NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
Summary of Significant Accounting Policies
Unaudited Consolidated Financial Statements
: The accompanying unaudited consolidated financial statements of Bob Evans Farms, Inc. (“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 U.S. 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. No significant changes have occurred in the financial disclosures made in our Form 10-K for the fiscal year ended April 29, 2016 (refer to the Form 10-K for a summary of significant accounting policies followed in the preparation of the consolidated financial statements). Throughout the Unaudited Consolidated Financial Statements and Notes to the Consolidated Financial Statements, dollars are in thousands, except share amounts.
Description of Business
: As of
July 29, 2016
, we operated
522
full-service Bob Evans Restaurants in
18
states. Bob Evans Restaurants are primarily located in the Midwest, Mid-Atlantic and Southeast regions of the United States. In the BEF Foods segment we produce and distribute a variety of complementary home-style, refrigerated side dish convenience food items and pork sausage under the Bob Evans ®, Owens ® and Country Creek ® brand names. These food products are available throughout the United States. We also manufacture and sell similar products to food-service accounts, including Bob Evans Restaurants and other restaurants and food sellers.
Reporting Segments:
We have
two
reporting segments: Bob Evans Restaurants and BEF Foods. The revenues from these
two
segments include both net sales to unaffiliated customers and intersegment net sales, which are accounted for on a basis consistent with net sales to unaffiliated customers. Intersegment net sales and other intersegment transactions have been eliminated in the consolidated financial statements. Operating income represents earnings before interest and income taxes. All direct costs related to our
two
reporting segments are included in segment results, while certain costs related to corporate and other functions are not allocated to our reporting segments.
Revenue Recognition:
Revenue in the Bob Evans Restaurants segment is recognized at the point of sale, other than revenue from the sale of gift cards, which is deferred and recognized upon redemption. Our gift cards do not have expiration dates or inactivity fees. All revenue is presented net of sales tax collections. We recognize revenue from gift cards when they are redeemed by the customer. In addition, we recognize income on unredeemed gift cards (“gift card breakage”) based on historical redemption patterns, referred to as the redemption recognition method. Gift card breakage is recognized proportionately over the period of redemption in net sales in the Consolidated Statements of Net Income. The liability for unredeemed gift cards is included in deferred revenue on the Consolidated Balance Sheets, and was
$12,793
and
$14,147
at
July 29, 2016
, and
April 29, 2016
, respectively.
Revenue in the BEF Foods segment is recognized when products are received by our customers. We engage in promotional (sales incentive / trade spend) programs in the form of "off-invoice" deductions, billbacks, cooperative advertising and coupons with our customers. Costs associated with these programs are classified as a reduction of gross sales in the period in which the sale occurs.
Promotional (Trade) Spending:
We engage in promotional (sales incentive) programs in the form of promotional discounts and coupons at Bob Evans Restaurants, and off-invoice deductions, billbacks, and cooperative advertising at BEF Foods. Costs associated with these programs are classified as a reduction of gross sales in the period in which the sale occurs. Promotional spending at Bob Evans Restaurants, primarily comprised of discounts taken on dine-in sales, was
$6,774
and
$8,749
for the three months ended
July 29, 2016
, and
July 24, 2015
, respectively. Promotional spending at BEF Foods, primarily comprised of off-invoice deductions and billbacks, was
$16,291
and
$14,752
for the three months ended
July 29, 2016
, and
July 24, 2015
.
Shipping and Handling costs:
Expenditures related to shipping our BEF Foods' products to our customers are expensed when incurred. Shipping and handling costs were
$3,313
and
$3,869
for the three months ended
July 29, 2016
, and
July 24, 2015
, respectively, and are recorded in the other operating expenses line of the Consolidated Statements of Net Income.
Accounts Receivable:
Accounts receivable represents amounts owed to us through our operating activities and are presented net of allowance for doubtful accounts. Accounts receivable for Bob Evans Restaurants consist primarily of credit card receivables, while accounts receivable for BEF Foods consist primarily of trade receivables from customer sales. We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware
of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. In addition, we recognize allowances for bad debts based on the length of time receivables are past due with allowance percentages, based on our historical experiences, applied on a graduated scale relative to the age of the receivable amounts. If circumstances such as higher than expected bad debt experience or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us were to occur, the recoverability of amounts due to us could change by a material amount. We had allowance for doubtful accounts of
$758
and
$534
as of
July 29, 2016
, and
April 29, 2016
, respectively. Accounts receivable was reduced by
$4,920
and
$4,916
as of
July 29, 2016
, and
April 29, 2016
, respectively, related to promotional incentives that reduce what is owed to the Company from certain BEF Foods' customers.
Notes Receivable:
As a result of the sale of Mimi’s Café to Le Duff America, Inc. ("Le Duff"), we received a Promissory Note ("the Note") for
$30,000
. The Note has an annual interest rate of
1.5%
, a term of
seven years
and a principal and interest payment due in February 2020. Partial prepayments are required prior to maturity if the buyer's business reaches certain levels of EBITDA during specified periods. No partial prepayments have been received on the Note as of
July 29, 2016
. Repayment of the Note is not guaranteed by the parent company. Our right to repayment under the Note is subordinated to third-party lenders as well as other funding that may be provided by the parent company. In the event of a sale or liquidation of the Mimi’s Café restaurant chain or the entity that owns it by its parent company, our right to repayment may be subordinated to payments owed to the parent company and potentially reduced based on the funds available for repayment.
