NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Description of Business:
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 at grocery retailers. We also manufacture and sell similar products to food-service accounts, including Bob Evans Restaurants and other restaurants. The revenue from sales to Bob Evans Restaurants were eliminated in consolidation.
On January 24, 2017, we entered into an Asset and Membership Interest Purchase Agreement (the "BER Sale Agreement") with Bob Evans Restaurants, LLC (formerly BER Acquisition, LLC) a Delaware limited liability company formed by affiliates of Golden Gate Capital Opportunity Fund, L.P. ("the Buyer"). The Buyer completed the acquisition of the Company's Bob Evans Restaurants Business (the "Restaurants Business"), including our corporate headquarters, on
April 28, 2017
(the "Restaurants Transaction"). For all periods presented in our Consolidated Statements of Net Income, all sales, costs, expenses, gains and income taxes attributable to our Restaurants Business as well as the Restaurants Transaction have been reported under the captions "Income from Discontinued Operations, Net of Income Taxes." Cash flows used in or provided by our Restaurants Business have been reported in the Consolidated Statements of Cash Flows under operating and investing activities. Refer to Note 2 - Discontinued Operations for additional information.
Prior to the decision to sell our Restaurants Business, we had
two
reporting segments, Bob Evans Restaurants and BEF Foods. BEF Foods sells food products throughout the retail grocery and food service channels, including to Bob Evans Restaurants. Corporate and other costs related to shared services functions were not allocated to our reporting segments. As a result of the decision to sell our Restaurants Business, which is now classified as discontinued operations, we have
one
reporting segment. Revenues and costs related to our BEF Foods business, including indirect corporate overhead costs, are reported within results from continuing operations. All revenues and costs incurred directly in support of the Bob Evans Restaurants business are presented in results from discontinued operations. Prior year information has been adjusted to conform with the current presentation. Unless otherwise stated, the information disclosed in footnotes accompanying the financial statements refer to continuing operations. See Note 2 for additional information regarding results from discontinued operations.
Principles of Consolidation:
The consolidated financial statements include the accounts of Bob Evans and its subsidiaries. Intercompany accounts and transactions have been eliminated. Dollars are in thousands, except share and per share amounts.
Use of Estimates:
The preparation of financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used.
Fiscal Year:
Our fiscal year ends on the last Friday in April. References herein to fiscal
2017
, fiscal
2016
and fiscal
2015
refer to fiscal years ended
April 28, 2017
,
April 29, 2016
, and
April 24, 2015
, respectively. Fiscal years 2017 and 2015 were 52 week periods, whereas fiscal year 2016 was a 53
week
period.
Revenue Recognition:
Revenue is recognized when products are received by our customers. We engage in promotional (sales incentives or 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 spending for continuing operations, primarily comprised of off-invoice deductions and billbacks, was $
84,748
,
$79,302
, and $
56,618
for fiscal years
2017
,
2016
and
2015
, respectively.
Shipping and Handling costs:
Expenditures related to shipping our BEF Foods products to our customers are expensed when incurred. Shipping and handling costs were $
16,125
,
$14,850
and
$17,025
in fiscal years
2017
,
2016
and
2015
, respectively, and are recorded in the other operating expenses line of the Consolidated Statements of Net Income.
Cash Equivalents:
We consider all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. We did not own any cash equivalents as of
April 28, 2017
, or
April 29, 2016
.
Accounts Receivable:
Accounts receivable represents amounts owed to us through our operating activities and are presented net of allowance for doubtful accounts and promotional incentives. Accounts receivable 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 allowances for doubtful accounts of
$269
and
$421
as of
April 28, 2017
, and
April 29, 2016
, respectively. Accounts receivable are reduced by
$8,055
and
$4,916
as of
April 28, 2017
, and
April 29, 2016
, respectively, related to promotional incentives that reduce what is owed to the Company from certain BEF Foods customers.
Concentration of Credit Risk:
We maintain cash depository accounts with major banks. Accounts receivable can be potentially exposed to a concentration of credit risk with customers or in particular industries. In fiscal 2017 sales to Wal-mart comprised approximately
20%
of net sales from continuing operations while sales to Kroger comprised approximately
14%
of net sales from continuing operations. Reserves for credit losses have historically been within our expectations.
Notes Receivable:
As a result of the sale of Mimi’s Café to Le Duff, we received a promissory note ("the Note") for
$30,000
. The Note had an annual interest rate of
1.5%
, a term of
seven years
and a full principal and interest payment date of February 2020. Partial prepayments were required prior to maturity if the buyer reached certain levels of EBITDA during specified periods. No partial prepayments were received on this Note. The Note was originally valued using a discounted cash flow model and we recognized accretion income of
$1,133
, $
2,082
and
$1,859
in fiscal years
2017
,
2016
and
2015
, respectively.
In the third quarter of fiscal 2017, we reached an agreement with Mimi's Café and settled the Note. We received a payment of
$7,000
which settled all of Mimi's Café outstanding obligations of the Note. The settlement resulted in an impairment charge of
$15,256
, which was recorded in the Impairments line of the Consolidated Statements of Net Income.
Inventories:
Our inventories are determined on an average cost method which approximates a first in, first out basis due to the perishable nature of our inventory. Inventory includes raw materials and supplies ($
6,037
in fiscal
2017
and $
5,911
in fiscal
2016
) and finished goods ($
11,173
in fiscal
2017
and $
11,182
in fiscal
2016
). Inventories associated with the Restaurants Business were transferred to the Buyer as part of the Restaurants Transaction. See Note 2 for additional information.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost less accumulated depreciation. The straight-line depreciation method is used for all capitalized assets. Depreciation is calculated at rates adequate to amortize costs over the estimated useful lives of buildings and improvements (
5
to
25
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 from continuing operations was
$23,875
,
$20,887
and
$18,207
and in fiscal years
2017
,
2016
and
2015
, respectively.
We capitalized internal labor costs of
$605
,
$1,557
and
$2,118
in fiscal years
2017
,
2016
and
2015
, respectively, primarily associated with the first and second phases of our ERP implementation and other IT projects. The first phase of our ERP system was put in service in the first quarter of fiscal
2016
, and has an expected useful life of
ten years
. The second phase of our ERP system was put in service in the second quarter of fiscal year
2017
and also has an expected useful life of
10 years
.
We evaluate property, plant and equipment held and used in the business for impairment whenever events or changes circumstances 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.
