a5817595.htm
UNITED
STATES
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 thirteen weeks ended September 27,
2008
|
|
|
|
|
o |
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 including Zip Code)
215-221-8500
(Company's
telephone number, including area code)
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| |
Large
accelerated filer
|
o
|
|
Accelerated
filer
|
x
|
|
| |
Non-accelerated
filer
|
o
|
|
Smaller
reporting company
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES o NO x
There were
8,308,646 shares of Common Stock outstanding as of October 31,
2008.
TASTY
BAKING COMPANY AND SUBSIDIARIES
INDEX
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
| |
|
|
|
|
|
5
|
|
|
|
|
|
|
|
6-17
|
|
|
|
|
|
Item
2.
|
|
|
|
|
|
18-23
|
|
|
|
|
|
Item
3.
|
|
23
|
|
|
|
|
|
Item
4.
|
|
23
|
| |
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
| |
|
|
| Item
5. |
Other Information |
24 |
| |
|
|
|
Item
6.
|
|
24
|
|
|
|
|
|
|
|
25
|
Part
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
TASTY
BAKING COMPANY AND SUBSIDIARIES
(Unaudited)
(000’s)
|
|
|
|
|
|
|
|
|
|
|
September
27, 2008
|
|
|
December
29, 2007
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$ |
45 |
|
|
$ |
57 |
|
|
Receivables,
less allowance of $2,594 and
$2,608, respectively
|
|
|
24,288 |
|
|
|
19,358 |
|
|
Inventories
|
|
|
7,401 |
|
|
|
7,719 |
|
|
Deferred
income taxes
|
|
|
1,657 |
|
|
|
1,547 |
|
|
Prepayments
and other
|
|
|
3,500 |
|
|
|
2,303 |
|
|
Total
current assets
|
|
|
36,891 |
|
|
|
30,984 |
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,433 |
|
|
|
1,433 |
|
|
Buildings
and improvements
|
|
|
49,974 |
|
|
|
49,874 |
|
|
Machinery
and equipment
|
|
|
130,754 |
|
|
|
126,132 |
|
|
Construction
in progress
|
|
|
32,143 |
|
|
|
9,425 |
|
|
|
|
|
214,304 |
|
|
|
186,864 |
|
|
Less
accumulated depreciation
|
|
|
122,217 |
|
|
|
112,774 |
|
|
|
|
|
92,087 |
|
|
|
74,090 |
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Long-term
receivables from independent sales distributors
|
|
|
9,955 |
|
|
|
9,889 |
|
|
Deferred
income taxes
|
|
|
8,075 |
|
|
|
6,396 |
|
|
Other
|
|
|
3,417 |
|
|
|
3,162 |
|
|
|
|
|
21,447 |
|
|
|
19,447 |
|
|
Total
assets
|
|
$ |
150,425 |
|
|
$ |
124,521 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
6,196 |
|
|
$ |
6,210 |
|
|
Accrued
payroll and employee benefits
|
|
|
2,732 |
|
|
|
4,080 |
|
|
Cash
overdraft
|
|
|
3,853 |
|
|
|
890 |
|
|
Current
obligations under capital leases
|
|
|
625 |
|
|
|
431 |
|
|
Current
portion of long-term debt
|
|
|
1,000 |
|
|
|
- |
|
|
Other
accrued liabilities
|
|
|
4,427 |
|
|
|
5,343 |
|
|
Total
current liabilities
|
|
|
18,833 |
|
|
|
16,954 |
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
|
6,954 |
|
|
|
6,676 |
|
|
Accrued
pensions
|
|
|
14,823 |
|
|
|
16,502 |
|
|
Long-term
obligations under capital leases, less current portion
|
|
|
1,087 |
|
|
|
1,003 |
|
|
Long-term
debt, less current portion
|
|
|
53,364 |
|
|
|
25,697 |
|
|
Other
accrued liabilities
|
|
|
2,844 |
|
|
|
2,888 |
|
|
Postretirement
benefits other than pensions
|
|
|
7,460 |
|
|
|
7,365 |
|
|
Reserve
for restructure
|
|
|
1,652 |
|
|
|
- |
|
|
Total
liabilities
|
|
|
107,017 |
|
|
|
77,085 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.50 per share and entitled to one
|
|
|
4,558 |
|
|
|
4,558 |
|
|
vote
per share: Authorized 30,000 shares, issued 9,116 shares
|
|
|
|
|
|
|
Capital
in excess of par value of stock
|
|
|
28,742 |
|
|
|
28,683 |
|
|
Retained
earnings
|
|
|
21,639 |
|
|
|
25,119 |
|
|
Accumulated
other comprehensive income
|
|
|
9 |
|
|
|
634 |
|
|
Treasury
stock, at cost
|
|
|
(11,540 |
) |
|
|
(11,558 |
) |
|
Total
shareholders' equity
|
|
|
43,408 |
|
|
|
47,436 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
150,425 |
|
|
$ |
124,521 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
TASTY
BAKING COMPANY AND SUBSIDIARIES
(Unaudited)
(000’s,
except per share amounts)
| |
|
|
|
|
For
the Thirteen Weeks Ended
|
|
|
For
the Thirty-Nine Weeks Ended
|
|
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
sales
|
|
$ |
69,147 |
|
|
$ |
69,103 |
|
|
$ |
210,620 |
|
|
$ |
209,466 |
|
|
Less
discounts and allowances
|
|
|
(26,342 |
) |
|
|
(26,584 |
) |
|
|
(80,401 |
) |
|
|
(78,817 |
) |
|
Net
sales
|
|
|
42,805 |
|
|
|
42,519 |
|
|
|
130,219 |
|
|
|
130,649 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, exclusive of depreciation shown below
|
|
|
28,367 |
|
|
|
27,457 |
|
|
|
86,353 |
|
|
|
82,494 |
|
|
Depreciation
|
|
|
3,484 |
|
|
|
2,866 |
|
|
|
9,583 |
|
|
|
6,909 |
|
|
Selling,
general and administrative
|
|
|
11,168 |
|
|
|
11,745 |
|
|
|
35,172 |
|
|
|
37,946 |
|
|
Interest
expense
|
|
|
545 |
|
|
|
467 |
|
|
|
1,509 |
|
|
|
907 |
|
|
Other
(income) expense, net
|
|
|
1,484 |
|
|
|
(164 |
) |
|
|
1,091 |
|
|
|
(596 |
) |
|
|
|
|
45,048 |
|
|
|
42,371 |
|
|
|
133,708 |
|
|
|
127,660 |
|
|
Income
(loss) before provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
(2,243 |
) |
|
|
148 |
|
|
|
(3,489 |
) |
|
|
2,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
(891 |
) |
|
|
(62 |
) |
|
|
(1,253 |
) |
|
|
960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,352 |
) |
|
$ |
210 |
|
|
$ |
(2,236 |
) |
|
$ |
2,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,034 |
|
|
|
8,034 |
|
|
|
8,034 |
|
|
|
8,034 |
|
|
Diluted
|
|
|
8,034 |
|
|
|
8,173 |
|
|
|
8,034 |
|
|
|
8,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.17 |
) |
|
$ |
0.03 |
|
|
$ |
(0.28 |
) |
|
$ |
0.25 |
|
|
Diluted
|
|
$ |
(0.17 |
) |
|
$ |
0.03 |
|
|
$ |
(0.28 |
) |
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.15 |
|
The accompanying
notes are an integral part of these unaudited condensed consolidated financial
statements.
TASTY
BAKING COMPANY AND SUBSIDIARIES
(Unaudited)
(000’s)
| |
|
|
|
|
|
|
For
the Thirty-Nine Weeks Ended
|
|
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from (used for) operating activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(2,236 |
) |
|
$ |
2,029 |
|
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
|
cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
9,583 |
|
|
|
6,909 |
|
|
Amortization
|
|
|
253 |
|
|
|
239 |
|
|
Asset
retirement obligation interest
|
|
|
278 |
|
|
|
- |
|
|
Gain
(loss) on sale of routes
|
|
|
(7 |
) |
|
|
57 |
|
|
Reserve
for restructure
|
|
|
1,652 |
|
|
|
- |
|
|
Defined
benefit pension benefit
|
|
|
(282 |
) |
|
|
(377 |
) |
|
Pension
contributions
|
|
|
(1,360 |
) |
|
|
(500 |
) |
|
Increase
deferred taxes
|
|
|
(1,250 |
) |
|
|
(889 |
) |
|
Post
retirement medical
|
|
|
(1,277 |
) |
|
|
(458 |
) |
|
Other
|
|
|
(1,159 |
) |
|
|
691 |
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Increase
in receivables
|
|
|
(4,866 |
) |
|
|
(2,999 |
) |
|
Decrease
(increase) in inventories
|
|
|
318 |
|
|
|
(1,166 |
) |
|
Increase
in prepayments and other
|
|
|
(1,450 |
) |
|
|
(1,685 |
) |
|
(Decrease)
increase in accrued taxes
|
|
|
(26 |
) |
|
|
1,166 |
|
|
Decrease
in accounts payable, accrued
|
|
|
|
|
|
|
|
|
|
payroll
and other current liabilities
|
|
|
(2,057 |
) |
|
|
(865 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used for) from operating activities
|
|
|
(3,886 |
) |
|
|
2,152 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from (used for) investing activities
|
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(27,392 |
) |
|
|
(7,098 |
) |
|
Proceeds
from independent sales distributor loan repayments
|
|
|
2,266 |
|
|
|
2,789 |
|
|
Loans
to independent sales distributors
|
|
|
(2,484 |
) |
|
|
(2,123 |
) |
|
Other
|
|
|
(138 |
) |
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used for investing activities
|
|
|
(27,748 |
) |
|
|
(6,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from (used for) financing activities
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(1,244 |
) |
|
|
(1,237 |
) |
|
Borrowings
on long-term debt
|
|
|
98,729 |
|
|
|
40,768 |
|
|
Net
increase (decrease) in notes-payable bank
|
|
|
1,000 |
|
|
|
(631 |
) |
|
Payment
of long-term debt
|
|
|
(69,826 |
) |
|
|
(34,669 |
) |
|
Net
increase in cash overdraft
|
|
|
2,963 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash from financing activities
|
|
|
31,622 |
|
|
|
4,622 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(12 |
) |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
57 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$ |
45 |
|
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
610 |
|
|
$ |
940 |
|
|
Income
taxes
|
|
$ |
84 |
|
|
$ |
5 |
|
The accompanying
notes are an integral part of these unaudited condensed consolidated financial
statements.