The note was originally valued using a discounted cash flow model. The Note is recorded on the notes receivable line of the Consolidated Balance sheet, and was
$21,564
and
$20,886
as of
July 29, 2016
, and
April 29, 2016
, respectively. The Company recognized accretion income on the Note of
$558
and
$499
for the three months ended
July 29, 2016
, and
July 24, 2015
, respectively. Accretion income is reflected within the Net Interest Expense caption of the
Consolidated Statements of Net Income
.
Inventories:
We value our Bob Evans Restaurants' inventories at the lower of first-in, first-out cost (“FIFO”) or market and our BEF Foods' inventories at an average cost method which approximates a FIFO basis due to the perishable nature of that inventory. Inventory includes raw materials and supplies (
$13,644
at
July 29, 2016
, and
$13,815
at
April 29, 2016
) and finished goods (
$12,199
at
July 29, 2016
, and
$11,183
at
April 29, 2016
).
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost less accumulated depreciation. The straight-line depreciation method is used for nearly all capitalized assets, although some assets purchased prior to fiscal 1995 continue to be depreciated using accelerated methods. Depreciation is calculated at rates adequate to amortize costs over the estimated useful lives of buildings and improvements (
5
to
50
years) and machinery and equipment (
3
to
10
years). Improvements to leased properties are depreciated over the shorter of their useful lives or the initial lease terms. Total depreciation expense was
$17,534
and
$20,114
in the three months ended
July 29, 2016
, and
July 24, 2015
, respectively.
During the
three months
ended
July 29, 2016
, we capitalized internal labor costs of
$927
primarily related to the second phase of our ERP implementation and other IT projects. During the
three months
ended
July 24, 2015
, we capitalized internal labor costs of
$553
. The first phase of our ERP system was put in service on April 25, 2015, and has an expected useful life of
10
years. We are working to implement the second phase of our ERP system, which is expected to go live in the second quarter of fiscal 2017.
We evaluate property, plant and equipment held and used in the business for impairment whenever events or changes in circumstance indicate that the carrying amount of a long-lived asset may not be recoverable. Impairment is determined by comparing the estimated fair value for the asset group to the carrying amount of its assets. If impairment exists, the amount of impairment is measured as the excess of the carrying amount over the estimated fair values of the assets. See Note
5
for further information.
Assets for
29
nonoperating Bob Evans Restaurants' locations and our former Richardson, Texas, plant location totaling
$30,539
are classified as current assets held for sale in the Consolidated Balance Sheet as of
July 29, 2016
. Assets for
30
nonoperating Bob Evans Restaurants' locations, as well as our Richardson, Texas, location totaling
$31,644
are classified as current assets held for sale in the Consolidated Balance Sheet as of
April 29, 2016
.
Goodwill and Other Intangible Assets:
Goodwill and other intangible assets, which primarily
represents the cost in excess of fair market value of net assets acquired, was
$19,790
and
$19,829
as of
July 29, 2016
, and
April 29, 2016
, respectively. The goodwill and other intangible assets are related to the BEF Foods segment. The majority of our goodwill was acquired as part of our fiscal 2013 acquisition of Kettle Creations. Additionally, as part of this acquisition we obtained a non-compete agreement with certain executives of the former company. The Kettle Creations non-compete agreement is amortized on a straight-line basis over its estimated economic life of five years.
Goodwill impairment testing involves a comparison of the estimated fair value of reporting units to the respective carrying amount. If the estimated fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the estimated fair value, then a second step is performed to determine the amount of impairment, if any. We perform our impairment test using a combination of income based and market-based approaches. The income based approach indicates the fair value of an asset or business based on the cash flows it can be expected to generate over its remaining useful life. Under the market-based approach, fair value is determined by comparing our reporting segments to similar businesses or guideline companies whose securities are actively traded in public markets.
Earnings Per Share ("EPS"):
Our basic EPS computation is based on the weighted-average number of shares of common stock outstanding during the period presented. Our diluted EPS calculation reflects the assumed vesting of restricted shares and market-based performance shares, the exercise and conversion of outstanding employee stock options and the settlement of share-based obligations recorded as liabilities on the Consolidated Balance Sheet (see Note 7 for more information), net of the impact of anti-dilutive shares.
The numerator in calculating both basic and diluted EPS for each period is reported net income. The denominator is based on the following weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
July 29, 2016
|
|
July 24, 2015
|
|
Basic
|
19,792
|
|
|
22,733
|
|
|
Dilutive shares
|
172
|
|
|
148
|
|
|
Diluted
|
19,964
|
|
|
22,881
|
|
In the
three months
ended
July 29, 2016
,
313,382
shares of common stock were excluded from the diluted EPS calculations because they were anti-dilutive. In the
three months
ended
July 24, 2015
,
205,144
shares of common stock were excluded from the diluted EPS calculations because they were anti-dilutive.
