Bob Evans Farms, Inc.
BOB EVANS FARMS INC (Form: 10-K, Received: 07/09/2014 17:12:43)
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended April 25, 2014
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from            to             
Commission file number: 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)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $.01 par value per share
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ¨     No   þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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   þ     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   þ
 
Accelerated filer   ¨
 
Non-accelerated filer   ¨
 
Smaller reporting company ¨
 
 
(Do not check if a 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   þ
As of October 25, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,479,661,159 based on the closing sale price as reported on the NASDAQ Stock Market.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding as of July 1, 2014
Common Stock, $.01 par value per share
 
23,499,237 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
 
Parts Into Which Incorporated
Portions of the registrant’s Proxy Statement for the 2014 Annual Meeting of Stockholders
 
Part III



Forward-Looking Statements
The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K and other written or oral statements that we make from time-to-time in this report and in our public disclosures may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Statements in this Annual Report on Form 10-K, including those contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10-K, that are not historical facts are forward-looking statements. These statements are often indicated by words such as “expects,” “anticipates,” “believes,” “could,” “may,” “will,” “would,” “estimates,” “targets,” “assumes,” “continues,” “intends” and “plans,” and other similar expressions, whether in the negative or the affirmative. Forward-looking statements are not guarantees of future performance and 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. 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.
Many important factors could affect our future results and could cause those results to differ materially from those expressed in or implied by the forward-looking statements contained herein. Such factors, all of which are difficult or impossible to predict accurately, and many of which are beyond our control, include, but are not limited to, the following:
consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer;
food safety events, including instances of food-borne illness (such as salmonella or E. Coli) involving our restaurants, production plants or our supply chain;
the effects of negative publicity that can occur from increased use of social media;
success of operating and marketing initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;
changes in consumer tastes and preferences, and in discretionary consumer spending;
changes in spending patterns and demographic trends, such as the extent to which consumers eat meals away from home;
changes in commodity costs (including sows, beef, chicken and corn), labor, supply, fuel, utilities, distribution and other operating costs;
availability, location and terms of sites for restaurant development by us;
development costs, including real estate and construction costs;
availability of qualified restaurant and plant personnel, and the ability to retain such personnel;
our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to our restaurants and production facilities at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
availability and cost of insurance;
adverse weather conditions;
availability, terms (including changes in interest rates) and deployment of capital;
changes in, and our ability to comply with, legal, regulatory or similar requirements, including payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, government-mandated health care benefits, tax legislation, and accounting standards;
the costs, uncertainties and other effects of legal, environmental and administrative proceedings;
the effects of charges for impairment of goodwill or for the impairment of other long-lived assets;
the effects of war or terrorist activities; and
The effects of a new enterprise resource planning system implementation

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other risks and uncertainties affecting us and our subsidiaries referred to in this Annual Report on Form 10-K (see “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the SEC.

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Table of Contents

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PART I
ITEM 1.     BUSINESS
In this Annual Report on Form 10-K, 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 description of our business should be read in conjunction with the information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10-K and our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
The following terms are the principal trademarks and registered trademarks of Bob Evans, many of which are used herein: Get in on Something Good TM , All The Feast. None Of The Fuss ® , BE Express TM , BE Fit ® , BE Mail ® , BEST Bob Evans Special Touch ® , Big Farm Salad ® , Bob Evans ® , Bob Evans Express TM , Bob Evans Simple Goodness To Go! TM , Bob Evans Oven Bake ® , Bob Evans Restaurants ® , Bob Evans Wildfire ® , Come See What’s Cooking ® , Country Creek Farm ® , Discover Farm-Fresh Goodness ® , Endless Farmhouse Lunch ® , Farm-Fresh Goodness ® , Farmhouse Feast ® , Fit From the Farm ® , Kettle Creations ® , Owens ® and Taste of the Farm ® . Bob Evans uses additional registered trademarks and proprietary marks in its business.
Background
We are a full-service restaurant company that operates Bob Evans Restaurants. We are also a leading producer and distributor of pork sausage products and a variety of complementary home-style refrigerated side dishes and frozen food items primarily under the Bob Evans, Owens and Country Creek brand names. 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.
Our business began in 1948 when our founder, Bob Evans, began making sausage on his southeastern Ohio farm to serve at his 12-stool diner. Our business grew from there and was incorporated in Ohio in 1957. We became a publicly traded company in 1963. Our current parent company was incorporated in Delaware in 1985 as the successor to the original company.
In 1987, we expanded our business by acquiring Owens Foods, Inc. (then known as Owens Country Sausage, Inc.).
In 2004 we expanded our business by acquiring SWH Corporation, which owned and operated the Mimi's Café restaurant chain.
In August 2010 we closed our fresh sausage plant in Galva, Illinois.
In 2010 we eliminated Direct Store Deliveries and moved to shipping direct to customer warehouses.
In October 2011 we sold our Distribution Center in Springfield, Ohio.
In 2011 we launched the Farm Fresh Remodel ("FFR") program for Bob Evans Restaurants.
In August 2012 we purchased the Kettle Creations brand and a 100,000 square foot food production facility in Lima, Ohio where we produce potato and pasta-based side dishes.
In February 2013, we sold our Mimi’s Café restaurant chain to Le Duff America, Inc. (“Le Duff”). Le Duff is a U.S.-based subsidiary of Groupe Le Duff, a global bakery and restaurant company headquartered in France.
In September 2013 we closed our fresh sausage plant in Richardson, Texas.
In October 2013 we moved into our new corporate headquarters in New Albany, Ohio.
In December 2013 we closed our production facility in Bidwell, Ohio.
In October 2013 we completed the first phase of an expansion at the Kettle Creations production facility, including an expansion of 57,000 square feet and constructing an additional production line.
In October 2013 we implemented modifications and completed an expansion at the Sulphur Springs, Texas, production facility to modify and add production lines to increase production capabilities of ready-to-eat food products, as well as adding capacity for soups and gravies.
In February 2014 we closed our production facility in Springfield, Ohio.