Assets associated with our Richardson, Texas, location totaling
$3,334
are classified as Current Assets Held for Sale in the Consolidated Balance Sheet as of
April 28, 2017
and
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, were
$19,673
and $
19,829
as of
April 28, 2017
, and
April 29, 2016
, respectively. 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 and intangible assets with indefinite lives are not amortized, but rather are tested for impairment during the fourth quarter each year or on a more frequent basis when indicators of impairment exist. Goodwill and indefinite lived intangible asset 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 units to similar businesses or guideline companies whose securities are actively traded in public markets. There have been no impairments to our goodwill in the current or prior years.
Accrued Non-Income Taxes:
Accrued non-income taxes primarily represent obligations for real estate and personal property taxes. Accrued non-income taxes were
$3,353
and
$890
at
April 28, 2017
, and
April 29, 2016
, respectively. Accrued non-income taxes associated with the Restaurants Business were conveyed to the Buyer as part of the Restaurants Transaction. See Note 2 - Discontinued Operations for additional information.
Self-Insurance Reserves:
We record estimates for certain health, workers’ compensation and general liability 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 fiscal year end balance sheet date. Self-insurance reserves were
$10,692
and
$11,288
at
April 28, 2017
, and
April 29, 2016
, respectively. Workers compensation reserves associated with the Restaurants Business were transferred to the Buyer as part of the Restaurants Transaction. See Note 2 for additional information.
Other Accrued Expenses:
Other accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 28, 2017
|
|
|
April 29, 2016
|
|
Legal and professional fees
|
$
|
10,807
|
|
|
$
|
4,119
|
|
Accrued customer incentives
|
1,912
|
|
|
1,872
|
|
Accrued broker fees
|
945
|
|
|
957
|
|
Accrued advertising
|
515
|
|
|
727
|
|
Accrued utilities
|
492
|
|
|
449
|
|
Accrued interest
|
16
|
|
|
541
|
|
Other
|
3,218
|
|
|
4,949
|
|
Total other accrued expenses
|
$
|
17,905
|
|
|
$
|
13,614
|
|
Advertising Costs:
Media advertising is expensed at the time the media first airs. We expense all other advertising costs as incurred. Advertising expense from continuing operations was $
9,006
, $
6,658
and $
3,607
in fiscal years
2017
,
2016
and
2015
, respectively. Advertising costs are classified in other operating expenses in the Consolidated Statements of Net Income.
Cost of Sales:
Cost of sales represents primarily the cost of materials. Cost of sales excludes depreciation expense, which is recorded in the depreciation and amortization expense line on the Consolidated Statements of Net Income.
Comprehensive Income:
Comprehensive income is the same as reported net income as we have no other comprehensive income.
Earnings Per Share:
Our basic earnings per share ("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 Sheets (see Note 6 for more information), net of the impact of antidilutive 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:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Basic
|
19,839
|
|
|
21,336
|
|
|
23,489
|
|
Dilutive shares
|
293
|
|
|
158
|
|
|
160
|
|
Diluted
|
20,132
|
|
|
21,494
|
|
|
23,649
|
|
In fiscal years
2017
,
2016
and
2015
, respectively, there were
215,889
,
207,538
and
124,766
shares of common stock excluded from the diluted earnings per share calculations because they were antidilutive.
Dividends:
In fiscal
2017
, we paid
four
quarterly dividends, each equal to
$0.34
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:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Cash dividends paid to common stock holders
|
$
|
26,915
|
|
|
$
|
27,861
|
|
Dividend Equivalent Rights
|
560
|
|
|
400
|
|
Total dividends
|
$
|
27,475
|
|
|
$
|
28,261
|
|
Leases:
In fiscal 2016, we entered into sale leaseback transactions for
two
of our production facilities.
The transaction included
20
-year initial lease terms for each facility, with
two
10
-year additional renewal periods exercisable at our option,
2%
annual rent increases and payment and performance guaranties. A gain of
$2,305
on the sale of our Lima, Ohio, facility was deferred and is being recognized on a straight-line basis over the initial term of the lease. Rent expense is recorded on a straight-line basis. Our straight-line rent calculation does not include an assumption of lease renewal periods. We record the difference between the amount charged to expense and the rent paid as deferred rent in the Consolidated Balance Sheets. Rent expense was $
4,117
and
$2,202
in fiscal years
2017
and
2016
, respectively. Refer to the following table for expected future minimum lease payments, which excludes the impact of any available renewal periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Future operating lease payments
|
|
$
|
3,586
|
|
|
$
|
3,657
|
|
|
$
|
3,731
|
|
|
$
|
3,805
|
|
|
$
|
3,881
|
|
|
$
|
60,657
|
|
Income Taxes:
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with the Income Taxes Topic of the Financial Accounting Standards Board ("FASB ") ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Net Income. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets. See
Note 4
for additional information.
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 claim. 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. The Company retained liabilities for health insurance and general liability claims associated with the Restaurants Business that were incurred prior to the closing of the Restaurants Transaction. 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.
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 food manufacturing industry. Management 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. See
Note 8
for further information.
As part of the Restaurants Transaction, the Company and BEF Foods, Inc. continue to guarantee certain payment and performance obligations associated with Bob Evans Restaurants leases associated with the sale leaseback transaction that occurred in the fourth quarter of fiscal 2016. See Note 2 for additional information.
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. The pronouncements below were either adopted by the Company in fiscal 2017 or will be effective for the Company in future years.
In May 2014, the FASB and the International Accounting Standards Board ("IASB") issued new joint guidance surrounding revenue recognition. Under 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 will become effective for us in fiscal 2019.
We are in the process of implementing the new standard, focusing on promotional arrangements with customers. We do not believe the implementation will be material to our current or historical financial statements. We are in the process of developing additional controls to ensure proper oversight of new customer relationships and promotional activity, as well as to ensure we meet all of the disclosure requirements associated with the new standard. We have not yet concluded which transition method we will elect, but anticipate we will use the modified retrospective approach.
In August 2014, the FASB issued Accounting Standards Update ("ASU") 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 became effective for our fiscal year end 2017 and did not have an impact on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 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 will become 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 become 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 U.S. 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 will become 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 will become effective for us in our fiscal 2021. We do not expect this standard to have a material impact on the consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The guidance is to be applied using a retrospective transition method to each period presented. This standard will become effective for us in our fiscal 2019. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test. Under the previous guidance an impairment of goodwill exists when the carrying amount of goodwill exceeds its implied fair value, whereas under the new guidance a goodwill impairment loss would be recognized if the carrying amount of the reporting unit exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact this standard will have on our consolidated financial statements.
