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 thirty-nine weeks ended September 25, 2004
------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-5084
TASTY BAKING COMPANY
(Exact name of company as specified in its charter)
Pennsylvania 23-1145880
--------------------------------------------------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
2801 Hunting Park Avenue, Philadelphia, Pennsylvania 19129
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 221-8500
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(Company's Telephone Number, including area code)
Indicate by check mark whether the company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- --------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.50 8,077,006
--------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of October 25, 2004)
Page 1 of 17
TASTY BAKING COMPANY AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 25, 2004 and December 27, 2003................................................................3
Consolidated Statements of Operations Thirteen and Thirty-nine
weeks ended September 25, 2004 and September 27, 2003...................................................4
Consolidated Statements of Cash Flows Thirty-nine
weeks ended September 25, 2004 and September 27, 2003...................................................5
Notes to Consolidated Financial Statements...........................................................6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................................11-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk14
Item 4. Controls and Procedures................................................................................15
Item 5. Other Matters .........................................................................................15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................................16
Signature .............................................................................................17
Page 2 of 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(000's)
------------------------------------------------------------------------------------------------------------
September 25, 2004 December 27, 2003
------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 62 $ 33
Receivables, less allowance of $4,435
and $3,648, respectively 19,937 19,503
Inventories 5,751 5,730
Deferred income taxes 3,222 3,902
Prepayments and other 3,654 3,271
----------------------------------------------------
Total current assets 32,626 32,439
----------------------------------------------------
Property, plant and equipment:
Land 1,033 1,098
Buildings and improvements 40,274 40,288
Machinery and equipment 165,163 158,286
--------
206,470 199,672
Less accumulated depreciation 141,685 136,156
----------------------------------------------------
64,785 63,516
----------------------------------------------------
Other assets:
Long-term receivables from sales distributors 11,528 11,253
Deferred income taxes 9,215 9,267
Other 1,815 768
----------------------------------------------------
22,558 21,288
----------------------------------------------------
Total assets $119,969 $117,243
====================================================
Liabilities
Current liabilities:
Current obligations under capital leases $ 697 $ 634
Notes payable, banks 5,000 4,900
Accounts payable 8,176 9,261
Accrued payroll and employee benefits 7,691 6,013
Reserve for restructures 689 1,331
Other 2,169 2,280
----------------------------------------------------
Total current liabilities 24,422 24,419
Long-term debt 10,000 8,000
Long-term obligations under capital leases,
less current portion 4,308 4,705
Reserve for restructures, less current portion 563 1,044
Accrued pensions and other liabilities 21,224 19,938
Postretirement benefits other than pensions 16,881 16,718
----------------------------------------------------
Total liabilities 77,398 74,824
----------------------------------------------------
Shareholders' equity
Common stock 4,558 4,558
Capital in excess of par value of stock 29,304 29,393
Retained earnings 22,782 22,641
----------------------------------------------------
56,644 56,592
Less:
Accumulated other comprehensive loss 1,236 1,236
Treasury stock, at cost 12,728 12,545
Management Stock Purchase Plan
receivables and deferrals 109 392
----------------------------------------------------
42,571 42,419
----------------------------------------------------
Total liabilities and shareholders' equity $119,969 $117,243
====================================================
See Notes to Consolidated Financial Statements.