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In April 2014, we completed the FFR program for Bob Evans Restaurants.
We have a 52 or 53-week fiscal year that ends on the last Friday in April. When we refer to fiscal 2014 , fiscal 2013 and fiscal 2012 , we are referring to our fiscal years that ended on April 25, 2014 , April 26, 2013 , and April 27, 2012 , respectively. All years presented are comprised of 52 weeks.
Our Strategy
We believe our restaurant and foods businesses are regional brands with national potential. Our vision and mission statements embody our expectations for our company’s future. Our mission and vision are to make our regional brands powerful national brands. We achieve our vision and mission through our business strategy - the Bob Evans Special Touch ("BEST") Brand Builders - which defines our approach to managing our Company:
1.   Win Together as a Team  — Our entire team must work together in a spirit of collaboration. We must communicate openly and share ideas and BEST practices with one another. We are committed to recognizing outstanding performance with pay incentives. We have captured $24.9 million in synergies from our Supply Chain savings as a result of our joint collaboration.
2.   Consistently Drive Sales Growth  — We will bring our brand positioning to life in everything we do. Our goal is to drive sales by consistently offering innovative, high-quality food that our customers will crave. We will strive to get more guests in our restaurants for dine-in, carryout or catering, and to buy our grocery products through effective marketing. We will offer exceptional customer service and suggest our great menu items at every table.
3.   Improve Margins with an Eye on Customer Satisfaction  — We must keep our customers satisfied with high-quality products and service while improving our long-term profitability. This involves using effective systems and processes to deliver margin improvements, such as our restaurant labor management systems and lean manufacturing initiatives in our BEF Foods segment. We must control our “controllables,” such as food costs, yields and waste.
4.   Be the BEST at Operations Execution  — We are committed to producing the highest-quality products and following the highest food safety standards. We must deliver outstanding customer service every day and fix any problems that make our customers unsatisfied. We must also ensure employee satisfaction while driving operational efficiency and productivity.
5.   Increase Returns on Invested Capital  — We must generate a good return on the money we invest. Each business in the Bob Evans Farms family must earn the right to receive funding by generating a favorable return on the money our company invests in it. All of our employees must think and act like owners of our business.
Our Restaurant Concept
As of April 25, 2014 , we owned and operated all 561 Bob Evans Restaurants and licensed two Bob Evans Express locations. Through our restaurant concept, we offer our customers a unique dining experience by serving a variety of high-quality, reasonably priced breakfast, lunch and dinner items in family-friendly settings.
Bob Evans Restaurants Segment
Our vision for Bob Evans Restaurants is to be nationally recognized as a premier restaurant company in all markets in which we compete. Our mission is to be our customers’ favorite restaurant by giving them our BEST . . . one customer at a time. Bob Evans Restaurants are founded on quality, home-style food and friendly service. Bob Evans Restaurants feature “farm fresh goodness that brings families together,” including a wide variety of comfort foods inspired by our homestead heritage, such as Bob Evans sausage gravy and chicken pot pie. We want our customers to always feel right at home with us, so we “treat strangers like friends and friends like family.” Breakfast, lunch and dinner each comprise approximately one third of total dine-in sales, which means we must be great at all three. Off-premise sales are 13.2 percent of the total Bob Evans Restaurants segment revenue and have grown by a 5.9 percent compound annual growth rate since fiscal 2010.
Breakfast entrées are served all day and feature traditional favorites such as sausage, bacon and eggs, as well as specialty offerings like sweet and stacked hotcakes and omelets. We also offer a wide variety of lunch and dinner entrées, including a full line-up of Farm Fresh Salads and signature dinner items, such as country fried steak and slow-roasted turkey. During fiscal 2014 we added the $7.99 Knife & Fork Sandwich value platform.
Bob Evans Restaurants feature an inviting atmosphere inspired by our Ohio farm heritage. Most traditional Bob Evans Restaurants range in size from approximately 3,600 to 6,500 square feet and average approximately 5,000 square feet, while our larger Bob Evans Restaurants & General Stores are approximately 9,800 square feet. In fiscal 2014, we completed our

