SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the twenty-six weeks ended June 25, 2005
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-5084
TASTY BAKING COMPANY
--------------------
(Exact name of company as specified in its charter)
Pennsylvania 23-1145880
------------- ----------
(State of Incorporation) (IRS Employer Identification Number)
2801 Hunting Park Avenue, Philadelphia, Pennsylvania 19129
---------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(215) 221-8500
---------------
(Company's Telephone Number, including area code)
Indicate by check mark whether the company (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 company 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.50 8,155,026
----------------------------- -------------------------
(Title of Class) (No. of Shares Outstanding
as of July 21, 2005)
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TASTY BAKING COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 25, 2005 and December 25, 2004.................................................................3
Consolidated Statements of Operations
Thirteen and Twenty-six weeks ended June 25, 2005 and June 26, 2004.................................4
Consolidated Statements of Cash Flows
Twenty-six weeks ended June 25, 2005 and June 26, 2004..............................................5
Notes to Consolidated Financial Statements.......................................................6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................14-22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk22
Item 4. Controls and Procedures............................................................................23
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and use of Proceeds........................................24
Item 4. Submission of Matters to a Vote of Security Holders................................................24
Item 5. Other Information..................................................................................25
Item 6. Exhibits ..........................................................................................25
Signature ...................................................................................................26
2 of 26
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(000's)
------------------------------------------------------------------------------------------------------------------
June 25, 2005 December 25, 2004 (a)
------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 49 $ 320
Receivables, less allowance of $3,913 and $4,848, respectively 22,272 20,049
Inventories 5,790 5,412
Deferred income taxes 3,367 3,280
Prepayments and other 452 1,092
-------------------------------------------
Total current assets 31,930 30,153
-------------------------------------------
Property, plant and equipment:
Land 1,033 1,033
Buildings and improvements 41,370 41,327
Machinery and equipment 140,624 166,449
-------------------------------------------
183,027 208,809
Less accumulated depreciation 120,376 143,774
-------------------------------------------
62,651 65,035
-------------------------------------------
Other assets:
Long-term receivables from independent sales distributors 11,453 11,185
Deferred income taxes 10,375 10,337
Other 1,799 1,792
-------------------------------------------
23,627 23,314
-------------------------------------------
Total assets $118,208 $118,502
===========================================
Liabilities
Current liabilities:
Current obligations under capital leases $ 728 $ 713
Notes payable, banks 4,600 2,700
Accounts payable 7,036 9,083
Accrued payroll and employee benefits 7,815 7,145
Reserve for restructures 414 436
Other Accrued Liabilities 1,729 3,307
-------------------------------------------
Total current liabilities 22,322 23,384
Long-term obligations under capital leases, less current portion 3,788 4,159
Long-term debt 10,000 9,000
Reserve for restructures, less current portion 280 601
Accrued pensions and other liabilities 23,734 23,774
Postretirement benefits other than pensions 16,648 16,747
-------------------------------------------
Total liabilities 76,772 77,665
-------------------------------------------
Shareholders' equity
Common stock 4,558 4,558
Capital in excess of par value of stock 28,922 28,933
Retained earnings 22,809 22,261
-------------------------------------------
56,289 55,752
Less:
Accumulated other comprehensive loss 2,398 2,398
Treasury stock, at cost 11,748 11,568
Deferred Stock Compensation 672 898
Management Stock Purchase Plan receivables 35 51
-------------------------------------------
41,436 40,837
-------------------------------------------
Total liabilities and shareholders' equity $118,208 $118,502
===========================================
(a) Amounts have been reclassified for comparative purposes.
See Notes to Consolidated Financial Statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(000's, except per share amounts)
----------------------------------------------------------------------------------------------------------------
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended
June 25, 2005 June 26, 2004 (a) June 25, 2005 June 26, 2004 (a)
----------------------------------------------------------------------------------------------------------------
Gross Sales $ 69,580 $ 64,837 $ 135,526 $ 133,197
Less discounts and allowances (25,850) (24,782) (50,642) (52,664)
---------------------------------------------------------------
Net Sales 43,730 40,055 84,884 80,533
---------------------------------------------------------------
Costs and expenses:
Cost of sales 27,125 25,752 53,149 52,078
Depreciation 1,661 1,825 3,462 3,555
Selling, general and administrative 13,526 11,447 26,181 23,023
Interest expense 326 326 647 629
Gain on sale of routes -- (75) -- (75)
Other income, net (242) (258) (480) (484)
---------------------------------------------------------------
42,396 39,017 82,959 78,726
---------------------------------------------------------------
Income before provision for
income taxes 1,334 1,038 1,925 1,807
Provision for income taxes 448 384 560 670
---------------------------------------------------------------
Net income $ 886 $ 654 $ 1,365 $ 1,137
===============================================================
Average common shares outstanding:
Basic 8,056 8,092 8,060 8,094
Diluted 8,159 8,099 8,163 8,106
Per share of common stock:
Net income:
Basic and Diluted $ 0.11 $ 0.08 $ 0.17 $ 0.14
===============================================================
Cash dividend $ 0.05 $ 0.05 $ 0.10 $ 0.10
===============================================================
(a) Amounts have been reclassified for comparative purposes.
See Notes to Consolidated Financial Statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(000's)
-----------------------------------------------------------------------------------------------------
For the Twenty-Six Weeks Ended
June 25, 2005 June 26, 2004
-----------------------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
Net income $ 1,365 $ 1,137
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,462 3,555
Gain on sale of routes -- (75)
Restructure payments (343) (843)
Pension expense 167 1,055
Deferred taxes (124) 733
Other 366 42
Changes in assets and liabilities:
Decrease (increase) in receivables (2,629) 395
Decrease (increase) in inventories (378) 343
Decrease (increase) in prepayments and other 724 (1,139)
Decrease in accounts payable, accrued
payroll and other current liabilities (2,955) (431)
--------------------------------------
Net cash from (used for) operating activities (345) 4,772
--------------------------------------
Cash flows from (used for) investing activities
Proceeds from sale of property, plant and equipment -- 67
Purchase of property, plant and equipment (1,287) (4,730)
Proceeds from independent sales distributor loan repayments 2,299 1,930
Loans to independent sales distributors (2,483) (1,683)
Other (89) (14)
--------------------------------------
Net cash used for investing activities (1,560) (4,430)
--------------------------------------
Cash flows from (used for) financing activities
Dividends paid (817) (809)
Payment of long-term debt (356) (167)
Net increase (decrease) in short-term debt 1,900 (1,300)
Additional long-term debt 1,000 2,000
Purchase of treasury stock (93) --
--------------------------------------
Net cash from (used for) financing activities 1,634 (276)
--------------------------------------
Net increase (decrease) in cash (271) 66
Cash, beginning of year 320 33
--------------------------------------
Cash, end of period $ 49 $ 99
======================================
Supplemental Cash Flow Information
Cash paid during the period for:
Interest $ 649 $ 615
======================================
Income taxes $ 13 $ 43
======================================
See Notes to Consolidated Financial Statements.
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TASTY BAKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
--------------------------------
(000's, except share and per share amounts)
Nature of the Business
Tasty Baking Company is a leading producer of sweet baked goods and one
of the nation's oldest and largest independent baking companies, in
operation since 1914. It has two manufacturing facilities, one in
Philadelphia, PA, and a second facility in Oxford, PA.
Fiscal Year
The company and its subsidiaries operate on a 52-53 week fiscal year,
ending on the last Saturday of December. Fiscal year 2005 is a 53-week
year.
Basis of Consolidation
The consolidated financial statements include the accounts of the company
and its subsidiaries. Intercompany transactions are eliminated.
