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BOBE > SEC Filings for BOBE > Form 10-K on 9-Jul-2014All Recent SEC Filings

Show all filings for BOB EVANS FARMS INC

Form 10-K for BOB EVANS FARMS INC


9-Jul-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
In this Management's 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. This MD&A contains forward-looking statements that set forth our expectations and anticipated results based on management's plans and assumptions. These statements are often indicated by words such as "expects," "anticipates," "believes," "estimates," "intends" and "plans." 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 this Annual Report on Form 10-K under the heading "Item 1A. Risk Factors." The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. Please refer to "Part I, Item 1. Business." of this Form 10-K for more information regarding forward-looking statements.
We operate in two segments, Bob Evans Restaurants and BEF Foods, which is reflected in management's discussion and analysis. Refer to Note 13 for additional reporting segment information.
As of April 25, 2014, we operated 561 full-service Bob Evans Restaurants in 19 states and licensed two Bob Evans Express locations. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. Revenue at Bob Evans Restaurants is recognized at the point of sale.
Effective February 15, 2013, we completed the sale of the Mimi's Café restaurant chain to Le Duff America, Inc., ("Le Duff") a U.S.-based subsidiary of Groupe Le Duff, a global bakery and restaurant company headquartered in France. Mimi's Café results are included in our Consolidated Statements of Net Income as discontinued operations.
We produce and distribute pork sausage and a variety of complementary home-style convenience food items under the Bob Evans, Owens and Country Creek brand names. These food products are delivered to warehouses that distribute to grocery stores throughout the United States. We also manufacture and sell similar products to foodservice accounts, including Bob Evans Restaurants and other restaurants and food sellers.
References herein to 2014, 2013 and 2012 refer to fiscal years. All years presented are 52-week years.
Results of Operations
The following table reflects data for our fiscal year ended April 25, 2014, compared to the preceding two fiscal years. The consolidated information is derived from the accompanying Consolidated Statements of Net Income. The table also includes data for two reporting segments - Bob Evans Restaurants and BEF Foods. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amount.
We have recast the consolidated financial statements to reflect the Mimi's Café operations as a discontinued operation for all periods presented. We have also restated the financial statements for the impact of prior period error corrections after reflecting the impact of the discontinued operations. The as adjusted column reflects Mimi's Café as a discontinued operation and the impact of the error corrections.


                                                   Consolidated Results from Continuing Operations
                                                 Fiscal 2014           Fiscal 2013         Fiscal 2012
                                                                      (as adjusted)       (as adjusted)
Net sales                                    $      1,328,552       $      1,330,226     $    1,287,210
Operating income                                       33,125                 87,954            106,475
Cost of sales                                            33.8 %                 31.8 %             32.6 %
Operating wages and fringe benefit expenses              30.2 %                 30.5 %             30.9 %
Other operating expenses                                 15.0 %                 14.4 %             13.8 %
Selling, general and administrative expenses             11.6 %                 11.5 %              9.7 %
Depreciation and amortization expense                     6.0 %                  5.2 %              4.7 %
Impairment of assets held for sale                        0.9 %                    - %                - %
Operating income                                          2.5 %                  6.6 %              8.3 %

Segment Results
                                     Bob Evans Restaurants                                     BEF Foods
                         FY 2014         FY 2013            FY 2012          FY 2014         FY 2013            FY 2012
                                      (as adjusted)      (as adjusted)                    (as adjusted)      (as adjusted)
Net sales              $ 956,579     $      981,418     $      972,490     $ 371,973     $      348,808     $      314,720
Operating income          27,134             69,317             86,269         5,991             18,637             20,206
Cost of sales               25.6 %             25.0 %             24.5 %        54.9 %             50.8 %             57.5 %
Operating wages and
fringe benefit
expenses                    37.7 %             37.5 %             38.0 %        10.9 %             10.7 %              8.9 %
Other operating
expenses                    17.2 %             16.6 %             16.4 %         9.1 %              8.0 %              6.0 %
S,G&A (1)                    9.0 %              8.0 %              7.0 %        18.5 %             21.5 %             18.3 %
Depreciation and
amortization expense         6.7 %              5.8 %              5.2 %         4.2 %              3.6 %              3.0 %
Impairment of assets
held for sale                1.0 %                - %                - %         0.8 %                - %                - %
Operating income             2.8 %              7.1 %              8.9 %         1.6 %              5.3 %              6.4 %