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Farm Fresh Refresh remodeling initiative for all of the Bob Evans Restaurants selected for remodeling, as discussed in more detail in “Restaurant Locations and Expansion” below.
We believe our Bob Evans Restaurants draw people who want a delicious meal at a fair price in an alcohol-free, family-friendly atmosphere. Our average annual store sales were $1.7 million for Bob Evans Restaurants in fiscal 2014 . Average per-guest checks for fiscal 2014 for breakfast, lunch and dinner were $8.83, $9.41 and $9.48, respectively, for an average of $9.23 for all day parts. The average check has increased primarily due to a mix shift in carryout and dine-in sales. Depending on each location’s business patterns, Bob Evans Restaurants are generally open from 6 a.m. or 7 a.m. until 9 p.m. or 10 p.m. Sunday through Thursday, with extended closing hours on Friday and Saturday at some locations. During fiscal 2014 , breakfast, lunch and dinner accounted for 33 percent, 37 percent and 30 percent, respectively, of total Bob Evans Restaurants’ revenue. Weekend sales, defined as Saturday and Sunday, accounted for approximately 40 percent of a typical week’s revenue during fiscal 2014 . From an industry perspective, 61 percent of restaurant category eatings occurred off-premise in the past year.
We aim to “Consistently Drive Sales Growth” by continuing to implement strategies to build Bob Evans Restaurants and to grow Bob Evans Restaurants’ carryout and catering sales. We have increased marketing of our carryout offerings, including our Family Meals To-Go, catering menu and take-home family holiday Farmhouse Feasts. We also introduced online ordering for Bob Evans Restaurants during fiscal 2011 and online coupon code redemption in fiscal 2013, which we believe fostered growth in our carryout business in 2012 , 2013 and 2014 . During fiscal 2014 , Bob Evans Restaurants’ off-premise business (i.e., carryout and catering) accounted for approximately 13.2 percent of the concept’s total revenues, up from 11.6 percent in fiscal 2013 . We will continue to focus efforts on increasing our carryout, bakery and catering business in fiscal 2015 .
Restaurant Operations and Management
We believe that high-quality restaurant management is critical to the success of our restaurant concept. We must “Be the BEST at Operations Execution” to keep our customers satisfied. Our restaurant management structure for Bob Evans Restaurants is organized to drive top-line growth and bottom-line profitability.
The Bob Evans Restaurants segment is led by a president who focuses efforts on the overall growth and development of the concept, with particular focus on increasing sales, new restaurant development and concept evolution. The restaurant leadership team is responsible for building a sales, service and people-first culture that delivers “BEST in Class” results for Bob Evans Restaurants. The leadership team also develops solutions for standardizing operating processes for the restaurants and ensures that all new procedures and tools are “restaurant ready.” We also implemented a new labor management system during the year to enhance our labor efficiency.
Each Bob Evans Restaurants location employs approximately 50 to 90 hourly employees, and is led by a general manager and assistant manager, and two to three managers, depending on the size, location and sales volume of the restaurant. A Bob Evans Restaurants general manager reports to an Above Restaurant Leader who oversees an area of approximately 8-12 restaurants. The Above Restaurant Leader reports to a Region Coach, who is responsible for approximately 8-12 areas. The Region Coach reports to a senior vice president of restaurant operations. Bob Evans Restaurants are visited regularly by all levels of management to ensure they are operating effectively and adhering to our standards.
Restaurant Locations and Expansion
As of April 25, 2014 , Bob Evans Restaurants were located in 19 states, primarily in the Midwest, mid-Atlantic and Southeast. We believe we must innovate and change the way people think about Bob Evans Restaurants by ensuring that the concept is relevant to our family-first growth target. During fiscal 2014 , we opened four new Bob Evans Restaurants, compared to two in fiscal 2013 , and four in fiscal 2012 . We did not rebuild any existing Bob Evans Restaurants and remodeled 229 existing restaurants in fiscal 2014 . These restaurants are part of Bob Evans Restaurants’ Farm Fresh Refresh remodeling initiative, which provides our existing restaurants with a contemporary look and feel designed to enhance our guests’ experience. The new and remodeled restaurants feature a fresher, brighter color scheme, a new “Taste of the Farm” bakery, a dedicated carryout area, gift card displays, a redesigned retail area, and a mural depicting the heritage of the Bob Evans brand. This Farm Fresh Refresh initiative is now complete. During fiscal 2015 , we plan to build up to eight new Bob Evans Restaurants. These new restaurants will be located in or near existing markets to deepen the concept’s penetration in successful trade areas and to expand into contiguous trade areas.