(000’s,
except share, per share and square footage amounts, unless otherwise
noted)
All
disclosures are pre-tax, unless otherwise noted.
1. Summary
of Significant Accounting Policies
Nature
of the Business
Tasty
Baking Company (the “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 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 2008 is a 52-week
year. Fiscal year 2007 was a 52-week year.
Basis
of Presentation
The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
The
condensed consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”) have
been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the accompanying
unaudited condensed consolidated interim financial statements reflect all
adjustments, consisting of only normal recurring items, which are necessary for
a fair statement of the results of operations for the periods shown. The
results of operations for such periods are not necessarily indicative of the
results expected for the full year or for any future period.
The
preparation of condensed consolidated financial statements in conformity with
GAAP requires management to make estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates, including those related to customer
sales, discounts and allowances, long-lived asset impairment, pension and
postretirement plan assumptions, workers’ compensation expense and income
taxes. Actual results may differ from these estimates.
Concentration of
Credit
The
Company encounters, in the normal course of business, exposure to concentrations
of credit risk with respect to trade receivables. Ongoing credit
evaluations of customers’ financial conditions are performed and, generally, no
collateral is required. The Company maintains reserves for potential
credit losses and such losses have not exceeded management’s
expectations.
Revenue
Recognition
Revenue is
recognized when title and risk of loss pass, which is upon receipt of goods by
the independent sales distributors, retailers or third-party
distributors. For route area sales, the Company sells to independent
sales distributors who, in turn, sell to retailers. Revenue for sales
to independent sales distributors is recognized upon receipt of the product by
the distributor. For sales made directly to a customer or a
third-party distributor, revenue is recognized upon receipt of the products by
the retailer or third-party distributor.
Sale
of Routes
Sales
distribution routes are primarily owned by independent sales distributors who
purchase the exclusive right to sell and distribute Tastykake® products in
defined geographical territories. When the Company sells routes to
independent sales distributors, it recognizes 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. Any potential impairment of net carrying value is reserved as
identified. The Company recognizes gains or losses on sales of routes
because all material services or conditions related to the sale have been
substantially performed or satisfied by the Company as of the date of the
sale. In most cases, the Company will finance a portion of the
purchase price with interest bearing notes, which are required to be repaid in
full. Interest rates on the notes are based on Treasury or LIBOR
yields plus a spread. 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. Cash
overdrafts are recorded within current liabilities. Cash flows
associated with cash overdrafts are classified as financing
activities.
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, as necessary, based on the forecast of product
demand and production requirements.
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, machinery and equipment, and
vehicles are depreciated over thirty-nine years, seven to fifteen years, and
five to ten years, respectively, except where a shorter useful life is
necessitated by the Company’s decision to relocate its Philadelphia
operations. Spare parts are capitalized as part of machinery and
equipment and are expensed as utilized or capitalized as part of the relevant
fixed asset. Spare parts are valued using a moving average method and
are reviewed for potential obsolescence on a regular basis. Reserves
are established for all spare parts that are no longer usable and have no fair
market value. Capitalized computer hardware and software is
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 interest and labor costs associated with the construction and
installation of plant and equipment and significant information technology
development projects.
In
accordance with Statement of Financial Accounting Standards No.144, Accounting for the Impairment or Disposal of
Long-Lived Assets, ("FAS 144") long-lived assets are reviewed for
impairment at least annually or 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 value of the asset, which is based on the best information
available. These assets are recorded at the lower of their book value
or fair value.
The
Company has a conditional asset retirement obligation related to asbestos in its
Philadelphia manufacturing facility. As a result of the Company’s
decision in May 2007 to relocate its Philadelphia operations, it was able to
estimate a settlement date for the asset retirement obligation and in accordance
with FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations, recorded an obligation of $6.6 million which was
the present value of the future obligation. This obligation will
continue to accrete to the full value of the future obligation over the
remaining period until settlement of the obligation, which is expected to occur
in June 2010, while the capitalized asset retirement cost is depreciated through
December 2044, the remaining useful life of the Philadelphia manufacturing
facility. For the thirteen weeks and thirty-nine weeks ended
September 27, 2008, the Company recorded $0.1 million and $0.3 million,
respectively, in interest associated with the asset retirement
obligation. As of September 27, 2008 and December 29, 2007, the asset
retirement obligation totaled $7.0 million and $6.7 million,
respectively.
Grants
The
Company receives grants from various government agencies for employee training
purposes. Expenses for the training are recognized in the Company’s
income statement at the time the training takes place. When the
proper approvals are given and funds are received from the government agencies,
the Company records an offset to the training expense already
recognized.
In 2007,
in connection with the decision to relocate its Philadelphia manufacturing
operations, the Company received a $0.6 million grant from the Department of
Community and Economic Development of the Commonwealth of Pennsylvania
(“DCED”). The opportunity grant has certain spending, job retention
and nondiscrimination conditions with which the Company must
comply. The Company accounted for this grant under the deferred
income approach and will amortize the deferred income over the same period as
the useful life of the asset acquired with the grant. The asset
acquired with the grant is expected to be placed into service when the new
manufacturing facility becomes fully operational in 2010.
In
addition, in 2006, in conjunction with The Reinvestment Funds, Allegheny West
Foundation and the DCED, the Company activated Project Fresh Start (the
“Project”). The Project is an entrepreneurial development program
that provides an opportunity for qualified minority entrepreneurs to purchase
routes from independent sales distributors. The source of grant
monies for this program is the DCED. The grants are used by minority
applicants to partially fund their purchase of an independent sales distribution
route.
Because
the Project’s grant funds merely pass through the Company in its role as an
intermediary, the Company records an offsetting asset and liability for the
total amount of grants as they relate to the project. There is no
Statement of Operations impact related to the establishment of, or subsequent
change to, the asset and liability amounts.
Marketing
Costs
The
Company expenses marketing costs, which include advertising and consumer
promotions, as incurred or as required in accordance with Statement of Position
93-7, Reporting on Advertising
Costs. Marketing costs are included as a part of selling,
general and administrative expense.
Computer
Software Costs
The
Company capitalizes certain costs, such as software coding, installation and
testing that are incurred to purchase or create and implement internal use
computer software in accordance with Statement of Position 98-1, Accounting for Costs of Computer
Software Development or Obtained for Internal Use. The
majority of the Company’s capitalized software relates to the implementation of
the enterprise resource planning and handheld computer systems.
Freight,
Shipping and Handling Costs
Outbound
freight, shipping and handling costs are included as a part of selling, general
and administrative expense. Inbound freight, shipping and handling
costs are capitalized with inventory and expensed with cost of
sales.
Pension
Plan
The
Company’s funding policy for the 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. Effective January 1, 2008, the Company is required to
make quarterly contributions under the Pension Protection Act of
2006. The Company will make three quarterly contributions in
2008. As of September 27, 2008, the Company had made two
of the three required contributions. In 1987, the Company elected to
immediately recognize all gains and losses in excess of the pension corridor,
which is equal to the greater of ten percent of the accumulated pension benefit
obligation or ten percent of the market-related value of plan
assets.
The
Company accrues normal periodic pension expense or income during the year based
upon certain assumptions and estimates from its actuarial
consultants. These estimates and assumptions include discount rate,
rate of return on plan assets, 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 and have recently been very
volatile. The use of the above estimates and assumptions, including
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. Expense or income that falls outside the corridor is
recognized only in the fourth quarter of each year.
In
accordance with Financial Accounting Standards Board (“FASB”) Statement No. 158,
Employers’ Accounting
for Defined Benefit
Pension and Other Postretirement Plans, the Company maintains a liability
on its balance sheet equal to the under-funded status of its defined benefit and
other postretirement benefit plans.
Accounting
for Derivative Instruments
The
Company has entered into certain variable-to-fixed interest rate swap contracts
to fix the interest rates on a portion of its variable interest rate
debt. These contracts are accounted for as cash flow hedges in
accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (“FAS
133”). Accordingly, these derivatives
are marked to market and the resulting gains or losses are recorded in other
comprehensive income as an offset to the related hedged asset or
liability. The actual interest expense incurred, inclusive of the
effect of the hedge in the current period, is recorded in the Statement of
Operations.