Note 2 — Discontinued Operations
On January 24, 2017, the Company entered into the BER Sale Agreement with the Buyer. On April 28, 2017, we completed the sale of the Restaurants Business for an aggregate purchase price of
$565,000
in cash, subject to certain adjustments set forth in the BER Sale Agreement (the “Restaurants Transaction”). The Buyer also purchased our corporate headquarters as part of the transaction.
The Restaurants Transaction was effected by (i) the sale of the Restaurants Business assets by the Company’s affiliates to Buyer and (ii) the sale by the Company of
fifty
percent of the equity interests in a newly formed special purpose entity that holds specified intellectual property assets used by both the Restaurants Business and the Company’s food production business. As part of the Restaurants Transaction the Company also conveyed to the Buyer the majority of working capital liabilities associated with the Restaurants Business, including outstanding payables, accrued wages, and other accrued current liabilities, other than debt.
The Company will continue to supply Bob Evans Restaurants with certain of its products under a
five
-year supply agreement. The supply agreement requires Bob Evans Restaurants purchase
100%
of certain food products from the Company in the first year. The required percentage of purchases for those products then decreases annually, down to
25%
in the final year. In fiscal years
2017
,
2016
and
2015
respectively, the Company's BEF Foods business sold
$22,056
,
$18,769
and
$19,304
of products to Bob Evans Restaurants. These sales were eliminated on our Consolidated Statements of Net Income.
Additionally, pursuant to a transition services agreement, the Company will supply certain services, primarily information technology related, to Bob Evans Restaurants and will receive certain human resource, tax and accounting services from Bob Evans Restaurants. These services will be provided at cost for a period up to
18 months
, which can be further extended.
Results associated with the Restaurants Business are classified as income from discontinued operations, net of income taxes, in our Consolidated Statements of Net Income. Prior year results have been adjusted to conform with the current presentation. Income from discontinued operations is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Net Sales
|
$
|
876,786
|
|
|
$
|
951,211
|
|
|
$
|
969,878
|
|
Costs and expenses:
|
|
|
|
|
|
Cost of sales
|
226,516
|
|
|
252,612
|
|
|
258,677
|
|
Operating wage and fringe benefit expenses
|
359,959
|
|
|
384,959
|
|
|
381,822
|
|
Operating expenses
|
172,717
|
|
|
169,673
|
|
|
168,610
|
|
Selling, general and administrative expenses
|
62,025
|
|
|
73,873
|
|
|
69,916
|
|
Depreciation and amortization expense
|
36,059
|
|
|
58,562
|
|
|
61,710
|
|
Impairments
|
522
|
|
|
8,385
|
|
|
6,100
|
|
Operating Income from discontinued operations
|
18,988
|
|
|
3,147
|
|
|
23,043
|
|
Gain on sale of Restaurants Business
|
150,167
|
|
|
—
|
|
|
—
|
|
Net interest expense
|
2,203
|
|
|
373
|
|
|
—
|
|
Income from discontinued operations before income taxes
|
166,952
|
|
|
2,774
|
|
|
23,043
|
|
Provision (Benefit) for income taxes
|
57,521
|
|
|
(5,240
|
)
|
|
1,110
|
|
Income from discontinued operations
|
$
|
109,431
|
|
|
$
|
8,014
|
|
|
$
|
21,933
|
|
Selling, general and administrative expenses recorded in discontinued operations include corporate costs incurred directly in support of the Restaurants Business. In fiscal 2017, these costs included
$10,818
of severance and stock compensation costs associated with corporate employees who supported the Restaurants Business.
We sold our corporate headquarters facility to the Buyer on a debt-free basis as part of the Restaurants Transaction, which required us to pay-in-full the outstanding borrowings on our Mortgage Loan prior to closing the Transaction. In accordance with ASC 205 - Presentation of Financial Statements, interest expense associated with the Mortgage Loan, which includes
$972
of debt issuance amortization charges recorded upon termination of the Mortgage Loan in the fourth quarter, was allocated to discontinued operations.
See the table below for a reconciliation of the gain recorded on the sale of our Restaurants Business:
|
|
|
|
|
Net proceeds received from Restaurant Transaction
(1)
|
$
|
539,301
|
|
|
|
Restaurants Business assets:
|
|
Accounts receivable
|
3,522
|
|
Inventory
|
8,538
|
|
Property, plant and equipment
|
480,663
|
|
Other assets
|
5,693
|
|
Total Restaurants Business assets
|
498,416
|
|
|
|
Restaurants Business liabilities:
|
|
Accounts payable
|
13,813
|
|
Accrued non income taxes
|
11,587
|
|
Accrued wages and benefits
|
8,794
|
|
Self-insurance reserves
|
8,003
|
|
Accrued gift cards
|
13,810
|
|
Accrued miscellaneous liabilities
|
12,455
|
|
Deferred sale leaseback gain
|
51,077
|
|
Other restaurant liabilities
|
7,039
|
|
Total Restaurants Business Liabilities
|
126,578
|
|
|
|
Other transaction costs incurred as part of the sale of the Restaurants Business
(2)
|
$
|
17,296
|
|
|
|
Gain on sale of the Restaurants Business before income taxes
|
$
|
150,167
|
|
(1)
The proceeds received from the Restaurants Transaction are net of certain costs paid at closing, including transfer taxes and title insurance, and other working capital adjustments outlined in the BER Sale Agreement.
(2)
C
osts directly incurred as a result of the sale of our Restaurants Business, including investment bank fees, legal fees, professional fees and other administrative costs.
Prior to the closing of the Restaurants Transaction, these assets and liabilities were classified as held for sale in the Consolidated Balance Sheets as of
January 27,
2017, in the Form 10-Q. The Company retained certain liabilities associated with the Restaurants Business, including
$7,408
of liabilities for general liability and health insurance claims incurred prior to the closing of the Restaurants Transaction. Additionally we retained all liabilities related to income taxes associated with the Restaurants Business.
Proceeds from the sale of the Restaurants Business have been presented in the Consolidated Statements of Cash Flow under investing activities for fiscal year 2017. Total operating and investing cash flows of discontinued operations for fiscal years
2017
,
2016
and
2015
are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Net cash (used in) provided by operating activities
|
$
|
(35,807
|
)
|
|
$
|
72,645
|
|
|
$
|
123,401
|
|
Net cash provided by (used in) investing activities
|
$
|
519,833
|
|
|
$
|
175,816
|
|
|
$
|
(49,184
|
)
|
Net cash provided by investing activities in fiscal year 2017 includes the proceeds from the sale of the Restaurants Business, while net cash provided by investing activities in fiscal year 2016 includes approximately
$197,000
of proceeds associated with our sale leaseback of
143
restaurant properties. Net cash provided by (used in) investing activities in each year is net of capital expenditures associated with the Restaurants Business.