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The following table sets forth the number and location of our Bob Evans Restaurants as of the end of fiscal 2014 :
Restaurants in Operation at April 25, 2014
 
Bob Evans
Restaurants
Arkansas
2

Delaware
7

Florida
48

Illinois
15

Indiana
61

Kansas
3

Kentucky
23

Maryland
28

Michigan
51

Missouri
21

New Jersey
2

New York
8

North Carolina
7

Ohio
191

Pennsylvania
39

South Carolina
4

Tennessee
3

Virginia
17

West Virginia
31

Total
561

We strive to continuously “Increase Returns on Invested Capital.” Each reporting segment must earn the right to receive additional capital. We believe that we have to expand our restaurants with a focus on the quality, not just the quantity, of openings. Future restaurant growth depends on a variety of factors, including:
the expected rate of return on the capital invested in the new restaurant;
the availability of affordable sites that meet our demographic and other specifications;
general economic conditions, including consumer spending for family and casual dining;
growth trends in consumer demand for our restaurant concepts;
our ability to obtain local permits; and
the availability of high-quality management and hourly employees.
We use a site selection process for our Bob Evans Restaurants that includes a detailed evaluation of factors such as population density, household income in the area, competition, the site’s visibility and traffic patterns, accessibility, proximity to retail centers, and the demographics of potential guests.
We continually assess all of our existing restaurants under a program to determine whether any restaurants should be (1) rebuilt, (2) relocated, (3) remodeled or (4) closed. During fiscal 2014 , we closed three underperforming Bob Evans Restaurants. We believe these closures strengthened our restaurant portfolio by improving overall returns and freeing up resources for other uses.