Interim Financial Information
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
and recurring adjustments, necessary to present fairly the financial
position of the company as of June 25, 2005 and December 25, 2004, the
results of its operations for the thirteen and twenty-six weeks ended
June 25, 2005 and June 26, 2004, and cash flows for the twenty-six week
period ended June 25, 2005 and June 26, 2004, respectively. These
unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and footnotes thereto in the
company's 2004 Annual Report to Shareholders. In addition, the results of
operations for the thirteen and twenty-six weeks ended June 25, 2005 are
not necessarily indicative of the results to be expected for the full
year.
Use of Estimates
Certain amounts included in the accompanying consolidated financial
statements and related footnotes reflect the use of estimates based on
assumptions made by management. These estimates are made using all
information available to management, and management believes that these
estimates are as accurate as possible as of the dates and for the periods
that the financial statements are presented. Actual amounts could differ
from these estimates. Significant estimates for the company include
customer sales and discounts and allowances, collections, long-lived
asset impairment, pension and postretirement plan assumptions, workers'
compensation expense and income tax valuation.
Revenue Recognition
Revenue is recognized when title and risk of loss pass, which is upon
receipt of goods by the independent sales distributor, retailers or
third-party distributors. For route sales, the company sells to
independent sales distributors who, in turn, sell to retail customers.
Revenue for sales to independent sales distributors is recognized upon
receipt of the product by the distributor. For sales made directly to a
retail customer or a third-party distributor, revenue is recognized upon
receipt of the product by the retail customer or third-party distributor.
6 of 26
Sale of Routes
The company's sales distribution routes are owned by independent sales
distributors who purchase the exclusive right to sell and distribute
Tastykake products in defined geographical territories. The company may
sell routes to independent sales distributors, recognizing a gain or loss
on the sale. Routes sold by the company are either existing routes that
the company has previously purchased from an independent sales
distributor, or newly established routes in new geographies. Any gain or
loss recorded by the company is based on the difference between the sales
price and the carrying value of the route, and is recorded as a separate
line item in the consolidated statements of operations. The company
recognizes gains on sales of routes since all material services or
conditions related to the sale have been substantially performed or
satisfied by the company as of the date of sale. In most cases, the
company will finance a portion of the purchase price with interest
bearing notes. Interest rates on the notes are based on Treasury yields
plus a spread. The notes require full repayment of the loan amount. The
company has no obligation to later repurchase a route but may choose to
do so to facilitate a change in route ownership.
Cash and Cash Equivalents
The company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents.
Inventory Valuation
Inventories, which include material, labor and manufacturing overhead,
are stated at the lower of cost or market, cost being determined using
the first-in, first-out ("FIFO") method. Inventory balances for raw
materials, work in progress, and finished goods are regularly analyzed
and provisions for excess and obsolete inventory are recorded, if
necessary, based on the forecast of product demand and production
requirements.
Spare parts, which are recorded as property plant & equipment, are
reviewed for potential obsolescence on a quarterly basis. Reserves are
established for all spare parts that are no longer usable.
Excessive spoilage and idle facility expenses that would be material to
the financial statements would be excluded from allocated manufacturing
overhead and treated as period costs.
Property and Depreciation
Property, plant and equipment are carried at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
the assets. Buildings and improvements are depreciated over thirty-nine
years. The principal manufacturing plant is leased from the company's
pension plan and is amortized over twenty years. Leasehold improvements
are generally depreciated over thirty-nine years. Machinery and equipment
are depreciated over fifteen years. Spare parts are recorded as part of
machinery and equipment and are expensed as utilized. The new enterprise
resource planning system is being depreciated over five years.
Costs of major additions, replacements and betterments are capitalized,
while maintenance and repairs, which do not improve or extend the life of
the respective assets, are expensed as incurred.
For significant projects, the company capitalizes labor costs associated
with the construction and installation of plant and equipment and
significant information technology development projects. The company also
capitalizes interest as a component of the cost of significant
construction projects.
In accordance with SFAS No.144, long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. In instances where the carrying
amount may not be recoverable, the review for potential impairment
utilizes estimates and assumptions of future cash flows directly related
to the asset. For assets where there is no plan for future use, the
review for impairment includes estimates and assumptions of the fair
market value of the asset, which is based on the best information
available. These assets are recorded at the lower of their book value or
market value.
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Retirement Plans
The company's funding policy for the pension plan ("Pension Plan") is to
contribute amounts deductible for federal income tax purposes plus such
additional amounts, if any, as the company's actuarial consultants advise
to be appropriate. In 1987 the company elected to immediately recognize
all gains and losses in excess of the pension corridor.
The company accrues normal periodic pension expense or income during the
year based upon certain assumptions and estimates from its actuarial
consultants in accordance with Statement of Financial Accounting Standard
No. 87, "Employers' Accounting for Pensions." These estimates and
assumptions include discount rate, rate of return on plan assets,
compensation increases, mortality and employee turnover. In addition, the
rate of return on plan assets is directly related to changes in the
equity and credit markets, which can be very volatile. The use of the
above estimates and assumptions, market volatility and the company's
election to immediately recognize all gains and losses in excess of its
pension corridor in the current year may cause the company to experience
significant changes in its pension expense or income from year to year.
Expenses or income that fall outside the corridor are recognized only in
the fourth quarter of each year.
The company amended the Pension Plan to freeze benefit accruals effective
March 26, 2005. Participants will be credited for service after March 26,
2005 solely for vesting purposes pursuant to the terms of the Pension
Plan. Each vested participant will receive their total pension benefit
accrued through March 26, 2005, upon retirement from the company.
Effective March 27, 2005 the company adopted a new company funded
retirement plan, which is a defined contribution benefit that replaces
the benefit provided in the Pension Plan. In the new company funded
retirement plan, the company will make cash contributions into individual
accounts for eligible employees. These contributions will be equal to a
percentage of an employee's eligible compensation and will increase in
pre established increments based on a combination of the employee's age
and years of credited service.
8 of 26
Stock-Based Compensation
The company measures stock-based compensation and reports the calculated
differences between the reported and pro forma impact of the fair-value
method on the interim and annual financial reports as required. See
Recent Accounting Statements regarding a change effective in 2006.
Thirteen Weeks Ended Twenty-six Weeks Ended
June 25, 2005 June 26, 2004 June 25, 2005 June 26, 2004
------------- ------------- ------------- -------------
Net income as reported $ 886 $ 654 $ 1,365 $ 1,137
Deduct: Total stock-based employee
compensation expense determined under
fair-value net of related tax effects (64) (66) (126) (127)
-----------------------------------------------------------------
Pro forma net income $ 822 $ 588 $ 1,239 $ 1,010
================================================================
Earnings per share:
Basic and Diluted - as reported $ 0.11 $ 0.08 $ 0.17 $ 0.14
================================================================
Basic and Diluted - pro forma $ 0.10 $ 0.07 $ 0.15 $ 0.12
================================================================
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the FIFO method.
Net Income Per Common Share
Net income per common share is presented as basic and diluted earnings
per share. Net income per common share - Basic is based on the weighted
average number of common shares outstanding during the year. Net income
per common share - Diluted is based on the weighted average number of
common shares and dilutive potential common shares outstanding during the
year. Dilution is the result of including outstanding stock options and
restricted shares.