Lease Guarantee
As part of the Restaurants Transaction, the Buyer assumed all operating leases associated with the Restaurants Business, including leases for the
143
restaurant properties that were sold as part of a sale leaseback transaction in the fourth quarter of fiscal 2016. The Company and BEF Foods, Inc. continue to guarantee certain payment and performance obligations associated with the lease agreements for those restaurant properties (the "Guarantee"). In the event Bob Evans Restaurants fails to meet its payment and performance obligations under these lease agreements, the Company may be required to make rent and other payments to the landlord under the requirements of the Guarantee. Should the Company, as guarantor of the lease obligations, be required to make all lease payments due for the remaining term of the lease subsequent to
April 28, 2017
, the maximum amount we may be required to pay is the annual rent amount, for the remainder of the lease term. The current annual rent on these leases is approximately
$13,300
, and will increase up to
1.5%
annually based on indexed inflation. The lease term extends for approximately
19
more years as of
April 28, 2017
, and the Company would remain a guarantor of the leases in the event the leases are extended for a renewal period. In the event that the Company is obligated to make payments under the guarantor obligations, we believe the exposure is limited due to contractual protections and recourse available in the master lease agreements as well as the BER Sale Agreement, including a requirement of the landlord to mitigate damages by re-letting the properties in default. Bob Evans Restaurants continues to meet its obligations under these leases and there have not been any events that would indicate that they will not continue to meet the obligations of the leases. As such, we believe the fair value of the Guarantee is immaterial as of
April 28, 2017
.
Note 3
— Long-Term Debt and Credit Arrangements
As of
April 28, 2017
, long-term debt was comprised of 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
ten years
from the date of borrowing, with imputed interest.
In the fourth quarter of fiscal
2017
, in conjunction with the sale of our Restaurants Business, we paid all outstanding borrowings and terminated our Revolving and Restated Credit Agreement ("Credit Agreement"). Under the terms of the Credit Agreement, we were required to use proceeds from the sale of our Restaurants Business to pay off outstanding borrowings, which occurred on the date the Restaurants Transaction closed. In the fourth quarter of fiscal 2017, we also paid off all outstanding borrowings on the mortgage credit agreement on our corporate headquarters facility (the "Mortgage Loan"). Our corporate headquarters facility was sold as part of the Restaurants Transaction and the termination of the Mortgage Loan prior to closing the Restaurants Transaction was a requirement under the BER Sale Agreement. Interest expense associated with the Mortgage Loan, including the write off of unamortized debt issuance costs of
$972
, was recorded in the results from discontinued operations. We expensed
$2,005
of unamortized debt issuance costs in the fourth quarter of fiscal
2017
associated the termination of the Credit Agreement. Interest expense associated with the Credit Agreement, including the write off of unamortized debt issuance costs, were recorded in the Net Interest Expense line of the Consolidated Statements of Net Income.
Refer to the table below for outstanding borrowings as of
April 28, 2017
, and
April 29, 2016
, respectively:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 28, 2017
|
|
April 29, 2016
|
Credit Agreement borrowings
|
$
|
—
|
|
|
$
|
307,000
|
|
Mortgage Loan
|
—
|
|
|
28,963
|
|
R&D Loan
(1)
|
1,801
|
|
|
2,219
|
|
Interest-free loan
(1)
|
894
|
|
|
875
|
|
Total borrowings
|
2,695
|
|
|
339,057
|
|
Less current portion
|
(428
|
)
|
|
(3,419
|
)
|
Long term debt
|
$
|
2,267
|
|
|
$
|
335,638
|
|
|
|
(1)
|
The R&D Loan and Interest-free loan mature in fiscal 2021 and 2022, respectively.
|
Establishment of New Credit Facility
On
April 28, 2017
, the Company entered into a new
$300,000
Credit Facility (the “Credit Facility”). The Credit Facility represents a syndicated secured revolving credit facility under which up to
$300,000
will be available, with a letter of credit sub-facility of
$20,000
, and an accordion option to increase the revolving credit commitment to
$400,000
. All obligations under the Credit Facility are unconditionally guaranteed by the Company as well as certain wholly owned subsidiaries, and is secured by a first-priority security interest in certain property and assets of the Company, including accounts receivable,
inventory, equipment, intellectual property and certain other assets, including stock pledges of certain material direct subsidiaries. The Credit Facility has a maturity date of April 28, 2022. We incurred financing costs of
$1,542
associated with this Credit Facility, which will be amortized over the
five
-year term of the facility.
The primary purposes of the Credit Facility are for stand-by letters of credit in the ordinary course of business as well as working capital, capital expenditures, acquisitions, stock repurchases, dividends, including a special dividend paid to the Company’s stockholders at the close of business on June 16, 2017, and other general corporate purposes.
Borrowings under the Credit Facility bear interest, at Borrower’s option, at a rate based on the Eurodollar Rate or the Base Rate, plus a margin based on the Consolidated Leverage Ratio, as detailed in the Credit Facility, ranging from
1.25%
to
2.00%
per annum for Eurodollar Rate, and ranging from
0.25%
to
1.00%
per annum for Base Rate. Base Rate means, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the Federal Funds Rate, plus
0.50%
, and (ii) Bank of America, N.A.’s “prime rate”, and (iii) the Eurodollar Rate, plus
1.0
%. As of
April 28, 2017
, the margin on LIBOR-based loans was
1.50%
per annum and the margin on Base Rate-based loans was
0.50%
per annum. Commitment fees payable under the Credit Facility are also based on the Consolidated Leverage Ratio and range from
0.20%
per annum to
0.30%
per annum of the average unused portion of the total lender commitments then in effect.
The terms of the Credit Facility provide for customary representations and warranties and affirmative covenants. The Credit Facility contains negative covenants usual and customary for a transaction of this nature. The Credit Agreement also 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
3.50
to 1.00. As of
April 28, 2017
, there were no outstanding borrowings on the Credit Facility and we were in compliance with all covenants. A breach of any of these covenants could result in a default under our Credit Facility, in which all amounts under the Credit Facility may become immediately due and payable, and all commitments under our Credit Facility to extend further credit may be terminated.