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Supply Chain and Distribution
Controlling our supply costs is a key strategy for “Improving Margins with an Eye on Customer Satisfaction.” Our ability to offer high-quality, reasonably priced menu items at our restaurants depends upon acquiring food products and related items from reliable sources at competitive prices. Our supply chain team sources, negotiates and purchases food and nonfood items from more than 700 suppliers. Our suppliers must adhere to strict product specifications and quality control standards.
Our restaurant operating margins are subject to changes in the price and availability of food commodities. Prices for many of the foods and other commodities we bought for our restaurants increased during fiscal 2014 , and we expect increases during fiscal 2015 . Our operating margins are also affected by changes in the price of utilities, such as natural gas, upon which many of our restaurants depend for their energy supply.
To help control costs and obtain competitive prices, our supply chain team negotiates directly with our suppliers and occasionally uses purchase commitment contracts to stabilize the potentially volatile pricing associated with certain commodity items. Additionally, we purchase products in bulk for our food products operations and negotiate volume discounts with suppliers. We continue to consolidate our purchasing activities for the entire company. This allows us to leverage the combined purchasing power of our restaurant concept and BEF Foods segment. As part of this effort, we use competitive bidding and reverse online auctions for certain products and services.
The BEF Foods segment manufactures sausage products, as well as side dishes and soups, which are distributed to our restaurants by third parties. Third parties distribute food and inventory items to our restaurants twice a week, on average. Our distributors purchase products from the suppliers we specify, at the prices we negotiate, and distribute them to our restaurants on a cost-plus basis. Produce, breads and dairy items are sometimes delivered to restaurants more frequently and/or obtained from local suppliers.
We believe we have improved distribution efficiency, attained consistent pricing and lowered costs as we leverage the volume of our restaurant concept. Although only one distributor furnishes the majority of inventory items to our restaurants, we believe other distributors can readily provide this inventory. Please see Item 1A. Risk Factors — “Our restaurant and food products businesses are dependent on timely delivery of fresh ingredients by our suppliers and distributors.” for more information.
Sources and Availability of Raw Materials
Menu mix in the restaurant business is varied enough that raw materials historically have been readily available. However, some food products may be in short supply during certain seasons and raw material prices often fluctuate according to availability. We believe that all essential food products will continue to be generally available from our existing suppliers or, upon short notice, can be obtained from other qualified suppliers. Due to the rapid turnover of perishable food items, our restaurants maintain inventories with a modest (approximately $12,000 of perishable inventory per restaurant) aggregate cost in relation to revenues.
Advertising and Marketing
We spent approximately $27 million on restaurant advertising and marketing during fiscal 2014 . Most of our advertising budget was spent on television, radio, print and outdoor advertising for Bob Evans Restaurants. We focus our advertisements on new Bob Evans Restaurants’ menu items and the concept’s position as offering “farm fresh goodness that brings families together,” and "get in on something good TM ." Our fiscal 2014 advertising campaigns featured new menu offerings, such as our expanded Three-Course Dinner entrée options starting at $9.99 and the $7.99 Knife and Fork Sandwiches and Sweet and Stacked Hotcakes. We also remained focused on our digital marketing efforts by utilizing BE Mail, Facebook, Instagram and Twitter, as well as the Bob Evans Internet Web site. We also distribute coupons and support in-store merchandising, menus, kids’ marketing programs, and local store marketing. Additionally, upon completion of the Farm Fresh Refresh remodeling market, we increased our advertising in the completed market and surrounding area.
Research and Development
Research and development expenses for our restaurant concept and BEF Foods operation have not been material. As part of our effort to “Consistently Drive Sales Growth,” we continuously test food items to identify new and improved menu and retail food product offerings to appeal to our existing customers, satisfy changing eating trends and attract new customers. We maintain a 12 to 24 month product development pipeline which is focused on creating and introducing innovative menu items and retail food products, as well as enhancements to our existing offerings.


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In order to keep our menu and retail food products fresh and appealing to our guests’ taste preferences, our product development team is concentrated on creating appealing menu offerings that are consistent with the positioning of the brand, as well as quality enhancements to some of our best-selling items. Product development for both Bob Evans Restaurants and BEF Foods segments focuses on home-style offerings with a unique Bob Evans twist.
Competition
The restaurant industry is highly competitive. There are numerous segments within the restaurant industry distinguishable based on the type of food, food quality, service, location, associated price-to-value relationship and overall dining experience. We have positioned our Bob Evans Restaurants in the family dining segment. We must “Be the BEST at Operations Execution” to effectively compete for customers’ “share of stomach.”
Key competitive factors in the industry include the quality and value of menu offerings, quality and speed of service, attractiveness of facilities, advertising, name-brand awareness and image, and restaurant locations. Although we believe our restaurant concept competes favorably with respect to each of these factors, many of our competitors are well-established national, regional or local chains, and some have substantially greater financial, marketing and other resources than we have. Additionally, we compete with many restaurant operators and other retail establishments for site locations and restaurant employees. We also face growing competition from quick-service and fast-casual restaurants that are improving the quality and expanding the variety of their offerings, especially at breakfast.
Our BEF Foods Segment
Our vision for our BEF Foods segment is to be a powerful national brand food business driven by innovation and strong retail partnerships with a portfolio of convenient meal solutions that meet consumer needs. We offer a wide variety of quality, home-style food products to retail and foodservice customers. We sell our retail food products under the Bob Evans, Owens and Country Creek brand names. We believe our food products provide “farm-fresh goodness” and convenient meal solutions that uphold our high-quality standards. Our food products include approximately 155 varieties of branded fresh, smoked and fully cooked pork sausage, ham and hickory-smoked bacon products. We also offer over 140 complementary, convenience food items in the refrigerated and frozen areas of grocery stores such as mashed potatoes, macaroni and cheese, and microwaveable sandwiches.
During fiscal 2014 , we introduced approximately 10 new retail food products, including new varieties of Bob Evans side dishes, precooked sausage and fresh and frozen sandwiches. Our refrigerated mashed potatoes and macaroni and cheese side dishes continue to grow as a percentage of our food products volume. We expect to continue to “Consistently Drive Sales Growth” through new product development and enhancing existing items to address changing consumer demands.
Production
We currently produce food products in our four manufacturing facilities. We produce fresh sausage products at our plants located in Hillsdale, Michigan, and Xenia, Ohio. Our Sulphur Springs, Texas, plant produces ready-to-eat products, such as sandwiches, soups and gravies, and our Lima, Ohio, plant produces refrigerated dinner sides.
In August 2012, we purchased the Kettle Creations brand and a 100,000 square foot food production facility in Lima, Ohio, where we produce potato and pasta-based side dishes. Kettle Creations previously was a co-packer for BEF Foods. We completed the first phase of expansion at the Kettle Creations production facility, including an expansion of 57,000 square feet and constructing an additional production line at a cost of approximately $24 million. Construction was completed during the second quarter of fiscal 2014.
We have made efforts to “Increase Returns on Invested Capital” by implementing a plant optimization program to ensure we are operating efficiently and are positioned for future growth. The program is geared to identify operational gaps and opportunities to improve production efficiencies at our production facilities. As a part of this program, we closed our fresh sausage plant in Galva, Illinois, and the fresh sausage production portion of our Bidwell, Ohio, plant in fiscal 2011. We closed our ready-to-eat plants in Springfield and Bidwell, Ohio, and our fresh sausage plant in Richardson, Texas, in fiscal 2014.
Additionally, as part of our plant optimization program, we invested approximately $36 million of capital to expand, modify and add production lines to our food production facility in Sulphur Springs, Texas, which increased production of ready-to-eat food products, as well as added capacity for soups and gravies.
We strive to “Be the BEST at Operations Execution” by always focusing on food safety. We follow a Hazard Analysis and Critical Control Points (“HACCP”) program at each of our manufacturing plants. HACCP is a comprehensive system developed in conjunction with government agencies to prevent food safety problems by addressing physical, chemical and biological hazards. We use HACCP to identify potential safety hazards so that key actions can be taken to reduce or eliminate