Recent Accounting Statements
In December 2004, the FASB issued FASB Statement No. 123(R), Share-Based
Payment (FAS 123(R)), which requires companies to expense the fair-value
of employee stock options and other forms of stock-based compensation. In
April 2005, the SEC approved a new rule that makes FAS 123(R) effective
for annual periods that begin after June 15, 2005. The company expects to
adopt FAS 123(R) in January 2006. The company expects to select the
Modified Prospective Application (MPA), without restatement of prior
interim periods in the year of adoption. The company is currently
evaluating the impact of the adoption of this standard, but does not
expect a material impact compared to the pro forma amounts.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154 ("SFAS No. 154"), Accounting Changes and Error Corrections. SFAS
No. 154 replaces APB No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements, and
establishes retrospective application as the required method for
reporting a change in accounting principle. SFAS No. 154 provides
guidance for determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The statement also requires
that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. SFAS
No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The company does
not anticipate that the adoption of SFAS No. 154 will have a material
impact on its consolidated results of operations.
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2. Restructure Charges
-------------------
From fiscal years 2001 to 2004, the company implemented three strategies
that resulted in restructuring charges. These strategies were the closing
of the company owned thrift stores which began in 2001, the exit from the
Dutch Mill Baking facility in 2001, and the departure of executives as a
result of the strategic changes made in 2002 with the arrival of the new
CEO to the company. The specific costs and activities related to these
events are outlined below.
During the fourth quarter of 2001, a strategic decision was made to exit
the Dutch Mill Baking Company production facility and recognize the
efficiencies related to moving production to the company's Oxford, PA,
plant. There were 19 manufacturing and four administrative positions
eliminated as a result. In addition, the company made a strategic
decision to exit the thrift store business. The closing affected six
thrift store employees. Costs related to these two events were included
in a restructure charge of $1,728.
During the second quarter of 2002, the company closed six thrift stores
and eliminated certain manufacturing and administrative positions as the
company made a strategic decision to exit the thrift store business in
the fourth quarter of 2001. There were 67 employees terminated as a
result of this restructure, of which 42 were temporary employees, 13 were
thrift store employees and 12 were corporate and administrative
employees. Costs related to these events were included in a restructure
charge of $1,405.
During the fourth quarter of 2002, the company incurred a $4,936
restructure charge related to the closing of the remaining twelve thrift
stores and the specific arrangements made with senior executives who
departed the company in the fourth quarter of 2002. The departure of the
senior executives was a result of the strategic changes made in the
fourth quarter of 2002 with the arrival of the new CEO to the company.
There were 29 employees terminated as a result of this restructure, of
which 25 were thrift store employees and four were corporate executives.
During the fourth quarter of 2003, the company incurred a $429
restructure charge related to specific arrangements made with senior
executives who departed the company. The departure of the senior
executives was the result of the continued transition resulting from the
strategic changes made in the fourth quarter of 2002 with the arrival of
the new CEO to the company.
The company recognized net restructure charge reversals in 2003 of $500.
These reversals resulted from favorable settlements of certain thrift
store lease contracts reserved in the 2002 restructuring.
In the fourth quarter of 2004, the company favorably settled certain
thrift store lease contracts for a gain of $35. This gain was offset by
reversals of previously sub-leased contracts that subsequently defaulted,
and other adjustments related to the estimated expenses for maintaining
the thrift stores still under contract, which resulted in a net charge of
$9.
Restructure Reserve Activity
Lease Obligations Severance Other Total
---------------------------------------------------------
Balance December 27, 2003 $ 813 $ 1,485 $ 77 $ 2,375
Q1 2004 Payments (125) (387) (16) (528)
---------------------------------------------------------
Balance March 27, 2004 688 1,098 61 1,847
Q2 2004 Payments (112) (187) (16) (315)
---------------------------------------------------------
Balance June 26, 2004 576 911 45 1,532
Q3 2004 Payments (88) (176) (16) (280)
---------------------------------------------------------
Balance September 25, 2004 488 735 29 1,252
Q4 2004 Reversal of reserve, net
of adjustments 4 - 5 9
Q4 2004 Payments (85) (143) 4 (224)
---------------------------------------------------------
Balance December 25, 2004 407 592 38 1,037
Q1 2005 Payments (116) (58) (12) (186)
--------------------------------------------------------
Balance March 26, 2005 291 534 26 851
Q2 2005 Payments (89) (57) (11) (157)
--------------------------------------------------------
Balance June 25, 2005 $ 202 $ 477 $ 15 $ 694
--------------------------------------------------------
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Restructure Charges (cont.)
---------------------------
The balance of the severance charges is expected to be paid as of
December 2005, and the balance of the lease obligations and other charges
is expected to be paid as of November 2006. The company is not in a
situation where a liability for costs associated with any of the
restructurings noted above could not be recognized because the fair-value
could not be reasonably estimated.
3. Inventories
-----------
Inventories are classified as follows:
June 25, 2005 December 25, 2004
------------- -----------------
Finished goods $ 1,730 $ 1,481
Work in progress 181 135
Raw materials and supplies 3,879 3,796
--------------------------------------
$ 5,790 $ 5,412
======================================
4. Credit Facility
---------------
On January 31, 2002, the company entered into a new $40 million Credit
Facility (Facility) with two banks (the Bank Group) to replace its
short-term lines of credit and the former Revolving Credit Agreement. The
agreement was subsequently amended on January 23, 2004 to reduce the
commitments under the Facility to $30 million. The Facility, as amended,
provides $10 million for short-term borrowings under a 364-day line and
$20 million for long-term borrowings under a three year revolving line.
The 364-day line contains a $6 million sub-limit for overnight borrowings
and the revolving line allows for the issuance of Standby Letters of
Credit up to $6 million, which reduce the availability under the
Facility. Upon approval of the Bank Group, the terms of both the 364-day
line and the revolving line may be extended for an additional 364-day or
annual period, respectively. Interest rates in the Facility are indexed
to LIBOR or the Prime Rate based upon the company's ratio of debt to
EBITDA and rates may change up to 1.5% based on that ratio. Commitment
fees are charged on the unused portion of the Facility and range from 30
to 45 basis points based upon the same ratio used to determine interest
rates. The Facility, as amended, contains restrictive covenants that
require the maintenance of minimum Tangible Net Worth, limit the amount
of capital expenditures and limit the ratios of EBITDA to certain fixed
charges and total indebtedness. The Facility also provides the Bank Group
with a security interest in all unencumbered assets of the company
including certain real property through June 25, 2005. After that date,
the security interest may be terminated if certain objective measures are
met. The company had not met the objective criteria to release the
security interest as of June 25, 2005.
In the first quarter of 2005, the company and the Bank Group amended the
Facility 1) to waive certain covenant violations that existed on December
25, 2004; 2) to amend the Facility's definitions to exclude the effects
of the company's 2004 pension expense in excess of its 10% corridor; 3)
to amend the limit on capital expenditures for 2005 to $10 million; 4) to
amend the minimum Tangible Net Worth required; and 5) to extend the
maturity of the 364-day line to March 20, 2006. The waivers obtained
cured the company's covenant violations for its 2004 capital expenditures
and its required minimum Tangible Net Worth.
11 of 26
5. Defined Benefit Retirement Plans
--------------------------------
The company maintains a partially funded noncontributory Pension Plan
providing retirement benefits for substantially all employees. Benefits
under this Pension Plan generally are based on the employees' years of
service and compensation during the years preceding retirement. The
company maintains an unfunded Supplemental Executive Retirement Plan
("SERP") providing retirement benefits for key employees designated by
the Board of Directors. Benefits under the SERP generally are based on
the key employees' years of service and compensation during the years
preceding retirement. The company also maintains an unfunded Directors'
Retirement Plan. The benefit amount is the annual retainer in the year of
retirement.
Effective October 2004, the SERP for all active employees was converted
from a defined benefit to a defined contribution plan to be consistent
with the changes made to the Pension Plan.
