decreased by $2.1 million (9.2%) to $20.7 million for the nine months ended June 28, 2009 from $22.8 million for the nine months ended June 29, 2008. However, gross profit as a percentage of revenues increased to 12.8% for the nine months ended June 28, 2009 from 12.3% for the nine months ended June 29, 2008 due to higher margin sales mix along with increased efficiencies and yields, favorable commodity prices, lower freight charges, lower product development costs and modest increases in sales prices to several customers, offset partially by higher overhead costs as a percentage of net revenues on lower sales volume.
Selling, General and Administrative Expenses. SG&A expenses increased $1.0 million (15.4%) to $7.5 million (4.6% of net revenues) for the nine months ended June 28, 2009 from $6.5 million (3.5% of net revenues) for the nine months ended June 29, 2008. SG&A expenses were driven by higher brokerage fees stemming from higher sales to Safeway Inc., and higher professional fees relating to litigation described in footnote 9 to our most recent financial statements.
Operating Income. Operating income decreased $3.1 million (19.0%) to $13.2 million for the nine months ended June 28, 2009 from $16.3 million for the nine months ended June 29, 2008. The decrease in operating income was the result of the decrease in gross profit and an increase in SG&A expenses as noted above.
Total Interest Expense. Total interest expense for the nine months ended June 28, 2009 was $1.8 million, compared to $2.9 million for the nine months ended June 29, 2008. The decrease in interest expense was due to lower debt balances and lower variable interest rates.
Income Tax Provision. Income tax expense was $4.4 million for the nine months ended June 28, 2009, compared to $5.5 million for the nine months ended June 29, 2008. The effective tax rates were 39.1% for the nine months ended June 28, 2009 and 41.0% for the nine months ended June 29, 2008 and did not materially differ from the statutory rate.
Net Income. Net income for the nine months ended June 28, 2009 was $6.9 million, or $0.44 per basic and $0.43 per diluted share, compared to net income of $7.9 million, or $0.50 per basic and diluted share, for the nine months ended June 29, 2008.
Liquidity and Capital Resources
During the nine month periods ended June 28, 2009 and June 29, 2008, our operating activities provided cash of $15.0 million and $8.0 million, respectively. Cash generated from operations before working capital changes for the first nine months of fiscal year 2009 was $9.6 million. Cash generated by changes in working capital was $5.4 million during the first nine months of fiscal year 2009 and resulted from decreases in accounts receivable, inventory and prepaid expenses and other assets of $4.8 million, $1.2 million and $686,000, respectively, as well as an increase in accrued liabilities of $262,000. This was partially offset by cash used to decrease accounts payable by $1.5 million. As of June 28, 2009, we had working capital of $25.4 million compared to working capital of $26.3 million at fiscal year end 2008. The decrease was due to continued focus on timely collections of our receivables as well as lower inventory balances due to our traditional slower summer sales. We were able to fund our operations in the first nine months of fiscal year 2009 internally while decreasing our external debt.
During the first nine months of fiscal year 2009, our investing activities, consisting primarily of an acquisition of wastewater capacity units for our plant No. 1 in Vernon, California, and capital expenditures of $1.1 million and . . .
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