Dividends:
In the three months ended
July 29, 2016
, and
July 24, 2015
, the Company paid a quarterly dividend equal to
$0.34
and
$0.31
, respectively, per share on our outstanding common stock. Individuals that hold awards for unvested and outstanding restricted stock units, market-based performance share units and outstanding deferred stock awards are entitled to receive dividend equivalent rights equal to the per-share cash dividends paid on outstanding units. Dividend equivalent rights are forfeitable until the underlying share-units from which they were derived vest. Share-based dividend equivalents are recorded as a reduction to retained earnings, with an offsetting increase to capital in excess of par value. Refer to table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
July 29, 2016
|
|
July 24, 2015
|
|
Cash dividends paid to common stockholders
|
$
|
6,724
|
|
|
$
|
7,028
|
|
|
Dividend equivalent rights
|
85
|
|
|
124
|
|
|
Total dividends
|
$
|
6,809
|
|
|
$
|
7,152
|
|
Accrued Non-Income Taxes:
Accrued non-income taxes primarily represent obligations for real estate and personal property taxes, as well as sales and use taxes for Bob Evans Restaurants. Accrued non-income taxes were
$14,433
and
$15,696
as of
July 29, 2016
, and
April 29, 2016
, respectively.
Self-Insurance Reserves:
We record estimates for certain health, workers’ compensation and general insurance costs that are self-insured programs. Self-insurance reserves include actuarial estimates of both claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. Self-insurance reserves were
$19,639
and
$20,169
as of
July 29, 2016
, and
April 29, 2016
, respectively.
Deferred gains on sale leaseback transactions:
In fiscal 2016 we entered into sale leaseback transactions for
two
of our BEF Foods' production facilities and
143
Bob Evans Restaurants' properties.
Each of the BEF Foods and Bob Evans Restaurants transactions included
20
year lease terms with additional renewal periods, as well as payment and performance guaranties. Gains on the sale of properties related to the sale leaseback transactions that were completed in fiscal
2016
were deferred and are recognized on a straight-line basis over the initial term of the lease. Gains of $
56,868
and $
2,305
were recorded and deferred as part of our fiscal 2016 Bob Evans Restaurants and BEF Foods sale leaseback transactions,
respectively. Amortization of the deferred gains was
$736
in the
three months
ended
July 29, 2016
, and is recorded as a reduction to rent expense in the other operating expenses line of the Consolidated Statements of Net Income. See the table below for a summary of the unamortized deferred gains as of
July 29, 2016
, and
April 29, 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 29, 2016
|
|
April 29, 2016
|
|
Unamortized gain related to Bob Evans Restaurants' sale leaseback transaction
|
$
|
56,036
|
|
|
$
|
56,743
|
|
|
Unamortized gain related to BEF Foods' sale leaseback transaction
|
2,216
|
|
|
2,245
|
|
|
Total unamortized gains related to sale leaseback transactions
|
58,252
|
|
|
58,988
|
|
|
Less current portion
(1)
|
(2,952
|
)
|
|
(2,952
|
)
|
|
Non-current deferred sale leaseback gains
|
$
|
55,300
|
|
|
$
|
56,036
|
|
(1)
Current portion of unamortized sale leaseback gains is recorded to the other accrued expenses line on the Consolidated Balance Sheets.
Advertising Costs:
Media advertising is expensed at the time the media first airs. We expense all other advertising costs as incurred. Advertising expense was
$9,259
and
$8,993
in the
three months
ended
July 29, 2016
, and
July 24, 2015
, respectively. Approximately
72%
of year-to-date advertising costs were incurred in the Bob Evans Restaurants segment. Advertising costs are classified as other operating expenses in the Consolidated Statements of Net Income.
Commitments and Contingencies:
We occasionally use purchase commitment contracts to stabilize the potentially volatile pricing associated with certain commodity items.
We are self-insured for most casualty losses and employee health-care claims up to certain stop-loss limits per claimant. We have accounted for liabilities for casualty losses, including both reported claims and incurred, but not reported claims, based on information provided by independent actuaries. We have estimated our employee health-care claims liability through a review of incurred and paid claims history. We do not believe that our calculation of casualty losses and employee health-care claims liabilities would change materially under different conditions and/or different methods. However, due to the inherent volatility of actuarially determined casualty losses and employee health care claims, it is reasonably possible that we could experience changes in estimated losses, which could be material to net income.
New Accounting Pronouncements:
In the normal course of business, management evaluates all new accounting pronouncements issued by the FASB, the Securities and Exchange Commission (“SEC”), the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company’s consolidated financial statements.
In May 2014, the FASB and the International Accounting Standards Board ("IASB") issued new joint guidance surrounding revenue recognition. Under U.S. generally accepted accounting principles ("US GAAP"), this guidance is being introduced to the ASC as Topic 606, Revenue from Contracts with Customers ("Topic 606"), by Accounting Standards Update No. 2014-09. The new standard supersedes a majority of existing revenue recognition guidance under US GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to use more judgment and make more estimates while recognizing revenue, which could result in additional disclosures to the financial statements. Topic 606 allows for either a "full retrospective" adoption or a "modified retrospective" adoption. The standard is effective for us in fiscal 2019. We are currently evaluating which method we will use and the revenue recognition impact this guidance will have once implemented.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern to provide guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern. The guidance requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date that the financial statements are issued. When management identifies such conditions or events, a footnote disclosure is required to disclose their nature, as well as management's plans to alleviate the substantial doubt to continue as a going concern. The standard is effective for our fiscal year end 2017. We do not expect this update to have an impact on the consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the subsequent measurement of inventory by replacing today's lower of cost or market test with a lower of cost or net realizable test, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standard is effective for us in fiscal 2018. We do not expect this update to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance requires companies to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal 2020, with early adoption permitted. We are currently evaluating this standard, including the timing of adoption, and the related impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Compensation Accounting. ASU 2016-09 requires that excess tax benefits are recorded on the income statement as opposed to additional paid-in-capital, and treated as an operating activity on the statement of cash flows. ASU 2016-09 also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 further requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The standard is effective for us in fiscal 2018. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The standard is effective for us in our fiscal 2021. We do not expect this update to have a material impact on the consolidated financial statements.