3 of 17
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(000's, except per share amounts)
-------------------------------------------------------------------------------------------------------------------------------
For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended
September 25, 2004 September 27, 2003 (a) September 25, 2004 September 27, 2003 (a)
------------------------------------------------------------------------------------------------------------------------------------
Gross Sales $ 62,724 $ 60,837 $ 195,921 $ 188,153
Less discounts and allowances (23,414) (21,889) (76,077) (68,029)
----------------------------------------------------------------------------------------
Net Sales 39,310 38,948 119,844 120,124
----------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 25,452 26,397 77,363 81,353
Depreciation 1,975 1,772 5,531 5,249
Selling, general and administrative 11,456 13,026 34,646 34,824
Restructure charge net of reversals -- (129) -- (444)
Gain on sale of routes -- -- (75) --
Interest expense 301 223 930 644
Other income, net (224) (153) (708) (645)
----------------------------------------------------------------------------------------
38,960 41,136 117,687 120,981
----------------------------------------------------------------------------------------
Income before provision for
income taxes 350 (2,188) 2,157 (857)
Provision for (benefit from) income taxes 133 (755) 803 (296)
----------------------------------------------------------------------------------------
Net income (loss) $ 217 $ (1,433) $ 1,354 $ (561)
========================================================================================
Average common shares outstanding:
Basic 8,080 8,098 8,089 8,098
Diluted 8,081 8,114 8,098 8,106
Per share of common stock:
Net income (loss):
Basic and Diluted $ 0.03 ($ 0.18) $ 0.17 ($ 0.07)
========================================================================================
Cash dividend $ 0.05 $ 0.05 $ 0.15 $ 0.15
========================================================================================
(a) Amounts have been reclassified for comparative purposes.
4 of 17
TASTY BAKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's)
------------------------------------------------------------------------------------------------------------------------------------
For the Thirty-nine Weeks Ended
September 25, 2004 September 27, 2003 (a)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
Net income $ 1,354 $ (561)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 5,531 5,249
Gain on sale of route (75) --
Restructure charge net of reversals -- (444)
Restructure payments (1,123) (1,946)
Pension expense 1,607 1,747
Deferred taxes 733 (406)
Other (90) (468)
Changes in assets and liabilities:
Increase in receivables (900) (754)
Decrease (increase) in inventories (21) 1,101
Decrease (increase) in prepayments and other (1,380) 1,313
Increase in accrued payroll, accrued income
taxes, accounts payable and other current liabilities 481 3,680
------------------------------------------------------
Net cash from operating activities 6,117 8,511
------------------------------------------------------
Cash flows from (used for) investing activities
Proceeds from sale of property, plant and equipment 67 --
Purchase of property, plant and equipment (6,905) (4,159)
Proceeds from independent sales distributor loan repayments 2,792 2,575
Loans to independent sales distributors (2,526) (2,825)
Other (68) (153)
------------------------------------------------------
Net cash used for investing activities (6,640) (4,562)
------------------------------------------------------
Cash flows from (used for) financing activities
Dividends paid (1,213) (1,215)
Payment of long-term debt (335) (1,221)
Net increase (decrease) in short-term debt 100 (1,600)
Additional long-term debt 2,000 --
------------------------------------------------------
Net cash from (used for) financing activities 552 (4,036)
------------------------------------------------------
Net increase (decrease) in cash 29 (87)
Cash, beginning of year 33 282
------------------------------------------------------
Cash, end of period $ 62 $ 195
======================================================
Supplemental Cash Flow Information Cash paid during the period for:
Interest $ 933 $ 592
======================================================
Income taxes $ 90 $ 85
======================================================
Noncash investing and financing activities:
Capital leases $ 155 $ 1,845
======================================================
Loans to independent sales distributors for new routes $ (73) $ --
======================================================
(a) Amounts have been reclassified for comparative purposes
See Notes to Consolidated Financial Statements.
5 of 17
1. Significant Accounting Policies
-------------------------------
Interim Financial Information
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
and recurring adjustments, necessary to present fairly the financial
position of the company as of September 25, 2004, and December 27, 2003,
the results of its operations for the thirteen and thirty-nine weeks
ended September 25, 2004, and September 27, 2003, and cash flows for the
thirty-nine week periods ended September 25, 2004, and September 27,
2003, respectively. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements
and footnotes thereto in the company's 2003 Annual Report to
Shareholders. In addition, the results of operations for the thirteen and
thirty-nine weeks ended September 25, 2004, are not necessarily
indicative of the results to be expected for the full year.
