FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 27, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________________________________
Commission file number 0-1667
Bob Evans Farms, Inc.
(Exact name of registrant as specified in its charter)
Delaware 31-4421866
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3776 South High Street Columbus, Ohio 43207
(Address of principal executive offices)
(Zip Code)
(614) 491-2225
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of February 24, 2006, the registrant had issued 42,638,118 common
shares, of which 35,854,933 were outstanding.
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BOB EVANS FARMS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
------------------------------
Jan. 27, 2006 April 29, 2005
------------- --------------
Unaudited Audited
ASSETS
Current assets
Cash and equivalents $ 26,270 $ 5,267
Accounts receivable 18,943 14,707
Inventories 25,478 24,416
Deferred income taxes 10,623 10,623
Prepaid expenses 2,950 2,226
Assets held for sale 15,705 7,040
---------- ----------
TOTAL CURRENT ASSETS 99,969 64,279
Property, plant and equipment 1,400,757 1,359,467
Less accumulated depreciation 440,014 409,561
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT 960,743 949,906
Other assets
Deposits and other 3,038 2,698
Long-term investments 21,032 19,278
Deferred income taxes 33,044 33,044
Goodwill 57,729 57,364
Other intangible assets 56,802 57,417
---------- ----------
TOTAL OTHER ASSETS 171,645 169,801
---------- ----------
$1,232,357 $1,183,986
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 33,900 $ 43,000
Current maturities of long-term debt 4,000 4,000
Accounts payable 21,727 24,422
Dividends payable 4,300 4,249
Federal and state income taxes 35,566 21,763
Accrued wages and related liabilities 23,893 23,767
Self insurance 20,963 16,340
Other accrued expenses 66,508 51,087
---------- ----------
TOTAL CURRENT LIABILITIES 210,857 188,628
Long-term liabilities
Deferred compensation 17,355 17,046
Deferred income taxes 99,126 99,126
Deferred rent 16,570 16,022
Long-term debt 207,333 210,333
---------- ----------
TOTAL LONG-TERM LIABILITIES 340,384 342,527
Stockholders' equity
Common stock, $.01 par value; authorized 100,000,000
shares; issued 42,638,118 shares at Jan. 27, 2006,
and April 29, 2005 426 426
Preferred stock, authorized 1,200 shares; issued 120
shares at Jan. 27, 2006, and April 29, 2005 60 60
Capital in excess of par value 147,992 149,593
Retained earnings 654,805 633,372
Treasury stock, 6,803,983 shares at Jan. 27, 2006,
and 7,234,365 shares at April 29, 2005, at cost (122,167) (130,620)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 681,116 652,831
---------- ----------
$1,232,357 $1,183,986
========== ==========
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(Dollars in thousands, except per share amounts)
-------------------------------------------------------------
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Jan. 27, 2006 Jan. 28, 2005 Jan. 27, 2006 Jan. 28, 2005
------------- ------------- ------------- -------------
NET SALES $399,478 $380,976 $1,187,481 $1,077,611
Cost of sales 121,287 119,305 355,053 325,824
Operating wage and fringe benefit expenses 142,404 139,969 433,160 389,194
Other operating expenses 64,232 62,051 194,389 173,704
Selling, general and administrative expenses 29,801 30,002 90,394 86,947
Depreciation and amortization expense 18,142 16,530 54,284 46,555
-------- -------- ---------- ----------
OPERATING INCOME 23,612 13,119 60,201 55,387
Net interest expense 2,771 2,766 8,808 6,337
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 20,841 10,353 51,393 49,050
PROVISIONS FOR INCOME TAXES 6,867 3,717 17,103 17,609
-------- -------- ---------- ----------
NET INCOME $ 13,974 $ 6,636 $ 34,290 $ 31,441
======== ======== ========== ==========
EARNINGS PER SHARE - BASIC $ 0.39 $ 0.19 $ 0.96 $ 0.89
======== ======== ========== ==========
EARNINGS PER SHARE - DILUTED $ 0.39 $ 0.19 $ 0.96 $ 0.88
======== ======== ========== ==========
CASH DIVIDENDS PER SHARE $ 0.12 $ 0.12 $ 0.36 $ 0.36
======== ======== ========== ==========
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in thousands)
Nine Months Ended
-----------------------------
Jan. 27, 2006 Jan. 28, 2005
------------- -------------
OPERATING ACTIVITIES:
Net income $ 34,290 $ 31,441
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 54,284 46,555
(Gain) loss on sale of assets (4,941) 361
Gain on long-term investments (1,000) (502)
Deferred compensation 309 740
Compensation expense attributable to stock plans 551 845
Deferred rent 548 --
Cash provided by (used for) current assets
and current liabilities:
Accounts receivable (4,236) (3,141)
Inventories (1,062) (1,654)
Prepaid expenses (724) (212)
Accounts payable (2,695) 1,314
Federal and state income taxes 13,803 15,586
Accrued wages and related liabilities 126 (4,503)
Self insurance 4,623 2,153
Other accrued expenses 14,746 5,037
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 108,622 94,020
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (85,834) (90,692)
Acquisition of business (365) (178,893)
Purchase of long-term investments (999) (1,183)
Proceeds from sale of property, plant and equipment 17,849 4,521
Other (340) 758
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (69,689) (265,489)
FINANCING ACTIVITIES:
Cash dividends paid (12,806) (12,703)
Line of credit (9,100) 3,980
Proceeds from debt issuance -- 372,775
Principal payments on debt (3,000) (185,774)
Proceeds from issuance of treasury stock 6,976 1,570
-------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (17,930) 179,848
-------- ---------
Increase in cash and equivalents 21,003 8,379
Cash and equivalents at the beginning of the period 5,267 3,986
-------- ---------
Cash and equivalents at the end of the period $ 26,270 $ 12,365
======== =========
The accompanying notes are an integral part of the financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Unaudited 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") are presented
in accordance with the requirements of Form 10-Q and, consequently, do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally made in the company's Form 10-K
filing. In the opinion of management, all adjustments (consisting of
normal, recurring adjustments) considered necessary for a fair presentation
of the company's financial position and results of operations have been
included. The financial statements are not necessarily indicative of the
results of operations for a full fiscal year. Except as described in this
Form 10-Q, no significant changes have occurred in the disclosures made in
Bob Evans' Form 10-K for the fiscal year ended April 29, 2005 (refer to the
Form 10-K for a summary of significant accounting policies followed in the
preparation of the consolidated financial statements).