2.
Long-Term Debt and Credit Arrangements
As of
July 29, 2016
, long-term debt was comprised of the outstanding balance on our Revolving Credit Facility Amended and Restated Credit Agreement ("Credit Agreement") of
$333,337
, the long term portion of our
$30,000
Mortgage Loan, the long term portion of a
$3,000
Research and Development Investment Loan ("R&D Loan") and an interest-free loan of
$1,000
, due
10
years from the date of borrowing, with imputed interest, which as a result is discounted to
$877
. Refer to the table below:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 29, 2016
|
|
April 29, 2016
|
|
Credit Agreement borrowings
(1)
|
$
|
333,337
|
|
|
$
|
307,000
|
|
|
Mortgage Loan
(1)
|
28,223
|
|
|
28,963
|
|
|
R&D Loan
(1)
|
2,118
|
|
|
2,219
|
|
|
Interest-free loan
(1)
|
877
|
|
|
875
|
|
|
Total borrowings
|
364,555
|
|
|
339,057
|
|
|
Less current portion
|
(3,421
|
)
|
|
(3,419
|
)
|
|
Long-term debt
|
$
|
361,134
|
|
|
$
|
335,638
|
|
(1)
The Credit Agreement, Mortgage Loan, R&D Loan and Interest-free loan mature in fiscal 2019, 2026, 2021 and 2022, respectively.
Credit Agreement Borrowings
On January 2, 2014, we entered into the Credit Agreement, which represents a syndicated secured revolving credit facility. We incurred financing costs of
$2,064
associated with this Credit Agreement, which are being amortized over the remaining term of the agreement using the straight line method, which approximates the effective interest method. As a result of the Third Amendment to the Credit Agreement, effective October 21, 2015, and discussed further below, up to
$650,000
of borrowings are available, including a letter of credit sub-facility of
$50,000
, and an accordion provision that permits the Company to request an additional
$300,000
for certain transactions, which could increase the revolving credit commitment to
$950,000
. It is secured by the stock pledges of certain material subsidiaries. This agreement replaced our existing variable-rate revolving credit facility. Borrowings under the Credit Agreement bear interest, at Borrower’s option, at a rate based on LIBOR or the Base Rate, plus a margin based on the Leverage Ratio, ranging from
1.00%
to
2.75%
per annum for LIBOR, and ranging from
0.00%
to
1.75%
per annum for Base Rate. The Base Rate means for any day, a fluctuating per annum rate of interest equal to the highest of (i) the Federal Funds Open Rate, plus
0.5%
, (ii) the Prime Rate, or (iii) the Daily LIBOR Rate, plus
1.0%
. We are also required to pay a commitment fee of
0.15%
per annum to
0.25%
per annum of the average unused portion of the total lender commitments then in effect.
In the first quarter of fiscal 2015, we entered into a First Amendment to the Credit Agreement. The terms of the Credit Agreement that were amended related to: (a) an increase to the Maximum Leverage Ratio for the period starting July 25, 2014, through July 29, 2016, (b) certain restricted payment requirements related to share repurchases, and (c) an update to the Pricing Grid, which determines variable pricing and fees, to reflect changes in the allowable maximum leverage ratio. We incurred financing costs of
$1,279
associated with this amendment, which are being amortized using the straight line method, which approximates the effective interest method.
On May 11, 2015, we entered into a Second Amendment to the Credit Agreement. The amendment had an effective date of April 24, 2015. The terms of the Credit Agreement were amended related to: (a) an increase to the Maximum Leverage Ratio for the period starting April 24, 2015, through the remaining term of the agreement, (b) a change in the restrictions related to payments for share repurchases, and (c) a change in the definition of the LIBOR and Daily LIBOR rates that are used to calculate interest on outstanding borrowings. We incurred fees of
$1,705
associated with this amendment, which were paid in the first quarter of fiscal 2016 and amortized over the remaining term of the Credit Agreement using the straight line method, which approximates the effective interest method.