At
April 28, 2017
, we had outstanding letters of credit that totaled approximately
$12,036
, of which
$11,736
is utilized as part of the total amount available under our Credit Facility. 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. Approximately
$3,300
of these letters of credit were associated with our Restaurants Business and have subsequently been canceled or released.
Our combined effective annual interest rate for the now terminated Credit Agreement and Mortgage Loan was
2.37%
during the year ended
April 28, 2017
. Interest costs of
$445
,
$210
and
$471
incurred in fiscal years
2017
,
2016
and
2015
, respectively, were capitalized in connection with our ERP system implementation and other construction activities. Interest paid in fiscal years
2017
,
2016
and
2015
was $
9,718
,
$10,579
and
$10,399
, respectively. Net interest expense from continuing operations in fiscal years
2017
,
2016
and
2015
was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Interest Expense:
|
|
|
|
|
|
Variable-rate debt
(1)
|
$
|
7,817
|
|
|
$
|
10,925
|
|
|
$
|
10,373
|
|
Fixed-rate debt
(2)
|
3,213
|
|
|
2,262
|
|
|
1,177
|
|
Capitalized interest
|
(445
|
)
|
|
(210
|
)
|
|
(471
|
)
|
Total Interest Expense on outstanding borrowings
|
10,585
|
|
|
12,977
|
|
|
11,079
|
|
Interest Income:
|
|
|
|
|
|
Accretion on note receivable
(3)
|
(1,133
|
)
|
|
(2,082
|
)
|
|
(1,859
|
)
|
Other
(4)
|
(236
|
)
|
|
(468
|
)
|
|
(571
|
)
|
Total Interest Income
|
(1,369
|
)
|
|
(2,550
|
)
|
|
(2,430
|
)
|
Net Interest Expense
|
$
|
9,216
|
|
|
$
|
10,427
|
|
|
$
|
8,649
|
|
|
|
(1)
|
Primarily interest expense on our Credit Agreement borrowings.
|
|
|
(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 which was settled in fiscal 2017.
|
|
|
(4)
|
Primarily interest income on the
$30,000
note receivable, obtained as part of the sale of Mimi’s Café to Le Duff which was settled in fiscal 2017.
|
Note 4
— Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carryforward periods are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence, such as the Company’s projections for growth. Significant components of our deferred tax liabilities and assets as of
April 28, 2017
, and
April 29, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 28, 2017
|
|
April 29, 2016
|
Deferred tax assets:
|
|
|
|
Self-insurance
|
$
|
2,306
|
|
|
$
|
5,595
|
|
Stock and deferred compensation plans
|
14,034
|
|
|
12,582
|
|
Deferred proceeds on Mimi’s Café sale
|
—
|
|
|
3,564
|
|
Rebates, coupons and allowances
|
2,683
|
|
|
1,067
|
|
Inventory
|
2,234
|
|
|
2,605
|
|
Wage and related liabilities
|
2,511
|
|
|
3,426
|
|
Deferred gain from sale leaseback
|
769
|
|
|
22,306
|
|
Other
|
2,392
|
|
|
7,619
|
|
Total deferred tax assets before valuation allowances
|
26,929
|
|
|
58,764
|
|
Valuation allowance
|
(238
|
)
|
|
(246
|
)
|
Net deferred tax assets
|
$
|
26,691
|
|
|
$
|
58,518
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
$
|
19,988
|
|
|
$
|
28,111
|
|
Intangibles
|
1,217
|
|
|
747
|
|
Other
|
405
|
|
|
658
|
|
Total deferred tax liabilities
|
21,610
|
|
|
29,516
|
|
Net deferred tax assets (liabilities)
|
$
|
5,081
|
|
|
$
|
29,002
|
|
There are
$568
of state net operating loss carry forwards that will expire at various times through 2036.
As of
April 28, 2017
, and
April 29, 2016
, the valuation allowance for net operating loss carryovers totaled
$238
and
$246
, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in carryback years and tax-planning strategies when making this assessment.
Significant components of the provision (benefit) for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(3,647
|
)
|
|
$
|
3,714
|
|
|
$
|
(5,679
|
)
|
State
|
(173
|
)
|
|
873
|
|
|
(779
|
)
|
Total current
|
(3,820
|
)
|
|
4,587
|
|
|
(6,458
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
8,364
|
|
|
1,704
|
|
|
(1,922
|
)
|
State
|
(670
|
)
|
|
148
|
|
|
(246
|
)
|
Total deferred
|
7,694
|
|
|
1,852
|
|
|
(2,168
|
)
|
Total tax provision (benefit)
|
$
|
3,874
|
|
|
$
|
6,439
|
|
|
$
|
(8,626
|
)
|
Our provision for income taxes differs from the amounts computed by applying the federal statutory rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Statutory federal tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income tax — net
|
0.9
|
|
|
3.9
|
|
|
6.8
|
|
Domestic production activity deduction
|
(13.5
|
)
|
|
(11.7
|
)
|
|
13.4
|
|
Fixed assets
|
—
|
|
|
—
|
|
|
2.2
|
|
Officers life insurance
|
(2.5
|
)
|
|
2.7
|
|
|
4.4
|
|
Other
|
(1.4
|
)
|
|
(1.5
|
)
|
|
(0.2
|
)
|
Provision for income taxes
|
18.5
|
%
|
|
28.4
|
%
|
|
61.6
|
%
|
Taxes paid during fiscal
2017
, fiscal
2016
and fiscal
2015
were
$23,743
,
$7,739
and
$10,543
, respectively.
Uncertain Tax Positions
The following table summarizes activity of the total amounts of unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of fiscal year
|
$
|
4,983
|
|
|
$
|
5,202
|
|
|
$
|
5,952
|
|
Additions based on tax positions related to the current year
|
(23
|
)
|
|
306
|
|
|
63
|
|
Additions for tax positions of prior years
|
308
|
|
|
149
|
|
|
551
|
|
Reductions for tax positions of prior years
|
(227
|
)
|
|
(188
|
)
|
|
(284
|
)
|
Reductions due to settlements with taxing authorities
|
(126
|
)
|
|
(113
|
)
|
|
(672
|
)
|
Reductions due to statute of limitations expiration
|
(903
|
)
|
|
(373
|
)
|
|
(408
|
)
|
Balance at end of fiscal year
|
$
|
4,012
|
|
|
$
|
4,983
|
|
|
$
|
5,202
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of
April 28, 2017
,
April 29, 2016
, and
April 24, 2015
, was
$4,012
,
$4,720
and
$4,939
, respectively. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain, but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits would not affect our effective tax rate.