The
Company has also entered into foreign currency forward contracts to hedge the
future purchase of certain assets for its new facilities, which are denominated
in Australian Dollars. These contracts are accounted for as fair
value foreign currency hedges in accordance with FAS
133. Accordingly, the changes in fair value of both the commitment
and the derivative instruments are recorded currently in the Statement of
Operations, with the corresponding asset and liability recorded on the Balance
Sheet.
Treasury
Stock
Treasury
stock is stated at cost. Cost is determined by the FIFO method.
Accounting
for Income Taxes
The
Company accounts for income taxes under the asset and liability method, in
accordance with FASB Statement No. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates in effect when the
differences are expected to be recovered or settled.
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 period. Net
income per common share – Diluted is based on the weighted average number of
common shares and dilutive potential common shares outstanding during the
period. Dilution is the result of outstanding stock options and
restricted shares. For the thirteen weeks ended September 27, 2008
and September 29, 2007, 491,804 options to purchase common stock and restricted
shares and 339,996 options to purchase common stock, respectively, were excluded
from the calculation, as they were anti-dilutive. For the thirty-nine
weeks ended September 27, 2008 and September 29, 2007, approximately
538,591options to purchase common stock and restricted shares and 367,263
options to purchase common stock, respectively, were excluded from the
calculation, as they were anti-dilutive.
Share-based
Compensation
The
Company accounts for share-based compensation in accordance with FASB Statement
No. 123(R), Share-Based
Payment (“FAS 123(R)”). Share-based compensation expense,
recognized during the current period, is based on the value of the portion of
share-based payment awards that is ultimately expected to vest. The
total value of compensation expense for restricted stock is equal to the closing
market price of Tasty Baking Company shares on the date of grant. FAS
123(R) requires forfeitures to be estimated at the time of grant in order to
estimate the amount of share-based awards that will ultimately
vest. The forfeiture rate is based on the Company’s historical
forfeiture experience. The Company calculated its historical pool of
windfall tax benefits.
Recent
Accounting Statements
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS
157”), which creates a single definition of fair value, along with a conceptual
framework to measure fair value and to increase the consistency and the
comparability in fair value measurements and in financial
disclosure. The Company adopted the required provisions of FAS 157
effective December 30, 2007. The required provisions did not have a material
impact on the Company’s financial statements. See Note 6 for
additional information.
In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
Effective Date of FASB Statement No.
157. This FSP permits a delay in the effective date of
FAS 157 to fiscal years beginning after November 15, 2008, for
nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The delay is intended to allow the Board
and constituents additional time to consider the effect of various
implementation issues that have arisen, or that may arise, from the application
of FAS 157. The FASB also issued FSP FAS 157-1 to exclude
SFAS 13, Accounting for
Leases, and its related interpretive accounting pronouncements from the
scope of FAS 157 in February 2008. The Company is currently
assessing the potential impact that adoption of this statement would have on its
financial statements.
In October
2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active. This FSP clarifies the
application of FAS 157 in determining the fair values of assets or liabilities
in a market that is not active. This FSP became effective upon issuance,
including prior periods for which financial statements have not been issued. The
Company adopted this FSP for the condensed consolidated financial statements
contained within this Form 10-Q.
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (“FAS 159”). This statement permits, but does not require
entities to measure certain financial instruments and other assets and
liabilities at fair value on an instrument-by-instrument basis and is
irrevocable. At the adoption date, unrealized gains and losses on
financial assets and liabilities for which the fair value option has been
elected would be reported as a cumulative adjustment to beginning retained
earnings. Unrealized gains and losses due to changes in their fair value must be
recognized in earnings at each subsequent reporting date. This
statement is effective for fiscal years beginning after November 15,
2007. Although FAS 159 was adopted December 30, 2007, the Company has
not yet elected the fair value option for any items permitted under FAS
159.
In
December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations
("FAS 141(R)"). FAS 141(R) significantly changes the accounting for
business combinations in a number of areas including the treatment of contingent
consideration, acquired contingencies, transaction costs, in-process research
and development and restructuring costs. In addition, under
FAS 141(R), changes in an acquired entity's deferred tax assets and
uncertain tax positions after the measurement period will impact income tax
expense. FAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning after December 15,
2008. Earlier adoption is prohibited. The Company is
currently evaluating the extent to which its current practices, financial
statements and disclosures may change as a result of the adoption of FAS
141(R).
In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB
No. 51 ("FAS 160"), which establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary, changes in
a parent's ownership interest in a subsidiary and the deconsolidation of a
subsidiary. FAS 160 is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is
prohibited. The Company is currently evaluating the extent to which
its current practices, financial statements and disclosures may change as a
result of the adoption of FAS 160.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging
Activities—An Amendment of FASB Statement No. 133 (“FAS 161”). FAS 161 applies
to all derivative instruments and related hedged items accounted for under FAS
133. It requires entities to provide greater transparency about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
FAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
results of operations, and cash flows. FAS 161 is effective for
fiscal years and interim periods beginning after November 15,
2008. Because FAS 161 applies only to financial statement
disclosures, it will not have a material impact on the
Company's consolidated financial position, results of operations or cash
flows.
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162 (“FAS
162”), The Hierarchy of
Generally Accepted Accounting
Principles ("FAS
162"). FAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles in the United States. FAS 162 will
become effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company does not
expect the adoption of FAS 162 to have a material impact on the consolidated
financial statements.
In May
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard. The bakery lease agreement provides for a 26-year lease
for a 345,500 square foot bakery, warehouse and distribution center located on
approximately 25 acres. Construction of the facility is underway and
is expected to be completed by the end of 2009. The Company expects
the new facility to be fully operational in 2010. The lease provides
for no rent payments in the first year of occupancy. Rental payments
increase from $3.5 million in the second year of occupancy to $7.2 million in
the final year of the lease.
As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements. This agreement provides for no principal or interest
payments in the first year of occupancy and then requires equal monthly payments
of principal and interest aggregating to $1.2 million annually over the
remainder of the term.
The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard. This lease agreement provides for not
less than 35,000 square feet of office space. It commences upon the later of
substantial completion of the office space or April 2009, and ends coterminous
with the new bakery lease. The lease provides for no rent payments in
the first six months of occupancy. Rental payments increase from
approximately $0.9 million in the second year of occupancy to approximately $1.6
million in the final year of the lease.
In
connection with these agreements, the Company provided a $1.1 million letter of
credit, which increases to $8.1 million by the beginning of 2009. The
outstanding amount of the letter of credit will be reduced starting in 2026 and
will be eliminated by the end of the lease term. As of September 27,
2008, the outstanding letter of credit under this arrangement totaled $3.6
million.
In
connection with these agreements, the Company provided an additional $0.5
million letter of credit, which increases to $1.9 million by the beginning of
2009. The outstanding amount of the letter of credit will be
eliminated in August 2009. As of September 27, 2008, the outstanding
letter of credit under this arrangement totaled $1.0 million.
In
addition to the facility leases, the Company is purchasing high-tech, modern
baking equipment. This equipment is designed to increase product
development flexibility and efficiency, while maintaining existing taste and
quality standards. The investment for this project, in addition to
any costs associated with the agreements described above, is projected to be
approximately $75.0 million through 2010. In September 2007, the
Company closed on a multi-bank credit facility and low-interest development
loans provided in part by the Commonwealth of Pennsylvania and the Philadelphia
Industrial Development Corporation to finance this investment and refinance the
Company’s existing revolving credit facilities, as well as to provide for
financial flexibility in running the ongoing operations and working capital
needs.
The
Company anticipates that long-lived assets utilized in the Philadelphia
operations with an aggregate net book value of approximately $20.0 million at
June 30, 2007 would not be relocated to the new facilities or sold as a result
of the relocation. The Company accounts for disposal and exit activities in
accordance with FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (“FAS 146”) and FAS 144. To date, the Company
has not incurred any material obligations related to one-time termination
benefits, contract termination costs or other associated costs as described in
FAS 146.
The
Company has evaluated the long-lived assets utilized in its Philadelphia
operations for potential impairment or other treatment in accordance with FAS
144. Based on the commitment to the planned relocation, neither the
assets to be relocated nor the assets to be left in place at the Philadelphia
operations have suffered impairment. Therefore the estimated fair
value of the asset groups continues to exceed the carrying amount of such asset
groups. With respect to the group of assets not expected to be
relocated or sold, certain of the assets included in the group had previously
estimated useful lives that extended beyond the expected project completion in
2010. As such, in the quarter ended June 30, 2007, the Company
changed its estimate of the remaining useful lives of such assets to be
consistent with the time remaining until the end of the project, and accounted
for such change in estimate in accordance with FASB Statement No. 154,
Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.
3. For the thirteen and thirty-nine week periods ended
September 27, 2008, the change in estimated useful lives of these assets
resulted in incremental depreciation of $1.3 million and $3.9 million,
respectively. The after-tax impact of the incremental depreciation on
net income, net income per common share-basic and net income per common
share-diluted was $0.8 million, $0.10 per share, and $0.10 per share,
respectively, for the thirteen weeks ended September 27, 2008 and $2.4 million,
$0.30 per share, and $0.30 per share, respectively for the thirty-nine weeks
ended September 27, 2008. For the thirteen and thirty-nine week
periods ended September 29, 2007, the change in estimated useful lives of these
assets resulted in incremental depreciation of $1.3 million and $2.0 million,
respectively. The after-tax impact of the incremental depreciation on
net income, net income per common share-basic, and net income per common
share-diluted was $0.9 million, $0.11 per share, and $0.11 per share,
respectively, for the thirteen weeks ended September 29, 2007 and $1.3 million,
$0.16 per share and $0.16 per share, respectively, for the thirty-nine weeks
ended September 29, 2007. The Company expects that the future
pre-tax impact of incremental depreciation resulting from the change in useful
lives will be approximately $1.3 million per quarter through June 2010, when the
new bakery is expected to be fully operational.