Property and Depreciation
During the first quarter of 2004, the company performed a comprehensive
review of the estimated useful lives of all asset classes. As a result,
the company evaluated the utilization of certain machinery and equipment
and determined that its useful lives should be extended to 15 years from
7 years, consistent with similar assets already being depreciated over 15
years. The useful lives of buildings and improvements were standardized
at 39 years from 15 to 35 years. A decrease in depreciation expense of
$1,206 for the thirty-nine weeks ended September 25, 2004 resulted from
these changes in estimates. Also, depreciation expense increased by
$1,143 during the thirty-nine weeks ended September 25, 2004, due to a
change in estimated useful lives of certain machinery, leasehold
improvements and the current Enterprise Resource Planning (ERP) system
which is being replaced in the fourth quarter of 2004 when the new ERP
system will be implemented.
Net Income Per Common Share
Net income per common share is presented as basic and diluted earnings
per share. Net income per common share - Basic is based on the weighted
average number of common shares outstanding during the year. Net income
per common share - Diluted is based on the weighted average number of
common shares and dilutive potential common shares outstanding during the
year. Dilution is the result of outstanding stock options.
Page 6 of 17
Stock-Based Compensation
In December of 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
FASB Statement No. 123 (FAS 148)." The provisions of this statement are
effective for fiscal years beginning after December 15, 2003. The company
measures stock-based compensation and reports the calculated differences
between the reported and pro forma impact of the fair-value method on the
interim and annual financial reports as required.
Thirteen Weeks Ended Thirty-nine Weeks Ended
9/25/04 9/27/03 9/25/04 9/27/03
------- ------- ------- -------
Net income as reported $ 217 $(1,433) $ 1,354 $ (561)
Deduct: Total stock-based employee
compensation expense determined under
fair-value net of related tax effects (49) (41) (176) (86)
------------------ -------------------
Pro forma net income $ 168 $(1,474) $ 1,178 $ (647)
================== ===================
Earnings per share:
Basic and Diluted - as reported $ 0.03 $ (0.18) $ 0.17 $0.07
================== ===================
Basic and Diluted - pro forma $ 0.02 $ (0.18) $ 0.15 $(0.08)
================== ===================
Pension Plan
The company's funding policy for its 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. The company accrues normal periodic pension expense or
income during the year based upon certain assumptions and estimates from
its actuarial consultants in accordance with Statement of Financial
Accounting Standard No. 87, "Employers' Accounting for Pensions." These
estimates and assumptions include discount rate, rate of return on plan
assets, compensation increases, mortality and employee turnover. In
addition, the rate of return on plan assets is directly related to
changes in the equity and credit markets, which can be very volatile. The
use of the above estimates and assumptions, market volatility and the
company's election to immediately recognize all gains and losses in
excess of its pension corridor in the current year may cause the company
to experience significant changes in its pension expense or income from
year to year. Expenses or income that fall outside the corridor are
recognized only in the fourth quarter of each year.
Recent Accounting Statements
In April 2004, the FASB released FASB Staff Position (FSP) No. FAS 106-2
to address the accounting and disclosure requirements of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"),
which was signed into law on December 8, 2003. The Act established a
prescription drug benefit under Medicare Part D, and a Federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that
is at least actuarially equivalent to Medicare Part D. The company
sponsors medical programs for certain of its retirees and expects that
this legislation may reduce the costs for some of these programs. The FSP
is effective for interim or annual periods beginning after June 15, 2004.
The expected effects of the Act will be factored into the company's 2004
year-end measurement of postretirement medical obligations and related
expense calculation for 2005. The company is currently evaluating the
impact of FSP 106-2, but does not expect a material impact on the
financial statements.
Page 7 of 17
2. Restructure Charges
-------------------
During the fourth quarter of 2003, the company incurred a $429 pre-tax
restructure charge related to specific arrangements made with senior
executives who departed the company.
During the fourth quarter of 2002, the company incurred a $4,936 pre-tax
restructure charge related to the closing of twelve thrift stores and the
specific arrangements made with senior executives who departed the
company in the fourth quarter of 2002. There were 29 employees terminated
as a result of this restructure, of which 25 were thrift store employees
and 4 were corporate executives.