(1) Selling, general and administrative expenses ("S,G&A")

Restaurant Industry Overview
The ongoing industry-wide factors most relevant to our restaurants include: the economy, sales trends, labor and fringe benefit expenses, commodity prices, energy prices, competition, same-store sales, consumer acceptance, restaurant openings and closings, governmental initiatives, food safety and weather. Bob Evans Farms, Inc. Overview
Fiscal 2014 was a year of tremendous change for Bob Evans Farms, Inc. The Company completed many significant strategic actions during fiscal 2014 that impacted profitability including: consolidation of ready-to-eat production at the Sulphur Springs, Texas, facility; the expansion of the Lima, Ohio, plant, entering into an amended five-year credit facility; moving into the new corporate headquarters; professional expenditures related to responses to an activist shareholder and strengthening our internal processes and controls over financial reporting; and other restructuring activities.
The pretax net income from continuing operations for fiscal 2014 was $31.1 million and the provision for income taxes was $0.1 million. Earnings per basic share from continuing operations was $1.17 while earnings per diluted share from continuing operations was $1.16 per share. Net earnings per basic share was $1.27 and net earnings per diluted share was $1.26 for fiscal 2014. Bob Evans Restaurants Segment Overview
The factors that had the greatest impact on Bob Evans Restaurants' performance in fiscal 2014 were the costs associated with adverse severe winter weather conditions, completing our Farm Fresh Refresh remodeling initiative, launching the Bob Evans Express concept, commodity cost increases, the implementation of a new restaurant workforce management initiative and other operating expenses, which include snow removal, utilities, facility repair and other maintenance related items.


During fiscal 2014 the Farm Fresh Refresh initiative was completed for all remaining Bob Evans Restaurants selected for the remodeling initiative. During fiscal 2015, we expect to open up to eight new restaurants. BEF Foods Segment Overview
The ongoing industry-wide factors most relevant to the BEF Foods segment include: sow costs, including the impact of Porcine Epidemic Diarrhea ("PEDv") on costs and availability, other commodity costs, transportation and energy costs, governmental regulations, food safety, the economy and consumer acceptance.
We are focused on delivering top line growth in the BEF Foods segment. We expect to attain this goal through expanded distribution of side dishes, frozen and precooked sausage product lines, and increasing the volume of foodservice sales which includes products insourced to our restaurants.
Fiscal Year Ended April 25, 2014 ("fiscal 2014") as Compared to Fiscal Year Ended April 26, 2013 ("fiscal 2013")
Net Sales
Consolidated net sales from continuing operations decreased $1.7 million, or 0.1 percent, in fiscal 2014 compared to fiscal 2013. The fiscal 2014 decrease was the result of decreases of $24.8 million in the Bob Evans Restaurants segment net sales, offset partially by an increase of $23.2 million in the BEF Foods segment.
Same-store sales computations for a given year are based on net sales of restaurants that are open for at least 18 months prior to the start of that year. Net sales of restaurants to be rebuilt are excluded for all periods in the same-store sales computation when construction commences on the replacement building. Net sales of closed restaurants are excluded from the same-store sales computation in the period in which the restaurants are closed; with the exception of closed restaurant days for restaurants undergoing the Farm Fresh Refresh, which are included in the same-store sales base.
Bob Evans Restaurants reported net sales of $956.6 million in fiscal 2014, a 2.5 percent decrease compared to $981.4 million in fiscal 2013. Same-store sales at Bob Evans Restaurants decreased 2.1 percent in fiscal 2014, with average menu prices up 2.6 percent. The decrease in net sales is a result of negative same-store sales in each fiscal quarter of 2014. During fiscal 2014, Bob Evans Restaurants opened four new restaurants, remodeled 229 existing locations and closed three underperforming restaurants.
The negative same-store sales in fiscal 2014 was primarily due to the impact of severe and sustained winter weather, which had a -1.6% impact on same store sales, and also more than 1,400 lost sales days, which includes 108 incremental lost sales days for the Farm Fresh Refresh remodeling initiative. Bob Evans Restaurants that undergo a Farm Fresh Refresh remodel are closed an average of five to seven days, which equated to a loss in net sales of approximately $5.5 million in fiscal 2014 compared to $6.3 million in the corresponding period last year. As of April 25, 2014, the Farm Fresh Refresh remodeling initiative was completed except for the six general store-format restaurants, which we have decided to exclude from the Farm Fresh Refresh program, and any recently built restaurants.
Our Farm Fresh Refresh initiative is designed to drive dine-in sales and expand high growth layers, such as bakery, catering and carryout sales. In fiscal 2014, bakery, catering and carryout sales increased 18.5 percent, 13.1 percent and 1.8 percent, respectively, compared to fiscal 2013. Our broad value platform offers value and menu innovation across breakfast, lunch and dinner day parts at Bob Evans Restaurants. We offer Three-Course Dinners starting at $9.99, $19.99 Family Meals-to-go and Soups-to-go starting at $5. In fiscal 2014, we introduced a $7.99 Knife & Fork Sandwich and Sweet and Stacked Hotcakes value platforms. In fiscal 2015, we plan to execute our new restaurant expansion program by opening up to eight new restaurants, which will provide another source for top-line growth.