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risks during production. We also have a team dedicated to food safety and quality assurance. During fiscal 2014 , all of our manufacturing plants earned certification pursuant to Global Food Safety Initiative standards.
We use third parties to manufacture or “co-pack” the Bob Evans and Owens products that are not produced in our own facilities or to supplement production spikes. These co-packed items include some of our side dish and meat items. We used approximately 20 third parties to manufacture food products for us in fiscal 2014 .
Sales
The U.S. food industry has experienced significant consolidation over the last 20 years as competitors have shed non-core businesses and made strategic acquisitions to complement category positions, maximize economies of scale in raw material sourcing and production, and expand retail distribution. The importance of sustaining strong relationships with retailers has become a critical success factor for food companies because it drives category management and continuous replenishment programs. Food companies with category leadership positions and strong retail relationships have increasingly benefited from these initiatives as a way to maintain shelf space and maximize distribution efficiencies.
Although our Bob Evans brand mashed potatoes are not available in all grocery stores across the country, it is the leading brand of refrigerated mashed potatoes in the United States (based on pound sales and Information Resource Inc. total U.S. grocery data for 52 weeks ending in May 2014). Our goal is to “Consistently Drive Sales Growth” by leveraging our strong share position to secure additional retail store business and gain additional market penetration. We also believe strong brand awareness is critical in maintaining and securing valuable retail shelf space and will provide a strong platform for introducing product line extensions and new products.
Our retail sales force, which consists of our national account teams as well as third-party food brokers, sells our food products to a number of leading national and regional retail chains. Retail sales are approximately 80 percent of net sales, while foodservice sales account for approximately 20 percent of net sales.
A relatively small number of customers account for a large percentage of our sales. For fiscal 2014 , our largest 10 accounts represented approximately 60 percent of our total BEF Foods sales, with the top two customers representing approximately 30 percent of our BEF Foods segment sales. As part of our effort to “Win Together as a Team,” we maintain national account teams to address the needs of our key retailers on a long-term basis.
We continue to devote time and effort to increasing sales of our products to foodservice customers (i.e., third-party restaurants, schools and other commercial buyers). In fiscal 2014 , net sales to foodservice customers accounted for approximately 20 percent of our food products business. Items for our foodservice customers are made to their specifications and include sausage, sausage gravy, breakfast sandwiches and side dishes. Foodservice sales provide us with incremental volume in our production plants, as well as an opportunity for future growth.
Distribution
We supply our customers by shipping products directly to their warehouses for further distribution by the customers to their retail stores. We also distribute our products through food wholesalers and distributors who primarily service smaller, independent grocers.
At the end of fiscal 2014 , Bob Evans and Owens brand products were available for purchase in grocery stores in all 50 states and the District of Columbia. Our Owens brand products were available for purchase primarily in Oklahoma and Texas.
We continue to work with retailers in states where there is an opportunity to distribute our products. We will explore expansion prospects with retailers to profitably increase points of distribution.
Sources and Availability of Raw Materials
The most important raw material used in our food products business is live sows, which we depend upon to produce our pork sausage products. We procure live sows at prevailing market prices from terminals, local auctions, country markets and corporate and family farms in many states and Canada. The live sow market is highly volatile in terms of the number of sows available and market price. The live sow market is also dependent upon supply and demand for pork products, as well as corn and soybean meal prices (the major food supply for sows), weather and farmers’ access to capital. During fiscal 2014, sow costs reached all-time record high prices in part driven by Porcine Epidemic Diarrhea virus ("PEDv") which reduced the supply of sows for slaughter. The supply reduction did not significantly impact our ability to procure the live sows needed to meet customer demand, however it significantly impacted the cost beginning in the second quarter of fiscal 2014. In fiscal 2015 , we believe the BEF Foods segment will continue to face sow costs that are significantly higher than historical averages, due to the continuing effects of PEDv and the potential for higher exports of raw pork products which could put a strain on supply. We