During the second quarter of 2002, the company closed six thrift stores
and eliminated certain manufacturing and administrative positions. There
were 67 employees terminated as a result of this restructure, of which 42
were temporary employees, 13 were thrift store employees and 12 were
corporate and administrative employees. Costs related to these events
were included in a pre-tax restructure charge of $1,405.
During the fourth quarter of 2001, the company closed its Dutch Mill
Baking Company production facility. In addition, the company closed two
thrift stores. Costs related to these events were included in a pre-tax
restructure charge of $1,728.
Restructure Reserve Activity
Lease Fixed
Obligations Severance Assets Other Total
----------- --------- -------- ------- -------
Balance Dec. 28, 2002 $ 2,078 $ 3,403 $326 $178 $5,985
Q1 2003 Reclass of PP&E - - (326) - (326)
Q1 2003 Reversal of Reserve (220) - - - (220)
Q1 2003 Payments (165) (475) - (41) (681)
----- ----- - ---- -----
Balance March 29, 2003 1,693 2,928 - 137 4,758
Q2 2003 Reversal of Reserve (95) - - - (95)
Q2 2003 Payments (229) (460) - (40) (729)
----- ----- - ---- -----
Balance Sept. 27, 2003 1,369 2,468 - 97 3,934
Q3 2003 Reversal of Reserve (129) - - - (129)
Q3 2003 Payments (154) (363) - (18) (535)
----- ----- - ---- -----
Balance Sept. 27, 2003 1,086 2,105 - 79 3,270
Q4 2003 Restructure Charges - 429 - - 429
Q4 2003 Reclass of SERP - (683) - - (683)
Q4 2003 Reversal of Reserve (56) - - - (56)
Q4 2003 Payments (217) (366) - (2) (585)
----- ----- - ---- -----
Balance Dec. 27, 2003 813 1,485 - 77 2,375
Q1 2004 Payments (125) (387) - (16) (528)
----- ----- - ---- -----
Balance March 27, 2004 688 1,098 - 61 1,847
Q2 2004 Payments (112) (187) - (16) (315)
----- ----- - ---- -----
Balance June 26, 2004 576 911 - 45 1,532
Q3 2004 Payments (88) (176) - (16) (280)
----- ----- - ---- -----
Balance Sept. 25, 2004 $ 488 $ 735 $ - $ 29 $1,252
===== ===== ===== ==== =====
The balance of the severance charges is expected to be paid as of
December 2005 and the balance of the lease obligations and other charges
is expected to be paid as of November 2006.
Page 8 of 17
3. Inventories
Inventories are classified as follows:
9/25/04 12/27/03
------- --------
Finished goods $ 1,612 $ 2,397
Work in progress 807 740
Raw materials and supplies 3,332 2,593
----------------------------------------
$ 5,751 $ 5,730
========================================
4. Stock Option Plans
------------------
On October 29, 2004, 8,000 options were granted to employees of the
company under the 2003 Long Term Incentive Plan. Under this grant, the
options vest in three equal installments beginning on the first
anniversary date with a five year retention period from the date of
grant. The option price is determined by the Compensation Committee of
the Board 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 date of the option term specified
by the Compensation Committee of the Board (not more than ten years from
the date of grant in the case of incentive stock options) or three months
following the date on which employment with the company terminates.
On October 29, 2004, 112,000 shares of restricted common stock were
granted to certain executives of the company under the 2003 Long Term
Incentive Plan. Under this grant, the restricted stock will vest in equal
one-fifth increments on each anniversary of the date of grant. The grant
also includes a performance target which, if achieved, will accelerate
the vesting schedule. If the closing price of the company's common stock
equals or exceeds $14 per share for 10 consecutive trading days during
the five-year vesting period, then any unvested restricted shares will
become fully vested on the later of (i) the day on which the performance
target has been achieved or (ii) the third anniversary of the date of
grant.
