Bob Evans Farms, Inc.
BOB EVANS FARMS INC (Form: 10-Q, Received: 12/03/2014 17:17:19)


 
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 quarterly period ended October 24, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     
Commission file number 0-1667
Bob Evans Farms, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
31-4421866
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
8111 Smith’s Mill Road, New Albany, Ohio 43054
(Address of principal executive offices Zip Code)
(614) 491-2225
(Registrant’s telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report)
_______________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x          No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x          No ¨
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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ý
  
Accelerated Filer
¨
Non-Accelerated Filer
¨   (Do not check if a smaller reporting company)
  
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   ¨      No   ý
As of November 28, 2014 , the registrant had 23,602,038 common shares outstanding.


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TABLE OF CONTENTS
 
 
 


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BOB EVANS FARMS, INC.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
 
(in thousands)
 
Unaudited
October 24, 2014
 
April 25, 2014
Assets
Current Assets
 
 
Cash and equivalents
$
3,737

 
$
7,826

Accounts receivable, net
30,582

 
30,688

Inventories
27,977

 
25,243

Deferred income taxes
18,656

 
18,656

Federal and state income tax receivables
25,133

 
25,824

Prepaid expenses
5,599

 
4,281

Current assets held for sale
5,221

 
3,308

Total Current Assets
116,905

 
115,826

Property, Plant and Equipment
1,620,776

 
1,588,790

Less accumulated depreciation
749,650

 
715,867

Net Property, Plant and Equipment
871,126

 
872,923

Other Assets
 
 
 
Deposits and other
4,543

 
3,442

Long-term note receivable
17,366

 
16,243

Long-term investments
33,275

 
31,972

Goodwill
19,634

 
19,634

Other intangible assets
3,192

 
3,270

Long-term assets held for sale

 
2,251

Total Other Assets
78,010

 
76,812

Total Assets
$
1,066,041

 
$
1,065,561

Liabilities and Stockholders’ Equity
Current Liabilities
 
 
 
Credit facility borrowings
$

 
$
458,898

Current portion of long-term debt
369

 

Accounts payable
32,901

 
29,064

Accrued property, plant and equipment purchases
8,430

 
5,841

Accrued non-income taxes
15,111

 
17,843

Accrued wages and related liabilities
19,974

 
21,574

Self-insurance
20,619

 
19,874

Deferred revenue
11,192

 
12,967

Other accrued expenses
31,055

 
33,024

Total Current Liabilities
139,651

 
599,085

Long-Term Liabilities
 
 
 
Deferred compensation
39,727

 
35,731

Federal and state income taxes
4,895

 
4,959

Deferred income taxes
32,829

 
32,829

Deferred rent and other
6,560

 
6,534

Credit facility borrowings and other long-term debt
468,344

 
835

Total Long-Term Liabilities
552,355

 
80,888

Stockholders’ Equity
 
 
 
Common stock, $.01 par value; authorized 100,000 shares; issued 42,638 shares at October 24, 2014, and April 25, 2014
426

 
426

Capital in excess of par value
222,711

 
225,562

Retained earnings
840,039

 
849,619

Treasury stock, 19,038 shares at October 24, 2014, and 19,175 shares at April 25, 2014, at cost
(689,141
)
 
(690,019
)
Total Stockholders’ Equity
374,035

 
385,588

Total Liabilities and Stockholders’ Equity
$
1,066,041

 
$
1,065,561

The accompanying notes are an integral part of the financial statements.

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CONSOLIDATED STATEMENTS OF NET INCOME
UNAUDITED
 
(Dollars in thousands, except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
October 24, 2014
 
October 25, 2013
 
October 24, 2014
 
October 25, 2013
 
 
 
 
 
 
 
 
Net Sales
$
333,279

 
$
332,600

 
$
659,619

 
$
662,049

Cost of sales
116,012

 
113,605

 
229,475

 
220,246

Operating wage and fringe benefit expenses
102,785

 
101,971

 
207,214

 
204,817

Other operating expenses
49,973

 
49,460

 
99,481

 
98,382

Selling, general and administrative expenses
36,022

 
36,617

 
74,667

 
69,819

Depreciation and amortization expense
19,475

 
18,281

 
39,448

 
35,511

Impairment of assets held for sale

 
3,771

 
258

 
12,380

Operating Income
9,012

 
8,895

 
9,076

 
20,894

Net interest expense (income)
2,203

 
140

 
3,819

 
(16
)
Income Before Income Taxes
6,809

 
8,755

 
5,257

 
20,910

Provision for income taxes
770

 
2,502

 
234

 
6,281

Income From Continuing Operations
6,039

 
6,253

 
5,023

 
14,629

Loss from discontinued operations, net of income taxes

 
(134
)
 

 
(134
)
Net Income
$
6,039

 
$
6,119

 
$
5,023

 
$
14,495

Earnings Per Share— Income from Continuing Operations
 
 
 
 
 
 
 
Basic
$
0.26

 
$
0.23

 
$
0.21

 
$
0.54

Diluted
$
0.25

 
$
0.23

 
$
0.21

 
$
0.53

Loss Per Share—Loss from Discontinued Operations
 
 
 
 
 
 
 
Basic

 

 
$

 
$

Diluted

 

 
$

 
$

 
 
 
 
 
 
 
 
Earnings Per Share—Net Income
 
 
 
 
 
 
 
Basic
$
0.26

 
$
0.23

 
$
0.21

 
$
0.53

Diluted
$
0.25

 
$
0.23

 
$
0.21

 
$
0.53

 
 
 
 
 
 
 
 
Cash Dividends Paid Per Share
$
0.310

 
$
0.310

 
$
0.620

 
$
0.585

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding
 
 
 
 
 
 
 
Basic
23,509

 
27,086

 
23,467

 
27,287

Dilutive shares
226

 
98

 
231

 
115

Diluted
23,735

 
27,184

 
23,698

 
27,402

The accompanying notes are an integral part of the financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
 
(in thousands)
 
Six Months Ended
 
October 24, 2014
 
October 25, 2013
 
 
 

Operating activities :
 
 
 
Net income
$
5,023

 
$
14,495

Less loss from discontinued operations

 
134

Income from continuing operations
5,023

 
14,629

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,448

 
35,511

Impairment of assets held for sale
258

 
12,380

(Gain) / Loss on disposal and impairment of held and used fixed assets
943

 
1,484

(Gain) on long-term investments
(1,233
)
 
(777
)
Deferred compensation
880

 
(1,066
)
Stock based compensation
1,888

 
3,578

Accretion on long-term note receivable
(903
)
 
(1,081
)
Amortization of deferred financing costs
448

 
130

Cash provided by (used for) assets and liabilities:
 
 
 
Accounts receivable
106

 
(3,713
)
Inventories
(2,734
)
 
676

Prepaid expenses
(1,318
)
 
(602
)
Accounts payable
3,837

 
(1,193
)
Federal and state income taxes
627

 
8,614

Accrued wages and related liabilities
(1,600
)
 
(2,490
)
Self-insurance
745

 
434

Accrued non-income taxes
(2,732
)
 
3,760

Deferred revenue
(1,775
)
 
(1,891
)
Other assets and liabilities
(1,932
)
 
2,696

Net cash provided by operating activities
39,976

 
71,079

Investing activities:
 
 
 
Purchase of property, plant and equipment
(36,955
)
 
(117,673
)
Proceeds from sale of property, plant and equipment
1,108

 
5,638

Deposits and other
(261
)
 
5

Net cash used in investing activities
(36,108
)
 
(112,030
)
Financing activities:
 
 
 
Cash dividends paid
(14,603
)
 
(16,008
)
Proceeds from credit facility borrowings and other long-term debt
211,072

 
281,866

Payments of debt issuance costs
(1,279
)
 

Repayments of credit facility borrowings and other long-term debt
(202,101
)
 
(165,072
)
Purchase of treasury stock

 
(75,490
)
Proceeds from issuance of stock awards and treasury stock
239

 
11,148

Cash paid for net shares settled
(1,768
)
 
(2,306
)
Excess tax benefits from stock-based compensation
483

 
2,651

Net cash (used in) provided by financing activities
(7,957
)
 
36,789

Net cash (used in) operations
(4,089
)
 