In December 2004, upon approval by the Board of Directors, the company
announced to its employees that it was amending the Pension Plan to
freeze benefit accruals effective March 26, 2005. Participants will be
credited for service after March 26, 2005, solely for vesting purposes
pursuant to the terms of the Pension Plan. Each vested participant will
receive their total pension benefit accrued through March 26, 2005, upon
retirement from the company.
The components of the Pension, SERP, and Directors' Retirement plans are
summarized as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
June 25, 2005 June 26, 2004 June 25, 2005 June 26, 2004
----------------------------- -------------------------------
Service cost $ 131 $ 353 $ 262 $ 705
Interest cost 1,209 1,287 2,418 2,574
Expected return on plan assets (1,266) (1,124) (2,532) (2,248)
Amortization of prior service costs (5) (1) (9) (2)
Amortization of net loss 14 13 28 26
------------------------------ ---------------------------------
Net pension amount charged to income $ 83 $ 528 $ 167 $ 1,055
============================== =================================
There is no minimum cash contribution to the Pension Plan in 2005. The
company is expecting to make a cash contribution in 2005 but has not
determined the amount.
6. Defined Contribution Retirement Plans
-------------------------------------
Effective at the beginning of the second quarter 2005, the company
adopted a new company funded retirement plan which is a defined
contribution benefit that replaces the benefit provided in the Pension
Plan. In the new company funded retirement plan, the company will make
cash contributions into individual accounts for all eligible employees.
These contributions will be equal to a percentage of an employee's
eligible compensation and will increase in pre established increments
based on a combination of the employee's age and years of credited
service. Total contributions for the second quarter of 2005 were $501.
Effective October 2004, the SERP for all active employees was converted
from a defined benefit to a defined contribution plan to be consistent
with the changes made to the Pension Plan. Total accrued contributions
for the twenty-six weeks ended June 25, 2005 were $94.
12 of 26
7. Postretirement Benefits Other than Pensions
-------------------------------------------
Components of Net Periodic Postretirement Benefit Cost:
Thirteen Weeks Ended Twenty-six Weeks Ended
June 25, 2005 June 26, 2004 June 25, 2005 June 26, 2004
----------------------------- -------------------------------
Service cost $ 122 $ 104 $ 219 $ 208
Interest cost 163 235 365 471
Amortization of unrecognized
prior service cost (a) (134) - (239) -
Amortization of unrecognized gain (25) - (25) -
------------------------------ --------------------------------
Net periodic benefit cost $ 126 $ 339 $ 320 $ 679
============================== ================================
(a) Over the past 5 years, increases have been made in the portion of
the cost of life insurance paid by retirees. These substantive
changes to the plan are being treated as an amendment effective
December 26, 2004, which is the first day of fiscal 2005.
Employer Contributions:
Estimated company contributions for the twenty-six weeks ended June 25,
2005, are $439.
The Medicare Prescription Drug Improvement and Modernization Act of 2003
was signed into law on December 8, 2003. In accordance with FASB Staff
Position FAS 106-1, the company has made a one-time election to defer
recognition of the effects of the law in the accounting for its plan
under FAS 106 and in providing disclosures related to the plan. In
accordance with FASB Staff Position 106-2, any measures of the
Accumulated Postretirement Benefit Obligation or Net Periodic
Postretirement Benefit Cost do not reflect any amount associated with the
subsidy because the company has not yet concluded whether the benefits
provided by the plan are actuarially equivalent to Medicare Part D under
the Act.
13 of 26
TASTY BAKING COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(000's, except share and per share amounts)
Critical Accounting Estimates
-----------------------------
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
which require that management make numerous estimates and assumptions. Actual
results could differ from those estimates and assumptions, impacting the
company's reported results of operations and financial position. The company's
significant accounting policies are more fully described in Note 1 to the
company's audited consolidated financial statements in the company's 2004 Annual
Report to Shareholders. Certain accounting policies, however, are considered to
be critical in that (i) they are most important to the depiction of the
financial condition and results of operations of the company and (ii) their
application requires management's most subjective judgment in making estimates
about the effect of matters that are inherently uncertain.
Customer Sales and Discounts and Allowances
The company gives allowances and offers various sales incentive programs to
customers and consumers that are accounted for as a reduction of sales. The
company records estimated reductions to sales for:
o Price promotion discounts at the time the product purchased by the
independent sales distributor is sold to the final retail customer
o Distributor discounts at the time revenue is recognized
o Coupon expense at the estimated redemption rate
o Customer rebates at the time revenue is recognized
o Cooperative advertising at the time the company's obligation to
the customer is incurred
o Product returns received from independent sales distributors
Price promotion discount expense is recorded when the related product being
discounted is sold by the independent sales distributor to the retail customer.
The amount of the price promotion is captured in the hand held computer system
when the independent sales distributor sells product to the retail customer. The
price promotion discount is based upon actual discounts per case based upon an
approved price promotion calendar. Any variation in price discounts is due
primarily to the company selling more volume on discount than estimated, but
that variation is recorded each month. Independent sales distributors receive a
purchase discount equal to a percentage of the wholesale price of product sold
to retailers and other customers, adjusted for price promotions and product
returns. Direct retail customers receive a purchase discount equal to a
percentage of the wholesale price of product received. Discounts to independent
distributors and retail customers are based on agreed upon rates, and amounts
vary based upon volume.
Coupon expense estimates are based upon the number of coupons dropped to
consumers and the estimated redemption percentage. The estimated redemption
percentages are based on data obtained from the company's third-party coupon
processor, and their experience with similar coupon drops. The estimate is
updated monthly upon receipt of the actual coupon redemption report. Estimates
for customer rebates assume that customers will meet the required quantities to
qualify for payment. If the customers fall above or below the estimate as the
year progresses, this could impact the estimate. Cooperative advertising expense
is recorded based on the estimated advertising cost of the underlying program.
Product returns are recorded as product is received back to the company. At
quarter end, an estimated reserve for product returns is recorded based upon
sales and actual return experience in the last month of the quarter. Actual
returns may vary from this estimate. An estimate for the product return reserve
must be used at month end in order to prepare the financial statements on a
timely basis since actual product returns come in subsequent to month end.
14 of 26
Customer Sales and Discounts and Allowances (cont.)
Some customers take deductions when they make payments to the company. Based on
historical experience, it is the company's current policy to reserve for these
deductions at the time they are taken by the customer. If it is determined by
the company that a deduction may not be valid, the deduction is evaluated with
the customer and the reserve could be reversed.
Total sales discounts and allowances approximated $25 million per quarter in
2004. Since the company obtains updated information on every discount and
allowance account each month, the risk that estimates are not properly recorded
are generally limited to a percentage of one month's activity. This activity
approximated $8 million for 2004. Historically actual discounts and allowances
have not varied significantly from estimates.
Collections
The company aggressively pursues collection of accounts receivable balances. The
company performs ongoing credit evaluations of customers' financial condition
and makes quarterly estimates of its collectibility of its accounts receivable
balances. Management specifically analyzes accounts receivable trends and
historical bad debts, customer concentrations, customer credit worthiness,
levels of customer deductions, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. If the financial condition of customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances would
be required.
The provision for doubtful accounts is recorded as a selling, general and
administrative expense. The allowance for doubtful accounts has two components.
The first component is a reserve against all accounts receivable balances based
on the last five years of write-off experience for the company. The second
component is for specifically identified accounts receivable balances from
customers whose ability to pay is in question, such as customers who file
bankruptcy while they have an outstanding balance due the company. Although the
total allowance for doubtful accounts reflects the estimated risk for all
customer balances, if any one of our top twenty customers' accounts receivable
balances became fully uncollectible, that would have a material impact on our
consolidated statement of operations, and would negatively impact cash flow.