The chart below summarizes the restaurant openings and closings during the last two fiscal years for Bob Evans Restaurants:

            Beginning    Opened    Closed    Ending
Fiscal 2014
1st quarter       560         1         -       561
2nd quarter       561         1         -       562
3rd quarter       562         1         1       562
4th quarter       562         1         2       561
Fiscal 2013
1st quarter       565         2         2       565
2nd quarter       565         -         -       565
3rd quarter       565         -         -       565
4th quarter       565         -         5       560

The BEF Foods segment's net sales increased $23.2 million, or 6.6 percent, in fiscal 2014 versus fiscal 2013. The increase in net sales is a result of pricing and mix, offset by a decrease in total pounds sold of 2.4 percent in fiscal 2014 compared to fiscal 2013. Sales volumes were adversely impacted by a supplier dispute related to BEF Foods' refrigerated side dish business and the sale of the SWH facility in California that had been supporting Mimi's Café. We believe there are opportunities to increase product volume through accelerating product innovation, the expansion of existing production facilities, expanding our selection of food products at each distribution point, insourcing additional Bob Evans Restaurants needs and acquisitions. The insourcing relationship not only benefits the BEF Foods segment through potential increases in total pounds sold, it also offers consistency to our restaurant guests, reduces product preparation and helps insulate Bob Evans Restaurants from arbitrary price increases from outside suppliers.

On May 29, 2012, we announced a plan to close our ready-to-eat manufacturing plant in Bidwell, Ohio, and our soup and gravy manufacturing plant in Springfield, Ohio. We ceased operations at these two facilities and have consolidated the volume in Sulphur Springs, Texas, as part of that plant's expansion in fiscal 2014.
On September 27, 2013, we announced the closure of our food production plant in Richardson, Texas, reducing our fresh sausage plant network to two facilities to optimize our fresh sausage production network. The long-lived asset group related to this plant is included at its fair value in the "Current assets held for sale" line in the Consolidated Balance Sheets.
The expansions of our Lima, Ohio, and our Sulphur Springs, Texas, production facilities were completed during fiscal 2014. We expect to see continued efficiencies and growth in our refrigerated side dishes and precooked food products. We anticipate the efficiencies gained will enable us to continue our focus on product innovation for future growth and margin improvements.

Cost of Sales
Consolidated cost of sales (cost of materials) from continuing operations was 33.8 percent of net sales and 31.8 percent of net sales in fiscal 2014 and fiscal 2013, respectively.
Bob Evans Restaurants' cost of sales was 25.6 percent of net sales in fiscal 2014 and 25.0 percent of net sales in fiscal 2013. The increase in the cost of sales ratio was due to commodity cost increases, primarily driven by sausage and other pork-related items and beef. We responded to these commodity cost increases in fiscal 2014 by designing an updated menu that focuses on higher margin items, such as beverages, breakfasts and less costly proteins, mainly poultry. We also increased average menu prices by 2.6 percent to offset these higher costs.
BEF Foods' cost of sales was 54.9 percent of net sales and 50.8 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The increase in the cost of sales ratio in fiscal 2014 was due primarily to higher sow costs, which resulted in an increase in cost of sales of $21.1 million, partially offset by a reduction of sausage trade spending, increased pricing and the effect of the Lima, Ohio, plant acquisition in fiscal 2013. Prior to the acquisition of the Lima, Ohio, plant, substantially all costs related to acquiring product from the Lima, Ohio, plant were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition, as an owned facility, rather than as a co-packer, labor costs are included in operating wages; and utilities, freight, and hauling costs