The Company believes that it is reasonable that a decrease of up to
$73
to
$1,554
in unrecognized tax benefits related to state exposures may be necessary in the coming year due to settlements with taxing authorities or lapses of statutes of limitations.
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Consolidated Statements of Net Income. During fiscal
2017
, fiscal
2016
and fiscal
2015
, we recognized
$422
,
$50
and
$166
, respectively of benefits related to the adjustment of previously assessed interest and penalties. As of
April 28, 2017
, and
April 29, 2016
, we accrued approximately
$368
and
$790
, respectively, in interest and penalties related to unrecognized tax benefits.
We file United States federal and various state and local income tax returns. Tax returns are generally subject to examination for a period of
three
to
five
years after the filing of the respective return.
Note 5
— Restructuring and Severance Charges
In fiscal 2017, we incurred charges of
$6,662
related to a reduction of personnel as part of the Company's overall strategic initiatives, including the sale of the Restaurants Business (see Note 2 for additional information). Severance charges associated with employees who work in shared service functions were recorded in the S,G&A line of the Consolidated Statements of Net Income, while charges associated with employees who supported the Restaurant Business were recorded in results from discontinued operations. Liabilities for severance charges associated with restructuring activities as of
April 28, 2017
, were
$2,800
and are recorded in the accrued wages and related liabilities line of the Consolidated Balance Sheet and we expect these liabilities to be paid in fiscal 2018.
Additionally, in each of the fourth quarters of fiscal years
2016
and
2015
, we recorded charges related to a reduction of personnel at our corporate headquarters. Restructuring costs related to employees who supported our continuing operations or
worked in shared service functions were recorded in the S,G&A line of the Consolidated Statements of Net Income. See the table below for additional information.
|
|
|
|
|
|
Restructuring Charges
|
Balance April 25, 2014
|
$
|
1,227
|
|
Restructuring and related severance charges incurred
(1)
|
4,340
|
|
Amounts paid
|
(1,849
|
)
|
Balance Adjustments
|
(92
|
)
|
Balance April 24, 2015
|
$
|
3,626
|
|
|
|
Restructuring and related severance charges incurred
(1)
|
2,606
|
|
Amounts paid
|
(3,105
|
)
|
Adjustments
|
(429
|
)
|
Balance April 29, 2016
|
$
|
2,698
|
|
|
|
Restructuring and related severance charges incurred
(1)
|
6,662
|
|
Amounts paid
|
(5,632
|
)
|
Adjustments
|
(928
|
)
|
Balance April 28, 2017
|
$
|
2,800
|
|
(1)
Restructuring charges of
$2,090
,
$972
and
$3,236
were recorded in continuing operations in fiscal years 2017, 2016 and 2015, respectively, in the S,G&A line of the Consolidated Statements of Net Income. The remaining charges were recorded in the results of discontinued operations.
Note 6
— Share-Based Compensation Plans
Shared-based Employee 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 and restricted stock 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, which are recognized immediately upon grant. Compensation cost recognized is based on the grant date fair value estimated in accordance with ASC 718.
On September 13, 2010, our stockholders approved the Bob Evans Farms, Inc. 2010 Equity and Cash Incentive Plan (the “2010 Plan”). Upon approval, the 2010 Plan became our primary plan under which new stock-based compensation can be granted.
The types of awards that may be granted under the 2010 Plan include: stock options, stock appreciation rights, restricted stock, restricted stock units, cash incentive awards, performance shares, performance units, and other awards. The Compensation Committee of the Board of Directors administers the 2010 Plan, including establishing the terms and conditions of the awards. The 2010 Plan allows the Compensation Committee to make awards to any of our employees, consultants, or nonemployee directors. The 2010 Plan imposes various restrictions on awards, including a maximum life of
10 years
for stock options and stock appreciation rights and a minimum exercise price equal to the grant date stock price for stock options and stock appreciation rights. The remaining shares available for issue under the 2006 Equity and Cash Incentive Plan (the “2006 Plan”) became available for issuance under the 2010 Plan effective September 13, 2010.
In fiscal
2017
, we granted market-based performance share units ("PSUs") and restricted stock units ("RSUs"). The PSUs granted under the 2010 Plan have market-based vesting conditions, while RSUs granted under the 2010 Plan vest ratably over
three
years for employees, and
one
year for non-employee directors of the Company. The PSUs awarded in the first quarter of fiscal 2017 were designed to vest at the end of a
three
-year performance period if they achieved the market-based vesting conditions. The PSUs were valued using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company's total stockholder return, measured against the total stockholder return of a select group of peer companies over a
three
-year period. During fiscal years
2017
,
2016
and
2015
, we issued treasury shares to satisfy the vesting of restricted awards and stock option exercises.
In the third quarter of fiscal
2017
, in accordance with the authority and power granted to the Compensation Committee under the terms of the 2010 Plan, the Compensation Committee approved acceleration of the vesting of all unvested RSUs,
RSAs and PSUs then outstanding, contingent upon and effective at the time of the closing of the Restaurants Transaction. The Compensation Committee further determined that the performance criteria applicable to each PSU was deemed satisfied, upon the closing of the Restaurants Transaction and delivery by the participant of a written agreement with the Company containing a general release of claims and certain restrictive covenants. The Compensation Committee’s decision applied to all of the Company’s outstanding RSUs, RSAs and PSUs granted to employees that were unvested at the time of the modification.
The Compensation Committee's decision resulted in a Type III modification, defined as a change from improbable to probable vesting conditions as per ASC 718, for certain employees terminated during fiscal 2017 and for employees that left the Company as part of the Restaurants Transaction. For Type III modified stock awards, we recalculated the fair value on the modification date (January 24, 2017), and accelerated the associated unrecognized stock compensation expense. RSAs and RSUs are valued based on the stock closing price on the grant date. Total stock-based compensation expense from continuing operations in fiscal years
2017
,
2016
and
2015
, was
$7,269
,
$2,958
and
$1,600
respectively. The related tax benefit recognized was
$2,762
,
$1,124
and
$608
in fiscal years
2017
,
2016
and
2015
, respectively. Expense associated with stock-based compensation is primarily reflected in S,G&A expense.