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have not traditionally contracted in advance for the purchase of live sows, although we have done so in limited quantities from time-to-time. We have, however, entered into some supply contracts with regard to the purchase of live sows in which we have agreed to accept a specific number of truck loads per week with pricing based on the current market price upon delivery.
Other important raw materials used in our food products operations are potatoes, dairy products, seasonings and packaging materials. Historically, these materials have been readily available, although some items may be in short supply during certain seasons and price fluctuations according to availability. Such shortages did not have a material impact on net sales or operating income in fiscal 2014. Generally, we purchase these items under supply contracts, and we occasionally engage in forward buying when we believe it to be advantageous. We believe that these items will continue to be available from our existing suppliers or, upon short notice, can be obtained from other qualified suppliers.
Most of our food products are highly perishable and require proper refrigeration. Product shelf life ranges from 18 to 60 days for refrigerated products. Due to the highly perishable nature and shelf life of these items, our production plants normally process only enough products to fill existing orders. As a result, we maintain minimal inventory levels. With our transition to a warehouse delivery system, many of our breakfast and dinner sausage items are frozen and shipped to warehouses. Shipping frozen product allows our retailers added flexibility to slack out product to meet consumer demand and allows us to build inventory for heavy consumption periods.
Advertising and Marketing
During fiscal 2014 , we spent approximately $6 million advertising our food products, excluding coupons and trade promotion marketing costs. Our food products marketing programs consist of advertising, consumer promotions and trade promotions. Our advertising activities include newspaper, digital and magazine advertisements aimed at increasing brand awareness and building consumer loyalty. Consumer promotions include the distribution of recipes featuring our products and targeted coupons designed to attract new customers and increase the frequency of purchases. Our trade promotions are aimed at providing retail display support, price discounts and securing additional shelf space. During fiscal 2014 , we continued to “Win Together as a Team” and “Consistently Drive Sales Growth” through joint marketing programs to support both our Bob Evans Restaurants and BEF Foods segments.
Competition
The food products business is highly competitive and is affected by changes in the public’s eating habits and preferences, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond our control. Key competitive factors in the industry are the quality, flavor and value of the food products offered, advertising and name brand awareness. We believe that we compete favorably with respect to each of these factors. Our competitors include well-established national, regional and local producers and wholesalers of similar products, some of whom have substantially greater financial, marketing and other resources than we have. We also face growing competition from private label sausage products and side dishes.
Seasonality and Quarterly Results
Our Bob Evans Restaurants and BEF Foods segments are subject to seasonal fluctuations. Historically, our highest levels of revenue and net income at Bob Evans Restaurants occurred in the first and second quarters of our fiscal year. Many Bob Evans Restaurants are located near major interstate highways and generally experience increased revenue during the summer travel season. Holidays, severe weather conditions (such as snow storms, hurricanes, and thunderstorms), natural disasters (such as flooding, tornadoes, and earthquakes) and similar conditions can impact restaurant sales volumes in most of the markets in which we operate.
Our BEF Foods reporting segment is seasonal to the extent that third and fourth quarter sales are typically higher due to increased sales of sausage and our home-style side dishes during the colder months from November through April and especially during the holiday season.
Our consolidated quarterly results are significantly impacted by the cost and availability of raw materials, especially live sows. Our consolidated quarterly results are also impacted by the timing of new restaurant openings and remodels and their associated costs. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.
Trademarks and Service Marks
We have registered trademarks and service marks, such as the mark Bob Evans ® for our restaurant business, and Bob Evans ® , Owens ® , Country Creek Farm ® and Kettle Creations ® for BEF Foods. We use additional registered and proprietary marks, some of which are listed under “Item 1. Business” above. We maintain a registration program for our marks with the