2. Earnings Per Share
Basic earnings per share computations are based on the
weighted-average number of shares of common stock outstanding during the
period presented. Diluted earnings per share calculations reflect the
assumed exercise and conversion of employee stock options.
The numerator in calculating both basic and diluted earnings per share
for each period is reported net income. The denominator is based on the
following weighted-average number of common shares outstanding:
(in thousands)
-------------------------------------------------------------
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Jan. 27, 2006 Jan. 28, 2005 Jan. 27, 2006 Jan. 28, 2005
------------- ------------- ------------- -------------
Basic 35,825 35,326 35,604 35,296
Effect of dilutive
stock options 160 320 201 358
------ ------ ------ ------
Diluted 35,985 35,646 35,805 35,654
====== ====== ====== ======
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3. Stock-Based Employee Compensation
The company accounts for its stock-based employee compensation plans
under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no compensation expense has been recognized
for stock options when the exercise price of the options is equal to or
greater than the fair market value of the stock at the grant date.
The following table illustrates the effect on net income and earnings
per share if the company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation:
(in thousands, except per share data)
-------------------------------------------------------------
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Jan. 27, 2006 Jan. 28, 2005 Jan. 27, 2006 Jan. 28, 2005
------------- ------------- ------------- -------------
NET INCOME, AS REPORTED $13,974 $ 6,636 $34,290 $31,441
ADD: Stock-based employee
compensation cost, net of
related tax effects,
included in reported net
income 324 178 366 511
DEDUCT: Stock-based employee
compensation cost, net of
related tax effects,
determined under the fair
value method for all awards (1,083) (1,289) (2,658) (4,747)
------- ------- ------- -------
NET INCOME, PRO FORMA $13,215 $ 5,525 $31,998 $27,205
------- ------- ------- -------
EARNINGS PER SHARE - BASIC
As reported $ 0.39 $ 0.19 $ 0.96 $ 0.89
Pro forma $ 0.37 $ 0.16 $ 0.90 $ 0.77
EARNINGS PER SHARE - DILUTED
As reported $ 0.39 $ 0.19 $ 0.96 $ 0.88
Pro forma $ 0.37 $ 0.15 $ 0.89 $ 0.76
The company will be adopting SFAS 123 (R), Share-Based Payment,
beginning with the first quarter of fiscal 2007. Please refer to Note 6 for
more information.
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4. Industry Segments
The company's business includes restaurant operations and the
processing and sale of food products. The revenues from these segments
include both sales to unaffiliated customers and intersegment sales, which
are accounted for on a basis consistent with sales to unaffiliated
customers. Intersegment sales and other intersegment transactions have been
eliminated in the consolidated financial statements. Information on the
company's operating segments is summarized as follows:
(in thousands)
-------------------------------------------------------------
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Jan. 27, 2006 Jan. 28, 2005 Jan. 27, 2006 Jan. 28, 2005
------------- ------------- ------------- -------------
Sales
Restaurant operations $329,066 $316,205 $1,002,352 $ 905,990
Food products 79,661 75,342 214,243 201,527
-------- -------- ---------- ----------
408,727 391,547 1,216,595 1,107,517
Intersegment sales of food products (9,249) (10,571) (29,114) (29,906)
-------- -------- ---------- ----------
Total $399,478 $380,976 $1,187,481 $1,077,611
======== ======== ========== ==========
Operating income
Restaurant operations $ 18,511 $ 9,949 $ 49,008 $ 51,246
Food products 5,101 3,170 11,193 4,141
-------- -------- ---------- ----------
Total $ 23,612 $ 13,119 $ 60,201 $ 55,387
======== ======== ========== ==========
5. Acquisition and Debt Issuance
On July 7, 2004, the company acquired all of the stock of SWH
Corporation (d/b/a Mimi's Cafe) for approximately $106 million in cash,
plus the assumption of approximately $79 million in outstanding
indebtedness, which was paid in full at the closing of the acquisition.