Stock Options
The following table summarizes option-related activity for fiscal
2017
:
|
|
|
|
|
|
|
|
|
Options
|
|
Shares Subject to Options
|
|
Weighted-Average Exercise Price
|
Outstanding, Beginning of Year
|
|
38,040
|
|
|
$
|
33.26
|
|
Granted
|
|
—
|
|
|
—
|
|
Exercised
|
|
(15,150
|
)
|
|
34.16
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
Outstanding, End of Year
|
|
22,890
|
|
|
$
|
32.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted- Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
Options outstanding
|
22,890
|
|
|
$
|
32.67
|
|
|
1.59
|
|
$
|
780
|
|
Options exercisable
|
22,890
|
|
|
$
|
32.37
|
|
|
1.59
|
|
$
|
780
|
|
As of
April 28, 2017
, there was
no
remaining unrecognized compensation cost related to outstanding stock options. The total intrinsic value of options exercised during fiscal years
2017
,
2016
and
2015
was
$333
,
$195
and
$567
, respectively. Cash received from the exercise of options was
$518
,
$214
and
$534
for fiscal years
2017
,
2016
and
2015
, respectively.
Cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as financing cash flows. In fiscal years
2017
,
2016
and
2015
, excess tax (expense) benefits of
$(499)
,
$1,661
and
$228
, respectively, were classified as financing cash flows in the Consolidated Statements of Cash Flows.
Restricted Stock
A summary of the status of our non-vested restricted stock awards and restricted stock units as of
April 28, 2017
, and changes during fiscal
2017
is presented below:
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Non-vested, Beginning of Year
|
|
89,655
|
|
|
$
|
40.93
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
(85,222
|
)
|
|
41.25
|
|
Forfeited
|
|
(4,433
|
)
|
|
34.74
|
|
Non-vested, End of Year
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Non-vested, Beginning of Year
|
|
145,118
|
|
|
$
|
45.51
|
|
Granted
|
|
97,862
|
|
|
39.25
|
|
Vested
|
|
(211,743
|
)
|
|
43.55
|
|
Forfeited
|
|
(7,418
|
)
|
|
43.33
|
|
Non-vested, End of Year
|
|
23,819
|
|
|
$
|
37.91
|
|
At
April 28, 2017
, there was
$291
of unrecognized compensation cost related to non-vested restricted stock units for our Board of Directors. This cost is expected to be recognized over a weighted-average period of
0.33
years. The total fair value of RSAs and RSUs granted during fiscal years
2017
,
2016
and
2015
was
$3,841
,
$6,092
and
$4,649
, respectively. The total fair value of RSAs and RSUs that vested during fiscal years
2017
,
2016
and
2015
was
$9,221
,
$5,601
and
$10,136
, respectively.
In addition to the shares subject to outstanding options and unvested restricted stock units and performance share units, approximately
2.9
million shares were available for grant under the 2010 Plan at
April 28, 2017
.
Performance Share Units
|
|
|
|
|
|
|
|
|
Performance Share Units
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Non-vested, Beginning of Year
|
|
61,746
|
|
|
$
|
54.76
|
|
Granted
|
|
142,124
|
|
|
34.08
|
|
Vested
|
|
(189,959
|
)
|
|
40.19
|
|
Forfeited
|
|
(13,911
|
)
|
|
42.46
|
|
Non-vested, End of Year
|
|
—
|
|
|
$
|
—
|
|
At
April 28, 2017
, there was
no
unrecognized stock compensation expense. The total fair value of PSU awards granted during fiscal 2017 was
$4,844
. The total fair value of PSU awards vested during fiscal 2017 was
$7,634
. The weighted-average assumptions used for PSUs in the Monte Carlo simulation during fiscal 2017 were as follows:
|
|
|
|
|
|
Fiscal 2017 PSU grants
|
Grant date market price
|
$
|
39.69
|
|
Fair value
|
$
|
34.08
|
|
Assumptions:
|
|
Price volatility
|
30.9
|
%
|
Risk-free interest rate
|
0.92
|
%
|
Average volatility of peer companies
|
36.2
|
%
|
Average correlation coefficient of peer companies
|
0.774
|
|
Note 7
— Other Compensation Plans
Defined Contribution Plan:
We have a defined contribution plan (401(k)) that is available to substantially all employees who have at least
1,000
hours of service. Expenses related to matching contributions to these plans for continuing operations were
$1,426
,
$988
and
$946
for fiscals
2017
,
2016
, and
2015
respectively, and are primarily recorded within S,G&A.
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 provides 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.
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
April 28, 2017
, our deferred compensation obligation included
$1,398
of share based obligations, which represents
20,949
shares. The dilutive impact of these shares are 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 in the next 12 months are classified as current liabilities in the accrued wages and other liabilities line of the Consolidated Balance Sheets. Our deferred compensation liabilities as of
April 28, 2017
and
April 29, 2016
, consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 28, 2017
|
|
|
April 29, 2016
|
|
Deferred cash obligations in BEEDP and BEDDP plans
|
$
|
13,986
|
|
|
$
|
12,845
|
|
Deferred cash obligations in SERP plan
|
5,830
|
|
|
6,271
|
|
Deferred liability for share-based obligations in BEEDP and BEDDP plans
|
1,398
|
|
|
673
|
|
Other noncurrent compensation arrangements
|
110
|
|
|
100
|
|
Total deferred compensation liabilities
|
21,324
|
|
|
19,889
|
|
Less current portion
|
(4,047
|
)
|
|
(2,128
|
)
|
Noncurrent deferred compensation liabilities
|
$
|
17,277
|
|
|
$
|
17,761
|
|
Employees who transferred to Bob Evans Restaurants as part of the Restaurants Transaction were treated as terminated employees in our deferred compensation plans and will receive payouts based on their distribution elections.
Rabbi Trust Assets:
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 COLI policies held by the Rabbi Trust are recorded at cash surrender value on the Rabbi Trust Assets line of Consolidated Balance Sheets and totaled
$22,353
and
$20,662
as of
April 28, 2017
, and
April 29, 2016
, respectively. The cash receipts and payments related to the company owned life insurance policies 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 expense and other current assets line of the Consolidated Balance Sheets and totaled $
984
and
$3,290
as of
April 28, 2017
, and
April 29, 2016
, respectively. All assets held by the Rabbi Trust are restricted to their use as noted above.
Net expenses associated with our nonqualified deferred compensation plans include expenses associated with investment returns of our plan participants as well as premiums and administrative fees associated with the plans and our Rabbi Trust, and are offset by the investment returns on our COLI policies. Net expenses associated with our deferred compensation plans totaled $
1,031
, $
1,162
and $
1,236
in fiscal years
2017
,
2016
, and
2015
respectively, and are recorded within S,G&A.