Long-lived asset impairment
In accordance with SFAS No.144, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. In instances where the carrying amount may not be
recoverable, the review for potential impairment utilizes estimates and
assumptions of future cash flows directly related to the asset. Cash flow
estimates are typically derived from the company's historical experience and
internal business plans.
For assets where there is no plan for future use, the review for impairment
includes estimates and assumptions of the fair market value of the asset, which
is based on the best information available. The company uses market prices, when
available, and independent appraisals as appropriate to determine fair-value.
These assets are recorded at the lower of their book value or market value.
Adverse changes in future market conditions could result in losses or an
inability to recover the carrying value of the asset.
15 of 26
Pension and Postretirement Plans
Accounting for pensions and postretirement benefit plans requires the use of
estimates and assumptions regarding numerous factors, including discount rate,
rate of return on plan assets, compensation increases, health care cost
increases, mortality and employee turnover. A sensitivity analysis for pensions
is included in Note 8 and a sensitivity analysis for postretirement benefits
other than pensions is included in Note 9 to the company's audited consolidated
financial statements in the company's 2004 Annual Report to Shareholders.
Licensed independent actuaries perform these required calculations to determine
liability and expense in accordance with the accounting principles generally
accepted in the United States. In addition, the company may experience
significant changes in its pension expense from year to year because of its
election in 1987 to immediately recognize all pension gains and losses in excess
of its pension corridor in the year that they occur. For comparative purposes,
this is relevant because most other public companies use an amortization method
that allows recognition of pension gains and losses to be amortized over longer
periods of time, up to 15 years. Also, the final determination of the gains and
losses that could potentially exceed the corridor is not known until the last
day of the year, which makes it difficult to estimate. The combination of low
interest rates and low or negative rates of return on plan assets can cause
higher levels of pension expense; conversely, high interest rates and high rates
of return on assets could result in higher levels of pension income. Market
conditions where interest rates and asset returns move inversely relative to
each other, in most instances, cause the company to have pension expense or
income within its allowable pension corridor. Actual results may differ from the
company's assumptions and may impact the reported liability and expense amounts
reported for pensions and postretirement benefits. During the first half of 2005
long-term corporate bond rates declined. As a result, the discount rate used to
value the pension liability at December 31, 2005 could be below the December 25,
2004 discount rate, which increases the risk that pension expense would fall
outside of the corridor for fiscal year 2005.
Workers' Compensation Expense
Accounting for workers' compensation expense requires the use of estimates and
assumptions regarding numerous factors, including the ultimate severity of
injuries, the timeliness of reporting injuries, and health care cost increases.
The company insures for workers' compensation liabilities under a large
deductible program where losses are incurred by the company up to certain
specific and aggregate amounts. Accruals for claims under the large deductible
insurance program are recorded as claims are incurred. We estimate our liability
based on total incurred claims and paid claims, adjusted by loss development
factors which account for the development of losses over time. Loss development
factors are based on prior loss experience and on the age of incurred claims,
and are reviewed by a third-party claim loss specialist. The company's estimated
liability is the difference between the amounts we expect to pay and the amounts
we have already paid for those years, adjusted for the limits on the aggregate
amounts. We evaluate our estimated liability on a continuing basis and adjust it
accordingly. Included in the estimate of liability is an estimate for expected
changes in inflation and health care costs.
If there are an excessive number of workers' compensation claims in a given
accounting period and the actual results vary from the company's assumptions,
this could have a material impact on our consolidated statement of operations.
Income Tax Valuation
During the year, the company records income tax expense and liabilities based on
estimates of book and tax income, and current tax rates. These estimates could
vary in the future due to uncertainties in company profits, new laws, new
interpretations of existing laws, and rulings by taxing authorities. Differences
between actual results and our assumptions, or changes in our assumptions in
future periods, are recorded in the period they become known.
The company has recorded a deferred income tax asset for the benefit of federal
and state income tax loss carryforwards ("NOL's"). These carryforwards expire in
varying amounts between 2005 and 2024. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that the deferred tax assets will be realized. However, the amount
realizable could be reduced if estimates of future taxable income during the
carryforward period are reduced.
16 of 26
Income Tax Valuation (cont.)
The company has recorded a deferred income tax asset benefit for unused federal
AMT credits, which do not expire, and for unused state tax credits, which expire
in varying amounts between 2005 and 2009. Realization is dependent on generating
sufficient taxable income prior to expiration of the state credits. A valuation
allowance in the amount of $407 has been established as management believes that
a portion of the state credits may not be realized since NOL's must be utilized
before the state credits.
Results of Operations
---------------------
Overview
Net income for the second quarter of 2005 was $886 or $0.11 per diluted share.
Net income for the second quarter of 2004 was $654 or $0.08 per diluted share,
which included a $75 gain from the sale of one route to a sales distributor in
Maryland.
Net income for the twenty-six weeks ended June 25, 2005 was $1,365 or $0.17 per
diluted share. Net income for the twenty-six weeks ended June 26, 2004 was
$1,137 or $0.14 per diluted share, which included a $75 gain from the sale of
one route to a sales distributor in Maryland.
Sales
Net sales increased by 9.2% in the second quarter of 2005 compared to the same
quarter in 2004. Gross sales increased 7.3% in the second quarter of 2005 versus
the same quarter a year ago. Gross sales volume increased 5.5% versus the same
quarter a year ago. The net sales increase was greater than the gross sales
increase because there was a less than proportionate increase in discounts and
allowances compared to the prior year. Discounts and allowances as a percentage
of gross sales decreased 1.0 percentage point in the second quarter of 2005
versus the second quarter of 2004. The percentage improvement in discounts and
allowances was primarily the result of a reduction in the level of product
returns.
Net sales increased by 5.4% in the twenty-six weeks ended June 25, 2005 compared
to the twenty-six weeks ended June 26, 2004. Gross sales increased 1.7% for the
same time periods. The difference between the increase in net sales and the
increase in gross sales was the result of a decrease in discounts and
allowances. The decrease in discounts and allowances is primarily the result of
lower promotional expense in 2005 compared to 2004 and a reduction in the level
of product returns.
In the second quarter of 2005, route net sales were up 8.0% versus the same
period a year ago. Route net sales growth was driven by sales of the Tastykake
Sensables(TM) product line, an increase in Family Pack sales volume, and a
reduced rate of product returns. Non-route net sales increased 13.2% for the
same periods due to increased sales to existing direct customers, as well as
sales in new geographic areas through new third-party distributors. Sales to
existing direct customers benefited from the company's focus on key accounts and
incremental promotional programs.
Route net sales were up 4.5% for the twenty-six weeks ended June 25, 2005
compared to the twenty-six weeks ended June 26, 2004, driven by lower
promotional expense in the first half of 2005, partially offset by a decline in
Family Pack volume due to the higher promoted price points in the first half of
2005. Other factors contributing to the increase were sales of the Tastykake
Sensables (TM) product line and a reduced rate of product returns. Non-route net
sales increased 8.5% for the twenty-six weeks ended June 25, 2005 compared to
the twenty-six weeks ended June 26, 2004, due to increased sales to existing
direct customers, as well as sales in new geographic areas through new
third-party distributors. Sales to existing direct customers benefited from the
company's focus on key accounts and incremental promotional programs.