(4,162
)
Net cash (used in) operating activities of discontinued operations

 
(134
)
Net cash (used in) discontinued operations

 
(134
)
Cash and equivalents at the beginning of the period
7,826

 
9,010

Cash and equivalents at the end of the period
$
3,737

 
$
4,714

The accompanying notes are an integral part of the financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Summary of Significant Accounting Policies
Unaudited Consolidated Financial Statements: The accompanying unaudited consolidated financial statements of Bob Evans Farms, Inc. (“Bob Evans”) and its subsidiaries (collectively, Bob Evans and its subsidiaries are referred to as the “Company,” “we,” “us” and “our”) are presented in accordance with the requirements of Form 10-Q and, consequently, do not include all of the disclosures normally required by U.S. generally accepted accounting principles or those normally made in our Form 10-K filing. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations have been included. The consolidated financial statements are not necessarily indicative of the results of operations for a full fiscal year. No significant changes have occurred in the financial disclosures made in our Form 10-K for the fiscal year ended April 25, 2014 (refer to the Form 10-K for a summary of significant accounting policies followed in the preparation of the consolidated financial statements). Throughout the Unaudited Consolidated Financial Statements and Notes to the Consolidated Financial Statements, dollars are in thousands, except per share amounts.
Revenue Recognition:     Revenue in the Bob Evans Restaurants segment is recognized at the point of sale, other than revenue from the sale of gift cards, which is deferred and recognized upon redemption. All revenue is presented net of sales tax collections.
We issue gift cards, which do not have expiration dates or inactivity fees. We recognize revenue from gift cards when they are redeemed by the customer. In addition, we recognize income on unredeemed gift cards (“gift card breakage”) based on historical redemption patterns, referred to as the redemption recognition method. Gift card breakage is recognized proportionately over the period of redemption in net sales in the Consolidated Statements of Net Income . The liability for unredeemed gift cards is included in deferred revenue on the Consolidated Balance Sheets.
In the Bob Evans Restaurants segment, we engage in promotional programs that include email, direct mail, customer bounce-back offerings and specific platforms like, "Kids Eat Free." Costs associated with these programs are classified as a reduction of net sales in the period in which the sale occurs.
Revenue in the BEF Foods segment is generally recognized when products are received by our customers. All revenue is presented net of sales tax collections. We engage in promotional (sales incentive) programs in the form of “off-invoice” deductions, billbacks, cooperative advertising and coupons with our customers. Costs associated with these programs are classified as a reduction of net sales in the period in which the sale occurs.
Notes Receivable: As a result of the sale of Mimi’s Café to Le Duff America, Inc. ("Le Duff") in the fourth quarter of fiscal 2013, we received a Promissory Note ("the Note") for $30,000 . The Note has an annual interest rate of 1.5% and a term of seven years . The principal and interest are payable in full at maturity. Partial prepayments are required prior to maturity if the buyer reaches certain levels of EBITDA during specified periods, or upon a sale or liquidation. The buyer covenanted to and did provide funding of at least $10,000 through the initial 18-months after closing. To the extent of such capital being funded but not repaid, we agreed to subordinate our right to repayment under the Note until the buyer has first received a repayment of its funding. Our right to repayment under the Note is subordinated to third-party lenders. The Note is valued using a discounted cash flow model. We used our weighted-average cost of capital as the discount rate to value the Note from Le Duff.
Inventories:     We value our Bob Evans Restaurants inventories at the lower of first-in, first-out cost (“FIFO”) or market and our BEF Foods inventories are determined on an average cost method which approximates a FIFO basis due to the perishable nature of our inventory. Inventory includes raw materials and supplies ( $15,001  at October 24, 2014 , and $16,163  at April 25, 2014 ) and finished goods ( $12,976  at October 24, 2014 , and  $9,080  at April 25, 2014 ).
Property, Plant and Equipment: Property, plant and equipment are recorded at cost less accumulated depreciation. The straight-line depreciation method is used for nearly all capitalized assets, although some assets purchased prior to fiscal 1995 continue to be depreciated using accelerated methods. Depreciation is calculated at rates adequate to amortize costs over the estimated useful lives of buildings and improvements ( 10 to 50 years) and machinery and equipment ( 3 to 30 years). Improvements to leased properties are depreciated over the shorter of their useful lives or the initial lease terms.
During the three month period ending July 25, 2014, we reassessed our overall long-range capital plan and revised the anticipated timing for future store remodel initiatives. It is now anticipated that assets capitalized under the Farm Fresh Refresh

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remodeling program will have an estimated total life of ten years , rather than seven years and accordingly useful lives for those affected assets were modified.
We have capitalized $20,819 related to a new enterprise resource planning system ("ERP"). During the three and six months ended October 24, 2014 , we capitalized internal labor costs of $1,490 and $2,396 , respectively, which primarily related to the development of our new ERP. During the three and six months ended October 25, 2013, we capitalized internal labor costs of $1,093 and $2,122 , respectively, primarily related to the development of our new ERP.
We evaluate property, plant and equipment held and used in the business for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Impairment is determined by comparing the estimated fair value for the asset group to the carrying amount of its assets. If impairment exists, the amount of impairment is measured as the excess of the carrying amount over the estimated fair values of the assets. See Note 5 for further information.
Goodwill and Other Intangible Assets: Goodwill, which represents the cost in excess of fair market value of net assets acquired, was $19,634 as of October 24, 2014 , and April 25, 2014 . Other intangible assets were $3,192 and $3,270 as of October 24, 2014 , and April 25, 2014 , respectively. The goodwill and intangible assets are related to the BEF Foods segment. Of the $3,192 of intangible assets, $2,761 represents indefinite-lived trademark assets that are not subject to amortization and $431 represents definite-lived non-compete agreements that are amortized on a straight-line basis over the estimated economic life of five years. Goodwill and trademark intangible assets are tested for impairment during the fourth quarter each year or on a more frequent basis when indicators of impairment exist.
Earnings Per Share: Basic earnings-per-share computations are based on the weighted-average number of shares of common stock outstanding during the period presented. Diluted earnings-per-share calculations reflect the assumed exercise and conversion of outstanding employee stock options.
The numerator in calculating both basic and diluted earnings per share for each period is reported net income. The denominator is based on the weighted-average number of common shares outstanding.
Options to purchase 42,354 and 43,953 shares of common stock were excluded from the three and six months ended October 24, 2014, diluted earnings-per-share calculation because they were antidilutive.
Stock-Based Compensation: We account for stock-based compensation in accordance with ASC 718. Accordingly, stock-based compensation awards are measured based on the fair value of the award on the grant date and are recognized over the vesting period of the award on a straight-line basis with the exception of compensation cost related to awards for retirement eligible employees, which are recognized immediately upon grant.
Other Compensation Plans:   We have a defined contribution plan (401(k)) that is available to substantially all employees who have at least 1,000 hours of service. We also have nonqualified deferred compensation plans, the Bob Evans Executive Deferral Plan (“BEEDP”) and Bob Evans Directors’ Deferral Plan (“BEDDP”), which provides certain executives and Board of Directors members, respectively, the opportunity to defer a portion of their current income to future years. Our annual matching contributions to the plans are at the discretion of our Board of Directors. The Supplemental Executive Retirement Plan (“SERP”) provides awards in the form of nonqualified deferred cash compensation.
Reporting Segments: We have two business segments: Bob Evans Restaurants and BEF Foods. See Note 9 for detailed segment information.
The revenues from these two segments include both net sales to unaffiliated customers and intersegment net sales, which are accounted for on a basis consistent with net sales to unaffiliated customers. Intersegment net sales and other intersegment transactions have been eliminated in the consolidated financial statements. Operating income represents earnings before interest and income taxes.
Long-term Investments: Long-term investments include assets held under certain deferred compensation arrangements, which primarily represent the cash surrender value of company-owned life insurance policies. Long-term investments totaled $33,275 and $31,972 as of October 24, 2014 , and April 25, 2014 , respectively. Change in the cash surrender value for these investments is reflected within the “Selling, general and administrative expenses” line (“S,G&A”) in the Consolidated Statements of Net Income .
Financial Instruments: The fair value of our financial instruments (other than an interest-free loan recorded in long-term debt) approximate their carrying values at October 24, 2014 . We do not use derivative financial instruments for speculative purposes.

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Commitments and Contingencies: We rent certain restaurant facilities under operating leases having initial terms that primarily expire 20 years from inception. The leases typically contain renewal clauses of 5 to 30 years exercisable at our option. Most leases contain either fixed or inflation-adjusted escalation clauses.
We occasionally use purchase commitment contracts to stabilize the potentially volatile pricing associated with certain commodity items.
We are self-insured for most casualty losses and employee health-care claims up to certain stop-loss limits per claim. We have accounted for liabilities for casualty losses, including both reported claims and incurred but not reported claims. We have accounted for our employee health-care claims liability through a review of incurred, and paid claims history. We do not believe that our calculation of casualty losses and employee health-care claims liabilities would change materially under different conditions and/or different methods. However, due to the inherent volatility of actuarially determined casualty losses and employee health-care claims, it is reasonably possible that we could experience changes in estimated losses, which could be material to quarterly net income.
We are from time-to-time involved in ordinary and routine litigation, typically involving claims from customers, employees and others related to operational issues common to the restaurant and food manufacturing industries. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations. See Note 8 for further information.
Reclassifications: Certain prior period amounts have been reclassified or adjusted to conform to the current year presentation.
We reclassified $1,883 and $4,018 of carryout supplies expense incurred in the three and six months ended October 25, 2013 , from the operating expenses line to the cost of sales line on the Consolidated Statements of Net Income . We believe that carryout supplies are better classified as cost of sales expense rather than other operating expense. Such reclassifications had no impact on reported net income.
We reclassified $1,315 and $2,449 of wages expense related to our store management training program incurred in the three and six months ended October 25, 2013 , from the S,G&A expenses line to the operating wage and fringe benefit expenses line on the Consolidated Statements of Net Income . We believe that these costs are better classified as wage expense rather than S,G&A expense. Such reclassifications had no impact on reported net income.
We have reclassified to correct $2,755 of accrued promotional incentives sales deductions for the year ended April 25, 2014, from the other accrued expenses line to the accounts receivable line on the Consolidated Balance Sheets. These deductions are now classified in accounts receivable as they are reductions in what is owed to the Company from its customers.
We have reclassified the presentation of fiscal 2014 gross proceeds from, and repayments of credit facility borrowings to conform with current year presentation.
New Accounting Pronouncements: In the normal course of business, management evaluates all new accounting pronouncements issued by the FASB, the Securities and Exchange Commission (“SEC”), the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company’s consolidated financial statements.
In May 2014, the FASB and the International Accounting Standards Board ("IASB") issued new joint guidance surrounding revenue recognition. Under U.S. generally accepted accounting principles ("US GAAP"), this guidance is being introduced to the ASC as Topic 606, Revenue from Contracts with Customers ("Topic 606"), by Accounting Standards Update No. 2014-09 ("ASU 2014-09"). The new standard supersedes a majority of existing revenue recognition guidance under US GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to use more judgment and make more estimates while recognizing revenue, which could result in additional disclosures to the financial statements. Topic 606 allows for either a "full retrospective" adoption or a "modified retrospective" adoption. The standard is effective for us in fiscal 2018. We are currently evaluating which method we will use and the revenue recognition impact this guidance will have once implemented.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"), which is an update to existing guidance related to reporting discontinued operations. The updated guidance states that only those disposals of components of an entity which would represent a strategic shift in operations and has or will have a major impact on operations and financial results will be presented as discontinued operations. This update also requires the assets and liabilities of a discontinued operation to be