As part of
the relocation of its Philadelphia operations, the Company expects to eliminate
approximately 215 positions. While the Company hopes to achieve this
result through normal attrition and the reduction of contract labor, it is
probable that the Company will incur obligations related to postemployment
benefits accounted for under FASB Statement No. 112, Employers' Accounting for
Postemployment Benefits, an amendment of
FASB Statements No. 5 and 43. During the quarter ended
September 27, 2008, the Company recorded a reserve of $1.7 million, for
estimated future obligations related to postemployment benefits associated with
the relocation of its Philadelphia operations. The cost associated with this
reserve was recorded in other (income)/expense.
Inventories
are classified as follows:
|
|
|
Sep. 27, 2008
|
|
|
Dec. 29, 2007
|
|
|
Finished
goods
|
|
$ |
2,448 |
|
|
|
2,852 |
|
|
Work
in progress
|
|
|
133 |
|
|
|
161 |
|
|
Raw
materials and supplies
|
|
|
4,820 |
|
|
|
4,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,401 |
|
|
$ |
7,719 |
|
The
inventory balance has been reduced by reserves for obsolete and slow-moving
inventories of $56 and $95 as of September 27, 2008 and December 29, 2007,
respectively.
4. Credit
Facilities
On
September 6, 2007, the Company entered into a 5 year, $100.0 million secured
credit facility with four banks, consisting of a $55.0 million fixed asset line
of credit, a $35.0 million working capital revolver and a $10.0 million
low-interest loan from the agent bank with the Commonwealth of Pennsylvania (the
“Bank Credit Facility”). The Bank Credit Facility is secured by a
blanket lien on the Company’s assets and contains various non-financial and
financial covenants, including a fixed charge coverage covenant, a maximum
operating leverage ratio covenant, a minimum liquidity ratio covenant and
minimum level of earnings before interest, taxes, depreciation and amortization
(“EBITDA”) covenant. Interest rates for the fixed asset line of
credit and working capital revolver are indexed to LIBOR and as of September 27,
2008 included a spread above that index from 75 to 275 basis points based upon
the Company’s ratio of debt to EBITDA. The fixed asset line of credit
and the working capital revolver include commitment fees from 20 to 50 basis
points based upon the Company’s ratio of debt to EBITDA. The $10.0 million
low-interest loan bears interest at a fixed rate of 5.5% per
annum. In October 2008, the Company amended its Bank Credit Facility
to provide for additional flexibility and to change certain financial covenants,
including the minimum EBITDA requirement as of December 27, 2008 and the maximum
operating leverage ratio as of September 27, 2008 and December 27, 2008, which
was necessary to eliminate an instance of non-compliance. As
part of this amendment, the interest rates for the fixed asset line of credit
and working capital revolver were changed to be indexed to LIBOR plus a credit
spread from 125 to 325 basis points based upon the Company’s ratio of debt to
EBITDA.
On
September 6, 2007, the Company entered into a 10 year, $12.0 million secured
credit agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”). This credit facility bears interest at a blended fixed rate of 4.5%
per annum, participates in the blanket lien on the Company’s assets and contains
customary representations and warranties as well as customary affirmative and
negative covenants essentially similar to those in the Bank Credit Facility, as
amended in October 2008. Negative covenants include, among others,
limitations on incurrence of liens and secured indebtedness by the Company
and/or its subsidiaries, other than in connection with the Bank Credit
Facility, the MELF Loan 1 and the MELF Loan 2, as defined
below.
On
September 6, 2007, the Company entered into a 10 year, $5.0 million Machinery
and Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania
(“MELF Loan 1”). The Company borrowed $5.0 million under the MELF
Loan 1 in September 2008. This loan bears interest at a fixed rate of
5.0% per annum and contains customary representations and warranties as well as
customary affirmative and negative covenants, essentially similar to those
in the Bank Credit Facility, as amended in October 2008. Negative covenants
include among others, limitations on incurrence of liens and secured
indebtedness by the Company, other than in connection with the Bank Credit
Facility and the PIDC Credit Facility. In September 2008, the Company
entered into a second 10 year, $5.0 million Machinery and Equipment Loan Fund
secured loan with the Commonwealth of Pennsylvania (“MELF Loan
2”). The terms and conditions of the MELF Loan 2 are the same as the
MELF Loan 1. The Company expects to borrow the $5.0 million under the
MELF Loan 2 in the fourth quarter of 2008.
On
September 6, 2007, the Company entered into an agreement which governs the
shared collateral positions under the Bank Credit Facility, the PIDC Credit
Facility, the MELF Loan 1 and the MELF Loan 2 (the “Intercreditor
Agreement”), and establishes the priorities and procedures that each lender has
in enforcing the terms and conditions of each of their respective
agreements. The Intercreditor Agreement permits the group of banks
and their agent bank in the Bank Credit Facility to have the initial
responsibility to enforce the terms and conditions of the various credit
agreements, subject to certain specific limitations, and allows such bank group
to negotiate amendments and waivers on behalf of all lenders, subject to the
approval of each lender.
The
Company used a portion of the proceeds received under the Bank Credit Facility
to terminate and repay outstanding indebtedness. The Company is
currently utilizing proceeds from the Bank Credit Facility and MELF Loan 1 to
finance the Company's relocation of its Philadelphia manufacturing facility and
corporate headquarters to new facilities under construction at the Philadelphia
Navy Yard, along with working capital needs. The Company will further utilize
the proceeds from MELF Loan 2 and the PIDC Credit Facility, along with proceeds
under the Bank Credit Facility for continued funding of its relocation to the
Philadelphia Navy Yard.
5. Derivative
Instruments
In order
to hedge a portion of the Company’s exposure to changes in interest rates on
debt associated with the Company’s new manufacturing facilities, the Company
entered into certain variable-to-fixed interest rate swap contracts to fix the
interest rates on a portion of its variable interest rate debt. In
January 2008, the Company entered into an $8.5 million notional value interest
rate swap contract that increases to $35.0 million by April 2010 with a fixed
LIBOR rate of 3.835% that expires on September 5, 2012. As of
September 27, 2008, the notional value of the swap was $8.5
million. As of September 27, 2008, the LIBOR rates were subject to an
additional credit spread which could range from 75 basis points to 275 basis
points and was equal to 225 basis points as of that date. The Company
records as an asset or liability the cumulative change in the fair market value
of the derivative instrument, and as of September 27, 2008, the Company recorded
an asset of $0.3 million.
In May
2008, the Company entered into an $8.0 million notional value interest rate swap
with a fixed LIBOR rate of 2.97% that expires on May 1, 2011. As of
September 27, 2008, the LIBOR rates were subject to an additional credit spread
which could range from 75 basis points to 275 basis points and was equal to 225
basis points as of that date. The Company records as an asset or
liability the cumulative change in the fair market value of the derivative
instrument, and as of September 27, 2008, the Company recorded an asset of $0.1
million.
During the
third quarter of 2007, the Company entered into commitments to acquire assets
denominated in a foreign currency. In order to hedge the Company’s
exposure to changes in foreign currency rates, the Company entered into foreign
currency forward contracts with maturity dates ranging from July 2007 to April
2010. As of September 27, 2008, the notional principle of outstanding
foreign currency forward contracts was $5.3 million Australian Dollar ($4.3
million USD). As of September 27, 2008, the change in fair value of
both the commitment and the forward currency contracts was $0.1
million.
6. Fair
Value Measurements
As
described in Note 1, the Company adopted FAS 157 on December 30,
2007. FAS 157, among other things, defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either a recurring
or nonrecurring basis. FAS 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. As a basis for considering such
assumptions,
FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:
|
|
|
|
|
Level
1.
|
|
Observable
inputs such as quoted prices in active markets for identical assets or
liabilities;
|
|
Level
2.
|
|
Inputs,
other than quoted prices included within Level 1, that are observable
either directly or indirectly; and
|
|
Level
3.
|
|
Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
|
The
following table presents assets / (liabilities) measured at fair value on a
recurring basis at September 27, 2008:
|
|
|
|
|
|
Fair
Value Measurement at Reporting Date Using
|
|
|
Description
|
|
Balance
as of
Sep.
27, 2008
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Financial
instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
370 |
|
|
$ |
— |
|
|
$ |
370 |
|
|
$ |
— |
|
|
Foreign
currency hedges
|
|
|
107 |
|
|
|
— |
|
|
|
107 |
|
|
|
— |
|
|
Total
financial instruments owned
|
|
$ |
477 |
|
|
$ |
— |
|
|
$ |
477 |
|
|
$ |
— |
|
7. Defined
Benefit Retirement Plans
The
Company maintains a partially funded noncontributory Defined Benefit (“DB”)
Retirement Plan (the “DB Plan”) providing retirement benefits. Benefits under
this DB Plan generally are based on the employees’ years of service and
compensation during the years preceding retirement. In December 2004,
the Company announced to its employees that it was amending the DB Plan to
freeze benefit accruals effective March 26, 2005. The Company
maintains a DB Supplemental Executive Retirement Plan (“SERP”) for key employees
designated by the Board of Directors (the “Board”), however, there are no
current employees earning benefits under this plan. See Note 8 for
more information. The Company also maintains a frozen unfunded
Retirement Plan for Directors (the “Director Plan”). The benefit
amount is the annual retainer in the year of retirement.