In the second quarter of fiscal 2016, we entered into a Third Amendment to the Credit Agreement dated and effective as of October 21, 2015. The terms of the Credit Agreement were amended related to: (a) an increase of the level of permitted indebtedness in connection with sale and leaseback transactions of assets from
$100,000
to
$300,000
, (b) a removal of the
$150,000
share repurchase restriction during the 2016 fiscal year, (c) a decrease of the size of the facility from
$750,000
to
$650,000
, (d) a modification of the definition of the leverage ratio to account for rent expense from leases, so that the leverage ratio will be calculated as consolidated indebtedness plus
600%
of annual rent expense versus consolidated EBITDAR, and (e) an inclusion of an add back to the leverage ratio calculation for costs related to the settlement of a class action lawsuit. We incurred and paid fees of
$812
associated with this amendment, which will be amortized over the remaining term of the Credit Agreement using the straight line method, which approximates the effective interest method. In addition, as a result of lowering the borrowing capacity on the credit facility, we expensed
$480
of previously unamortized deferred financing costs related to the agreement.
Our Credit Agreement contains financial and other various affirmative and negative covenants that are typical for financings of this type. Our Credit Agreement contains financial covenants that require us to maintain a specified minimum coverage ratio of not less than
3.00
to 1.00, and a maximum leverage ratio that may not exceed
4.25
to 1.00. As of
July 29, 2016
, our minimum coverage ratio was
11.82
, and our leverage ratio was
2.78
, as defined in our Credit Agreement. Our Credit Agreement limits repurchases of our common stock and the amount of dividends that we pay to holders of our common stock in certain circumstances. The Credit Agreement also allows for a sale leaseback of our real estate up to
$300,000
, of which approximately
$51,000
is still available as of
July 29, 2016
. A breach of any of these covenants could result in a default under our Credit Agreement, in which all amounts under our Credit Agreement may become immediately due and payable, and all commitments under our Credit Agreement extend further credit may be terminated. We are in compliance with the financial covenant requirements of our Credit Agreement as of
July 29, 2016
.
As of
July 29, 2016
, we had
$333,337
outstanding on the Credit Agreement. The primary purposes of the Credit Agreement are for trade and stand-by letters of credit in the ordinary course of business as well as working capital, refinancing of existing indebtedness, if any, capital expenditures, joint ventures and acquisitions, stock repurchases and other general corporate purposes.
Mortgage Loan Borrowings
On February 9, 2016, we entered into a
$30,000
mortgage credit agreement ("Mortgage Loan") on our home office facility. The Mortgage Loan represents a credit facility secured by our home office real estate and building. Borrowings under the Mortgage Loan bear interest, at the Borrower's option, at a rate based on LIBOR or the Base Rate, plus an applicable rate of
4.625%
per annum for LIBOR or
3.625%
per annum for the Base Rate. The Base Rate means for any day, a fluctuating per annum rate of interest equal to the highest of (a) the Federal Funds Open Rate, plus
0.5%
, (b) the Bank of America Prime Rate, or (c) the Eurodollar Rate, plus
1.0%
. We incurred financing costs of
$1,064
associated with this borrowing, which is being amortized over the
10
year term of the agreement, and is classified as a reduction of the outstanding long-term debt liability on our Consolidated Balance Sheet. We are required to make quarterly payments of
$750
until the Mortgage Loan's maturity date. The Mortgage Loan has a maturity date of February 9, 2026.
The carrying values of our borrowings approximate their fair values.
As of
July 29, 2016
, we had outstanding letters of credit that totaled
$13,923
, of which
$13,623
is utilized as part of the total amount available under our Credit Agreement. If certain conditions are met under these arrangements, we would be
required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience and future expectations, we do not expect to make any significant payment outside of the terms set forth in these arrangements.
Our combined effective interest rate for the Credit Agreement and Mortgage Loan was
2.48%
for the
three months
ended
July 29, 2016
. Our effective interest rate for the Credit Agreement was
2.21%
for the
three months
ended
July 24, 2015
. Interest costs of
$198
and
$11
incurred for the
three months
ended
July 29, 2016
and
July 24, 2015
, respectively, were capitalized in connection with our ERP system implementation and other construction activities. Interest paid during
three months
ended
July 29, 2016
and
July 24, 2015
was
$2,203
and
$2,738
, respectively. Net interest expense during
three months
ended
July 29, 2016
and
July 24, 2015
was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
July 29, 2016
|
|
July 24, 2015
|
|
Interest Expense:
|
|
|
|
|
Variable-rate debt
(1)
|
$
|
2,371
|
|
|
$
|
2,795
|
|
|
Fixed-rate debt
(2)
|
396
|
|
|
437
|
|
|
Capitalized interest
|
(198
|
)
|
|
(11
|
)
|
|
Total Interest Expense on outstanding borrowings
|
2,569
|
|
|
3,221
|
|
|
Interest income:
|
|
|
|
|
Accretion on note receivable
(3)
|
(558
|
)
|
|
(499
|
)
|
|
Other
(4)
|
(118
|
)
|
|
(116
|
)
|
|
Total Interest Income
|
(676
|
)
|
|
(615
|
)
|
|
Net Interest Expense
|
$
|
1,893
|
|
|
$
|
2,606
|
|
|
|
|
|
(1)
|
Primarily interest expense on our Credit Agreement Borrowings and our Mortgage loan
|
|
|
|
|
(2)
|
Includes the amortization of debt issuance costs
|
|
|
|
|
(3)
|
Accretion on our
$30,000
note receivable, obtained as part of the sale of Mimi’s Café to Le Duff.
|
|
|
|
|
(4)
|
Primarily interest income on our
$30,000
note receivable, obtained as part of the sale of Mimi’s Café to Le Duff.
|
3.