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presented separately in the statement of financial position for all prior periods presented. ASU 2014-08 is to be applied prospectively, and is effective for us in the first quarter of fiscal 2015. This update did not have an impact on the consolidated financial statements.
2. Debt
On January 2, 2014, we entered into a $750,000 Revolving Credit Facility Amended and Restated Credit Agreement (“Credit Agreement”). The Credit Agreement represents a syndicated secured revolving credit facility under which up to $750,000 will be available, with a letter of credit sub-facility of $50,000 , and an accordion option to increase the revolving credit commitment to $1,050,000 . It is secured by the stock pledges of certain material subsidiaries. This agreement replaced our existing variable-rate revolving credit facility. Borrowings under the Credit Agreement bear interest, at Borrower’s option, at a rate based on LIBOR or the Base Rate, plus a margin based on the Leverage Ratio, ranging from 0.00% to 2.75%  per annum for LIBOR, and ranging from 0.00% to 1.75%  per annum for Base Rate. The Base Rate means for any day, a fluctuating per annum rate of interest equal to the highest of (i) the Federal Funds Open Rate, plus 0.50% , (ii) the Prime Rate, or (iii) the Daily LIBOR Rate, plus 1.00% . We are also required to pay a commitment fee of 0.15%  per annum to 0.25%  per annum of the average unused portion of the total lender commitments then in effect. We incurred financing costs of $2,064 associated with this refinancing, which along with previous unamortized debt financing costs of $760 are being amortized over five years.
On July 23, 2014, we entered into a First Amendment to the Credit Agreement. The terms of the Credit Agreement that were amended related to: (a) an increase to the Maximum Leverage Ratio for the period starting July 25, 2014, through July 22, 2016, (b) certain restricted payment requirements related to share repurchases and (c) an update to the Pricing Grid, which determines variable pricing and fees, to reflect changes in the allowable maximum leverage ratio. We incurred financing costs of $1,279 associated with this amendment, which are being amortized using the straight line method, which approximates the effective interest method.
Our Credit Agreement contains financial and other various affirmative and negative covenants that are typical for financings of this type. Our Credit Agreement contains financial covenants that require us to maintain a specified minimum coverage ratio and maximum leverage ratio at October 24, 2014 , of (1) a minimum coverage ratio of not less than 3.00 to 1.00; and (2) a maximum leverage ratio that may not exceed 4.50 to 1.00. As of October 24, 2014 , our minimum coverage ratio was 15.58 , and our maximum leverage ratio was 3.81 , as defined in our Credit Agreement. A breach of any of these covenants could result in a default under our Credit Agreement, in which all amounts under our Credit Agreement may become immediately due and payable, and all commitments under our Credit Agreement to extend further credit may be terminated. There were no covenant violations during the three months ended October 24, 2014 . The Credit Agreement also allows for the incurrence of additional indebtedness of up to $300,000 , a sale leaseback of our real estate of up to $100,000 , and mortgage indebtedness on our corporate headquarters of up to $50,000 .
Our effective interest rate for the Credit Agreement was 2.06% and 1.46% for the three months ended October 24, 2014 , and October 25, 2013 , respectively, and 1.84% and 1.46% for the six months ended October 24, 2014 , and October 25, 2013 , respectively. Of our total letter of credit sub-facility, $12,123 was used for certain stand-by letters of credit at October 24, 2014 . The Credit Agreement has a maturity date of January 2, 2019.
As of October 24, 2014 , we had $465,036 outstanding on the Credit Agreement. The primary purposes of the Credit Agreement is to fund working capital, capital expenditures, stock repurchases, joint ventures and acquisitions and other general corporate purposes as well as for trade and standby letters of credit. A one percent increase in the benchmark rate used for our Credit Agreement would increase our annual interest expense by approximately $4,715 assuming the $465,036 outstanding at the end of the second quarter of fiscal 2015 was outstanding for the entire year. Outstanding borrowings on the Credit Agreement are classified as a long-term liability as of October 24, 2014 and were classified as a current liability as of April 25, 2014. At the end of fiscal 2014 our Credit Agreement borrowings were classified as short term based on our assessment of the Company's inability to meet its leverage ratio covenant, as defined at that time, during fiscal 2015. The change in classification was made in the first quarter of fiscal 2015 as the Company amended the Credit Agreement to increase the leverage ratio requirement.
In the three months ended July 25, 2014, we obtained a $3,000 Research and Development Investment Loan ("R&D Loan") from the State of Ohio. The R&D Loan has a term of seven years, a variable interest rate as low as 2.00% and certain available tax incentives provided we meet certain requirements related to headcount, wages and capital expenditures. The R&D Loan was used to defray the purchase cost of machinery and equipment for our test kitchen.
3. Income Taxes
The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The Company’s effective income tax rate was 11.3% for the three months ended October 24, 2014,

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as compared to 28.6% for the corresponding period a year ago. The Company’s effective income tax rate was 4.5% for the first six months of fiscal year 2015, as compared to 30.0% for the corresponding period a year ago. The decrease in tax rate for both the three and six months ended October 24, 2014, as compared to the corresponding period last year, was primarily driven by the domestic production activities deduction, benefits from a Company owned life insurance policy recorded in the second quarter, and discrete items in the first and second quarters related to Work Opportunity Tax Credits and state refunds received.
4. Restructuring and Severance Charges
We recorded no pretax restructuring and severance charges in the three months ended October 24, 2014 , and $2,114 in the corresponding period last year. We recorded pretax restructuring and severance charges of $950 and $3,082 for the six months ended October 24, 2014 , and October 25, 2013 , respectively. These costs, reflected in S,G&A, relate to organizational realignments and closures of production facilities.
In the fourth quarter of fiscal 2014, we implemented a strategic realignment and reduction of personnel at Bob Evans Restaurants, BEF Foods and at our corporate office as part of our comprehensive plan to reduce S,G&A expenses. Costs incurred at the corporate office are allocated to the Bob Evans Restaurants and BEF Foods reporting segments.
In the third quarter of fiscal 2014, we closed our BEF Foods production plants in Springfield and Bidwell, Ohio. The action to close the food production facilities is intended to increase efficiency by consolidating production to our high capacity food production facility in Sulphur Springs, Texas.
On September 27, 2013, we announced the closure of our food production plant in Richardson, Texas, reducing our fresh sausage plant network to two facilities.
The components of the restructuring and severance charges are summarized below by reporting segment for the six months ended October 24, 2014 , and October 25, 2013 :
 
Bob Evans
Restaurants
 
BEF Foods
 
Total
Balance, April 25, 2014
$
486

 
$
741

 
$
1,227

Restructuring and severance charges incurred
285

 
665

 
950

Amounts paid
(583
)
 
(1,023
)
 
(1,606
)
Balance, October 24, 2014
$
188

 
$
383

 
$
571

 
Bob Evans
Restaurants
 
BEF Foods
 
Total
Balance, April 26, 2013
$
1,260

 
$
2,560

 
$
3,820

Restructuring and severance charges incurred
1,345

 
1,737

 
3,082

Adjustments
(131
)
 

 
(131
)
Amounts paid
(2,035
)
 
(1,366
)
 
(3,401
)
Balance, October 25, 2013
$
439

 
$
2,931

 
$
3,370

5 . Impairments
We measure certain assets and liabilities at fair value on a nonrecurring basis, including, long-lived assets that have been reduced to fair value when they are held for sale and long-lived assets that are written down to fair value when they are impaired.
We evaluate the carrying amount of long-lived assets held and used in the business periodically and when events and circumstances warrant such a review to ascertain if any assets have been impaired. A long-lived asset group is considered impaired when the carrying value of the asset group exceeds its fair value. The impairment loss recognized is the excess of carrying value above its fair value. The estimation of fair value requires significant estimates of factors in future restaurant performance and real estate appraisals. To estimate fair value for locations where we own the land and building, we obtain quoted appraisals from third party real estate valuation firms. We use discounted future cash flows to estimate fair value for leased locations. Our weighted average cost of capital is used as the discount rate in our fair value measurements for leased locations, which is considered a Level 3 measurement. A reasonable change in this discount rate would not have a significant impact on these fair value measurements.

- 10 -



In the six months ended October 24, 2014 , we incurred noncash asset impairment losses of  $1,319 in the Bob Evans Restaurant segment, a result of adverse performance in the first quarter and a reassessment of expected future cash flows and fair value at five restaurant locations. We did not incur noncash asset impairment losses for the three months ended October 24, 2014. These impairment losses are recorded in the S,G&A line on the Consolidated Statements of Net Income . An additional $258 noncash asset impairment loss was recorded in the Bob Evans Restaurants segment on the " Impairment of assets held for sale " line on the Consolidated Statements of Net Income . This charge related to one nonoperating location.
In the first quarter of fiscal 2014, we reached an agreement to sell 29 locations, resulting in a pretax noncash assets held for sale impairment charge in the Bob Evans Restaurants segment of $8,609 . In the second quarter of the prior year, we closed on the sale of 27 of the 29 properties and recorded an additional impairment charge of $771 related to the two remaining properties. We closed on the sale of 28 of the 29 nonoperating properties at the end of the prior year. The remaining property was moved out of held for sale assets during the fourth quarter of fiscal 2014 and we resumed depreciation for this location. We recorded an additional noncash asset impairment charge in the Bob Evans Restaurants reporting segment of $1,184 on one operating property in the three months ended October 25, 2013 . The charge was recorded in the S,G&A line in the Consolidated Statements of Net Income .
In the second quarter of fiscal 2014, we announced our plans to close our food production plant in Richardson, Texas. Based on the estimated value of the facility, we recorded a pretax noncash assets held for sale impairment charge in the BEF Foods segment of $3,000 during the three months ended October 25, 2013. The long-lived asset group related to this plant is included at its fair value in the “Current assets held for sale” line in the consolidated balance sheet, as of October 24, 2014. Upon being classified as held for sale, depreciation ceased for these assets.
The following table represents noncash asset impairment charges for those assets remeasured to fair value on a non-recurring basis during the three months and six months ended October 24, 2014 , and October 25, 2013 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
 
October 24, 2014
 
October 25, 2013
 
October 24, 2014
 
October 25, 2013
 
Bob Evans Restaurants
 
 
 
 
 
 
 
 
Assets held and used
$

 
$
1,184

(3)  
$
1,319

(1)  
$
2,364

(6)  
Assets held for sale

    
771

(4)  
258

(2)  
9,380

(7)  
BEF Foods
 
 
 
 
 
 
 
 
Assets held for sale

 
3,000

(5)  