Effective
February 15, 2007, benefit accruals under the Director Plan were frozen for
current directors and future directors were precluded from participating in the
plan. Participants are credited for service under the Director Plan
after February 15, 2007 solely for vesting purposes. On February 15,
2007, the Board approved a Deferred Stock Unit Plan (the “DSU
Plan”). The DSU Plan provides that for each fiscal quarter, the
Company will credit deferred stock units to the director’s account equivalent in
value to $4 on the last day of such quarter, provided that he or she is a
director on the last day of such quarter. Directors will be entitled
to be paid in shares upon termination of Board service provided the director has
at least five years of continuous service on the Board. The shares
may be paid out in a lump sum or at the director’s election, over a period of
five years.
The
components of the DB Plan, DB SERP, and DB Director Plan’s costs / (benefits)
are summarized as follows:
|
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-nine
Weeks Ended
|
|
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
Service
cost-benefits earned during the quarter
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10 |
|
|
Interest
cost on projected benefit obligation
|
|
|
1,252 |
|
|
|
1,247 |
|
|
|
3,757 |
|
|
|
3,735 |
|
|
Expected
return on plan assets
|
|
|
(1,268 |
) |
|
|
(1,302 |
) |
|
|
(3,804 |
) |
|
|
(3,906 |
) |
|
Prior
service cost amortization
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(12 |
) |
|
|
(13 |
) |
|
Actuarial
loss recognition
|
|
|
16 |
|
|
|
16 |
|
|
|
48 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
DB pension amount credited to income
|
|
$ |
(4 |
) |
|
$ |
(43 |
) |
|
$ |
(11 |
) |
|
$ |
(125 |
) |
Under the
Pension Protection Act of 2006, the Company made a $0.7 million and $1.4 million
cash contribution to the previously frozen DB Plan for the thirteen weeks and
thirty-nine weeks ended September 27, 2008, respectively. There is a
minimum required cash contribution to the DB Plan in fiscal 2008 of $2.0
million. The Company made a $0.5 million voluntary cash contribution
in July 2007.
8. Defined
Contribution Retirement Plans
The
Company maintains a funded Defined Contribution (“DC”) Retirement Plan (the “DC
Plan”), which replaced the benefits provided in the DB Plan. Under
the DC Plan, the Company makes weekly cash contributions into individual
accounts for all eligible employees. These contributions are based on
employees’ point values which are the sum of age and years of service as of
January 1 each year. All employees receive contributions that range
from 2% to 5% of covered compensation relative to their point
totals. Employees at March 27, 2005, who had 20 years of service or
10 years of service and 60 points, received an additional “grandfathered”
contribution of between 1.5% and 3.5% of salary. The “grandfathered”
contribution percentage was fixed as of March 27, 2005, and is paid weekly with
the regular contribution until those covered employees retire or separate from
the Company. These “grandfathered” contributions are being made to
compensate older employees for the shorter earnings period that their accounts
will have to appreciate in value relative to their normal retirement
dates.
The
Company also maintains the Tasty Baking Company 401(k) and Company Funded
Retirement Plan (the “Retirement Plan”). In the Retirement Plan, all
participants receive a company match of 50% of their elective deferrals that do
not exceed 4% of their compensation as defined in the Retirement
Plan. Under the Retirement Plan, the waiting period for participation
has been eliminated and participants are offered a broad array of investment
choices.
The
Company also maintains an unfunded defined contribution SERP (“DC SERP”) for one
eligible active employee.
Components
of DC pension amounts charged to income:
|
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-nine
Weeks Ended
|
|
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
Funded
retirement plan
|
|
$ |
419 |
|
|
$ |
465 |
|
|
$ |
1,223 |
|
|
$ |
1,445 |
|
|
Defined
contribution SERP
|
|
|
97 |
|
|
|
90 |
|
|
|
290 |
|
|
|
270 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
DC pension amount charged to income
|
|
$ |
516 |
|
|
$ |
555 |
|
|
$ |
1,513 |
|
|
$ |
1,715 |
|
9. Postretirement
Benefits Other than Pensions
In
addition to providing pension benefits, the Company also provides certain
unfunded health care and life insurance programs for substantially all retired
employees, or other postretirement benefits. These benefits are
provided through contracts with insurance companies and health service
providers. Coverage is maintained for all pre-65 retirees
and for certain post-65 retirees who have qualifying dependents that are
pre-65. Life insurance for incumbent retirees, as of January 1, 2006,
at company group rates is capped at $20 of coverage. Incumbent
retirees who purchase coverage in excess of $20 and all new retirees after
January 1, 2006 pay age-based rates for their life insurance
benefit.
Components
of net periodic postretirement benefit cost / (benefit) are as
follows:
|
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-nine
Weeks Ended
|
|
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
Service
cost
|
|
$ |
91 |
|
|
$ |
67 |
|
|
$ |
272 |
|
|
$ |
201 |
|
|
Interest
cost
|
|
|
115 |
|
|
|
92 |
|
|
|
347 |
|
|
|
277 |
|
|
Amortization
of unrecognized prior service cost
|
|
|
(458 |
) |
|
|
(457 |
) |
|
|
(1,373 |
) |
|
|
(1,373 |
) |
|
Amortization
of unrecognized gain
|
|
|
- |
|
|
|
(29 |
) |
|
|
- |
|
|
|
(87 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
FAS 106 net postretirement benefit
|
|
$ |
(252 |
) |
|
$ |
(327 |
) |
|
$ |
(754 |
) |
|
$ |
(982 |
) |
Estimated
company contributions for the thirty-nine weeks ended September 27, 2008 and
September 29, 2007 were $524 and $453, respectively.
At the
2006 Annual Meeting of Shareholders of the Company held on May 11, 2006, the
Company's shareholders approved the Tasty Baking Company 2006 Long-Term
Incentive Plan (the "2006 Plan") as adopted by the Board on March 24,
2006. The aggregate number of shares available for grant under the
Plan is 220,600 shares of the Company’s common stock as of September 27,
2008.
The 2006
Plan authorizes the Compensation Committee (the "Committee") of the Board to
grant awards of stock options, stock appreciation rights, unrestricted stock,
restricted stock (“RSA”) (including performance restricted stock) and
performance shares to employees, directors and consultants or advisors of the
Company. The option price is determined by the Committee and, in the
case of incentive stock options, will be no less than the fair market value of
the shares on the date of grant. Options lapse at the earlier of the
expiration of the option term specified by the Committee (not more than ten
years in the case of incentive stock options) or three months following the date
on which employment with the Company terminates.
The
Company also has active 2003 and 1997 Long-Term Incentive Plans (the “2003 Plan”
and “1997 Plan,” respectively). The aggregate number of shares
available for grant under the 2003 Plan is 50,466 and under the 1997 Plan is
143,891 as of September 27, 2008. The terms and conditions of the
2003 and 1997 plans are generally the same as the 2006 Plan. A
notable difference is that the 1997 Plan can award shares only to employees of
the Company while the 2003 Plan can only award shares to employees and directors
of the Company. The Company also has options outstanding under the 1994
Long-Term Incentive Plan, the terms and conditions of which are similar to the
1997 Plan.
Notwithstanding
the vesting and termination provisions described above, under the terms of the
Change of Control Agreements and Employment Agreements that the Company entered
into with certain executive officers, upon a change of control, the shares
granted as RSAs vest and any restrictions on outstanding stock options lapse
immediately. Additionally, under the terms of those agreements, in
certain change of control circumstances, shares granted as RSAs may vest after
termination of employment.
A summary
of stock options as of September 27, 2008 is presented below:
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
Aggregate
Intrinsic
|
|
|
|
|
Shares
(000’s)
|
|
|
Exercise
Price
|
|
|
Remaining
Contractual Term
|
|
|
Value
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at Dec. 29, 2007
|
|
|
439 |
|
|
$ |
10.44 |
|
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at Mar. 29, 2008
|
|
|
439 |
|
|
$ |
10.44 |
|
|
|
4.67 |
|
|
$ |
1,055 |
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2 |
) |
|
|
8.64 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at Jun. 28, 2008
|
|
|
437 |
|
|
$ |
10.45 |
|
|
|
4.44 |
|
|
$ |
1,051 |
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(68 |
) |
|
|
10.32 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at Sep. 28, 2008
|
|
|
369 |
|
|
|
10.48 |
|
|
|
4.11 |
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at Mar. 29, 2008
|
|
|
439 |
|
|
$ |
10.44 |
|
|
|
4.67 |
|
|
$ |
1,055 |
|
|
Options
exercisable at Jun. 28, 2008
|
|
|
437 |
|
|
|
10.45 |
|
|
|
4.44 |
|
|
|
1,051 |
|
|
Options
exercisable at Sep. 27, 2008
|
|
|
369 |
|
|
|
10.48 |
|
|
|
4.11 |
|
|
|
892 |
|
As of
September 27, 2008, there was no unrecognized compensation related to nonvested
stock options, as all options are fully vested. For the thirty-nine
weeks ended September 27, 2008, there were no options granted and there was no
cash received from option exercises. There was no compensation
expense recognized in the Condensed Consolidated Statements of Operations for
stock options in the thirty-nine weeks ended September 27, 2008 or September 29,
2007.