Income Taxes
The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The Company’s effective income tax rate was
22.4%
for the three months ended
July 29, 2016
, as compared to
24.3%
for the corresponding period a year ago. The lower tax rate for the
three
months ended
July 29, 2016
, as compared to the corresponding period last year, was driven primarily by the impact of yearly variances in the forecasted annual rate related to wage credits, the domestic productions activities deduction and officers' life insurance.
4.
Restructuring and Severance Charges
In fiscal 2013, we began a strategic organizational realignment including a closure of production facilities and a reduction of personnel at Bob Evans Restaurants, BEF Foods and at our corporate headquarters, as part of our comprehensive plan to reduce S,G&A expenses. In the second quarter of fiscal 2014, we closed our BEF Foods production plant in Richardson, Texas, and in the third quarter of fiscal 2014, we closed our BEF Foods production plants in Springfield and Bidwell, Ohio. The actions to close these food production facilities was intended to increase efficiency by consolidating production to our high capacity food production facility in Sulphur Springs, Texas. In each of the fourth quarters of fiscal years
2016
,
2015
and
2014
, we recorded charges related to a reduction of personnel at our corporate support center. Restructuring costs related to personnel at our corporate support center are primarily recorded in the S,G&A line of the Consolidated Statements of Net Income.
In the fourth quarter of fiscal 2015 management committed to a plan to close
16
owned, and
four
leased restaurants in fiscal 2016. We closed all
20
of these restaurants in the first half of fiscal 2016. In the fourth quarter of fiscal 2016 management committed to a plan to close an additional
21
owned and
six
leased restaurants. Associated with this plan, we incurred severance costs for both salaried and hourly employees at the closing restaurants. We closed all
21
of the owned locations in the fourth quarter of fiscal 2016 and closed
three
of the leased restaurants in the first quarter of fiscal 2017. We incurred charges of
$807
in the first quarter of fiscal 2017 associated with debranding and lease terminations.
Liabilities as of
July 29, 2016
, include
$1,022
associated with corporate severance charges, primarily incurred in the fourth quarter of fiscal 2016, as well as
$181
and
$267
of severance and lease termination charges associated with restaurant closure activity.
See tables below for detail of restructuring activity for the
three months
ended
July 29, 2016
, and
July 24, 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Bob Evans
Restaurants
|
|
BEF Foods
|
|
Corporate and Other
|
|
Total
|
|
Balance, April 29, 2016
|
$
|
1,135
|
|
|
$
|
—
|
|
|
$
|
1,563
|
|
|
$
|
2,698
|
|
|
Restructuring and related severance charges incurred
|
807
|
|
|
—
|
|
|
—
|
|
|
807
|
|
|
Amounts paid
|
(1,481
|
)
|
|
—
|
|
|
(562
|
)
|
|
(2,043
|
)
|
|
Adjustments
|
(13
|
)
|
|
—
|
|
|
21
|
|
|
8
|
|
|
Balance, July 29, 2016
|
$
|
448
|
|
|
$
|
—
|
|
|
$
|
1,022
|
|
|
$
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Bob Evans
Restaurants
|
|
BEF Foods
|
|
Corporate and Other
|
|
Total
|
|
Balance, April 24, 2015
|
$
|
1,105
|
|
|
$
|
481
|
|
|
$
|
2,040
|
|
|
$
|
3,626
|
|
|
Restructuring and related severance charges incurred
|
100
|
|
|
28
|
|
|
—
|
|
|
128
|
|
|
Amounts paid
|
(1,075
|
)
|
|
(216
|
)
|
|
(945
|
)
|
|
(2,236
|
)
|
|
Adjustments
|
—
|
|
|
(4
|
)
|
|
(74
|
)
|
|
(78
|
)
|
|
Balance, July 24, 2015
|
$
|
130
|
|
|
$
|
289
|
|
|
$
|
1,021
|
|
|
$
|
1,440
|
|
5
.
Impairments
We measure certain assets and liabilities at fair value on a nonrecurring basis, including long-lived assets that have been reduced to fair value when they are held for sale and long-lived assets that are written down to fair value when they are impaired.
We evaluate the carrying amount of long-lived assets held and used in the business periodically and when facts and circumstances indicate that an impairment may exist. A long-lived asset group is considered impaired when the carrying value of the asset group exceeds its fair value. The impairment loss recognized is the excess of carrying value above its fair value. The estimation of fair value requires significant judgment regarding future restaurant performance and market-based real estate appraisals. To estimate fair value for locations where we own the land and building, we obtain appraisals from third-party real estate valuation firms based on sales of comparable properties in the same area as our restaurant location, which we believe approximates fair value. We use discounted future cash flows to estimate fair value of long-lived assets for our leased locations. Our weighted average cost of capital is used as the discount rate in our fair value measurements for leased locations, which is considered a Level 3 measurement. A reasonable change in this discount rate would not have a significant impact on these fair value measurements.
No impairment charges were recorded in either the
three months
ended
July 29, 2016
, or
July 24, 2015
, respectively.
6.