In October 2005, the company paid a purchase price adjustment which
increased the total cost of the acquisition, and therefore goodwill, by
$365,000.
The transaction was accounted for using the purchase method of
accounting as required by SFAS No. 141, Business Combinations, and
accordingly, the results of operations of SWH Corporation have been
included in the company's consolidated financial statements from the date
of acquisition.
The acquisition was financed through a committed credit facility of
approximately $183 million, the proceeds of which were used to purchase all
of the outstanding stock of SWH Corporation, repay existing indebtedness of
SWH Corporation and pay certain transaction expenses. The credit facility
was refinanced on July 28, 2004, through a private placement of $190
million in unsecured senior notes. The maturities of these notes range from
3 to 12 years, with a weighted-average interest rate of 4.9%.
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The following table illustrates the pro-forma impact on certain
financial results if the acquisition had occurred at the beginning of
fiscal 2005. The pro-forma financial information does not purport to be
indicative of the operating results that would have been achieved had the
acquisition been consummated at the beginning of fiscal 2005 and should not
be construed as representative of future operating results.
(in thousands)
Nine Months
Ended
Jan. 28, 2005
-------------
Net sales $1,128,280
Net income $ 30,186
Earnings per share:
Basic $ 0.86
Diluted $ 0.85
6. New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 123 (R), Share-Based
Payment, which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS No. 123 (R) requires compensation costs related
to share-based payment transactions to be recognized in the financial
statements. With limited exceptions, the amount of compensation cost will
be measured based on the fair value on the grant date of the equity or
liability instruments issued. Compensation cost will be recognized over the
period that an employee provides service for that award. This new standard
will be effective for the company in the first quarter of fiscal 2007. The
company has not yet determined the method of adoption nor the effect of
adopting this standard.
In October 2005, the FASB issued FASB Staff Position (FSP) No. FAS
13-1, Accounting for Rental Costs Incurred during a Construction Period.
FSP No. FAS 13-1 requires rental costs associated with ground or building
operating leases, incurred during a construction period, to be classified
as rental expense. The company currently capitalizes such costs as part of
buildings and improvements. FSP No. FAS 13-1 is effective for the fourth
quarter of the current fiscal year and is expected to reduce operating
income by approximately $300,000 in the fourth quarter.
7. Income Taxes
In 2005, the company received an assessment from the State of Ohio
related to corporate franchise taxes for fiscal years 1998-2003. The
company is petitioning the State of Ohio for a
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reassessment as the company believes its positions on tax returns filed are
correct. However, in the event that the company does not ultimately
prevail, management believes that recorded reserves are adequate to meet
any future tax-related payments to the State of Ohio.
On June 30, 2005, the State of Ohio enacted tax legislation, which
phases out the Ohio corporate franchise (income) tax and phases in a new
gross receipts tax called the Commercial Activity Tax (CAT) over a
five-year period. While the corporate franchise (income) tax was generally
based on federal taxable income, the CAT is based on current year sales and
rentals in Ohio. The effect of these tax changes is not expected to have a
material impact on the company's results of operations, financial position
or liquidity.
8. Net Gain on Asset Disposals and Charge for Restaurant Closings
Consolidated and restaurant results for fiscal 2006 include a net
pre-tax gain of $1.8 million recorded in the third quarter and $5.5 million
year-to-date on the sale of several parcels of real property, including
vacant land and closed restaurant locations. The gains are classified as a
reduction of selling, general and administrative expenses.
The company has traditionally sold real property via like-kind
exchanges under Internal Revenue Code Section 1031 whereby gains are not
recognized for federal income tax purposes. Historically the company did
not recognize such gains for financial reporting purposes as they were
deemed to be immaterial. Due to the significance of the gain in the current
fiscal year, the company re-examined the accounting treatment for the sale
of real estate and determined the gain should be recognized for financial
reporting purposes. The company plans to recognize all such future gains
for financial reporting purposes regardless of materiality and will
separately disclose any significant impact.
In the third quarter of fiscal 2006, the company also recorded a
charge of $0.6 million related to the closing of the company's eight
remaining Owens Restaurants in January 2006.
9. Assets Held for Sale
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the company has classified certain land and
building assets as "held for sale" in the Consolidated Balance Sheets.
Depreciation of these assets has ceased and no gain or loss has been
recorded as it is anticipated that proceeds on sale will exceed the net
book value of the assets. The company believes these assets will be
disposed of within the next twelve months.
10. Reclassifications
Certain fiscal 2005 amounts have been reclassified to conform to the
fiscal 2006 classification.
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11. Subsequent Events
On January 24, 2006, the company announced the closing of its eight
remaining Owens Restaurants. On February 10, 2006, the company sold seven
of the eight Owens Restaurants, plus two additional properties in Texas.
The gain on this transaction will be recorded in the fourth quarter of
fiscal 2006.