are included in other operating expenses. Sow costs averaged $73.23 per hundredweight in fiscal 2014, an increase of 35.9% as compared to $53.87 per hundredweight in fiscal 2013.
Operating Wage and Fringe Benefit Expenses Consolidated operating wage and fringe benefit expenses ("operating wages") from continuing operations were 30.2 percent of net sales and 30.5 percent of net sales in fiscal 2014 and fiscal 2013, respectively.
Bob Evans Restaurants' operating wages were 37.7 percent of net sales and 37.5 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The fiscal 2014 increase in the operating wages ratio as a percentage of sales was due to sales deleverage from same-store sales declines and implementation costs for the new workforce management program, partially offset by bonus favorability as Company results did not meet the performance-based incentive compensation requirements.
In the BEF Foods segment, operating wages were 10.9 percent of net sales and 10.7 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The increase in the operating wages ratio in fiscal 2014 is due primarily to an increase in labor hours and to additional wages and fringe benefits associated with our acquisition of the Lima, Ohio, plant during the second quarter of fiscal 2013. Prior to the acquisition of the Lima, Ohio, plant, substantially all costs related to acquiring product from the Lima, Ohio, plant were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition of the Lima, Ohio, plant, as an owned facility rather than a supplier, Lima, Ohio's, labor costs were included in operating wages, resulting in an increase in operating wages. These increases were partially offset by bonus favorability as Company results did not meet the performance-based incentive compensation requirements.
Other Operating Expenses
Consolidated other operating expenses ("operating expenses") from continuing operations were 15.0 percent of net sales in fiscal 2014 and 14.4 percent of net sales in fiscal 2013. Approximately 83 percent of our consolidated operating expenses occurred in Bob Evans Restaurants in fiscal 2014; the most significant components of which were utilities, advertising, restaurant supplies, repair and maintenance, non-income based taxes, service contracts, credit card processing fees and insurance.
Bob Evans Restaurants' operating expenses were 17.2 percent of net sales and 16.6 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The increase in the other operating expenses ratio in fiscal 2014 was primarily a result of sales deleverage, increases in service contracts due to additional snow removal required in fiscal 2014, utilities and preopening expenses related to our Farm Fresh Refresh remodeling initiative and our new restaurants. BEF Foods segment's operating expenses were 9.1 percent of net sales and 8.0 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The fiscal 2014 increase in the other operating expenses ratio was due primarily to increased utilities, start-up costs related to the expansion at our Sulphur Springs facility, and increased repair and maintenance expense, much of which is also related to the plant expansions. Additionally, prior to the acquisition of the Lima, Ohio, plant, substantially all costs related to acquiring product from the Lima, Ohio, plant, were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition of the Lima, Ohio, plant, as an owned facility rather than a supplier, cost of materials are still included in inventories and cost of sales, however, other production costs are included in other operating expenses.
Selling, General and Administrative Expenses The most significant components of S,G&A expenses are wages and fringe benefits, BEF Foods segment's transportation costs, legal and professional fees, broker commission fees, and BEF Foods segment's advertising expense. Consolidated S,G&A expenses from continuing operations represented 11.6 percent of net sales and 11.5 percent of net sales in fiscal 2014 and fiscal 2013, respectively. Bob Evans Restaurants' S,G&A expenses were 9.0 percent of net sales and 8.0 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The increase in SG&A expenses as a percent of net sales is primarily due to a $4.5 million increase in allocated professional fees, which includes costs related to shareholder activism and strengthening the Company's internal processes and controls over financial reporting, and an increase of allocated corporate overhead as a result of the Company providing transition services to Mimi's Café at less than cost.
BEF Foods segment's, S,G&A expenses were 18.5 percent of net sales and 21.5 percent of net sales in in fiscal 2014 and fiscal 2013, respectively. The decrease in the S,G&A ratio for fiscal 2014 was due primarily to a $5.5 million reduction in advertising expenses and a $2.8 million reduction in severance and restructuring charges, primarily related to the decision to close our Bidwell and Springfield production plants in 2013. These cost reductions were partially offset by an increase of