5. Pension and Supplemental Retirement Costs
-----------------------------------------
In December 2003, the FASB issued a revised SFAS No. 132 R, "Employers'
Disclosure about Pensions and Other Postretirement Benefits," which
requires additional disclosures for benefits plans. The standard requires
interim disclosure of the various components of net periodic pension cost
and expanded annual disclosures, such as describing the types of plan
assets, investment strategy and plan obligations. The required interim
disclosure is included below. Annual disclosures will be provided in the
2004 Form 10-K.
Components of Net Periodic Cost
Thirty-nine Weeks Ended
9/25/04 9/27/03
------- -------
Service cost $ 1,058 $ 1,002
Interest cost 3,861 3,645
Expected return on plan assets (3,372) (3,129)
Amortization of prior service costs (3) (5)
Amortization of net (gain) loss 39 48
------------------------------
Net periodic benefit cost $ 1,583 $ 1,561
==============================
Employer Contributions
The company previously disclosed in its financial statements for the year
ended December 27, 2003, that it was not required to make contributions
to its pension plan in 2004. As of September 25, 2004, no contributions
have been made.
Page 9 of 17
6. Postretirement Benefits Other than Pensions
-------------------------------------------
Components of Net Periodic Postretirement Benefit Cost
Thirty-nine Weeks Ended
9/25/04 9/27/03
------- -------
Service cost $ 312 $ 252
Interest cost 707 741
Net amortization and deferral - (98)
------------------------------
Net periodic benefit cost $ 1,019 $ 895
==============================
Employer Contributions
Estimated company contributions for the thirty-nine weeks ended September
25, 2004, are $869.
Page 10 of 17
TASTY BAKING COMPANY AND SUBSIDIARIES
(000's, except share and per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
------------------------------------------------------------------
Results of Operations
Overview
Net income for the third quarter of 2004 was $217 or $.03 per diluted share. Net
loss for the third quarter of 2003 was $1,433 or $.18 per diluted share, which
included a $129 pre-tax restructure charge reversal due to the favorable
settlement of certain thrift store lease contracts.
Net income for the thirty-nine weeks ended September 25, 2004, was $1,354 or
$.17 per diluted share, which included a $75 pre-tax gain from the sale of one
route to an independent sales distributor in Maryland. Net loss for the
thirty-nine weeks ended September 27, 2003, was $561 or $.07 per diluted share,
which included a $444 pre-tax restructure charge reversal due to the favorable
settlement of certain thrift store lease contracts.
Sales
Gross sales increased by 3.1% in the third quarter of 2004 compared to the same
quarter in 2003. Route sales increased by 4.7% in the third quarter of 2004,
primarily driven by the impact of the new route territories added in Pittsburgh
and Cleveland in 2004, list price increases instituted on the Family Pack
product line and the new Tastykake Sensables product line launched in August
2004. Without the increase from the new route territories, same route sales
increased 1.4% compared to the third quarter of 2003. Gross sales in non-route
areas decreased in the third quarter of 2004 by 1.4% compared to the third
quarter of 2003. This decrease was primarily driven by the timing of certain
promotional events with key customers versus the same quarter a year ago. In
addition, sales to certain third party distributors in the southeast region
declined in the quarter due to weather related distribution issues.
Gross sales increased by 4.1% in the thirty-nine weeks ended September 25, 2004,
compared to the same period in 2003. Year to date route sales increased by 6.5%
compared to the same period in 2003, primarily driven by the impact of the new
route territories, list price increases and the new Tastykake Sensables product
line launched in August 2004. Without the increase from the new route
territories, year to date same route sales increased 3.5% compared to the same
period of 2003. Year to date gross sales in non-route areas decreased during the
thirty-nine weeks ended September 25, 2004, by 2.2% compared to the same period
in 2003, because the first quarter of 2003 includes sales from the West Coast, a
territory the company exited after that quarter.
In the third quarter of 2004, net sales increased by 0.9% compared to the third
quarter of 2003. This increase in net sales was less than the increase in gross
sales due to higher percentage increases in price promotion spending and product
returns.