The
Company recognizes expense for restricted stock using the straight-line method
over the requisite service period. A summary of the restricted stock
as of September 27, 2008 is presented below:
|
|
|
Shares
(000’s)
|
|
|
Weighted
Average Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at Dec. 29, 2007
|
|
|
230 |
|
|
$ |
7.88 |
|
|
Granted
|
|
|
100 |
|
|
|
6.76 |
|
|
Forfeited
|
|
|
(55 |
) |
|
|
7.65 |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at Sep. 27, 2008
|
|
|
275 |
|
|
$ |
7.52 |
|
As of
September 27, 2008, there was $1.2 million of unrecognized compensation cost
related to nonvested restricted stock which is expected to be recognized over a
weighted average period of approximately 2.03 years.
The
Company’s effective tax rate was 39.7 percent and (42.2) percent for the
thirteen weeks ended September 27, 2008 and September 29, 2007, respectively,
and 35.9 percent and 32.1 percent for the thirty-nine weeks ended September 27,
2008 and September 29, 2007, respectively. For the thirteen and
thirty-nine weeks ended September 27, 2008, the Company recorded $0.1 million
and $0.2 million, respectively, in non-recurring discrete income items related
to charitable contribution carryforwards. For the thirteen and
thirty-nine weeks ended September 29, 2007, the Company recorded $0.1 million in
non-recurring discrete income items related to changes in cumulative
temporary timing differences. The Company’s effective tax rate can differ from
the composite federal and state statutory tax rate due to certain expenses which
are not deductible for income tax purposes and non-recurring discrete
items.
12. Accumulated
Other Comprehensive Income / (Loss)
Total
accumulated other comprehensive income, net of taxes, is comprised as
follows:
|
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-nine
Weeks Ended
|
|
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
9/27/08
|
|
|
9/29/07
|
|
|
Net
income / (loss)
|
|
$ |
(1,352 |
) |
|
$ |
210 |
|
|
$ |
(2,236 |
) |
|
$ |
2,029 |
|
|
Other
comprehensive income / (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
plan
|
|
|
7 |
|
|
|
16 |
|
|
|
(43 |
) |
|
|
31 |
|
|
Other
postretirement benefits
|
|
|
(256 |
) |
|
|
(584 |
) |
|
|
(805 |
) |
|
|
(1,130 |
) |
|
Change
in unrealized gain / (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
derivative instruments
|
|
|
(214 |
) |
|
|
(34 |
) |
|
|
222 |
|
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income / (loss)
|
|
|
(463 |
) |
|
|
(602 |
) |
|
|
(626 |
) |
|
|
(1,164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income / (loss)
|
|
$ |
(1,815 |
) |
|
$ |
(392 |
) |
|
$ |
(2,862 |
) |
|
$ |
865 |
|
The
following table summarizes the components of accumulated other comprehensive
income / (loss), net of tax:
|
|
|
Sep.
27,
|
|
|
Dec.
29,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Pension
plan
|
|
$ |
(2,924 |
) |
|
$ |
(2,881 |
) |
|
Unrealized
gain on derivative instruments
|
|
|
222 |
|
|
|
- |
|
|
Other
postretirement benefits
|
|
|
2,711 |
|
|
|
3,515 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
accumulated other comprehensive income
|
|
$ |
9 |
|
|
$ |
634 |
|
In
September 2008, the Company had a fire at its Philadelphia bakery facility,
which damaged certain of its bakery equipment. As a result of the
fire the Company incurred approximately $1.1 million in total losses, including
$0.2 million in losses related to the interruption of the Company’s normal
operations. As of September 27, 2008 normal operations were restored
and the Company had recorded a receivable of $1.0 million, net of the deductible
under the Company’s insurance policies. For the thirteen and
thirty-nine weeks ended September 27, 2008, losses related to the fire and the
benefit associated with expected insurance recoveries were recorded in cost of
sales.
(000’s,
except share, per share and square footage amounts, unless otherwise
noted)
All
disclosures are pre-tax, unless otherwise noted.
Results of
Operations
For
the Thirteen Weeks ended September 27, 2008 and September 29, 2007
Overview
Net loss
for the third quarter of 2008 was $1.4 million or $0.17 per fully-diluted
share. This net loss included $0.8 million or $0.10 per fully-diluted
share of after-tax accelerated depreciation resulting from the change in the
estimated useful lives of certain assets at the Company’s Philadelphia
operations in the second quarter of fiscal 2007, as well as $1.0 million or
$0.13 per fully diluted share of after-tax severance costs related to the
Company’s planned move to a new bakery beginning at the end of
2009. Net income for the third quarter of 2007 was $0.2 million or
$0.03 per fully-diluted share, which included $0.9 million, or $0.11 per fully
diluted share of after-tax accelerated depreciation.
Sales
Total gross sales and net
sales increased 0.1% and 0.7%, respectively, in the third quarter of 2008
compared to the same period in 2007, driven primarily by strength in Route
sales, which benefited from continued growth in Single Serve product sales,
combined with the impact of increased selling prices for both Family Pack and
Single Serve products. Route net sales grew 1.3% in the third quarter of 2008
compared to the same period in 2007. Non-Route net sales declined 1.2% in
the third quarter of 2008 compared to the same period a year ago due to
planned product rationalization in the direct sales channel.
Cost
of Sales
Cost of
sales for the third quarter of 2008 increased 3.3% versus the third quarter of
2007, on a unit volume decline of 4.2%. This was primarily driven by
a $2.3 million increase in ingredient and packaging costs, which was partially
offset by $1.1 million in net benefit from increased product selling
prices. Fixed manufacturing expenses decreased 6.6% in the third quarter of 2008
versus the third quarter of 2007. This decrease was driven primarily
by lower employee related expenses when compared to the same period a year
ago. In the third quarter of 2008, the Company had a fire at its
Philadelphia bakery operations, which damaged certain of its bakery
equipment. As a result of the fire the Company incurred approximately
$1.1 million in total losses, including $0.2 million in losses related to the
interruption of the Company’s normal operations. As of September 27,
2008, normal operations were restored and the Company had recorded a receivable
of $1.0 million, net of the deductible under the Company’s insurance
policies. For the thirteen weeks ended September 27, 2008, losses
related to the fire and the benefit associated with the expected insurance
recoveries were recorded in cost of sales.
Gross
Margin
Gross
margin decreased 3.1 percentage points to 25.6% of net sales for the thirteen
weeks ended September 27, 2008 as compared to the same period in
2007. The decline in gross margin was primarily attributable to the
$2.3 million increase in ingredient and packaging costs and a $0.6 million
increase in depreciation expense when compared to the same period in
2007. Offsetting much of this expense were the net benefits from
increased product selling prices and lower fixed manufacturing costs in the
third quarter of 2008 when compared to the third quarter of 2007.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses declined by $0.6 million in the third
quarter of 2008 to 26.1% of net sales, compared to 27.6% of net sales in the
third quarter of 2007. The decrease was driven by lower compensation
and other employee related costs.
Interest
Interest
expense remained relatively constant at $0.5 million in the third quarter of
2008 as compared to the third quarter of 2007. The Company is exposed
to market risk relative to its interest expense as certain of its
notes payable and long-term debt have floating interest rates that vary with the
conditions of the credit market.
Other
(Income) / Expense
Other
expense, net, increased by $1.6 million in the thirteen weeks ended September
27, 2008 as compared to the thirteen weeks ended September 29, 2007, primarily
due to the $1.7 million in severance costs related to the Company’s planned move
to a new bakery beginning at the end of 2009.
Taxes
The
effective income tax rate for state and federal taxes was 39.7% and (42.2%) for
the thirteen weeks ended September 27, 2008 and September 29, 2007,
respectively. For the thirteen weeks ended September 27, 2008, the
Company recorded $0.1 million in non-recurring discrete income items related to
charitable contribution carryforwards. For the thirteen weeks ended September
29, 2007, the Company recorded $0.1 million in non-recurring discrete income
items related to changes in the cumulative temporary timing
differences.
For
the Thirty-nine Weeks ended September 27, 2008 and September 29,
2007
Overview
Net loss
for the thirty-nine weeks ended September 27, 2008, was $2.2 million or $0.28
per fully-diluted share. This net loss included $2.4 million or $0.30
per fully-diluted share of after-tax accelerated
depreciation resulting from the change in the estimated useful lives of certain
assets at the Company’s Philadelphia operations in the second quarter of fiscal
2007, as well as $1.0 million or $0.13 per fully-diluted share of after-tax
severance costs related to the Company’s planned move to a new bakery beginning
at the end of 2009. Net income for the thirty-nine weeks ended
September 29, 2007 was $2.0 million or $0.25 per fully-diluted share, which
included $1.3 million, or $0.16 per fully diluted share of after-tax accelerated
depreciation.
Sales
Gross
sales increased 0.6% in the thirty-nine weeks ended September 27, 2008 compared
to the same period in 2007, driven by 2.5% growth in Route gross
sales. Route gross sales benefited from product price
increases for both Family Pack and Single Serve products as well as from
continued growth in Single Serve volumes. Total net sales declined 0.3% in the
thirty-nine weeks ended September 27, 2008 compared to the same period last
year. Route net sales increased 0.2% in the thirty-nine weeks ended September
27, 2008 compared to the same period last year. Route net sales grew at a lower
rate than gross sales due to an increased level of product returns and
promotional expense when compared to the same period last year. Non-Route net
sales declined 2.0% in the thirty-nine weeks ended September 27, 2008 compared
to the same period in the prior year due to fewer promotional events and planned
product rationalization in the direct sales channel.