17 of 26
Cost of Sales
Cost of sales, excluding depreciation, for the second quarter of 2005 increased
by 5.3% compared to the second quarter of 2004. This increase in cost of sales
dollars was consistent with the 5.5% sales volume increase in the second quarter
2005 versus the same period in 2004. The company was able to maintain its cost
of sales per case sold by offsetting increased fuel and utility costs with
savings on certain commodities, including eggs, sugar and other ingredients.
Cost of sales, excluding depreciation, for the twenty-six weeks ended June 25,
2005 increased by 2.1% compared to the twenty-six weeks ended June 26, 2004.
This increase in cost of sales dollars was driven by increases in fuel and
utility costs, which were partially offset by savings on certain commodities,
including eggs, sugar and other ingredients.
Gross Margin
Gross margin after depreciation, was 34.2% of net sales for the second quarter
of 2005 compared to 31.2% in the second quarter of 2004. The 3.0 percentage
point improvement resulted from the improved net sales price realization. Net
sales per case increased while the cost of sales per case remained equal to the
same period a year ago.
Gross margin after depreciation, was 33.3% of net sales for the twenty-six weeks
ended June 25, 2005 compared to 30.9% for the twenty-six weeks ended June 26,
2004. The 2.4 percentage point improvement resulted from the improved price
realization on net sales. Net sales per case increased while the cost of sales
per case increased at a lesser rate when compared to the same period a year ago.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 2005
increased $2,079, or 18.2%, compared to the second quarter of 2004. This
increase is attributed to increased investments made in the sales and
information technology organizations as well as increases in marketing spending,
performance based compensation costs and compliance related costs.
Selling, general and administrative expenses for the twenty-six weeks ended June
25, 2005 increased $3,158, or 13.7%, compared to the twenty-six weeks ended June
26, 2004. This increase is attributed to increased investments made in the sales
and information technology organizations as well as increases in marketing
spending, performance based compensation costs and compliance related costs.
These increases were partially offset by a first quarter reduction in pension
expense during the conversion of the defined benefit pension plan to a defined
contribution pension plan and a reduction of retiree medical expense.
Depreciation
Depreciation expense in the second quarter of 2005 decreased 9.0% compared to
the same period a year ago. This is a result of the accelerated depreciation
recognized in 2004 related to the previous Enterprise Resource Planning system,
partially offset by an increase in depreciation from the new Enterprise Resource
Planning system implemented in the fourth quarter of 2004.
Depreciation expense for the twenty-six weeks ended June 25, 2005 decreased 2.6%
compared to the same period a year ago. This is a result of assets related to
the previous Enterprise Resource Planning system becoming fully depreciated
early in the first quarter of 2005, partially offset by an increase in
depreciation from the new Enterprise Resource Planning system implemented in the
fourth quarter of 2004.
The thirteen and twenty-six week periods ended June 25, 2005 also include an
impairment charge of $150 related to the discontinued use of a manufacturing
line for products that the company discontinued.
18 of 26
Depreciation (cont.)
In March 2004, the company performed a comprehensive review of the estimated
useful lives of all asset classes. As a result, the company evaluated the
utilization of certain machinery and equipment and determined that its useful
lives should be extended to 15 years from 7 years, consistent with similar
assets already being depreciated over 15 years. The useful lives of buildings
and improvements were standardized at 39 years from 15 to 35 years. Also as part
of this review, the estimated useful lives for certain machinery, leasehold
improvements and the Enterprise Resource Planning (ERP) System were reduced, and
depreciation was accelerated. The result of this change in estimate was a
decrease in depreciation expense for the twenty-six week period ended June 26,
2004 of $42 or $29 after tax, or less than $.01 per fully diluted share.
Management has accounted for these changes as changes in estimates because the
facts, circumstances and assumptions surrounding the original determination of
the useful lives have changed. For the ERP System, the company's decision to
implement a new system by the end of fiscal 2004 resulted in a change to the
estimated useful life of the replaced ERP System. The changes in the estimated
useful lives of the machinery and equipment from 7 years to 15 years relate to
the Philadelphia, PA, bakery modernization that started in 1997. All machinery
and equipment installed from 1997 to 1999 was assigned a 7 year life based on
the assumption at the time about the quality of the equipment being installed.
Starting in fiscal year 2000, management started assigning 15 year lives to the
machinery and equipment as it was determined that the quality of the machinery
and equipment was better than originally expected at the start of the
modernization in 1997. In our review completed in March 2004, we determined that
the machinery and equipment assigned 7 year lives from 1997 to 1999 had the same
performance characteristics as the machinery and equipment assigned 15 year
estimated lives, thereby supporting the change in estimate in 2004. The plant
modernization started in 1997 also supported the change in estimate for
buildings and improvements to 39 years.
Non-Operating Items
Interest expense was unchanged for the second quarter of 2005 compared to the
second quarter of 2004.
Interest expense increased by $18 or 2.9%, for the twenty-six weeks ended June
25, 2005, compared to the twenty-six weeks ended June 26, 2004. This is due to
increased average interest rates, partially offset by a decrease in the average
borrowing levels in the first quarter 2005 versus the same period a year ago.
The company is exposed to market risk relative to its interest expense as its
notes payable and long-term debt have floating interest rates that vary with the
conditions in the credit market. It is expected that a one percentage point
increase in interest rates would result in additional quarterly expense of
approximately $40, pre-tax.
The effective income tax rate was 33.6% and 37.0% for the thirteen weeks ended
June 25, 2005, and June 26, 2004, respectively. These rates compare to a federal
statutory rate of 34%. In 2005, the difference between the effective rate and
the statutory rate is the result of estimated state tax benefits generated from
state tax losses and federal tax credits. In 2004, the difference between the
effective tax rate and the statutory tax rate is principally due to the effect
of state income taxes.
The effective income tax rate was 29.1% and 37.1% for the twenty-six weeks ended
June 25, 2005, and June 26, 2004, respectively. These rates compare to a federal
statutory rate of 34%. In 2005, the difference between the effective rate and
the statutory rate is the result of estimated state tax benefits generated from
state tax losses as well as state and federal tax credits and first quarter
adjustments related to prior year estimates. In 2004, the difference between the
effective tax rate and the statutory tax rate is principally due to the effect
of state income taxes. For the balance of 2005, the company expects an effective
income tax rate of approximately 34.0%.
Liquidity and Capital Resources
Current assets at June 25, 2005 were $31,930 compared to $30,153 at December 25,
2004, and current liabilities at June 26, 2005, were $22,322 compared to $23,384
at December 25, 2004. The increase in current assets is primarily related to a
seasonal increase in accounts receivable, net of the allowance. The accounts
receivable allowance decreased by $935 which can be attributed to credits issued
against the reserve for promotional expenses. The decrease in current
liabilities was principally related to a decrease in accounts payable and other
accrued expenses partially offset by an increase in short-term notes payable.
19 of 26
Cash and Cash Equivalents
Historically, the company has been able to generate sufficient amounts of cash
from operations. Bank borrowings are used to supplement cash flow from
operations during periods of cyclical shortages. A Credit Facility is maintained
with two banks and certain capital and operating leases are utilized.