Note 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 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 fiscal 2015, we recorded a charge of
$6,000
related to the settlement of this matter. In the first quarter of fiscal 2016, we reached an agreement in principle to resolve litigation matter and recorded an additional
$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. The Company recorded a favorable adjustment of
$3,344
related to the final settlement of this matter in fiscal 2016.
Note 9
— Goodwill and Other Intangible Assets
The carrying value of our goodwill and other intangible assets as of the end of fiscal
2017
and fiscal
2016
is
$19,673
and
$19,829
, respectively, and primarily represents goodwill acquired in our fiscal 2013 acquisition of Kettle Creations. We assess the carrying value of our goodwill annually or whenever circumstances indicate that a decline in the carrying value may have occurred as required under the provisions of ASC 350. In the fourth quarter of fiscal 2017 we completed our annual impairment test. There have been no impairments to our goodwill in the current or prior years
We also have a definite-lived intangible assets recorded on the Consolidated Balance Sheets consisting of noncompetition agreements that are being amortized over a
5
-year life and have an immaterial remaining unamortized balance as of
April 28, 2017
.
Note 10 — Acquisitions
On January 24, 2017, the Company’s subsidiary BEF Foods, Inc. (“BEF Foods”) entered into a Stock Purchase Agreement (the “PFPC Agreement”) with Pineland Farms Potato Company, Inc., a Maine corporation (“PFPC”), the stockholders of PFPC party thereto (collectively, the “Sellers”), and Libra Foundation, as the Sellers’ Representative, and, solely for the purposes of guaranteeing the payment and performance obligations of BEF Foods under the PFPC Agreement, the Company. Pursuant to the PFPC Agreement, subject to the satisfaction or waiver of certain conditions, BEF Foods has purchased and acquired from the Sellers all of the equity interests of PFPC outstanding immediately after the closing , in exchange for (i)
$115,000
in cash, subject to certain adjustments set forth in the PFPC Agreement, and (ii) up to an additional $
25,000
in cash as potential earn-out consideration, the payment of which is subject to the achievement of certain operating EBITDA performance milestones over a consecutive
twelve
-month period during the
24
months following the closing. The transaction closed in the first quarter of fiscal 2018.
Note 11
— Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial results for Fiscal 2017 and Fiscal 2016 follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net Sales from Continuing Operations
|
$
|
85,941
|
|
|
$
|
83,044
|
|
|
$
|
96,158
|
|
|
$
|
94,281
|
|
|
$
|
112,820
|
|
|
$
|
107,897
|
|
|
$
|
99,923
|
|
|
$
|
102,394
|
|
Operating Income (Loss) from Continuing Operations
|
$
|
8,265
|
|
|
$
|
5,986
|
|
|
$
|
(4,768
|
)
|
|
$
|
5,330
|
|
|
$
|
17,121
|
|
|
$
|
11,424
|
|
|
$
|
9,508
|
|
|
$
|
10,334
|
|
Net Income (Loss) from Continuing Operations
|
$
|
5,298
|
|
|
$
|
2,582
|
|
|
$
|
(4,857
|
)
|
|
$
|
1,278
|
|
|
$
|
9,838
|
|
|
$
|
6,416
|
|
|
$
|
6,757
|
|
|
$
|
5,932
|
|
Net Income (Loss) from Discontinued Operations
|
$
|
3,864
|
|
|
$
|
1,698
|
|
|
$
|
5,074
|
|
|
$
|
5,152
|
|
|
$
|
(1,617
|
)
|
|
$
|
6,515
|
|
|
$
|
102,110
|
|
|
$
|
(5,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Earnings Per Share - Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.46
|
|
|
$
|
0.19
|
|
|
$
|
0.01
|
|
|
$
|
0.29
|
|
|
$
|
0.41
|
|
|
$
|
0.62
|
|
|
$
|
5.47
|
|
|
$
|
0.03
|
|
Diluted
|
$
|
0.46
|
|
|
$
|
0.19
|
|
|
$
|
0.01
|
|
|
$
|
0.29
|
|
|
$
|
0.41
|
|
|
$
|
0.62
|
|
|
$
|
5.39
|
|
|
$
|
0.03
|
|
Common stock sale prices
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$
|
46.83
|
|
|
$
|
51.88
|
|
|
$
|
41.09
|
|
|
$
|
49.92
|
|
|
$
|
57.94
|
|
|
$
|
44.34
|
|
|
$
|
67.25
|
|
|
$
|
48.14
|
|
Low
|
$
|
35.67
|
|
|
$
|
43.02
|
|
|
$
|
35.90
|
|
|
$
|
42.51
|
|
|
$
|
40.05
|
|
|
$
|
37.51
|
|
|
$
|
55.49
|
|
|
$
|
38.92
|
|
Cash dividends paid
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
|
(1)
|
Common stock sale prices are based on the market-close prices during the respective periods.
|
|
|
•
|
Fiscal quarters represent 13-week periods, except the fourth quarter of fiscal year 2016, which was a 14-week period.
|
|
|
•
|
Total quarterly EPS may not equal the annual amount because EPS is calculated independently for each quarter.
|
|
|
•
|
Stock prices are high and low sale prices for our common stock as reported on the NASDAQ Stock Market (trading symbol — BOBE), which is the principal market for our common stock.
|
|
|
•
|
The number of registered stockholders of our common stock at
June 9, 2017
, was
14,648
.
|
Note 12
— Subsequent Events
On May 1, 2017, we completed the acquisition of PFPC. We acquired all of the equity interests of PFPC in exchange for (i)
$115,000
in cash, subject to certain adjustments set forth in the purchase agreement, and (ii) up to an additional
$25,000
in cash as potential earn-out consideration, the payment of which is subject to the achievement of certain operating EBITDA performance milestones over consecutive
twelve
month periods during the
24
months following the closing.
The acquisition increases our side-dish production capacity and provides us the capability to produce and sell diced and shredded potato products in both the retail and food-service channels. The acquisition also diversifies our production capability by adding a second state-of-the-art potato processing facility with approximately
180 million
pounds of capacity. PFPC also owns and operates a 900-acre potato farm and is surrounded by an estimated 55,000 acres of annual potato production.
On May 1, 2017, the Company’s Board of Directors announced the declaration of a special dividend in the amount of
$7.50
per share on the Company’s outstanding common stock. The dividend is payable on June 16, 2017 to stockholders of record at the close of business on May 30, 2017.
On May 31, 2017, the Company’s Board of Directors announced the declaration of a quarterly cash dividend of
$0.34
per share on the Company's outstanding common stock. The dividend is payable on June 26, 2017 to stockholders of record at the close of business on June 12, 2017.