 
3,000

(5)  
(1)      $1,319 relates to impairment of five operating locations
(2)      $258 relates to impairment of one nonoperating location
(3)      $1,184 relates to impairment of one operating location
(4)      $771 relates to impairment of two nonoperating locations
(5)      $3,000 relates to impairment of one nonoperating location
(6)      $2,364 relates to impairment of two operating locations
(7)      $9,380 relates to impairment of 29 nonoperating location

To be consistent with current period presentation, we have reclassified the assets for two Bob Evans Restaurants' nonoperating locations to the “ Long-term assets held for sale ” line in the Consolidated Balance Sheets as of April 25, 2014 .
6. Stock-Based Compensation
At  October 24, 2014 , there were equity awards outstanding under the Bob Evans Farms, Inc. 2010 Equity and Cash Incentive Plan (the “2010 Plan”), as well as previous equity plans adopted in 2006, 1998 and 1992. The types of awards that may be granted under the 2010 Plan include: stock options, stock appreciation rights, restricted stock awards ("RSAs"), restricted stock units ("RSUs"), cash incentive awards, performance shares, performance units, and other awards. We granted approximately 26,000 and 17,000 RSAs and RSUs under the 2010 Plan in the three months ended October 24, 2014 , and October 25, 2013 , respectively, and 39,000 and 195,000 RSAs and RSUs under the 2010 Plan in the six months ended October 24, 2014 , and October 25, 2013 , respectively.
Stock-based compensation expense, included primarily within the S,G&A line on the Consolidated Statements of Net Income , was $1,037 and $1,948 for the three months ended October 24, 2014 , and October 25, 2013 , respectively, and $1,888 and $3,578 for the six months ended October 24, 2014 , and October 25, 2013 , respectively.
7. Other Compensation Plans

- 11 -




We have a defined contribution plan (401(k)) that is available to substantially all employees who have at least 1,000 hours of service. We also have nonqualified deferred compensation plans, the BEEDP and BEDDP, which provides certain executives and members of Board of Directors, respectively, the opportunity to defer a portion of their current income to future years. A third party manages the investments of employee and Board of Directors deferrals. Gains and losses related to investment results of these deferrals are recorded within the S,G&A caption in the consolidated statements of net income.
The SERP provides awards to a limited number of executives in the form of nonqualified deferred cash compensation. Gains and losses related to the cash contributions and investment results of this deferred compensation are recorded within the S,G&A caption in the consolidated statements of net income.
8 . Commitments and Contingencies
We are subject to various claims and contingencies related to lawsuits and other matters arising out of the normal course of business. We are of the opinion that there are no matters pending or threatened that are expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial condition or results of operations. The Company establishes a reserve for the outcome of litigation where it deems appropriate to do so under applicable accounting rules.
In August 2012, a former Bob Evans Restaurant employee filed an action against Bob Evans Farms, Inc. (“Bob Evans”) in the United States District Court for the Southern District of Ohio (the “Ohio District Court”). The lead plaintiff alleged that Bob Evans violated the Fair Labor Standards Act by failing to pay overtime compensation during the period of time the employee worked as an assistant manager. The lead plaintiff sought to maintain the suit as a collective action on behalf of other similarly situated assistant managers. The Court has since approved the substitution of another former employee as the lead plaintiff. Plaintiff filed a motion for conditional certification of the class, Bob Evans filed a motion in opposition to the same, and the Ohio District Court granted conditional certification on December 5, 2013. The proceedings remain in the early stages with significant uncertainty as to factual issues, outcome of legal proceedings, and likely number of opt-in plaintiffs and/or damages claimed. We do not believe based on currently available information, that the outcome of this matter will have a material adverse effect on our financial condition, though an adverse outcome could be material to our results of operations for a particular period. We believe the claims are without merit and intend to vigorously contest the action. An amount or range of a reasonably possible loss cannot be estimated.
9 . Reporting Segments
We have two reporting segments: Bob Evans Restaurants and BEF Foods. We determine our segments on the same basis we use to allocate resources and assess performance. Our operations include restaurant operations and the processing and sale of food products. The revenues from our two segments, Bob Evans Restaurants and BEF Foods include both net sales to unaffiliated customers and intersegment net sales, which are accounted for on a basis consistent with net sales to unaffiliated customers. Intersegment net sales and other intersegment transactions have been eliminated in the consolidated financial statements. Operating income represents earnings before interest and income taxes.
Information on our reporting segments is summarized as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
October 24, 2014
 
October 25, 2013
 
October 24, 2014
 
October 25, 2013
Sales:
 
 
 
 
 
 
 
Bob Evans Restaurants
$
241,151

 
$
240,500

  
$
481,302

 
$
485,051

BEF Foods
97,761

 
95,857

 
188,557

 
184,038

Intersegment net sales of food products
(5,633
)
 
(3,757
)
 
(10,240
)
 
(7,040
)
Subtotal of BEF Foods
92,128

 
92,100

 
178,317

 
176,998

Total
$
333,279

 
$
332,600

 
$
659,619

 
$
662,049

Operating income (loss):
 
 
 
 
 
 
 
Bob Evans Restaurants
$
6,712

 
$
11,912

 
$
8,427

 
$
18,394

BEF Foods
2,300

 
(3,017
)
  
649

 
2,500

Total
$
9,012

 
$
8,895

 
$
9,076

 
$
20,894

Discussion of segment results is included within Management's Discussion and Analysis of Financial Condition and Results of Operations.

- 12 -



10. Supplemental Cash Flow Information
Cash paid for income taxes and interest for the six months ended October 24, 2014 , and October 25, 2013 , is summarized as follows:
 
 
 
Six Months Ended
 
October 24, 2014
 
October 25, 2013
Income taxes paid
$
4,652

 
$
11,464

Income taxes refunded
$
(5,531
)
 
$
(16,200
)
Income taxes (refunded) paid, net
$
(879
)
 
$
(4,736
)
 
 
 
 
Interest paid
$
4,611

 
$
1,732

11. Subsequent Events
On November 20, 2014 , the Board of Directors approved a quarterly cash dividend of $0.310 per share, payable on December 15, 2014 , to shareholders of record at the close of business on December 1, 2014 .
In November 2014, we committed to a plan to sell our ownership interest in an aircraft jointly owned with the Greif Corporation. The sale is expected to be completed prior to the end of the current fiscal year and may result in a loss on disposal of $1,700 to $2,200



- 13 -



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General Overview
In our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we use the terms “Bob Evans,” “Company,” “we,” “us” and “our” to collectively refer to Bob Evans Farms, Inc., a Delaware corporation, and its subsidiaries. The following terms used herein are registered trademarks or service marks of Bob Evans: Bob Evans ® , Bob Evans Restaurants ® , Bob Evans Special Touch ® , Best Brand Builders SM , Farm Fresh ® , Kettle Creations ® and Owens ® . Broasted ® is a trademark owned by the Broaster Company. We may use other trademarks or service marks in this document.
As of October 24, 2014 , we owned and operated 562 Bob Evans Restaurants in 19 states. Bob Evans Restaurants are primarily located in the Midwest, Mid-Atlantic and Southeast regions of the United States. Revenue in the Bob Evans Restaurants segment is recognized at the point of sale, other than revenue from the sale of gift cards, which is deferred and recognized upon redemption.
In our BEF Foods segment, we produce and distribute pork sausage products and a variety of complementary homestyle refrigerated side dishes and frozen food items under the Bob Evans, Owens and Country Creek brand names in fifty states, and to third parties who distribute to Mexico. These food products are distributed primarily to warehouses that distribute to grocery stores throughout the United States. Additionally, we manufacture and sell similar products to foodservice accounts, including Bob Evans Restaurants and other restaurants and food sellers. Revenue in the BEF Foods segment is recognized when products are received by our customers. All revenue is presented net of sales tax.
This MD&A and other written or oral statements that we make from time to time may contain forward-looking statements that set forth anticipated results based on management’s plans and assumptions. Statements in this MD&A that are not historical facts are forward-looking statements. These statements are often indicated by words such as “expects,” “anticipates,” “believes,” “estimates,” “intends” and “plans.” Forward-looking statements involve various important assumptions, risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including the assumptions, risks and uncertainties discussed in our Annual Report on Form 10-K for the fiscal year ended April 25, 2014, under the heading “Item 1A. Risk Factors,” and as supplemented in our other filings with the Securities and Exchange Commission. We note these factors for investors as contemplated by the Private Securities Litigation Reform Act of 1995. It is impossible to predict or identify all of the risk factors that we face. Consequently, you should not consider any such list to be a complete set of all potential assumptions, risks or uncertainties. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement for circumstances or events that occur after the date on which the statement is made. Any further disclosures we make in our filings with the Securities and Exchange Commission should also be consulted.
Three Months Ended October 24, 2014 , as Compared to Three Months Ended October 25, 2013
The following tables reflect data for the three months ended October 24, 2014 , compared to the prior year’s three months ended October 25, 2013 . The consolidated information is derived from the accompanying Consolidated Statements of Net Income . The table also includes data for our two segments – Bob Evans Restaurants and BEF Foods. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amounts.
 