On January 31, 2002, the company entered into a new $40 million Credit Facility
(Facility) with two banks (the Bank Group) to replace its short-term lines of
credit and the former Revolving Credit Agreement. The agreement was subsequently
amended on January 23, 2004 to reduce the commitments under the Facility to $30
million. The Facility, as amended, provides $10 million for short-term
borrowings under a 364-day line and $20 million for long-term borrowings under a
three year revolving line. The 364-day line contains a $6 million sub-limit for
overnight borrowings and the revolving line allows for the issuance of Standby
Letters of Credit up to $6 million, which reduce the availability under the
Facility. Upon approval of the Bank Group, the terms of both the 364-day line
and the revolving line may be extended for an additional 364-day or annual
period, respectively. Interest rates in the Facility are indexed to LIBOR or the
Prime Rate based upon the company's ratio of debt to EBITDA and rates may change
up to 1.5% based on that ratio. Commitment fees are charged on the unused
portion of the Facility and range from 30 to 45 basis points based upon the same
ratio used to determine interest rates. The Facility, as amended, contains
restrictive covenants that require the maintenance of minimum Tangible Net
Worth, limit the amount of capital expenditures and limit the ratios of EBITDA
to certain fixed charges and total indebtedness. The Facility also provides the
Bank Group with a security interest in all unencumbered assets of the company
including certain real property through the second quarter of 2005. After that
date, the security interest may be terminated if certain objective measures are
met. The company had not met the objective criteria to release the security
interest as of June 25, 2005.
In the first quarter of 2005, the company and the Bank Group amended the
Facility 1) to waive certain covenant violations that existed on December 25,
2004; 2) to amend the Facility's definitions to exclude the effects of the
company's 2004 pension expense in excess of its 10% corridor; 3) to amend the
limit on capital expenditures for 2005 to $10 million; 4) to amend the minimum
Tangible Net Worth required; and 5) to extend the maturity of the 364-day line
to March 20, 2006. The waivers obtained cured the company's covenant violations
for its 2004 capital expenditures and its required minimum Tangible Net Worth.
All covenants were met in the second quarter of 2005.
Net cash from operating activities for the twenty-six weeks ended June 25, 2005
decreased by $5,117 compared to the same period in 2004. This decrease was
driven by an unfavorable change in assets and liabilities in the first
twenty-six weeks of 2005 compared to the change in the same period in 2004. The
unfavorable change in assets and liabilities resulted from an increase in
accounts receivable compared to a decrease in the prior year. There was also a
significant decrease in accounts payable that was larger than the decrease
during the comparable period last year. Noncash adjustments for pension and
deferred taxes decreased for the twenty-six weeks ended June 25, 2005 compared
to the same period in 2004 due to the conversion to a defined contribution
pension plan in 2005 which requires cash contributions that are currently
deductible for tax purposes. This was partially offset by lower cash restructure
payments in the first quarter of 2005 compared to the same period in 2004.
Net cash used for investing activities for the twenty-six weeks ended June 25,
2005 decreased by $2,870 relative to the same period in 2004. In the first
twenty-six weeks of 2005, there was a $3,443 decrease in capital expenditures
relative to the same period in the prior year. In the first twenty-six weeks of
2004, the company began the implementation of its new Enterprise Resource
Planning system. Partially offsetting this decrease in capital expenditures was
an increase of $431 in the net expenditures for financing activity to the
independent sales distributors relative to the same period last year, which is
due to the timing of settlements for independent sales distributor financing.
Net cash from financing activities for the twenty-six weeks ended June 25, 2005
increased by $1,910 relative to the comparable period in 2004 due primarily to a
$3,200 increase in the short-term borrowing position offset by a $1,000
reduction in long-term debt additions.
For the remainder of 2005, the company anticipates that cash flow from
operations, along with the continued availability of credit under the Amended
Facility, will provide sufficient cash to meet operating and financing
requirements.
20 of 26
Certain Financing Activity
Future payments due under debt, lease obligations, and employee benefits as of
June 25, 2005, are reflected in the following table:
Payments Due by Period
----------------------------------------------------------------------
Contractual Obligations (a) Less than 1-3 3-5 More than
Total 1 year years years 5 years
----- ------ ----- ----- -------
Long-term debt obligations (b) $10,000 $ - $ 10,000 $ - $ -
Capital lease obligations (c) 6,469 571 2,812 1,122 1,964
Operating lease obligations 3,726 886 2,690 150 -
Notes Payable (d) 4,600 4,600 - - -
Estimated employee benefit payments 4,486 255 1,504 921 1,806
------------ -------------- ------------- ------------- --------------
Total $29,281 $ 6,312 $ 17,006 $ 2,193 $ 3,770
============ ============== ============= ============= ==============
a. In addition to the obligations listed in this chart, the company enters
into purchase commitments primarily related to the purchase of
ingredients and packaging utilized in the ordinary course of business,
which historically approximates $65 to $70 million annually. The majority
of these items are obtained by purchase orders on an as needed basis. At
June 25, 2005, the company had $7.5 million in purchase commitments that
extended beyond twelve months but were shorter than three years. At June
25, 2005, the company had $0.7 million in one purchase commitment that
extended seven years.
b. On January 23, 2005, the company extended the maturity of its revolving
line in the Facility to January 22, 2007.
c. Capital lease obligation with interest at 11.0% and 5.7%.
d. On March 21, 2005, the company extended the maturity of its 364-day line
in the Facility to March 19, 2006. On the consolidated balance sheet, the
364-day line is reflected as a current liability as the balance
fluctuates daily based on working capital requirements.
There is no minimum cash contribution for the Pension Plan in 2005. The company
is expecting to make a cash contribution in 2005, but has not determined the
amount.
21 of 26
Forward-Looking Statements
Certain matters discussed in this Report, including those under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to the safe
harbor created by that Act. These forward-looking statements can be identified
by the use of such words as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," " predict," "project," "should," "would," "is
likely to," or "is expected to" and other similar terms. They may include
comments about competition in the baking industry, concentration of customers,
commodity prices, consumer preferences, long-term receivables, inability to
develop brand recognition in the company's expanded market, production and
inventory concerns, loss of one or both of the company's production facilities,
availability of capital, fluctuation in interest rates, governmental
regulations, legal proceedings, pension expense, protection of the company's
intellectual property and trade secrets and other statements contained herein
that are not historical facts. Because such forward-looking statements involve
risks and uncertainties, various factors could cause actual results to differ
materially from those expressed or implied by such forward-looking statements,
including, but not limited to, changes in general economic or business
conditions nationally and in the company's primary markets, the availability of
capital upon terms acceptable to the company, the availability and prices of raw
materials, the level of demand for the company's products, the outcome of legal
proceedings to which the company is or may become a party, the actions of
competitors within the packaged food industry, changes in consumer tastes or
eating habits, the success of business strategies implemented by the company to
meet future challenges, the company being delisted from the New York Stock
Exchange, and the ability to develop and market in a timely and efficient manner
new products which are accepted by consumers. The reader should review
"Management's Discussion and Analysis" and "Risk Factors" in the company's 2004
Annual Report to Shareholders and in the company's annual report on Form 10-K
for the year ended December 25, 2004, for a more complete discussion of other
risk factors which may affect the company's financial position or operating
performance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The company is exposed to market risk relative to its interest expense as its
notes payable and long-term debt have floating interest rates that vary with the
conditions in the credit markets and the company's financial performance. It is
expected that a one percentage point increase in interest rates would result in
additional quarterly expense of approximately $40 thousand. Under current market
conditions, the company believes that changes in interest rates would not have a
material impact on the financial statements of the company. The company also has
notes receivable from independent sales distributors whose rates adjust every
three years, which would partially offset the fluctuations in the company's
interest rates on its notes payable. The company also has the right to sell
these notes receivable, and could use these proceeds to liquidate a
corresponding amount of the notes payable. For a more detailed explanation see
the company's 2004 Annual Report on Form 10-K "Quantitative and Qualitative
Disclosure about Market Risk," page 16.
During the first half of 2005 long-term corporate bond rates declined. As a
result, the discount rate used to value the pension liability at December 31,
2005 could be below the December 25, 2004 discount rate, which increases the
risk that pension expense would fall outside of the pension corridor for fiscal
year 2005. See "Pension and Postretirement Plans" under Item 2. for a
description of the accounting treatment for the pension plan and the pension
corridor.