For the thirty-nine weeks ended September 25, 2004, net sales decreased by 0.2%
compared to the same period in 2003. The decrease in net sales versus the
increase in gross sales resulted from higher percentage increases in price
promotion spending and product returns.
Page 11 of 17
Cost of Sales
Cost of sales, excluding depreciation, for the third quarter of 2004 decreased
by 3.6%. As a percentage of gross sales, cost of sales decreased 2.8 percentage
points to 40.6% in the third quarter from 43.4% in the third quarter of 2003.
Cost of sales for the thirty-nine weeks ended September 25, 2004, decreased by
4.9%. As a percentage of gross sales, cost of sales year to date decreased 3.7
percentage points to 39.5% from 43.2% in the same period in 2003. These
decreases are primarily the result of sales volume reductions along with
packaging and productivity initiatives, partially offset by the increased costs
associated with the new product line and the increased cost of eggs, oils, and
butter.
Gross Margin
Gross margin after depreciation, as a percentage of net sales, was 30.2% and
27.7% for the third quarters of 2004 and 2003, respectively. The 2.5 percentage
point improvement resulted from the combined effect of the Family Pack price
increase, favorable sales mix and the decrease in cost of sales resulting from
the company's productivity initiatives. These positive improvements were
partially offset by increased price promotion spending and increased product
returns.
Gross margin after depreciation, as a percentage of net sales, was 30.8% and
27.9% for the thirty-nine weeks ended September 25, 2004, and September 27,
2003, respectively. The 2.9 percentage point improvement resulted from the
combined effect of the Family Pack price increase, favorable sales mix, and the
decrease in cost of sales resulting from the company's productivity initiatives.
These positive improvements were partially offset by increased price promotion
spending and increased product returns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of 2004
decreased by $1,570 or 12.1% compared to the third quarter of 2003. The decrease
resulted from a reduction in marketing spending to fund an increase in price
promotion spending, and lower freight costs. This was partially offset by an
increase in administrative expenses related to the ERP system implementation and
work required by section 404 of the Sarbanes Oxley Act (Sarbox). Selling,
general and administrative expenses for the thirty-nine weeks ended September
25, 2004, decreased by $178 or .5% compared to the same period in 2003. The
decrease resulted from a reduction in marketing spending to fund an increase in
price promotion spending, and lower freight costs. This was partially offset by
an increase in administrative expenses related to the ERP system implementation
and work required by section 404 of the Sarbox, as well as increased selling
expense related to the Pittsburgh and Cleveland route expansion.
Depreciation
Depreciation expense in the third quarter of 2004 increased 11.5% compared to
the third quarter of 2003. This increase is primarily due to the amortization of
new handheld equipment implemented during the second quarter of 2004.
Depreciation expense for the thirty-nine weeks ended September 25, 2004,
increased 5.3% compared to the same period in 2003. During the first quarter,
the company performed a comprehensive review of the estimated useful lives of
all asset classes. As a result, the company evaluated the utilization of certain
machinery and equipment and determined that its useful lives should be extended
to 15 years from 7 years, consistent with similar assets already being
depreciated over 15 years. The useful lives of buildings and improvements were
standardized at 39 years from 15 to 35 years. These changes in estimates
resulted in a decrease in depreciation expense of $1,206 for the thirty-nine
weeks ended September 25, 2004. Also, depreciation expense increased by $1,143
during the thirty-nine weeks ended September 25, 2004, due to a change in
estimated useful lives of certain machinery, leasehold improvements and the
current ERP system which is being replaced in the fourth quarter of 2004 when
the new ERP system will be implemented.
Page 12 of 17
Non-Operating Items
Interest expense increased by 35.4% in the third quarter of 2004 compared to the
third quarter of 2003. Interest expense increased by 44.5% in the thirty-nine
weeks ended September 25, 2004, compared to the same period in 2003. These
increases are due to increased average borrowing levels and increased average
interest rates. The company is exposed to market risk relative to its interest
expense as its notes payable and long-term debt have floating interest rates
that vary with the conditions in the credit market. It is expected that a one
percentage point increase in interest rates would result in additional quarterly
expense of approximately $38, pre-tax.