Share-Based Compensation
The Stock Compensation Topic of the FASB ASC 718 ("ASC 718") requires that we measure the cost of employee services received in exchange for an equity award, such as stock options, restricted stock awards, restricted stock units and market-based performance share units, based on the estimated fair value of the award on the grant date. The cost is recognized in the income statement over the vesting period of the award on a straight-line basis with the exception of compensation cost related to awards for retirement eligible employees (as defined in the applicable plan or share grant) which is recognized immediately on the grant date. Compensation cost is recognized based on the grant date fair value estimated in accordance with ASC 718.
As of
July 29, 2016
, there were equity awards outstanding under the Amended and Restated Bob Evans Farms, Inc. 2010 Equity and Cash Incentive Plan (the “2010 Plan”), as well as previous equity plans adopted in 2006, and 1993. The types of awards that may be granted under the 2010 Plan include: stock options, stock appreciation rights, restricted stock awards ("RSAs"), restricted stock units ("RSUs"), cash incentive awards, performance share units ("PSUs"), and other awards. During the
three months
ended
July 29, 2016
, the Company granted approximately
74,000
and
142,000
RSUs and PSUs respectively, under the 2010 Plan. During the
three months
ended
July 24, 2015
, the Company granted approximately
67,000
RSAs and RSUs and
70,000
PSUs under the 2010 Plan.
RSAs and RSUs granted under the 2010 Plan vest ratably, primarily over
three
years for employees and
one
year for nonemployee directors of the Company. The PSUs granted in fiscal years 2016 and 2017 have market-based vesting conditions and vest at the end of a
three
-year performance period if they achieve those vesting conditions.
Share-based compensation expense, included primarily within the S,G&A line on the
Consolidated Statements of Net Income
, was
$1,440
and
$2,048
for the
three months
ended
July 29, 2016
, and
July 24, 2015
, respectively.
7.
Other Compensation Plans
Defined Contribution Plan:
We have a defined contribution 401(k) retirement savings plan that is available to substantially all employees who have at least
1,000
hours of service.
Nonqualified Deferred Compensation Plans:
We have
three
nonqualified deferred compensation plans, the Bob Evans Executive Deferral Plans I and II (collectively referred to as “BEEDP”) and Bob Evans Directors’ Deferral Plan (“BEDDP”), which provide certain executives and Board of Directors members, respectively, the opportunity to defer a portion of their current year salary or stock compensation to future years. A third party manages the investments of employee deferrals. Expenses related to investment results of these deferrals are based on the change in quoted market prices of the underlying investments elected by plan participants, and are recorded within S,G&A.
Obligations to participants who defer stock compensation through our deferral plans are satisfied only in company stock. There is no change in the vesting term for stock awards that are deferred into these plans. Obligations related to these deferred stock awards are treated as "Plan A" instruments, as defined by ASC 710. These obligations are classified as equity instruments within the Capital in excess of par value line of the Consolidated Balance Sheets. No subsequent changes in fair value are recognized in the Consolidated Financial Statements for these instruments. Participants earn share-based dividend equivalents in an amount equal to the value of per-share dividends paid to common shareholders. These dividends accumulate into additional shares of common stock, and are recorded through retained earnings in the period in which dividends are paid. Vested, deferred shares are included in the denominator of basic and diluted EPS in accordance with ASC 260 - Earnings per Share. The dilutive impact of unvested, deferred stock awards is included in the denominator of our diluted EPS calculation.
Participants who defer cash compensation into our deferral plans have a range of investment options, one of which is company stock. Obligations for participants who choose this investment election are satisfied only in shares of company stock, while all other obligations are satisfied in cash. These share-based obligations are treated as "Plan B" instruments, as defined by ASC 710. These deferred compensation obligations are recorded as liabilities on the Consolidated Balance Sheets, in the deferred compensation line. We record compensation cost for subsequent changes in fair value of these obligations. Participants earn share-based dividend equivalents in an amount equal to the value of per-share dividends paid to common shareholders. These dividends accumulate into additional shares of common stock, and are recorded as compensation cost in the period in which the dividends are paid. At
July 29, 2016
, our deferred compensation obligation included
$592
of share based obligations, which represents approximately
16,000
shares. The dilutive impact of these shares is included in the denominator of our EPS calculation. Compensation cost (benefit) recognized on the adjustment of fair value for deferred awards was immaterial in the current and prior year.
Supplemental Executive Retirement Plan:
The Supplemental Executive Retirement Plan ("SERP") provides awards to a limited number of executives in the form of nonqualified deferred cash compensation. Gains and losses related to these benefits and the related investment results are recorded within the S,G&A caption in the Consolidated Statements of Net Income. The SERP is frozen and no further persons can be added
,
and funding was reduced to a nominal amount per year for the remaining participants.