22 of 26
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of Disclosure Controls and Procedures
The company maintains a system of disclosure controls and procedures designed to
provide reasonable assurance that information required to be disclosed in the
company's reports filed or submitted pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission ("SEC"). Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
such information is accumulated and communicated to the company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
The company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, of the design and operation of the company's disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures were not effective at June 25, 2005 because of the material weakness
in internal control over financial reporting related to accounting for income
taxes as fully described in our Annual Report on Form 10-K for the year ended
December 25, 2004.
We performed additional analysis and other post-closing procedures to provide
assurance that our consolidated financial statements are prepared in accordance
with generally accepted accounting principles. Accordingly, management believes
that the financial statements included in this report fairly present in all
material respects our financial condition, results of operations and cash flows
for the periods presented.
(b) Changes in Internal Control over Financial Reporting
During the period covered by this report, the company has not made changes in
its internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, the company's internal control over
financial reporting. However in the first quarter of 2005, the company
implemented certain enhancements to its internal control over financial
reporting related to the material weaknesses described in the company's Form
10-K for the year ended December 25, 2004:
1. Accounting for Income Taxes: The company has i) implemented additional
monitoring controls through increased documented management review;
ii) fully documented the methodology and tools for calculating and
reporting tax related transactions; iii) enhanced the formality and
rigor of controls for reconciliation procedures; and iv) increased use
of a third-party service provider for the more complex areas of the
company's income tax compliance efforts. The enhancements have not
been in place for a sufficient length of time to complete remediation
testing on these controls. Management performed additional substantive
procedures to ensure the accuracy of the amount of taxes recorded in
this report.
2. Payroll: During the first quarter of 2005, the company made
improvements to segregation of duties and formalized and implemented
more rigorous approval policies and procedures. The enhancements have
been in place long enough for management to obtain a large enough
sample size to complete remediation testing. Remediation testing
evidenced that these controls give the company a reasonable level of
assurance that employee access to and authority in the payroll system
is appropriately restricted and that payroll expenses and liabilities
are accurately recorded in this report.
3. Spare Parts Inventory: During the first quarter of 2005, the company
formalized and enhanced management's process for documenting and
executing cycle counts, performing analytical procedures surrounding
parts issues, and assuring authorization of price and use of parts on
a monthly basis. These enhancements were in place long enough at the
end of the first quarter of 2005 for management to obtain a large
enough sample size to complete remediation testing. Remediation
testing evidenced that these controls give the company a reasonable
level of assurance that expenses and assets related to spare parts are
properly reflected in this report.
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TASTY BAKING COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Issuer Purchases of Equity Securities
On July 28, 2004, the Board of Directors renewed the company's stock repurchase
program originally adopted in July 2003. Under the program, the company may
acquire up to 400,000 shares of Tasty Baking Company common stock, which is
approximately 5.0% of the shares outstanding, through July 29, 2006. These
purchases may be commenced or suspended without prior notice depending on then
existing business or market conditions and other factors. The following chart
sets forth the amounts of the company's common stock purchased on the open
market by the company during the second quarter of fiscal 2005 under the stock
repurchase plan.
--------------------- ----------------- -------------- ----------------------------- -------------------------------
Period (a) Total (b) Average (c) Total Number of Shares (d) Maximum Number or
Number of Shares Price Paid (or Units) Purchased as Approximate Dollar Value of
(or Units) per Part of Publicly Announced Shares (or Units) that may
Purchased Share Plans or Programs yet be purchased Under the
(or Unit) Plans or Programs
--------------------- ----------------- -------------- ----------------------------- -------------------------------
March 27 - - - - 384,100
April 30
--------------------- ----------------- -------------- ----------------------------- -------------------------------
May 1 - 7,200 $7.57 7,200 376,900
May 28
--------------------- ----------------- -------------- ----------------------------- -------------------------------
May 29 - - - - 376,900
June 25
--------------------- ----------------- -------------- ----------------------------- -------------------------------
Total 7,200 $7.57 7,200 376,900
--------------------- ----------------- -------------- ----------------------------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The company's annual meeting of shareholders was held on May 12, 2005.
(b) The directors elected at the meeting were:
For Against Withheld
--- ------- --------
Fred C. Aldridge, Jr. 6,368,402 842,801 -
James C. Hellauer 5,799,746 1,411,457 -
James E. Nevels 5,801,148 1,410,055 -
Other directors whose terms of office continued after the meeting are as
follows: James E. Ksansnak, Ronald J. Kozich, Charles P. Pizzi, Judith M. von
Seldeneck and David J. West.
(c) Other matters voted upon at the meeting and the results of those votes were
as follows:
Broker
For Against Withheld Non-Votes
--- -------- -------- ---------
Amendment of Company's 2003 Long-Term
Incentive Plan to Increase the Number of Authorized
Shares of Common Stock by 500,000 Shares 2,511,288 2,808,659 24,824 1,866,435
Ratification of PricewaterhouseCoopers LLP
as independent registered public accounting
firm for fiscal year ending December 31, 2005 7,083,384 115,386 12,435 --
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Item 5. Other Information
-----------------
In its Definitive Proxy Statement, dated April 8, 2005, in the section entitled
"Fees Paid to the Independent Accounting Firm," the Company stated the following
with regard to the audit fees billed for audit of the company's financial
statements for the fiscal year ended December 25, 2004, in relevant part:
The amount for fiscal 2004 represents the fee estimate provided by
PricewaterhouseCoopers in its engagement letter executed in September
2004, which was based upon an estimated number of hours to be worked on
the audit. The engagement letter also provided that if the actual
number of hours incurred on the audit exceeded the estimated number of
hours, then the excess hours would be billed at a fixed hourly rate.
PricewaterhouseCoopers has verbally requested $250,000 of additional
fees resulting from these excess hours; however, the Company and its
Audit Committee intend to analyze the additional hours incurred and
discuss with PricewaterhouseCoopers the amount of any additional fees
to be paid.
The Audit Committee of the Board of Directors met on May 2, 2005 to discuss this
issue and the matter was ultimately resolved with a payment of $135,000 of
additional fees paid to PricewaterhouseCoopers.
Expected Notification from New York Stock Exchange Regarding Listing Criteria:
In June 2005, the New York Stock Exchange ("NYSE") announced that it has changed
certain listing criteria, including increased requirements for market
capitalization and shareholders' equity. With the new standards in place, and an
initial assessment period ending July 29, 2005, Tasty Baking Company does not
expect to meet the new standards and anticipates the receipt of a letter from
the NYSE in August 2005 notifying the company that it is currently below the
NYSE's recently increased continued listing criteria.
Should the company receive such a letter, it is anticipated that in order to
retain its listing on the NYSE, the company would be required to submit its
business plan to the NYSE for review to determine if, in the NYSE's opinion, the
company would gain compliance with the new continued listing requirements within
18 months. If the NYSE determines that the plan meets its requirements, Tasty
Baking Company would continue to be listed on the NYSE as TBC.BC pending
quarterly reviews by the NYSE. If the company should be informed by the NYSE
that the submitted plan does not meet the NYSE's requirements, the company would
pursue an alternative trading market for its common stock.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 31.1 - Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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TASTY BAKING COMPANY AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TASTY BAKING COMPANY
------------------------------------------------------------------------------
(Company)
July 29, 2005 /s/ David S. Marberger
--------------------- --------------------------------------------
(Date) DAVID S. MARBERGER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and
Accounting Officer)
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