Other income, net increased in the third quarter and the thirty-nine weeks ended
September 25, 2004 compared to the same period in 2003 due to a loss on the
disposition of certain equipment in 2003.
The effective income tax rate was 37% for the thirty-nine weeks ended September
25, 2004, and 35% for the same period in 2003, which compares to a federal
statutory rate of 34%. Differences between the effective tax rates and the
statutory tax rate arise from the effect of state income taxes.
Liquidity and Capital Resources
Historically, the company has been able to generate sufficient amounts of cash
from operations. Bank borrowings are used to supplement cash flow from
operations during periods of cyclical shortages. A credit facility is maintained
with two banks and certain capital and operating leases are utilized. Details of
the credit facility can be found in the company's Form 10-K for the year ended
December 27, 2003. The company has been and expects to continue to be in
compliance with its covenants under the credit facility this year.
Net cash from operating activities for the thirty-nine weeks ended September 25,
2004, decreased by $2,394 compared to the same period in 2003. This decrease was
driven by an unfavorable change in assets and liabilities in 2004 compared to
2003. The unfavorable change in assets and liabilities resulted primarily from a
smaller increase in accounts payable during 2004 compared to 2003. Prepayments
increased in 2004 compared to a decrease in 2003, due to the payment in 2004 of
a long-term maintenance contract and costs for new package designs across the
entire product line. These unfavorable changes were partially offset by an
increase in net income for 2004 compared to a net loss in 2003.
Net cash used for investing activities for the thirty-nine weeks ended September
25, 2004, increased by $2,078 relative to the same period in 2003 principally
due to an increase of $2,746 in capital expenditures for the new ERP system and
a new production line at the company's Oxford manufacturing location.
Net cash from financing activities for the thirty-nine weeks ended September 25,
2004, increased by $4,588 relative to the comparable period in 2003, due to a
$2,000 increase in long-term borrowing, a net increase in short-term borrowing
of $1,700 and a $886 reduction in long-term repayments, relative to the prior
year.
For the remainder of 2004, the company anticipates that cash flow from
operations, along with the continued availability of credit under the company's
credit facility, will provide sufficient cash to meet operating and financing
requirements.
Page 13 of 17
Forward-Looking Statements
Certain matters discussed in this Report, including those under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to the safe
harbor created by that Act. These forward-looking statements may include
comments about legal proceedings, competition within the baking industry,
availability and pricing of raw materials and capital, sales growth by
distribution through direct sales programs, private label, institutional sales
and other channels of distribution, changes in the company's business strategies
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 changes in general economic or
business conditions nationally and in the company's primary markets, the
availability of capital upon terms acceptable to the company, the availability
and prices of raw materials, the level of demand for the company's products, the
outcome of legal proceedings to which the company is or may become a party, the
actions of competitors within the packaged food industry, changes in consumer
tastes or eating habits, the success of business strategies implemented by the
company to meet future challenges, and the ability to develop and market in a
timely and efficient manner new products which are accepted by consumers. The
reader should review "Management's Discussion and Analysis" and "Risk Factors"
in the company's 2003 Annual Report to Shareholders and "Management's Discussion
and Analysis" in the company's annual report on Form 10-K for the year ended
December 27, 2003, for a more complete discussion of other risk factors which
may affect the company's financial position or operating performance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The company is exposed to market risk relative to its interest expense as its
notes payable and long-term debt have floating interest rates that vary with the
conditions in the credit markets and the company's financial performance. It is
expected that a one percentage point increase in interest rates would result in
additional quarterly expense of approximately $38. Under current market
conditions, the company believes that changes in interest rates would not have a
material impact on the financial statements of the company. The company also has
notes receivable from independent sales distributors whose rates adjust every
three years, which would partially offset the fluctuations in the company's
interest rates on its notes payable. The company also has the right to sell
these notes receivable, and could use these proceeds to liquidate a
corresponding amount of the notes payable. For a more detailed explanation see
the company's 2003 Annual Report on Form 10-K "Quantitative and Qualitative
Disclosure about Market Risk," page 6.