On February 23, 2006, SWH Corporation (d/b/a Mimi's Cafe), a wholly
owned subsidiary of the company, entered into a memorandum of understanding
for the settlement of a class action lawsuit that was filed prior to the
company's July 2004 purchase of SWH Corporation. The majority of the
settlement payment is recoverable from the sellers of SWH Corporation.
Although the charge ultimately to be incurred by the company related to
this settlement is still unknown, the company believes the charge will not
be material to the financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL OVERVIEW
As of January 27, 2006, the company owned and operated 678 full-service
restaurants, including 582 Bob Evans Restaurants in 19 states and 96 Mimi's Cafe
casual restaurants in 13 states. Bob Evans Restaurants are primarily located in
the Midwest, mid-Atlantic and Southeast regions of the United States. Mimi's
Cafes are primarily located in California and other western states. Revenue in
the restaurant segment is recognized at the point of sale. The company is also a
leading producer and distributor of pork sausage and a variety of complementary
homestyle convenience food items under the Bob Evans and Owens brand names.
These food products are distributed primarily to grocery stores in the East
North Central, mid-Atlantic, Southern and Southwestern United States. Revenue in
the food products segment is recognized when products are delivered to the
retailer. The company acquired SWH Corporation (d/b/a Mimi's Cafe) ("Mimi's") in
the first quarter of fiscal 2005 (see Note 5 of the consolidated financial
statements).
The following table reflects data for the company's third fiscal quarter
ended January 27, 2006, compared to the prior year's third fiscal quarter ended
January 28, 2005. The consolidated information is derived from the accompanying
consolidated statements of income. Also included is data for the company's two
industry segments - restaurant operations and food products. The ratios
presented reflect the underlying dollar values expressed as a percentage of the
applicable net sales amount.
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CONSOLIDATED RESTAURANT FOOD PRODUCTS
RESULTS SEGMENT SEGMENT
------------------- ------------------- -----------------
Q3 2006* Q3 2005 Q3 2006* Q3 2005 Q3 2006 Q3 2005
-------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Net sales $399,478 $380,976 $329,066 $316,205 $70,412 $64,771
Operating income $ 23,612 $ 13,119 $ 18,511 $ 9,949 $ 5,101 $ 3,170
Cost of sales 30.4% 31.3% 25.3% 26.5% 53.9% 54.7%
Operating wages 35.6% 36.8% 40.9% 41.8% 11.2% 11.9%
Other operating 16.1% 16.3% 18.5% 18.6% 5.2% 5.3%
S,G&A 7.5% 7.9% 4.8% 5.4% 19.8% 20.1%
Depr. & amort. 4.5% 4.3% 4.9% 4.6% 2.7% 3.1%
-------- -------- -------- -------- ------- -------
Operating income 5.9% 3.4% 5.6% 3.1% 7.2% 4.9%
* Consolidated and restaurant results include the following special items:
$1,772 net pre-tax gain on asset disposals in S,G&A and a $628 charge,
primarily to operating wages, related to the closing of 8 Owens
Restaurants. The net pre-tax gain of the special items is $1,144 in the
third quarter. Excluding the special items in the third quarter, results
would have been as follows:
- Cost of sales: $121,149 consolidated; 30.4% of consolidated sales
and 25.3% of restaurant sales
- Operating wages: $141,914 consolidated; 35.5% of consolidated
sales and 40.7% of restaurant sales
- S,G&A: $31,573 consolidated; 7.9% of consolidated sales and 5.3%
of restaurant sales
- Operating income: $22,468 consolidated; 5.6% of consolidated
sales and 5.3% of restaurant sales
- Net income: $13,206 consolidated; 3.3% of consolidated sales
- EPS (basic and diluted) would have been $0.37
RESTAURANT SEGMENT OVERVIEW
The ongoing economic and industry-wide factors relevant to the restaurant
segment include: competition, same-store sales (defined in the "Sales" section
below), labor and fringe benefit expenses, commodity prices, energy prices,
restaurant openings and closings, governmental initiatives, food safety and
other risks such as the economy, weather and consumer acceptance. For the third
quarter of fiscal 2006, the factors having the greatest impact on restaurant
segment profitability were same-store sales and improved food and labor costs.
Third quarter 2006 same-store sales decreased 0.4% at Bob Evans Restaurants
and increased 0.4% at Mimi's Cafes compared to the corresponding period last
year. Although Bob Evans Restaurants experienced a decline in same-store sales
for the quarter, the magnitude of the decrease represented a significant
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improvement over results earlier in the fiscal year. The company attributes some
of the improvement to moderate weather conditions in January of 2006 compared to
the severe winter weather a year ago.
Management's focus on controlling food and labor costs had a significant
positive impact in the third quarter. Additionally, commodity costs were more
favorable when compared to the corresponding period last year. Labor costs
improved through effective management of labor hours and modifying hours of
operation to better complement customer traffic patterns. These factors are
discussed further in the detailed sections that follow. However, the end result
is that restaurant operating income increased $8.6 million, or 86.1%, in the
third quarter of fiscal 2006 compared to a year ago. Furthermore, the segment's
operating income margin was 5.6% compared to 3.1% in the same period last year.