Deferred compensation liabilities expected to be satisfied within the next 12 months are classified as current liabilities within the Accrued wages and related liabilities line of the Consolidated Balance Sheets. Our deferred compensation liabilities as of
July 29, 2016
, and
April 29, 2016
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 29, 2016
|
|
April 29, 2016
|
|
Liability for deferred cash obligations in BEEDP and BEDDP Plans
|
$
|
13,389
|
|
|
$
|
12,845
|
|
|
Liability for deferred cash obligations in SERP plan
|
6,148
|
|
|
6,271
|
|
|
Liability for deferred share-based obligations in BEEDP and BEDDP Plans
|
592
|
|
|
673
|
|
|
Other noncurrent compensation arrangements
|
106
|
|
|
100
|
|
|
Total deferred compensation liabilities
|
20,235
|
|
|
19,889
|
|
|
Less current portion
(1)
|
(2,092
|
)
|
|
(2,128
|
)
|
|
Noncurrent deferred compensation liabilities
|
$
|
18,143
|
|
|
$
|
17,761
|
|
(1)
Current portion of deferred compensation is included within the accrued wages and related liabilities line on the Consolidated Balance Sheets
The Rabbi Trust is intended to be used as a source of funds to match respective funding obligations in our nonqualified deferred compensation plans. Assets held by the Rabbi Trust are recorded on our Consolidated Balance Sheets, and include company-owned life insurance ("COLI") policies, short-term money market securities and Bob Evans common-stock. The company-owned life insurance policies held by the Rabbi Trust are recorded at cash surrender value on the Rabbi Trust Assets line of Consolidated Balance Sheets and totaled
$20,943
and
20,662
as of
July 29, 2016
, and
April 29, 2016
, respectively. The cash receipts and payments related to the company-owned life insurance proceeds are included in cash flows from operating activities on the Consolidated Statements of Cash Flows and changes in the cash surrender value for these assets are reflected within the S,G&A line in the Consolidated Statements of Net Income.
The short-term securities held by the Rabbi Trust are recorded at their carrying value, which approximates fair value, on the prepaid expenses and other current assets line of the Consolidated Balance Sheets and totaled
$2,569
and
$3,290
as of
July 29, 2016
, and
April 29, 2016
, respectively. All assets held by the Rabbi Trust are restricted to their use as noted above.
8.
Commitments and Contingencies
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, and 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.
In the fourth quarter of fiscal 2016 we settled a class-action related to alleged violations of the Fair Labor Standards Act by misclassifying assistant managers as exempt employees and failing to pay overtime compensation during the period of time the employee worked as an assistant manager. In the first quarter of fiscal 2016 we reached an agreement in principle to resolve the litigation matter and recorded a
$10,500
charge. In the fourth quarter of fiscal 2016, the Court issued a Final Approval Order on the settlement and the appeals period expired, and we recorded a favorable adjustment of
$3,344
. The charge and adjustment were recorded in the S,G&A line of the consolidated and Bob Evans Restaurants' Statement of Net Income.
Other Matters:
The Division of Enforcement of the SEC is conducting a formal investigation relating to disclosures set forth in our filings on Form 8 - K and Form 10 - Q/A both filed on December 3, 2014. Those filings addressed the correction of our error in the classification of our borrowings under our credit agreement as a current liability rather than as a long-term liability, as reported in our Form 10 - Q filed on August 27, 2014. We are cooperating fully with the SEC in this matter. The Company cannot predict the duration, scope or outcome of the SEC’s investigation.
9.
Reporting Segments
We have
two
reporting segments: Bob Evans Restaurants and BEF Foods. We determine our segments on the same basis that the Company's chief operating decision maker uses to allocate resources and assess performance. We evaluate our segments based on operating income, excluding expenses and charges from corporate and other functions which we consider to be overall corporate costs, or costs not reflective of the reporting segment’s core operating businesses. This includes corporate functions such as information technology, finance, legal, human resources, supply chain and other corporate functions, and includes costs such as ongoing IT infrastructure costs, certain legal and professional fees, depreciation on our corporate assets and other costs.
Information on our reporting segments is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
July 29, 2016
|
|
July 24, 2015
|
|
Net Sales:
|
|
|
|
|
Bob Evans Restaurants
|
$
|
220,376
|
|
|
$
|
238,669
|
|
|
BEF Foods
|
90,713
|
|
|
86,048
|
|
|
Intersegment net sales of food products
|
(4,772
|
)
|
|
(3,004
|
)
|
|
Subtotal of BEF Foods
|
85,941
|
|
|
83,044
|
|
|
Total
|
$
|
306,317
|
|
|
$
|
321,713
|
|
|
Operating income (loss):
|
|
|
|
|
Bob Evans Restaurants
|
$
|
11,602
|
|
|
$
|
9,796
|
|
|
BEF Foods
|
15,387
|
|
|
15,851
|
|
|
Corporate and Other
|
(13,291
|
)
|
|
(17,385
|
)
|
|
Total
|
$
|
13,698
|
|
|
$
|
8,262
|
|
Discussion of segment results is included within Management's Discussion and Analysis of Financial Condition and Results of Operations.
10.
Supplemental Cash Flow Information
Cash paid for income taxes and interest for the
three months
ended
July 29, 2016
, and
July 24, 2015
, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
July 29, 2016
|
|
July 24, 2015
|
|
Income taxes paid
|
$
|
17,701
|
|
|
$
|
55
|
|
|
Income taxes refunded
|
(128
|
)
|
|
(7,471
|
)
|
|
Income taxes refunded, net
|
17,573
|
|
|
(7,416
|
)
|
|
Interest paid
|
$
|
2,203
|
|
|
$
|
2,738
|
|
11.
Subsequent Events
On
August 24, 2016
, the Board of Directors approved a quarterly cash dividend of
$0.34
per share, payable on
September 19, 2016
, to shareholders of record at the close of business on
September 5, 2016
.