Cost
of Sales
Cost of
sales for the thirty-nine weeks ended September 27, 2008 increased 4.7% versus
the comparable period in 2007, on a unit volume decline of 4.0%. The
increase in cost of sales primarily resulted from a $6.8 million increase in
ingredient and packaging costs, which was partially offset by the
net benefits of higher product selling prices and the benefits of improved
operating efficiency at the Company’s manufacturing facilities. In the
third quarter of 2008, the Company had a fire at its Philadelphia bakery
operations, which damaged certain of its bakery equipment. As a
result of the fire the Company incurred approximately $1.1 million in total
losses, including $0.2 million in losses related to the interruption of the
Company’s normal operations. As of September 27, 2008, normal
operations were restored and the Company had recorded a receivable of $1.0
million, net of the deductible under the Company’s insurance
policies. For the thirty-nine weeks ended September 27, 2008, losses
related to the fire and the benefit associated with the expected insurance
recoveries were recorded in cost of sales.
Gross
Margin
Gross
margin decreased 5.3 percentage points to 26.3% during the first thirty-nine
weeks ended September 27, 2008 compared to the same period of
2007. This decline was primarily attributed to the $6.8 million
increase in ingredient and packaging costs and a $2.7 million increase in
depreciation expenses when compared to the same period in
2007. Partially offsetting these declines were the benefits from
product price increases and continued cost containment efforts.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the thirty-nine weeks ended September
27, 2008 decreased to 27.0% of net sales, compared to 29.0% of net sales in the
first thirty-nine weeks of fiscal 2007. This decrease was primarily
due to reductions in employee related expenses, as well as lower marketing costs
resulting from a shift in timing of advertising spending as compared to a year
ago. Partially offsetting this was an increase in transportation and
freight costs resulting from the increased cost of fuel.
Interest
Interest
expense increased $0.6 million to $1.5 million in the thirty-nine weeks ended
September 27, 2008 from $0.9 million in the same period in 2007. The
increase was primarily due to higher deferred financing fee amortization related
to the Company’s new debt facilities as well as higher debt levels resulting
from investments in equipment for the Company’s new manufacturing and
distribution facility.
Other
(Income) / Expense
For the
thirty-nine weeks ended September 27, 2008, the Company had other expense, net,
of $1.1 million as compared to other income, net, of $0.6 million for the
thirty-nine weeks ended September 29, 2007. The increase in other
expense, net, was primarily due to $1.7 million in severance costs related to
the Company’s planned move to a new bakery beginning at the end of
2009.
Taxes
The
effective income tax rate for state and federal taxes was 35.9% and 32.1% for
the thirty-nine weeks ended September 27, 2008 and September 29, 2007,
respectively. For the thirty-nine weeks ended September 27, 2008, the
Company recorded $0.2 million in non-recurring discrete income items related to
charitable contribution carryforwards. For the thirty-nine weeks ended September
29, 2007, the Company recorded $0.1 million in non-recurring discrete income
items related to changes in the cumulative temporary timing
differences.
Liquidity and Capital
Resources
Current
assets at September 27, 2008 were $36,891 compared to $30,984 at December 29,
2007, and current liabilities at September 27, 2008 were $18,833 compared to
$16,954 at December 29, 2007. The increase in current assets
was driven by an increase in receivables of $4.9 million, due in part
to higher sales at the end of the third quarter as well as the $1.0
million receivable related to the fire claim. The $1.9 million
increase in current liabilities was primarily due to an increase in cash
overdraft of $3.0 million due to the timing of disbursements, which was
partially offset by a $1.3 million decrease in accrued employee related
costs.
In May
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard. The bakery lease agreement provides for a 26-year lease for a
345,500 square foot bakery, warehouse and distribution center located on
approximately 25 acres. Construction of the facility is
underway and is expected to be completed by the end of 2009. The
Company expects the new facility to be fully operational in 2010. The
lease provides for no rent payments in the first year of
occupancy. Rental payments increase from $3.5 million in the second
year of occupancy to $7.2 million in the final year of the lease.
As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements. The bakery lease agreement provides for no
principal or interest payments in the first year of occupancy and then requires
equal monthly payments of principal and interest aggregating to $1.2 million
annually over the remainder of the term.
The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard. The bakery lease agreement provides for
not less than 35,000 square feet of office space and commences upon the later of
substantial completion of the office space or April 2009, and which ends
coterminous with the new bakery lease. The lease provides for no rent
payment in the first six months of occupancy. Rental payments
increase from approximately $0.9 million in the second year of occupancy to
approximately $1.6 million in the final year of the lease.
In
connection with these agreements, the Company provided a $1.1 million letter of
credit, which increases to $8.1 million by the beginning of 2009. The
outstanding amount of the letter of credit will be reduced starting in 2026 and
will be eliminated by the end of the lease term. As of September 27,
2008, the outstanding letter of credit under this arrangement totaled $3.6
million.
In
connection with these agreements, the Company provided an additional $0.5
million letter of credit, which will increase to $1.9 million by the beginning
of 2009. The outstanding amount of the letter of credit will be
eliminated in August 2009. As of September 27, 2008, the outstanding
letter of credit under this arrangement totaled $1.0 million.
In
addition to the facility leases, the Company is purchasing high-tech, modern
baking equipment. This equipment is designed to increase product
development flexibility and efficiency, while maintaining existing taste and
quality standards. The Company anticipates that this project, when
completed, will generate approximately $13.0 to $15.0 million in pre-tax cash
savings, after taking into account the impact of the new leases, but before any
debt service requirements resulting from the investment in the
project. The investment for this project, in addition to any costs
associated with the agreements described above, is projected to be approximately
$75.0 million through 2010. In September 2007, the Company closed on
a multi-bank credit facility and low-interest development loans provided in part
by the Commonwealth of Pennsylvania and the Philadelphia Industrial Development
Corporation to finance this investment and refinance the Company’s existing
revolving credit facilities, as well as to provide for financial flexibility in
running the ongoing operations and working capital needs.
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. The Company
maintains a Bank Credit Facility, a PIDC Credit Facility, a MELF Loan 1 and
a MELF Loan 2, as defined below, and utilizes certain capital and operating
leases.
Cash
overdrafts are recorded within current liabilities. Cash flows
associated with cash overdrafts are classified as financing
activities.
On
September 6, 2007, the Company entered into a 5 year, $100.0 million secured
credit facility with four banks, consisting of a $55.0 million fixed asset line
of credit, a $35.0 million working capital revolver and a $10.0 million
low-interest loan from the agent bank with the Commonwealth of Pennsylvania (the
“Bank Credit Facility”). The Bank Credit Facility is secured by a
blanket lien on the Company’s assets and contains various non-financial and
financial covenants, including a fixed charge coverage covenant, a maximum
operating leverage ratio covenant, a minimum liquidity ratio covenant and a
minimum level of earnings before interest, taxes, depreciation and amortization
(“EBITDA”) covenant. Interest rates for the fixed asset line of
credit and working capital revolver are indexed to LIBOR and included, as of
September 27, 2008, a spread above that index from 75 to 275 basis points based
upon the Company’s ratio of debt to EBITDA. The fixed asset line of
credit and the working capital revolver include commitment fees from 20 to 50
basis points based upon the Company’s ratio of debt to EBITDA. The $10.0 million
low-interest loan is at a fixed rate of 5.5% per annum. In October
2008, the Company amended its Bank Credit Facility to provide for additional
flexibility and to change certain financial covenants, including the minimum
EBITDA requirements as of December 27, 2008 and the maximum operating leverage
ratio as of September 27, 2008 and December 27, 2008, which was necessary
to eliminate an instance of non-compliance. As part of this
amendment, the interest rates for the fixed asset line of credit and working
capital revolver were changed to be indexed to LIBOR plus a credit
spread from 125 to 325 basis points based upon the Company’s ratio of debt
to EBITDA.
On
September 6, 2007, the Company entered into a 10 year, $12.0 million secured
credit agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”). This credit facility bears interest at a blended fixed rate of 4.5%
per annum, participates in the blanket lien on the Company's assets and contains
customary representations and warranties as well as customary affirmative and
negative covenants essentially similar to those in the Bank Credit Facility, as
amended in October 2008. Negative covenants include, among others,
limitations on incurrence of liens and secured indebtedness by the Company
and/or its subsidiaries, other than in connection with the Bank Credit
Facility, the MELF Loan 1 and the MELF Loan 2, as defined
below.
On
September 6, 2007, the Company entered into a 10 year, $5.0 million Machinery
and Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania
(“MELF Loan 1”). The Company borrowed $5.0 million under MELF Loan 1
in September 2008. This loan bears interest at a fixed rate of 5.0%
per annum and contains customary representations and warranties as well as
customary affirmative and negative covenants similar to those in the Bank Credit
Facility, as amended in October 2008. Negative covenants include,
among others, limitations on incurrence of liens and secured indebtedness by the
Company, other than in connection with the Bank Credit Facility and the PIDC
Credit Facility. In September 2008, the Company entered into a second
10 year, $5.0 million Machinery and Equipment Loan Fund secured loan with the
Commonwealth of Pennsylvania (“MELF Loan 2”). The terms and
conditions of MELF Loan 2 are the same as MELF Loan 1. The Company
expects to borrow the $5.0 million under MELF Loan 2 in the fourth quarter of
2008.