Excluding the $1.1 million pre-tax gain from the special items outlined in the
earnings table above, the segment's operating income increased $7.4 million, or
74.6%, in the third quarter of fiscal 2006 compared to a year ago, and the
segment's operating margin was 5.3%.
Through nine months of fiscal 2006, the company closed 24 restaurants.
These restaurants contributed approximately $28 million in annualized sales and
represented approximately $1 million in annualized operating losses.
FOOD PRODUCTS SEGMENT OVERVIEW
The ongoing economic and industry-wide factors relevant to the food
products segment include: hog costs, governmental initiatives, food safety and
other risks such as the economy, weather and consumer acceptance. For the third
quarter of fiscal 2006, the two factors that had the greatest impact on food
products segment profitability were strong sales growth and lower hog costs.
Food products segment net sales increased 8.7% in the third quarter of
fiscal 2006 compared to the same period last year. The higher net sales were
driven by an 11.6% increase in pounds sold of comparable products (principally
sausage and refrigerated side dishes).
Hog costs represent the majority of food products segment cost of sales,
and the volatile nature of hog costs greatly impacts the profitability of the
segment. For the third quarter of fiscal 2006, average hog costs decreased 16.9%
compared with the quarter a year ago. This decrease in hog costs, as well as
better
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leveraging of costs due to the increase in pounds sold, caused cost of sales in
the food products segment to decrease to 53.9% of sales in the third quarter
this year from 54.7% in the corresponding period last year.
The increase in net sales, combined with lower hog costs and better
leveraging of expenses, resulted in an increase in operating income of $1.9
million (or 60.9%) compared to the corresponding period last year. Additionally,
the food products operating income margin increased to 7.2% of sales in the
third quarter versus 4.9% in the third quarter a year ago.
SALES
Consolidated net sales increased 4.9% to $399.5 million in the third
quarter of fiscal 2006 compared to the corresponding quarter last year. The
increase was comprised of sales increases in the restaurant segment and food
products segment of $12.9 million and $5.6 million, respectively. Restaurant
sales accounted for 82.4% of consolidated sales in the third quarter of fiscal
2006. For the nine-month period ended January 27, 2006, consolidated net sales
increased $109.9 million, or 10.2%, compared to the previous year. Most of this
increase was due to the fact that fiscal 2005 sales did not include Mimi's sales
until after the company acquired Mimi's near the end of the first quarter of
fiscal 2005. Based on the pro-forma data (provided in Note 5 of the financial
statements), the nine-month sales increase this year would have been 5.2%
compared to the same period a year ago if Mimi's sales were included for all of
fiscal 2005.
Restaurant sales increased $12.9 million, or 4.1%, in the third quarter of
fiscal 2006 compared to the corresponding quarter last year. The sales increase
was attributable to more restaurants in operation (582 Bob Evans Restaurants and
96 Mimi's Cafes at quarter end versus 587 Bob Evans Restaurants and 88 Mimi's
Cafes a year ago), partially offset by a decrease in same-store sales at Bob
Evans Restaurants. Bob Evans Restaurants experienced a same-store sales decline
of 0.4% in the third quarter, which included an average menu price increase of
2.4%. Mimi's Cafes had a same-store sales increase of 0.4% in the third quarter,
which included an average menu price increase of 2.3%. The 0.4% decrease in
same-store sales at Bob Evans Restaurants in the third quarter this year
represented the best same-store comparison for Bob Evans Restaurants since the
fourth quarter of fiscal 2004. The company attributes some of the improvement to
moderate weather conditions in January of 2006 compared to the severe winter
weather a year ago. Same-
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store sales computations, for a given year, are based on net sales of stores
that are open for at least two years prior to the start of that year. Sales of
stores to be rebuilt are excluded for all periods in the computation when
construction commences on the replacement building. Sales of closed stores are
excluded for all periods in the computation.
Management believes that sub par economic conditions in the Midwest, where
the company operates a majority of its Bob Evans Restaurants, contributed to
continued weak sales in those restaurants. Management also believes that high
energy prices had some effect on the frequency of customer visits at the
company's restaurants, particularly Bob Evans Restaurants. These economic
conditions have also been particularly difficult for older individuals who may
be on fixed incomes, who comprise a large portion of the Bob Evans Restaurant
customer base.
In November 2005, a new streamlined menu was introduced at Bob Evans
Restaurants. Management is taking a "back to the basics" approach with its Bob
Evans Restaurants by focusing on customer service and by highlighting and
improving its higher margin breakfast offerings, which have been the company's
traditional strength. The company closed nine underperforming restaurants during
the third quarter in an effort to improve profitability and has now closed 24
for the fiscal year to date. The company expects the number of closings to be
minimal, if any, in the fourth quarter and much lower in fiscal 2007 compared to
fiscal 2006.
Although Mimi's same-store sales have slowed somewhat, management is very
pleased with the overall performance and progress of Mimi's Cafes. Management is
also pleased with the strong reception that Mimi's Cafes have received in new
markets. For the third quarter, Mimi's total net sales were $84.4 million versus
$75.6 million a year ago, a 12% increase.