allocated corporate overhead as a result of the Company providing transition services to Mimi's Café at less than cost, and a $1.5 million increase in allocated professional fees, which includes costs related to shareholder activism and strengthening the Company's internal processes and controls over financial reporting.
Depreciation and Amortization
Consolidated depreciation and amortization ("D&A") from continuing operations was 6.0 percent of net sales and 5.2 percent of net sales in fiscal 2014 and fiscal 2013, respectively.
Bob Evans Restaurants' D&A was 6.7 percent of net sales and 5.8 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The D&A ratio increased in fiscal 2014, primarily as a result of property, plant and equipment additions from remodeling 424 existing restaurants as part of our Farm Fresh Refresh initiative in the last two years, and opening four new restaurants in fiscal 2014. The D&A ratio also increased due to sales deleverage from same-store sales declines
BEF Foods segment's D&A was 4.2 percent of net sales and 3.6 percent of net sales in fiscal 2014 and fiscal 2013, respectively. The fiscal 2014 D&A ratio increase was due primarily to additional depreciation expense associated with the Lima, Ohio, and Sulphur Springs, Texas, plant expansions and with our acquisition of the Lima, Ohio, plant early in the second quarter of fiscal 2013. Impairment of Assets Held for Sale
In accordance with the Intangibles - Goodwill and Other Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 360, we assess the carrying value of our long-lived asset group whenever circumstances indicate that a decline in fair value may have occurred. Based on our purchase agreement, effective July 25, 2013, and subject to customary due diligence, to sell nonoperating property, plant and equipment at 29 locations for $3.5 million, we determined that indicators of impairment existed for our held for sale asset group at that time. This resulted in pretax noncash assets held for sale impairment charges in the Bob Evans Restaurants business segment of $9.4 million.
As of April 25, 2014, we have closed on the sale of 28 of the 29 nonoperating properties. The remaining property was moved out of held for sale assets during the fourth quarter of fiscal 2014 as the sale of the property was determined by management not to be probable in the next year. We have resumed depreciation for this location and the resulting impact to depreciation expense was immaterial for fiscal 2014.
On September 27, 2013, we announced our plans to close our food production plant in Richardson, Texas. Based on the estimated value of the facility, we determined that the long-lived asset group's then-current carrying value was greater than the fair value. This resulted in a pretax, noncash assets held for sale impairment charge in the BEF Foods segment of $3.0 million. The long-lived asset group related to this plant is included at its fair value in the "Current assets held for sale" line in the Consolidated Balance Sheets. Upon being classified as held for sale, depreciation ceased for these assets. Interest
Net interest expense from continuing operations was as follows:

                           2014         2013
                            (In thousands)
Gross interest expense:
Fixed-rate debt         $    391     $ 10,844
Variable-rate debt         4,885        1,672
Capitalized interest        (611 )       (835 )
Total Interest Expense     4,665       11,681
Gross interest income
Accretion                 (1,918 )          -
Other                       (733 )       (196 )
Total Interest Income   $ (2,651 )   $   (196 )
Net interest expense    $  2,014     $ 11,485


The decrease in net interest expense in fiscal 2014 was the result of lower average interest rates on our borrowings as compared to the prior year. During fiscal 2013, we prepaid our outstanding Note Purchase Agreements dated July 28, 2004, as amended, and July 28, 2008, as amended, ("Private Placement Notes"). This was partially offset by an increase in variable-rate debt as our average borrowings on our credit facility increased in fiscal 2014, as well as interest income from the accretion on our long-term note receivable in fiscal 2014. As a result of the sale of Mimi's Café to Le Duff, we received a promissory note for $30,000. The note has an annual interest rate of 1.5% and a term of seven years. The note is discounted to its fair value, which as of April 25, 2014 was $16.0 million, and reflected as a long term asset on the Consolidated Balance Sheet. Accretion income on this note was $1,918 in fiscal 2014.
As of April 25, 2014, we had $458.9 million outstanding on our credit facility and a $0.8 million interest-free loan ($1.0 million nominal) for the construction of our new corporate headquarters. A one percent increase in the benchmark rate used for our credit facility would increase our annual interest expense by approximately $4.7 million assuming the $458.9 million outstanding at the end of fiscal 2014 was outstanding for the entire year. Provision (Benefit) for Income Taxes
The effective tax rate for continuing operations for fiscal 2014 was 0.5 percent compared to (8.0 percent) for fiscal 2013. The effective income tax rate in fiscal 2014 was substantially different than the statutory rate due to the Company's domestic production activities deduction, and favorable state settlements. The effective income tax rate in fiscal 2013 was substantially . . .

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