Consolidated Results
(in thousands)
October 24, 2014
 
October 25, 2013
 
$
 
%
 
$
 
%
Net sales
$
333,279

 
 
 
$
332,600

 
 
Cost of sales
116,012

 
34.8
%
 
113,605

 
34.2
%
Operating wages and fringe benefit expenses
102,785

 
30.8
%
 
101,971

 
30.7
%
Other operating expenses
49,973

 
15.0
%
 
49,460

 
14.9
%
Selling, general and administrative expenses
36,022

 
10.8
%
 
36,617

 
11.0
%
Depreciation and amortization expense
19,475

 
5.8
%
 
18,281

 
5.5
%
Impairment of assets held for sale

 
%
 
3,771

 
1.1
%
Operating income
$
9,012

 
2.7
%
 
$
8,895

 
2.7
%

- 14 -



 
Bob Evans Restaurants
 
BEF Foods
(in thousands)
October 24, 2014
 
October 25, 2013
 
October 24, 2014
 
October 25, 2013
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Net sales
$
241,151

 
 
 
$
240,500

 
 
 
$
92,128

 
 
 
$
92,100

 
 
Cost of sales
64,165

 
26.6
%
 
59,921

 
24.9
%
 
51,847

 
56.3
%
 
53,684

 
58.3
 %
Operating wages and fringe benefit expenses
92,006

 
38.2
%
 
91,954

 
38.2
%
 
10,779

 
11.7
%
 
10,017

 
10.9
 %
Other operating expenses
42,702

 
17.7
%
 
42,013

 
17.5
%
 
7,271

 
7.9
%
 
7,447

 
8.1
 %
Selling, general and administrative expenses
20,777

 
8.6
%
 
19,213

 
8.0
%
 
15,245

 
16.5
%
 
17,404

 
18.9
 %
Depreciation and amortization expense
14,789

 
6.1
%
 
14,716

 
6.1
%
 
4,686

 
5.1
%
 
3,565

 
3.9
 %
Impairment of assets held for sale

 
%
 
771

 
0.3
%
 

 
%
 
3,000

 
3.3
 %
Operating income (loss)
$
6,712

 
2.8
%
 
$
11,912

 
5.0
%
 
$
2,300

 
2.5
%
 
$
(3,017
)
 
(3.3
)%
Sales
Consolidated net sales increased 0.2% to $333.3 million for the three months ended October 24, 2014 , compared to $332.6 million in the corresponding period last year. The net sales increase was comprised of an increase of $0.7 million in Bob Evans Restaurants.
Bob Evans Restaurants’ net sales increased $0.7 million , a 0.3% increase, for the three months ended October 24, 2014 , compared to the corresponding period last year. As compared to the prior year, same-store sales were flat in the three months ended October 24, 2014 . The sales increase as compared to last year is due to new stores opened since the second quarter of fiscal 2014.
Same-store sales computations for a given period are based on net sales of restaurants that are open for at least 18 months prior to the start of that period. Net sales of restaurants to be rebuilt are excluded for all periods in the same-store sales computation when construction of the replacement building commences. Closed restaurant days for restaurants included in the Farm Fresh Refresh remodel initiative are included in the same-store sales base in the prior year. Net sales of closed restaurants are excluded from the same-store sales computation in the period in which the restaurants are closed.
The following chart summarizes the restaurant openings and closings during the last six quarters for Bob Evans Restaurants:
 
Beginning
 
Opened
 
Closed
 
Ending
Fiscal 2015
 
 
 
 
 
 
 
2nd quarter
562

 
 
 
 
 
562

1 st  quarter
561

 
1

 

 
562

Fiscal 2014
 
 
 
 
 
 
 
1 st  quarter
560

 
1

 
1

 
560

2 nd  quarter
560

 
1

 

 
561

3 rd  quarter
561

 
1

 

 
562

4 th  quarter
562

 
1

 
2

 
561

The BEF Foods segment sales were flat in the three months ended October 24, 2014 , compared to the corresponding period last year. Pounds sold in the BEF Foods segment decreased by 4.5% compared to the corresponding period last year, primarily as a result of a 16.4% reduction in sausage sales. The reduction in pounds sold was offset by a 12.4% increase in sausage pricing. Adjusting for sales in the prior year at the Company’s Irvine, California, production facility (sold during the second quarter of fiscal 2014), pounds sold decreased 1.6% and net sales increased 1.6% . The following chart summarizes pounds sold by category in the three months ended October 24, 2014 and the corresponding period last year.

- 15 -



(in millions)
October 24, 2014
 
October 25, 2013
Category
Pounds
 
%
 
Pounds
 
%
Sausage
10.8
 
20.6%
 
12.9
 
24.2%
Sides
24.1
 
45.9%
 
22.1
 
41.5%
Frozen
2.6
 
5.0%
 
2.8
 
5.3%
Food Service
12.6
 
24.0%
 
13.5
(1)
25.3%
Other
2.4
 
4.6%
 
2.0
 
3.8%
Total
52.5
 
 
 
53.3
 
 
(1)     Excludes 1.6 million pounds sold at the Company's Irvine, California, production facility

Cost of Sales
Consolidated cost of sales (cost of materials) was $116.0 million or 34.8% of net sales, in the three months ended October 24, 2014 , compared to $113.6 million , or 34.2% of net sales, in the corresponding period a year ago. The 60 basis points ("bps") increase in the cost of sales ratio was driven by a 120 bps weighted increase in Bob Evans Restaurants, partially offset by a 60 bps weighted decrease in BEF Foods.
Bob Evans Restaurants’ cost of sales, predominantly food costs, was $64.2 million , or 26.6% of net sales, for the three months ended October 24, 2014 , compared to $59.9 million , or 24.9% of net sales, in the corresponding period a year ago. The increase in cost of sales as a percentage of net sales was primarily due to higher food costs, with approximately $1.9 million attributable to menu mix, $1.7 million to increased commodity costs and the remainder primarily attributable to discount activity.
BEF Foods’ cost of sales was $51.8 million , or 56.3% of net sales, in the three months ended October 24, 2014 , compared to $53.7 million , or 58.3% of net sales, in the corresponding period a year ago. The decrease as a percentage of sales was due primarily to $3.0 million increased pricing, partially offset by $0.8 million of increased sow and other pork related material costs. Sow costs averaged $78.82 per hundredweight, in the three months ended October 24, 2014 , compared to $77.33 per hundredweight, in the corresponding period last year.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses (“operating wages”) were $102.8 million , or 30.8% of net sales, in the three months ended October 24, 2014 , compared to $102.0 million , or 30.7% of net sales, in the corresponding period last year. The 10 bps increase in the operating wages ratio was driven by a weighted increase in BEF Foods operating wages.
Bob Evans Restaurants’ operating wages were $92.0 million , or 38.2% of net sales, in the three months ended October 24, 2014 , consistent with $92.0 million and 38.2% of net sales in the corresponding period last year. Restaurant operating wages increased $1.5 million as a result of higher health care costs and incremental training and labor costs associated with the rollout of the Broasted Chicken platform and Carryout Acceleration program. These increases were offset by favorability due to better restaurant staffing resulting from last year's implementation of a workforce management system and lower incentive costs.
In BEF Foods, operating wages were $10.8 million , or 11.7% of net sales, for the three months ended October 24, 2014 , compared to $10.0 million , or 10.9% of net sales, in the corresponding period last year. Operating wages increased primarily as a result of expanded production activities at our Sulphur Springs, Texas, plant and an additional production line at our Lima, Ohio, plant.
Other Operating Expenses
Consolidated other operating expenses were $50.0 million , or 15.0% of net sales, for the three months ended October 24, 2014 , compared to $49.5 million , or 14.9% of net sales, in the corresponding period last year. The 10 bps increase in the other operating expenses ratio was driven by a weighted increase from Bob Evans Restaurants. Approximately 85% of other operating expenses in the three months ended October 24, 2014 , occurred in Bob Evans Restaurants. The most significant components of other operating expenses were utilities, restaurant advertising, restaurant supplies, repairs and maintenance, non-income based taxes and credit/debit/gift card processing fees.
Bob Evans Restaurants’ other operating expenses were $42.7 million , or 17.7% of net sales, for the three months ended October 24, 2014 , compared to $42.0 million , or 17.5% of net sales, in the corresponding period last year. The increase in other operating expenses is primarily due to a $0.6 million increase in repairs and maintenance expense, a $0.4 million increase in

- 16 -



advertising, $0.3 million increases in utilities expense and restaurant supplies and smallwares costs, partially offset by the elimination of preopening expenses of $1.0 million associated with our Farm Fresh Refresh remodeling program, which was completed in fiscal 2014.
BEF Foods’ other operating expenses were $7.3 million , or 7.9% of net sales, for the three months ended October 24, 2014 , compared to $7.4 million , or 8.1% of net sales, in the corresponding period last year. The decrease in the other operating expenses is primarily due to a decrease in general insurance costs and repairs and maintenance expense.
Selling, General and Administrative Expenses (“S,G&A”)
Consolidated S,G&A expenses were $36.0 million, or 10.8% of net sales, for the three months ended October 24, 2014, compared to $36.6 million, or 11.0% of net sales, in the corresponding period last year. The 20 bps decrease in the S,G&A ratio was driven by a 40 bps weighted increase from Bob Evans Restaurants and a 60 bps weighted decrease from BEF Foods. The most significant components of consolidated S,G&A expenses were management and selling wages and fringe benefits, transportation costs and costs related to shareholder activism.
The decrease in S,G&A was primarily due to a $2.0 million reduction of expenses related to severance and restructuring, impairment of held and used assets and disposals of property plant and equipment, a $1.4 million reduction in BEF Foods advertising costs and a $0.9 million reduction of management and selling wages. These decreases in S,G&A were partially offset by $3.7 million of professional fees related to shareholder activism incurred in the current quarter. The net impact of these items was a $1.6 million increase in S,G&A for Bob Evans Restaurants, and a $2.2 million net decrease in S,G&A for BEF Foods.     
Depreciation and Amortization
Consolidated depreciation and amortization expenses (“D&A”) were $19.5 million , or 5.8% of net sales, for the three months ended October 24, 2014 , compared to $18.3 million , or 5.5% of net sales, in the corresponding period last year. The 30 bps increase in the D&A ratio was driven by flat depreciation expense from Bob Evans Restaurants versus last year, and a 30 bps weighted increase from BEF Foods.
Bob Evans Restaurants’ D&A expenses were $14.8 million , or 6.1% of net sales, for the three months ended October 24, 2014 , compared to $14.7 million , or 6.1% of net sales, in the corresponding period last year. D&A was higher as compared to the prior year due to the impact of the Farm Fresh Refresh remodeling initiative, which was completed in fiscal 2014. This increase was offset by the change in useful life on Farm Fresh Refresh assets completed prior to fiscal 2014.
BEF Foods’ D&A expenses were $4.7 million , or 5.1% of net sales, for the three months ended October 24, 2014 , compared to $3.6 million , or 3.9% of net sales, in the corresponding period last year. The increase in D&A ratio is primarily the result of an increase in depreciable assets related to our Lima, Ohio, and Sulphur Springs, Texas, plant expansions, which were completed in fiscal year 2014.
Impairment of Assets Held for Sale
In the second quarter of the prior year, we closed on the sale of 27 nonoperating Bob Evans Restaurant properties and recorded an additional impairment charge of $0.8 million related to the two additional nonoperating properties. We also recorded a $3.0 million impairment charge to BEF Foods related to the closing of our food production plant in Richardson, Texas, as the fair value of assets at the Richardson location were determined to be lower than their carrying value.