The chart below summarizes the restaurant openings and closings during the
last seven quarters for Bob Evans Restaurants and Mimi's Cafes:
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Bob Evans Restaurants:
Beginning Opened Closed Ending
--------- ------ ------ ------
Fiscal 2006
1st quarter 591 6 4 593
2nd quarter 593 6 11 588
3rd quarter 588 3 9 582
Fiscal 2005
1st quarter 558 11 2 567
2nd quarter 567 12 1 578
3rd quarter 578 10 1 587
4th quarter 587 4 0 591
Mimi's Cafes:
Beginning Opened Closed Ending
--------- ------ ------ ------
Fiscal 2006
1st quarter 92 1 0 93
2nd quarter 93 2 0 95
3rd quarter 95 1 0 96
Fiscal 2005
1st quarter 81 0 0 81
2nd quarter 81 3 0 84
3rd quarter 84 4 0 88
4th quarter 88 4 0 92
Consolidated Restaurants:
Beginning Opened Closed Ending
--------- ------ ------ ------
Fiscal 2006
1st quarter 683 7 4 686
2nd quarter 686 8 11 683
3rd quarter 683 4 9 678
Fiscal 2005
1st quarter 639 11 2 648
2nd quarter 648 15 1 662
3rd quarter 662 14 1 675
4th quarter 675 8 0 683
-16-
In the third quarter of fiscal 2006, the company opened three new Bob Evans
Restaurants and one Mimi's Cafe. The company expects to open a total of 20 Bob
Evans Restaurants and 11 Mimi's Cafes in fiscal 2006. However, several Mimi's
Cafes are scheduled to open in April, and one might carry over into the next
fiscal year. As noted above, one under-performing Bob Evans Restaurant and the
remaining eight Owens Restaurants were closed in the third quarter of fiscal
2006. The company then sold seven of the eight Owens Restaurants plus two
additional parcels of real estate in Texas. The gain on this sale will be
recorded in the fourth quarter of fiscal 2006. In the current fiscal year, the
company has decreased the growth rate of Bob Evans Restaurants and at the same
time accelerated the remodeling and rebuilding programs for existing
restaurants.
Preliminary plans for fiscal 2007 include 15 new Bob Evans Restaurants, 16
to 18 new Mimi's Cafes and the rebuilding of four restaurants (compared to 14 in
the current year). These plans are preliminary and subject to change.
The food products segment experienced a sales increase of $5.6 million, or
8.7%, in the third quarter and $13.5 million, or 7.9%, through nine months of
fiscal 2006 compared to the corresponding periods a year ago. The sales
increases were mostly due to an 11.6% increase in the volume of comparable
products sold (principally sausage products and refrigerated side dishes) in the
third quarter of fiscal 2006 and 9.3% year-to-date versus the corresponding
periods in fiscal 2005. Comparable pounds sold is calculated using the same
products in both periods and excludes new products.
COST OF SALES
Consolidated cost of sales (cost of materials) was 30.4% of sales in the
company's third quarter and 29.9% through nine months of fiscal 2006 compared to
31.3% and 30.2%, respectively, in the corresponding periods a year ago.
In the third quarter of fiscal 2006, restaurant segment cost of sales
(predominantly food cost) was 25.3% of sales (25.8% year-to-date) versus 26.5%
of sales (25.6% year-to-date) a year ago. During the third quarter of fiscal
2006, efforts were focused on reducing cost of sales at Bob Evans Restaurants.
The third
-17-
quarter improvement in cost of sales is partly due to the focus on breakfast at
Bob Evans Restaurants (breakfast items usually have lower food costs than lunch
and dinner items), the impact of higher menu prices and the fact that the
commodity price environment has improved. The year-to-date increase in
restaurant segment cost of sales was mainly due to the inclusion of Mimi's cost
of sales for the full nine months in fiscal 2006 but less than seven months last
year. Mimi's cost of sales is traditionally higher than Bob Evans Restaurants'
cost of sales primarily because a greater portion of sales are derived from
lunch and dinner items (which have higher food costs) as well as a different
positioning strategy (similar to casual theme restaurants) than Bob Evans
Restaurants.
The food products segment cost of sales ratio was 53.9% of sales in the
third quarter (52.0% year-to-date) compared to 54.7% (54.5% year-to-date) a year
ago. The decrease in the food products segment cost of sales ratio was due to
lower hog costs, which averaged $42.99 per hundredweight in the third quarter of
fiscal 2006 compared to $51.73 per hundredweight in the corresponding period
last year - a 16.9% decrease. The company believes that hog costs may average
around $40.00 per hundredweight for the remainder of the fiscal year.
OPERATING WAGE AND FRINGE BENEFIT EXPENSES
Consolidated operating wage and fringe benefit expenses ("operating wages")
were 35.6% of sales in the third quarter and 36.5% of sales through nine months
of fiscal 2006 compared to 36.8% and 36.1% of sales in the corresponding periods
last year. The operating wage ratio decreased in both the restaurant segment and
in the food products segment.