Page 14 of 17
Item 4. Controls and Procedures
-----------------------
The company maintains a system of disclosure controls and procedures designed to
provide reasonable assurance as to the reliability of its consolidated financial
statements and other disclosures included in this report. The company
established a disclosure controls committee, which consists of certain members
of management. The company carried out an evaluation, under the supervision and
with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the design and operation of the company's disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective at a reasonable level of assurance for gathering,
analyzing and disclosing material information the company is required to
disclose in the reports it files with the Securities and Exchange Commission
(SEC) pursuant to the Securities and Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms. In addition, the company
reviewed its internal control over financial reporting and there have been no
changes during the period covered by this report in the company's internal
control over financial reporting, to the extent that elements of internal
control over financial reporting are subsumed within disclosure controls and
procedures, that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
As has been previously disclosed, the company is implementing a new enterprise
resource planning (ERP) system in the fourth quarter of 2004. The new ERP system
will provide the company with an integrated planning, accounting and reporting
system which will improve the company's business planning and financial
reporting processes. As a result of this system implementation, certain changes
to the company's internal control structure will be made in the fourth quarter
of 2004 which management believes will maintain and strengthen the company's
overall internal controls. Given the timing of the ERP system implementation
with relation to the internal control testing required by section 404 of the
Sarbanes Oxley Act, there is the risk that there may be insufficient time
remaining before fiscal year end 2004 for the company to remediate any
deficiencies identified. Management is diligently working to complete all
testing and remediation within the Sarbanes Oxley Act deadline.
Item 5. Other Matters
-------------
On October 29, 2004, 112,000 shares of restricted common stock were granted to
certain executives of the company under the 2003 Long Term Incentive Plan,
including 30,000 shares to Charles P. Pizzi, President and Chief Executive
Officer; 15,000 shares to David S. Marberger, Senior Vice President and Chief
Financial Officer; 15,000 shares to Vincent A. Melchiorre, Senior Vice President
and Chief Marketing Officer; 15,000 shares to Blake W. Thompson, Senior Vice
President, Supply Chain; 10,000 shares to Autumn R. Bayles, Chief Information
Officer; and 5,000 shares to Nancy K. O'Toole, Vice President, Human Resources.
Under this grant, the restricted stock will vest in equal one-fifth increments
on each anniversary of the date of grant. There is also a performance target
which, if achieved, will accelerate the vesting schedule. If the closing price
of the company's common stock equals or exceeds $14 per share for 10 consecutive
trading days during the five-year vesting period, then any unvested restricted
shares will become fully vested on the later of (i) the day on which the
performance target has been achieved or (ii) the third anniversary of the date
of grant.
Page 15 of 17
TASTY BAKING COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 3 - Ammended and Restated Articles of Incorporation dated
August 18, 2004
Exhibit 10.1 - Second Amendment to Employment Agreement for
Charles P. Pizzi dated August 19, 2004
Exhibit 10.2 - Supplemental Executive Retirement Plan Agreement,
Amended and Restated effective August 19, 2004 for Charles P.
Pizzi
Exhibit 31.1 - Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The company filed the following reports on Form 8-K during the
thirteen weeks ended September 25, 2004:
On July 27, 2004, the company furnished a report on Form 8-K under
Item 12, Results of Operation and Financial Condition, attaching a
press release announcing its financial results for the second
quarter ended June 26, 2004.
On July 30, 2004, the company furnished a report on Form 8-K under
Item 5, Other Events. The report disclosed that on July 28, 2004,
the Board of Directors declared a regular cash dividend of $0.05
per share and renewed the company's stock repurchase program
adopted in July 2003.
Page 16 of 17
TASTY BAKING COMPANY AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TASTY BAKING COMPANY
-------------------------------
(Company)
November 3, 2004 /s/ David S. Marberger
---------------------- -------------------------------
(Date) DAVID S. MARBERGER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and
Accounting Officer)
Page 17 of 17