On
September 6, 2007, the Company entered into an agreement which governs the
shared collateral positions under the Bank Credit Facility, the PIDC Credit
Facility, the MELF Loan 1 and the MELF Loan 2 (the “Intercreditor Agreement”),
and establishes the priorities and procedures that each lender has in enforcing
the terms and conditions of each of their respective agreements. The
Intercreditor Agreement permits the group of banks and their agent bank in the
Bank Credit Facility to have the initial responsibility to enforce the terms and
conditions of the various credit agreements, subject to certain specific
limitations, and allows such bank group to negotiate amendments and waivers on
behalf of all lenders, subject to the approval of each lender.
In order
to hedge a portion of the Company’s exposure to changes in interest rates on
debt associated with the Company’s new manufacturing facilities, the Company
entered into certain variable-to-fixed interest rate swap contracts to fix the
interest rates on a portion of its variable interest rate debt. In
January 2008, the Company entered into an $8.5 million notional value interest
rate swap contract that increases to $35.0 million by April 2010 with a fixed
LIBOR rate of 3.835% that expires on September 5, 2012. As of
September 27, 2008, the notional value of the swap was $8.5 million. As of
September 27, 2008, the LIBOR rates were subject to an additional credit spread
which could range from 75 basis points to 275 basis points and was equal to 225
basis points as of that date. The
Company records as an asset or liability the cumulative change in the fair
market value of the derivative instrument, and as of September 27, 2008, the
Company recorded an asset of $0.3 million. In May 2008, the Company entered into
an $8.0 million notional value interest rate swap with a fixed LIBOR rate of
2.97% that expires on May 1, 2011. The LIBOR rates are subject to an
additional credit spread which could range from 75 basis points to 275 basis
points and was equal to 225 basis points as of September 27,
2008. The Company records as an asset or liability the cumulative
change in the fair market value of the derivative instrument, and as of
September 27, 2008, the Company recorded an asset of $0.1 million.
Net cash
used for investing activities for the thirty-nine weeks ended September 27, 2008
was $27,748, comprised primarily of $27,392 for capital expenditures related to
the Company’s new manufacturing facility.
Net cash
from financing activities for the thirty-nine weeks ended September 27, 2008
totaled $31,622 driven by increased borrowings of long-term debt of $28,903
primarily related to the Company’s new manufacturing facility.
The
Company anticipates that the foreseeable future cash flow from operations, along
with the continued availability under the Bank Credit Facility, the PIDC Credit
Facility, MELF Loan 1 and MELF Loan 2 will be sufficient to meet
operating and financing requirements. The Company anticipates total
capital expenditures of approximately $32.0 million for fiscal 2008, $26.0
million of which are expenditures associated with the Company’s new
manufacturing facility.
Critical
Accounting Policies and Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based on the condensed consolidated financial statements and accompanying notes
that have been prepared in conformity with GAAP. The preparation of such
condensed consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Included
in the Company’s Annual Report on Form 10-K for fiscal 2007 are the significant
accounting policies of the Company which are described in Note 1 to the
consolidated financial statements, and the critical accounting estimates which
are described in the Management’s Discussion and Analysis of Financial Condition
and Results of Operations in the 2007 Form 10-K. Information
concerning the Company’s implementation and impact of new accounting standards
is included in Note 1 of the condensed consolidated financial statements
included herein. Otherwise, there were no changes in the Company’s
critical accounting policies and estimates in the third quarter of 2008 which
had a material impact on the Company’s financial condition, change in financial
condition, liquidity or results of operations.
Forward-Looking
Statements
Statements
contained in this Quarterly Report on Form 10-Q, including but not limited to
those under the headings “Risk Factors” and “Management’s Discussion
and Analysis,” 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. Such forward-looking statements are based
upon assumptions by management, as of the date of this Report, including
assumptions about risks and uncertainties faced by the Company. These
forward-looking statements can be identified by the use of words such 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 relocating operations and the funding thereof, legal proceedings,
competition within the baking industry, concentration of customers, commodity
prices, consumer preferences, long-term receivables, inability to develop brand
recognition in the Company’s expanded markets, production and inventory
concerns, employee productivity, availability of capital, fluctuation in
interest rates, pension expense and related assumptions, changes in long-term
corporate bond rates or asset returns that could affect the pension corridor
expense or income, governmental regulations, 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 pricing 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 costs to lease and
fit-out a new facility and relocate thereto, the costs and availability of
capital to fund improvements or new facilities and equipment, the retention of
key employees, and the ability to develop and market in a timely and efficient
manner new products which are accepted by consumers. If any of our
assumptions prove incorrect or should unanticipated circumstances arise, our
actual results could differ materially from those anticipated by such
forward-looking statements. The differences could be caused by a
number of factors or combination of factors, including, but not limited to,
those factors described in the Company’s 2007Annual Report on Form 10-K (“2007
Form 10-K”), “Item 1A, Risk Factors.” There can be no assurance that
the new manufacturing facility described herein will be
successful. The Company undertakes no obligation to publicly revise
or update such forward-looking statements, except as required by
law. Readers are advised, however, to consult any further public
disclosures by the Company (such as in the Company’s filings with the SEC or in
Company press releases) on related subjects.
Not
required for smaller reporting companies.
(a) Evaluation of Disclosure Controls
and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
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 Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure at a reasonable assurance
level 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.
Management
of the Company, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company’s
disclosure controls and procedures (as defined in the Exchange Act Rule
13a-15(e)) as of September 27, 2008. Based upon the evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of September 27,
2008.
(b)
Changes in Internal Control over Financial Reporting
During the
thirteen weeks ended September 27, 2008, there have been no changes in the
Company’s internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
TASTY
BAKING COMPANY AND SUBSIDIARIES
PART
II. OTHER INFORMATION
By the
Third Amendment to Credit Agreement dated October 29, 2008 the Company amended
certain provisions of its Bank Credit Facility, including changes to the maximum
operating leverage ratio as of September 27, 2008 and December 27, 2008, the
minimum EBITDA requirement as of December 27, 2008, and the applicable borrowing
rate spread. The full text of the agreement is included herein as Exhibit
10(b) under
Item 6.
On October 31, 2008, the
Company received $5.0 million of funding under a Machinery and Equipment Loan
Fund ("MELF") Agreement with The Commonwealth of Pennsylvania acting by and
through the Department of Community and Economic Development, dated September 9,
2008. This MELF funding secured by (i) a first lien on certain equipment
acquired with amounts advanced under the MELF Agreement, and (ii) a second lien
on certain other equipment acquired with amounts advanced under the MELF
Agreement. The MELF loan requires repayment over a ten year term with interest
only during the first two years. Amounts advanced under the MELF Agreement will
bear interest until repaid at a fixed rate of 5.0% per annum.
The MELF Agreement contains
customary representations and warranties as well as customary affirmative and
negative covenants. Negative covenants include, among others, limitations on
incurrence of liens and secured indebtedness by the Company, other than in
connection with the Company's Bank Credit Facility and PIDC Credit Facility. The
MELF Agreement also contains customary events as default. Upon the occurence and
during the continuance of any event of default, MELF may declare the outstanding
loans and all other obligations under the MELF Agreement immediately due and
payable.
The description of the MELF
Agreement contained herein is qualified in its entirety by reference to the MELF
Agreement, a copy of which is filed herewith as Exhibit 10(c) and is
incorporated herein by reference.
|
(a) Exhibits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
10 (a)
|
–
|
Second
Amendment, effective as of July 16, 2008, to Credit Agreement, dated as of
September 6,
2007, among Tasty Baking Company and its subsidiaries, as
Borrowers; Citizens Bank of Pennsylvania, as Administrative Agent,
Collateral Agent, Swing Line Lender and Letter of Credit Issuer; and Bank
of
America, N.A., Sovereign Bank, and Manufacturers and Traders Trust
Company, each as a
Lender, is incorporated herein by reference to Exhibit 10(b) to
Form 10-Q report of Company for the thirteen weeks ended June 28,
2008.
|
| |
|
|
|
| |
Exhibit
10 (b)
|
–
|
Third
Amendment, effective as of October 29, 2008, to Credit Agreement, dated as
of September 6, 2007, among Tasty Baking Company and its
subsidiaries, as Borrowers; Citizens Bank of Pennsylvania, as
Administrative Agent, Collateral Agent, Swing Line Lender and Letter of
Credit Issuer; and Bank of America, N.A., Sovereign Bank, and
Manufacturers and Traders Trust Company, each as a
Lender.
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Exhibit
10 (c)
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Machinery
and Equipment Loan Fund Loan Agreement, dated as of September 9, 2008,
between Tasty Baking Company and The Commonwealth of Pennsylvania acting
by and through the Department of Community and Economic
Development. |
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Exhibit
31 (a)
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Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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Exhibit
31 (b)
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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Exhibit
32
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–
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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
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.
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TASTY BAKING COMPANY
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(Company)
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November 4,
2008
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/s/ Paul D.
Ridder
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(Date)
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PAUL
D. RIDDER
SENIOR
VICE PRESIDENT
AND
CHIEF
FINANCIAL OFFICER
(Principal
Financial Officer)
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