Restaurant segment operating wages were 40.9% of sales in the third quarter
and 41.0% of sales through nine months of fiscal 2006 compared to 41.8% and
40.5% of sales in the corresponding periods last year. The improvement in the
restaurant segment for the third quarter was primarily due to initiatives to
reduce labor costs through effective management of labor hours as well as
modifying hours of operation to better complement customer traffic patterns.
In the food products segment, operating wages were 11.2% of sales in the
third quarter and 12.0% of sales through nine months of fiscal 2006 compared to
11.9% and 12.7% of sales in the corresponding periods
-18-
last year. The decrease was due to better leveraging of costs as a result of
increased sales volume discussed in the "Sales" section above.
OTHER OPERATING EXPENSES
More than 94% of other operating expenses ("operating expenses") occurred
in the restaurant segment in the third quarter and through nine months of both
fiscal 2006 and fiscal 2005. The most significant components of operating
expenses were restaurant advertising, utilities, restaurant supplies, repair and
maintenance, taxes (other than federal and state income taxes), rent and credit
card processing fees. Consolidated other operating expenses were 16.1% of sales
in the third quarter and 16.4% of sales through nine months of fiscal 2006
compared to 16.3% and 16.1% of sales in the corresponding periods last year. The
third quarter decrease was due mostly to better leveraging of expenses as a
result of increased sales. The year-to-date increase was due mostly to the
inclusion of Mimi's results for the full nine-month period this year. Mimi's
Cafes generally have higher operating expenses due to rent expense (nearly all
of Mimi's locations are leased whereas nearly all Bob Evans Restaurant locations
are owned).
In the restaurant segment, operating expenses were 18.5% of sales in the
third quarter and 18.4% of sales for year-to-date in fiscal 2006. This compares
to 18.6% and 18.1% of sales, respectively, in the corresponding periods a year
ago.
In the food products segment, the operating expense ratio decreased
slightly to 5.2% of sales in the third quarter and 5.5% of sales through nine
months of fiscal 2006 compared to 5.3% and 5.5% of sales in the corresponding
periods last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses ("S, G & A
expenses") were 7.5% of sales in the third quarter and 7.6% of sales through
nine months of fiscal 2006 compared to 7.9% and 8.1% of sales in the
corresponding periods last year. The most significant components of S, G & A
expenses were wages, fringe benefits and food products segment advertising
expenses. The decrease in fiscal 2006 was due mostly to recognizing the gains on
the sale of real estate in fiscal 2006: $1.8 million in the third quarter and
$5.5 million year-to-date (see Note 8 to the financial statements). Excluding
these gains, consolidated S, G & A
-19-
expenses were 7.9% of sales in the third quarter and 8.1% of sales through nine
months of fiscal 2006 which were both unchanged compared to the corresponding
periods last year.
TAXES
The effective combined federal and state income tax rates were 32.9% in the
third quarter of fiscal 2006 versus 35.9% in fiscal 2005. The change in the
effective tax rate is a result of changing federal and state tax laws and tax
credits. The effective tax rate for the entire year of fiscal 2006 is expected
to be approximately 32.0%.
MANAGEMENT'S OUTLOOK
Management expects food products segment sales to increase approximately 6%
in the fourth quarter of fiscal 2006. Fourth quarter hog costs are expected to
average approximately $40.00 per hundredweight, which may result in an operating
income margin of 8% to 9% in the fourth quarter in the food products segment.
Management expects fourth quarter interest expense to approximate $2.5
million and capital expenditures for all of fiscal 2006 to be near $110 million.
Depreciation and amortization are expected to total approximately $73 million in
fiscal 2006.
As noted in previous filings, the company is not at this time providing
overall, nor restaurant related guidance.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from both the restaurant and food products segments has been
used as the main source of funds for working capital and capital expenditure
requirements. Bank lines of credit are also used for liquidity needs, capital
expansion and repurchases of Bob Evans common stock. Bank lines of credit
available total $100.0 million, of which $33.9 million was outstanding at
January 27, 2006. Proceeds from the sale of closed restaurants and other real
property, including vacant land, was used to reduce outstanding debt. Draws on
the lines of credit are limited by the balance on the company's standby
letters-of-credit which totaled $2.7 million at January 27, 2006.
-20-
Capital expenditures consist of purchases of land for future restaurant
sites, new restaurants under construction, purchases of new and replacement
furniture and equipment, and ongoing remodeling programs. Capital expenditures
were $85.8 million through nine months of fiscal 2006 compared to $90.7 million
in the corresponding period last year.
The company believes that the funds needed for capital expenditures and
working capital during the remainder of fiscal 2006 will be generated both
internally and from available bank lines of credit. Financing alternatives will
continue to be evaluated by the company as warranted.
At January 27, 2006, the company's cash balance was unusually large due to
timing issues. Subsequent to the end of the quarter, this cash and additional
funds from real property sales and operations were used to reduce the company's
balance on its lines of credit to $17.7 million at February 24, 2006.
CONTINGENCIES
In 2005, the company received an assessment from the State of Ohio related
to corporate franchise tax for fiscal years 1998-2003. The company is
petitioning the State of Ohio for a reassessment as the company believes its
positions on tax returns filed are correct. However, in the event that the
company does not ultimately prevail, management believes that recorded reserves
are adequate to meet any future tax-related payments to the State of Ohio.