- 17 -



Interest
Net interest expense for the three months ended October 24, 2014 , compared to the corresponding period last year was as follows:
 
Three Months Ended
(in thousands)
October 24, 2014
 
October 25, 2013
Gross interest expense:
 
 
 
Fixed-rate debt
$
322

 
$
65

Variable-rate debt
2,575

 
1,021

Capitalized interest
(91
)
 
(227
)
Total interest expense
2,806

 
859

Gross interest income:
 
 
 
Accretion
(458
)
 
(419
)
Other
(145
)
 
(300
)
Total interest income
(603
)
 
(719
)
Net interest expense
$
2,203

 
$
140

At October 24, 2014 , $465.0 million was outstanding on our revolving Credit Agreement. A change in market interest rates will impact our Credit Agreement when there is an outstanding balance. For example, a 1% increase in the benchmark rate used for our Credit Agreement would increase our annual interest expense by approximately $4.7 million , assuming the $465.0 million outstanding at the end of the three months ended October 24, 2014 , was outstanding for the entire year.
Income Taxes
The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The Company’s effective income tax rate was 11.3% for the three months ended October 24, 2014, as compared to 28.6% for the corresponding period a year ago. The decrease in tax rate was primarily driven by the domestic production activities deduction, benefits from a Company owned life insurance policy recorded in the second quarter, and discrete items related to Work Opportunity Tax Credits and state refunds received.
Six Months Ended October 24, 2014 , as Compared to Six Months Ended October 25, 2013
The following tables reflect data for the six months ended October 24, 2014 , compared to the prior year’s six months ended October 25, 2013 . The consolidated information is derived from the accompanying Consolidated Statements of Net Income . The table also includes data for our two segments – Bob Evans Restaurants and BEF Foods. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amounts.
 
Consolidated Results
(in thousands)
October 24, 2014
 
October 25, 2013
 
$
 
%
 
$
 
%
Net sales
$
659,619

 
 
 
$
662,049

 
 
Cost of sales
229,475

 
34.8
%
 
220,246

 
33.3
%
Operating wages and fringe benefit expenses
207,214

 
31.4
%
 
204,817

 
30.9
%
Other operating expenses
99,481

 
15.1
%
 
98,382

 
14.9
%
Selling, general and administrative expenses
74,667

 
11.3
%
 
69,819

 
10.5
%
Depreciation and amortization expense
39,448

 
6.0
%
 
35,511

 
5.4
%
Impairment of assets held for sale
258

 
%
 
12,380

 
1.9
%
Operating income
$
9,076

 
1.4
%
 
$
20,894

 
3.2
%

- 18 -



 
Bob Evans Restaurants
 
BEF Foods
(in thousands)
October 24, 2014
 
October 25, 2013
 
October 24, 2014
 
October 25, 2013
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Net sales
$
481,302

 
 
 
$
485,051

 
 
 
$
178,317

 
 
 
$
176,998

 
 
Cost of sales
127,376

 
26.5
%
 
122,574

 
25.3
%
 
102,099

 
57.3
%
 
97,672

 
55.2
%
Operating wages and fringe benefit expenses
186,847

 
38.8
%
 
185,175

 
38.2
%
 
20,367

 
11.4
%
 
19,642

 
11.1
%
Other operating expenses
85,207

 
17.7
%
 
83,326

 
17.2
%
 
14,274

 
8.0
%
 
15,056

 
8.5
%
Selling, general and administrative expenses
43,057

 
8.9
%
 
37,295

 
7.7
%
 
31,610

 
17.7
%
 
32,524

 
18.4
%
Depreciation and amortization expense
30,130

 
6.3
%
 
28,907

 
6.0
%
 
9,318

 
5.2
%
 
6,604

 
3.7
%
Impairment of assets held for sale
258

 
0.1
%
 
9,380

 
1.9
%
 

 
%
 
3,000

 
1.7
%
Operating income
$
8,427

 
1.8
%
 
$
18,394

 
3.8
%
 
$
649

 
0.4
%
 
$
2,500

 
1.4
%
Sales
Consolidated net sales decreased 0.4% to $659.6 million for the six months ended October 24, 2014 , compared to $662.0 million in the corresponding period last year. The net sales decrease was comprised of a decrease of $3.7 million in Bob Evans Restaurants with an offset of an increase of $ 1.3 million in Bob Evans Foods.
Bob Evans Restaurants’ net sales decreased $3.7 million , a 0.8% decrease, for the six months ended October 24, 2014 , compared to the corresponding period last year. The decrease in net sales in the six months ended October 24, 2014 , was primarily the result of a 1.0% decline in same-store sales as compared to the corresponding period last year, partially offset by sales at new stores opened since mid-fiscal 2014.
Same-store sales computations for a given period are based on net sales of restaurants that are open for at least 18 months prior to the start of that period. Net sales of restaurants to be rebuilt are excluded for all periods in the same-store sales computation when construction of the replacement building commences. Closed restaurant days for restaurants included in the Farm Fresh Refresh remodel initiative are included in the same-store sales base in the prior year. Net sales of closed restaurants are excluded from the same-store sales computation in the period in which the restaurants are closed.
The BEF Foods segment sales increased by $1.3 million , or 0.7% , in the six months ended October 24, 2014 , compared to the corresponding period last year. The increase in sales was primarily due to pricing increases implemented to offset higher sow costs as compared to the prior year. These pricing increases were partially offset by a 5.3% reduction in overall pounds sold, primarily the result of a 17.6% decline in sausage sales. Adjusting for sales in the prior year at the Company’s Irvine, California, production facility (sold during the second quarter of fiscal 2014), pounds sold decreased by 0.8%. Refer to the table below for pounds sold by category in the six months ended October 24, 2014, and corresponding period last year.
(in millions)
October 24, 2014
 
October 25, 2013
Category
Pounds
 
%
 
Pounds
 
%
Sausage
20.0
 
19.9%
 
24.3
 
24.0%
Sides
44.3
 
44.1%
 
42.2
 
41.7%
Frozen
4.8
 
4.8%
 
5.4
 
5.3%
Food Service
27.0
 
26.9%
 
25.5
(1)
25.2%
Other
4.4
 
4.4%
 
3.9
 
3.8%
Total
100.5
 
 
 
101.3
 
 
(1)     Excludes 4.8 million pounds sold at the Company's Irvine, California, production facility

Cost of Sales
Consolidated cost of sales (cost of materials) was $229.5 million , or 34.8% of net sales, in the six months ended October 24, 2014 , compared to $220.2 million , or 33.3% of net sales, in the corresponding period a year ago. The 150 bps increase in the cost of sales ratio was driven by a 90 bps weighted increase in Bob Evans Restaurants and a 60 bps weighted increase in BEF Foods.

- 19 -



Bob Evans Restaurants’ cost of sales, predominantly food costs, was $127.4 million , or 26.5% of net sales, for the six months ended October 24, 2014 , compared to $122.6 million , or 25.3% of net sales, in the corresponding period a year ago. The increase in cost of sales as a percentage of net sales was primarily due to menu mix, increased discount activity. and commodity cost increases. The commodity cost increases were driven by sausage and other pork items.
BEF Foods’ cost of sales was $102.1 million , or 57.3% of net sales, in the six months ended October 24, 2014 , compared to $97.7 million , or 55.2% of net sales, in the corresponding period a year ago. The increase as a percentage of sales was due primarily to a $7.4 million increase in incremental sow and pork trim costs. Sow costs averaged $83.03 per hundredweight, in the six months ended October 24, 2014 , compared to $70.79 per hundredweight, in the corresponding period last year. Plant inefficiencies at our Sulphur Springs, Texas, and Lima, Ohio, facilities resulted in lower yield and increased spoilage, which also contributed to the higher cost of sales ratio. These higher costs were partially offset by higher pricing and a reduction in trade spending.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses (“operating wages”) were $207.2 million , or 31.4% of net sales, in the six months ended October 24, 2014 , compared to $204.8 million , or 30.9% of net sales, in the corresponding period last year. The 50 bps increase in the operating wages ratio was driven by a 40 bps weighted increase from Bob Evans Restaurants and a 10 bps weighted increase from BEF Foods.
Bob Evans Restaurants’ operating wages were $186.8 million , or 38.8% of net sales, in the six months ended October 24, 2014 , compared to $185.2 million or 38.2% of net sales, in the corresponding period last year. Operating wages were higher as compared to the corresponding period last year primarily due to a $2.2 million increase in costs related to our health care costs, partially offset by a $0.7 million decrease in incentives.
In BEF Foods, operating wages were $20.4 million , or 11.4% of net sales, for the six months ended October 24, 2014 , compared to $19.6 million , or 11.1% of net sales, in the corresponding period last year. Operating wages increased due to expanded production activities at our Sulphur Springs, Texas, plant and an additional production line at our Lima, Ohio, plant as well as increased costs related to our health insurance coverage.
Other Operating Expenses
Consolidated other operating expenses were $99.5 million , or 15.1% of net sales, for the six months ended October 24, 2014 , compared to $98.4 million , or 14.9% of net sales, in the corresponding period last year. The 20 bps increase in the other operating expenses ratio was driven by a 40 bps weighted increase from Bob Evans Restaurants, offset by a 20 bps weighted decrease from BEF Foods. Approximately 85% of other operating expenses in the six months ended October 24, 2014 , occurred in Bob Evans Restaurants. The most significant components of other operating expenses were utilities, restaurant advertising, restaurant supplies, repairs and maintenance, non-income based taxes and credit/debit/gift card processing fees.
Bob Evans Restaurants’ other operating expenses were $85.2 million , or 17.7% of net sales, for the six months ended October 24, 2014 , compared to $83.3 million , or 17.2% of net sales, in the corresponding period last year. The increase in other operating expenses as a percentage of sales is primarily due to a $1.9 million increase in advertising and other promotional costs, a $1.4 million increase in repairs and maintenance and $0.3 million increases in utilities and credit card fee processing costs, partially offset by $2.0 million of nonrecurring preopening expenses associated with our Farm Fresh Refresh remodeling program which was completed in fiscal 2014.
BEF Foods’ other operating expenses were $14.3 million , or 8.0% of net sales, for the six months ended October 24, 2014 , compared to $15.1 million , or 8.5% of net sales, in the corresponding period last year. The decrease in the other operating expenses is partially due to a decrease in general insurance costs and repairs and maintenance expense.
Selling, General and Administrative Expenses (“S,G&A”)
Consolidated S,G&A expenses were $74.7 million, or 11.3% of net sales, for the six months ended October 24, 2014, compared to $69.8 million, or 10.5% of net sales, in the corresponding period last year. The 80 bps increase in the S,G&A ratio was driven by a 90 bps weighted increase from Bob Evans Restaurants, offset by a 10 bps weighted decrease from BEF Foods. The most significant components of consolidated S,G&A expenses were management and selling wages and fringe benefits, transportation costs, costs related to shareholder activism and strengthening the Company's internal processes and controls over financial reporting, impairment and severance costs.
The increase in S,G&A was due primarily to an $8.3 million increase in professional fees, which includes legal fees, costs related to shareholder activism and strengthening the Company’s internal processes and controls over financial reporting and other professional fees, including costs incurred to improve efficiencies at our BEF Foods production facilities. These costs