On February 23, 2006, SWH Corporation (d/b/a Mimi's Cafe), a wholly owned
subsidiary of the company, entered into a memorandum of understanding for the
settlement of a class action lawsuit that was filed prior to the company's July
2004 purchase of SWH Corporation. The majority of the settlement payment is
recoverable from the sellers of SWH Corporation. Although the charge ultimately
to be incurred by the company related to this settlement is still unknown, the
company believes the charge will not be material to the financial statements.
-21-
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this report that are not historical facts are forward-looking
statements and are based on current expectations. Forward-looking statements
involve various important assumptions, risks and uncertainties. Actual results
may differ materially from those predicted by the forward-looking statements
because of various factors and possible events, including, without limitation:
- Changing business and/or economic conditions, including energy costs
- Competition in the restaurant and food products industries
- Ability to control restaurant operating costs, which are impacted by
market changes in the cost or availability of labor and food, minimum
wage and other employment laws, fuel and utility costs and general
inflation
- Changes in the cost or availability of acceptable new restaurant sites
- Adverse weather conditions in locations where the company operates its
restaurants
- Consumer acceptance of changes in menu, price, atmosphere and/or
service procedures
- Consumer acceptance of the company's restaurant concepts in new
geographic areas
- Changes in hog and other commodity costs.
There is also the risk that the company may incorrectly analyze these risks or
that the strategies developed by the company to address them will be
unsuccessful.
Additional discussion of these factors is included in the company's periodic
filings with the Securities and Exchange Commission. Forward-looking statements
speak only as of the date on which they are made, and the company undertakes no
obligation to update any forward-looking statement to reflect circumstances or
events that occur after the date on which the statement is made to reflect
unanticipated events. All subsequent written and oral forward-looking statements
attributable to the company or any person acting on behalf of the company are
qualified by the cautionary statements in this section.
-22-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company does not currently use derivative financial instruments for
speculative or hedging purposes. The company maintains its cash and cash
equivalents in financial instruments with maturities of three months or less
when purchased. Additionally, the company has minimal sensitivity to interest
rate changes given that only its line of credit arrangements (outstanding
balance of $33.9 million at January 27, 2006) have variable rates of interest.
ITEM 4. CONROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
With the participation of the company's management, including Bob Evans'
principal executive officer and principal financial officer, the company's
management has evaluated the effectiveness of the company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act")) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, Bob Evans' principal
executive officer and principal financial officer have concluded that:
- information required to be disclosed by Bob Evans in this Quarterly
Report on Form 10-Q and other reports that Bob Evans files or submits
under the Exchange Act would be accumulated and communicated to Bob
Evans' management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions
regarding required disclosure;
- information required to be disclosed by Bob Evans in this Quarterly
Report on Form 10-Q and other reports that Bob Evans files or submits
under the Exchange Act would be recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms; and
- Bob Evans' disclosure controls and procedures are effective as of the
end of the period covered by this Quarterly Report on Form 10-Q to
ensure that material information relating to Bob Evans and its
consolidated subsidiaries is made known to them, particularly during
the period in which the periodic reports of Bob Evans, including this
Quarterly Report on Form 10-Q, are being prepared.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the
period covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting.
-23-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no pending legal proceedings involving the company other than
routine litigation incidental to its business. In the opinion of the
company's management, these proceedings should not, individually or in the
aggregate, have a material adverse effect on the company's results of
operations or financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Bob Evans did not purchase any of its common stock during the nine fiscal
months ended January 27, 2006. In May 2005, the board of directors
authorized a share repurchase program for fiscal 2006. The program
authorizes Bob Evans to repurchase, through April 28, 2006, up to 2 million
shares of its outstanding common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable
ITEM 5. OTHER INFORMATION. Not Applicable
ITEM 6. EXHIBITS.
Exhibit No. Description Location
- ----------- ----------- --------
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Filed herewith
Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Filed herewith
Financial Officer)
32.1 Section 1350 Certification (Principal Executive Filed herewith
Officer)
32.2 Section 1350 Certification (Principal Financial Filed herewith
Officer)
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
BOB EVANS FARMS, INC.
By: /s/ Larry C. Corbin
------------------------------------
Larry C. Corbin
Interim Chief Executive Officer and
President
(Principal Executive Officer)
By: /s/ Donald J. Radkoski
------------------------------------
Donald J. Radkoski*
Chief Financial Officer
(Principal Financial Officer)
March 7, 2006
Date
* Donald J. Radkoski has been duly authorized to sign on behalf of the
Registrant as its principal financial officer.
-25-
INDEX TO EXHIBITS
Quarterly Report on Form 10-Q
Dated March 7, 2006
Bob Evans Farms, Inc.
Exhibit No. Description Location
- ----------- ----------- --------
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Filed herewith
Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Filed herewith
Financial Officer)
32.1 Section 1350 Certification (Principal Executive Filed herewith
Officer)
32.2 Section 1350 Certification (Principal Financial Filed herewith
Officer)
-26-