- 20 -



were partially offset by a $2.0 million reduction in severance and restructuring charges and a $1.2 million reduction in BEF Foods advertising costs. The net impact of these items was a $5.8 million increase in S,G&A for Bob Evans Restaurants, and a net $0.9 million decrease in S,G&A for BEF Foods.
Depreciation and Amortization
Consolidated depreciation and amortization expenses (“D&A”) were $39.4 million , or 6.0% of net sales, for the six months ended October 24, 2014 , compared to $35.5 million , or 5.4% of net sales, in the corresponding period last year. The 60 bps increase in the D&A ratio was driven by a 20 bps increase from Bob Evans Restaurants and a 40 bps increase from BEF Foods.
Bob Evans Restaurants’ D&A expenses were $30.1 million , or 6.3% of net sales, for the six months ended October 24, 2014 , compared to $28.9 million , or 6.0% of net sales, in the corresponding period last year. The increase in D&A expenses is primarily the result of our Farm Fresh Refresh remodeling initiative.
BEF Foods’ D&A expenses were $9.3 million , or 5.2% of net sales, for the six months ended October 24, 2014 , compared to $6.6 million , or 3.7% of net sales, in the corresponding period last year. The increase in D&A ratio is primarily the result of an increase in depreciable assets related to our Lima, Ohio, and Sulphur Springs, Texas, plant expansions, which were completed in the prior year.
Impairment of Assets Held for Sale
We assess the carrying value of our goodwill, other intangible assets and long-lived assets whenever circumstances indicate that a decline in value may have occurred.
We recorded an impairment charge on assets classified as held for sale of $0.3 million for the six months ended October 24, 2014 , compared to $12.4 million in the corresponding period last year.
Bob Evans Restaurants incurred an impairment charge on assets held for sale in the current year on one nonoperating property when its fair value was determined to be lower than its carrying value. Impairment charges of $9.4 million were recorded on 29 nonoperating properties in the six months ended October 25, 2013, related to the decision to sell those properties. At the end of fiscal 2014, 28 of those properties had been sold. The remaining property is no longer classified as held for sale and has resumed depreciation.
BEF Foods incurred an impairment charge of $3.0 million on assets held for sale in the six months ended October 25, 2013. The charge related to plans to close our food production plant in Richardson, Texas, as the fair value of assets at the Richardson location were determined to be lower than their carrying value.

- 21 -



Interest
Net interest expense for the three months ended October 24, 2014 , compared to the corresponding period last year was as follows:
 
Six Months Ended
(in thousands)
October 24, 2014
 
October 25, 2013
Gross interest expense:
 
 
 
Fixed-rate debt
$
485

 
$
130

Variable-rate debt
4,654

 
1,860

Capitalized interest
(147
)
 
(437
)
Total interest expense
4,992

 
1,553

Gross interest income:
 
 
 
Accretion
(903
)
 
(1,081
)
Other
(270
)
 
(488
)
Total interest income
(1,173
)
 
(1,569
)
Net interest expense
$
3,819

 
$
(16
)
At October 24, 2014 , $465.0 million was outstanding on our revolving Credit Agreement. A change in market interest rates will impact our credit facility when there is an outstanding balance. For example, a 1% increase in the benchmark rate used for our Credit Agreement would increase our annual interest expense by approximately $4.7 million , assuming the $465.0 million outstanding at the end of the six months ended October 24, 2014 , was outstanding for the entire year.
Income Taxes
The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The Company’s effective income tax rate was 4.5% for the first six months of fiscal year 2015, as compared to 30.0% for the corresponding period a year ago. The decrease in tax rate was primarily driven by the domestic production activities deduction, benefits from a Company owned life insurance policy recorded in the second quarter, and discrete items in the first and second quarters related to Work Opportunity Tax Credits and state refunds received.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from operating activities and the borrowing capacity under our $750.0 million revolving Credit Agreement with a consortium of banks, which expires in January 2019.
Historically, our working capital requirements have been minimal; overall, our current liabilities (excluding credit facility borrowings) have generally exceeded our current assets (excluding cash and equivalents). This favorable working capital position results from transacting substantially all of our Bob Evans Restaurants segment sales for cash or third-party credit or debit cards; the relatively short trade credit terms with our BEF Foods customers as well as most of our major suppliers and distributors; and the quick turnover of our inventories in both of our reporting segments.
Capital expenditures were $37.0 million and $117.7 million , respectively, for the six months ended October 24, 2014 , and October 25, 2013 . In the six months ended October 24, 2014 , capital expenditures primarily related to new restaurant construction and our new Enterprise Resource Planning ("ERP") system. In the six months ended October 25, 2013 , capital expenditures primarily related to our Farm Fresh Refresh remodeling initiative for Bob Evans Restaurants, plant expansions for BEF Foods and completion of our corporate headquarters. In fiscal 2015 , capital expenditures are expected to approximate $80.0 million to $85.0 million and include expenditures for up to seven new restaurants, the ongoing development and integration of an ERP system, rollout of the Broasted ® Chicken platform and continuing infrastructure maintenance.
During each of the first and second quarters of fiscal year 2015 , we paid cash dividends of $0.31 per share, compared to dividends of $0.275 and $0.31 per share in the first and second quarters of fiscal year 2014 , respectively. While we expect to continue paying regular quarterly cash dividends, the declaration, amount and timing of future dividends will be at the discretion of our Board of Directors.
On August 20, 2014, the Board of Directors updated the authorized stock repurchase program for up to $150.0 million through fiscal 2016. The program authorizes the Company to repurchase its outstanding common stock pursuant to plans approved by the Board under SEC Rules 10b-18 and 10b5-1, and in the open market or through privately negotiated transactions. The ability to repurchase stock and complete the repurchase program is dependent upon our having available

- 22 -



funds and complying with the financial covenants and other restrictions contained in our credit facility and the repurchase authorization.
On January 2, 2014, we entered into a $750 million Revolving Credit Facility Amended and Restated Credit Agreement. The Credit Agreement represents a syndicated secured revolving credit facility under which up to $750 million will be available with a letter of credit sub-facility of $50 million, and an accordion option to increase the revolving credit commitment to $1.05 billion. It is secured by the stock pledges of certain material subsidiaries. Borrowings under the Credit Agreement bear interest, at our option, at a rate based on LIBOR or the Base Rate, plus a margin based on the Leverage Ratio, ranging from 0.00% to 2.75% per annum for LIBOR, and ranging from 0.00% to 1.75% per annum for Base Rate. The Base Rate means for any day, a fluctuating per annum rate of interest equal to the highest of (i) the Federal Funds Open Rate, plus 0.50%, (ii) the Prime Rate, or (iii) the Daily LIBOR Rate, plus 1.00%. We are also required to pay a commitment fee of 0.15% per annum to 0.25% per annum of the average unused portion of the total lender commitments then in effect. Our effective interest rate for the Credit Agreement was 1.84% during the six months ended October 24, 2014 . As of October 24, 2014 , we had outstanding borrowings of $465.0 million under our credit facility and $12.1 million was reserved for certain standby letters of credit.
Our Credit Agreement contains financial and other various affirmative and negative covenants that are typical for financings of this type. Our Credit Agreement contains financial covenants that require us to maintain specified ratios at October 24, 2014, of (1) a minimum coverage ratio of not less than 3.00 to 1.00; and (2) a maximum leverage ratio that may not exceed 4.50 to 1.00. An amendment to the Credit Agreement was executed during the first quarter of fiscal 2015 to increase the Maximum Leverage Ratio for the period starting July 25, 2014, through July 22, 2016. As of October 24, 2014 , our coverage ratio was 15.58 , and our leverage ratio was 3.81 , as defined in our Credit Agreement. Our Credit Agreement also limits repurchases of our common stock and the amount of dividends that we pay to holders of our common stock in certain circumstances. The Credit Agreement also allows for the incurrence of additional indebtedness of up to $300 million, a sale leaseback of our real estate of up to $100 million and mortgage indebtedness on our corporate headquarters of up to $50 million. A breach of any of these covenants could result in a default under our Credit Agreement, in which all amounts under our Credit Agreement may become immediately due and payable, and all commitments under our Credit Agreement to extend further credit may be terminated. We are in compliance with all of the financial covenant requirements of our Credit Agreement as of October 24, 2014 .
Operating activities
Net cash provided by operating activities was $40.0 million and $71.1 million for the six months ended October 24, 2014 , and October 25, 2013 , respectively. The decrease in cash provided by operating activities as compared to a year ago is primarily due to a decrease in net income from operations and a decrease of $10.7 million in federal and state income tax refunds received in fiscal 2015 as compared to the corresponding period last year.
Investing activities
Cash used in investing activities was $36.1 million and $112.0 million for the six months ended October 24, 2014 , and October 25, 2013 , respectively.
The decrease in cash used in investing activities was primarily due to a decrease in capital expenditures of $80.7 million compared to the prior year, as the Company has completed the Farm Fresh Refresh remodeling initiative, the major BEF Foods plant expansions and construction of our corporate headquarters. Capital expenditures in the current year primarily relate to a new enterprise resource planning system and new restaurant construction. We opened one new restaurant in the first quarter and expect to open four and two restaurants in the third and fourth quarters, respectively.
Financing activities
Cash used in financing activities was $8.0 million for the six months ended October 24, 2014 , as compared to cash provided by financing activities of $36.8 million for the six months ended October 25, 2013 . The decrease in the cash provided by financing activities was primarily due to credit facility borrowing of $6.1 million in the current year as compared to $116.8 in the corresponding period last year, partially offset by repurchases of treasury stock of $75.5 million in the prior year.
Contractual obligations
Other than the amendment to our Credit Agreement, discussed in footnote 2, there have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in our Annual Report on Form 10-K, for the fiscal year ended April 25, 2014 .

- 23 -



Off-Balance Sheet Arrangements
As of October 24, 2014 , we have not entered into any “off-balance sheet” arrangements with unconsolidated entities or other persons, as that term is defined by the Securities and Exchange Commission.
Critical Accounting Policies and Estimates
As discussed in Note 1 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, the preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of commitments and contingencies at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. We base these estimates and judgments on our historical experience and other factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We routinely re-evaluate these significant factors and make adjustments where facts and circumstances dictate. Our critical accounting policies have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended April 25, 2014.

- 24 -


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments for speculative or hedging purposes. We maintain our cash and cash equivalents in financial instruments with maturities of three months or less when purchased.
We purchase certain commodities such as beef, pork, poultry, seafood, produce and dairy products. These commodities are generally purchased based upon market prices established with suppliers. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid and most commodity price aberrations are generally short-term in nature.
ITEM 4. CONTROLS AND PROCEDURES
Changes in Internal Control Over Financial Reporting
As previously disclosed in Item 9A of our Form 10-K for the year ended April 25, 2014, management concluded that there was a material weakness in internal control over financial reporting related to our current and deferred income tax accounting. While we believe we have made significant progress in our remediation efforts of this material weakness and have implemented enhanced controls, we were unable to sufficiently test the operating effectiveness of the revised control processes as the enhanced controls have not been in place long enough to provide assurance to support the conclusion that the material weakness has been fully remediated. As such, management has concluded that the identified material weakness related to current and deferred income tax accounting has not been remediated as of October 24, 2014 .
As previously disclosed in Item 4 of our Quarterly Report in Form 10-Q for the fiscal quarter ended October 25, 2013, management concluded that there was a material weakness in internal controls over financial reporting related to property, plant and equipment accounting, more specifically timely capitalization and the recording of depreciation expense. While we believe we have made significant progress in our remediation efforts of this material weakness and have implemented enhanced controls, we were unable to sufficiently test the operating effectiveness of the revised control processes as the enhanced controls have not been in place long enough to provide assurance to support the conclusion that the material weakness has been fully remediated. As such, management has concluded that the identified material weakness related to property, plant and equipment accounting has not been remediated as of October 24, 2014 .
During the second quarter of fiscal 2015, we discovered an error in the classification of our credit facility borrowings which overstated current liabilities by $458,836 and understated long term liabilities by the same amount at July 25, 2014. At the end of fiscal 2014 our credit facility borrowings were classified as short term based on our assessment of the Company's inability to meet its leverage ratio covenant, as defined at that time, during fiscal 2015. On July 23, 2014, we amended the terms of the credit agreement, which included an increase to the maximum leverage ratio for the fiscal quarter ending July 25, 2014, through July 22, 2016. Subsequent to this amendment, our credit facility borrowings should have been classified as a long term liability. Accordingly, management amended the fiscal year 2015 Q1 Form 10-Q to restate the debt presentation and concluded there was a material weakness in internal controls over financial reporting related to management's review of the balance sheet classification of its Credit Agreement. The Company has developed a remediation plan to address the material weakness and expects to be remediated by the end of fiscal 2015.
Except as has been described above, there has been no material change in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended October 24, 2014 , that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
With the participation of our management, including Bob Evans’ principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, Bob Evans’ principal executive officer and principal financial officer have concluded that because of the material weakness in internal controls over financial reporting related to our current and deferred income tax accounting, the material weakness in internal controls over financial reporting related to property, plant and equipment accounting and the material weakness in internal control over financial reporting related to debt classification, disclosure controls and procedures were not effective.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

- 25 -


We are from time-to-time involved in ordinary and routine litigation, typically involving claims from customers, employees and others related to operational issues common to the restaurant and food manufacturing industries, and incidental to our business. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations.
In August 2012, a former Bob Evans Restaurant employee filed an action against the Company in the United States District Court for the Southern District of Ohio (the “Ohio District Court”). The lead plaintiff alleged that the Company violated the Fair Labor Standards Act by failing to pay overtime compensation during the period of time the employee worked as an assistant manager. The lead plaintiff sought to maintain the suit as a collective action on behalf of other similarly situated assistant managers employed at Bob Evans Restaurants between August 2009 and present. The Court has since approved the substitution of another former employee as the lead plaintiff. Plaintiff filed a motion for conditional certification of the class, we filed a motion in opposition to the same, and the Ohio District Court granted conditional certification on December 5, 2013. The proceedings remain in the early stages with significant uncertainty as to factual issues, outcome of legal proceedings, and likely number of opt-in plaintiffs and/or damages claimed. We do not believe based on currently available information, that the outcome of this matter will have a material adverse effect on our financial condition, though an adverse outcome could be material to our results of operations for a particular period. We believe the claims are without merit and intend to vigorously contest the action. An amount or range of a reasonably possible loss cannot be estimated.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended April 25, 2014 .
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 25, 2014, the Board of Directors authorized a stock repurchase program for up to $100.0 million. The program will authorize the Company to repurchase its outstanding common stock pursuant to plans approved by the Board under SEC Rules 10b-18 and 10b5-1, and in the open market or through privately negotiated transactions. The ability to repurchase stock and complete the repurchase program is dependent upon the Company having available funds and complying with the financial covenants and other restrictions contained within the Company’s credit facility and the repurchase authorization.
On August 20, 2014 , the Board of Directors increased the authorization for the current stock repurchase plan to $150.0 million and extended the authorization period through fiscal 2016.
We did not repurchase any shares of our common stock during the six months ended October 24, 2014 .
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
SEE INDEX TO EXHIBITS

- 26 -


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
BOB EVANS FARMS, INC.
 
 
 
 
Date: December 3, 2014
 
By:
/s/ Steven A. Davis
 
 
 
Steven A. Davis
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
Date: December 3, 2014
 
By:
/s/ Mark E. Hood
 
 
 
Mark E. Hood*
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
Date: December 3, 2014
 
By:
/s/ Sylvester J. Johnson
 
 
 
Sylvester J. Johnson*
Senior Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
 * Messrs. Hood and Johnson have been duly authorized to sign on behalf of the Registrant as its principal financial officer and its principal accounting officer, respectively.

- 27 -


INDEX TO EXHIBITS
Quarterly Report on Form 10-Q
Dated October 24, 2014
Bob Evans Farms, Inc.
 
 
 
 
 
Exhibit Number
  
Description
  
Location
3.1
 
Restated Certificate of Incorporation of Company reflecting amendments through Aug. 10, 1993. [This document represents the Company's Certificate of Incorporation in restated format incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.]

 
Incorporated herein by reference to Exhibit 3.1 to Bob Evans Farms, Inc.'s Annual Report on Form 10-K for its fiscal year ended April 30, 2010 (File No. 0-1667)

3.2
 
Bob Evans Farms, Inc. Amended and Restated Bylaws, Amended and Restated Effective January 28, 2014

 
Incorporated herein by reference to Exhibit 3.2 to Bob Evans Farms, Inc.'s Form 8-K Filed January 28, 2014 (File No. 0-1667)

31.1
  
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
  
Filed herewith
31.2
  
Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
  
Filed herewith
32.1
  
Section 1350 Certification (Principal Executive Officer)
  
Filed herewith
32.2
  
Section 1350 Certification (Principal Financial Officer)
  
Filed herewith
101.INS
  
XBRL Instance Document
  
Filed herewith
101.SCH
  
XBRL Taxonomy Extension Schema Document
  
Filed herewith
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
  
Filed herewith
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
  
Filed herewith
101.PRE
  
XBRL Taxonomy Presentation Linkbase Document
  
Filed herewith
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
  
Filed herewith


- 28 -


Exhibit 31.1
Rule 13a-14(a)/15d-14(a) CERTIFICATION
I, Steven A. Davis, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Bob Evans Farms, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 3, 2014
 
 
 
 
 
/s/ Steven A. Davis
 
 
Steven A. Davis
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)




Exhibit 31.2
Rule 13a-14(a)/15d-14(a) CERTIFICATION
I, Mark E. Hood, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Bob Evans Farms, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 3, 2014
 
 
 
 
 
/s/ Mark E. Hood
 
 
Mark E. Hood
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)




Exhibit 32.1
SECTION 1350 CERTIFICATION*
In connection with the Quarterly Report of Bob Evans Farms, Inc. (the “Company”) on Form 10-Q for the quarterly period ended October 24, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven A. Davis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 3, 2014
 
 
 
 
 
 
/s/ Steven A. Davis
 
 
Steven A. Davis
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)

 * This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.





Exhibit 32.2
SECTION 1350 CERTIFICATION*
In connection with the Quarterly Report of Bob Evans Farms, Inc. (the “Company”) on Form 10-Q for the quarterly period ended October 24, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark E. Hood, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 3, 2014
 
 
 
 
 
 
/s/ Mark E. Hood
 
 
Mark E. Hood
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)

* This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.