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United States Patent and Trademark Office and in certain foreign countries. In order to better protect our brands, we have also registered our ownership of the Internet domain names such as www.bobevans.com, beffoods.com and www.kettlecreations.net. We believe that our trademarks, service marks, proprietary recipes and other proprietary rights have significant value and are important to our brand-building efforts and the marketing of our Bob Evans Restaurants and BEF Foods segments. We have vigorously protected our proprietary rights in the past and expect to continue to do so. We cannot predict, however, whether steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our concepts. It may be difficult for us to prevent others from copying elements of our restaurant concepts and food products, and any litigation to enforce our rights would likely be costly.
Government Regulation
We are subject to numerous federal, state and local laws affecting our businesses. Our Bob Evans Restaurant segment is subject to licensing and regulation by a number of governmental authorities, which may include health, sanitation, environmental, zoning and public safety agencies in the state or municipality in which each of our restaurants is located. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development and openings of new restaurants or could disrupt the operations of existing restaurants. However, we believe that we are in compliance in all material respects with applicable governmental regulations and, to date, we have not experienced abnormal difficulties or delays in obtaining the licenses or approvals required to open or operate any of our restaurants.
Various federal and state labor laws govern our operations and our relationships with our employees, including such matters as minimum wage, meal and rest breaks, overtime, fringe benefits, safety, working conditions and citizenship requirements.
Minimum wages are governed by federal, state and local laws. There have been a number of increases in minimum wage in various states, as well as increasing legislative discussion at the federal level. Additionally, our industry has many tipped employees who receive much of their compensation in the form of customer tips. In many cases, we are allowed to take a tip credit against the required minimum wage rate and pay a lower cash wage rate to those employees. Any significant changes in the level of minimum wage or the permissibility of tipped wages could affect the profitability of our Bob Evans Restaurants and BEF Foods segments. Federal and state legislatures have also proposed bills that would require paid time off at the hourly level. As this has not been common practice in the restaurant industry, such changes could affect our labor costs and profitability.
The passage of the Affordable Care Act and ongoing changes in the governing rules have required significant effort to ensure compliance. The Company has chosen to continue to make health care available to eligible employees based on the terms set forth in the plan. Further, we are providing medical, prescription drug, dental, vision and an employee assistance program through a private exchange, which allows us to continue to diligently manage overall health care costs and provides us the foundation to build healthy living habits and a culture of wellness. Significant cost increases or administrative burdens could affect our profitability and our ability to continue our current health care strategy.
The nature of our business requires many of our employees to work nights, weekends and nontraditional schedules. Our restaurants may have varying labor needs at various points in time. These factors make it imperative that we carefully monitor and manage the hours that nonexempt employees work to remain compliant with overtime pay regulations. We employ both salaried exempt and hourly nonexempt employees at our restaurants, which require us to diligently manage the type of work done by the different classes of employees. As the definitions and enforcement of overtime and overtime exemption regulations continue to change at the federal and state levels, we may need to consider making changes in these classifications, which could result in higher payroll costs and negatively impact profitability.
There have been a number of federal, state and local proposals and regulations to require restaurants to provide nutritional information on menus and/or require that restaurants label menus with the country of origin of meal ingredients. For example, the Bob Evans Restaurant located in Montgomery County, Maryland, is subject to a menu-labeling law that became effective on July 1, 2010. The Affordable Care Act enacted on March 23, 2010, contains provisions that require restaurants with 20 or more locations to post calorie information on menus and additional nutritional information in writing at the restaurant. The Food and Drug Administration (“FDA”) has released two sets of proposed regulations related to this requirement and is in the process of soliciting comments. The FDA has not yet published the final rules and we continue to monitor the proposed regulations in anticipation of their final publication. We expect that the final rules will become effective six months from the date of publication for covered restaurants. Although the new federal legislation would preempt the state and local legislation already enacted (e.g., California, Maine, Massachusetts, Montgomery County, Maryland, New Jersey, Oregon, Nashville, Tennessee, New York City and Philadelphia), some of these jurisdictions are requiring compliance with their regulations until the FDA begins enforcing the federal regulations. We are concerned that these menu-labeling laws could have an adverse effect

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on our results of operations and financial position, as well as the restaurant industry in general. However, we support the implementation of uniform standards across the United States by the FDA, rather than a state-by-state and locality-by-locality approach.
Bob Evans must comply with the applicable requirements of the Americans with Disabilities Act of 1990, as amended by the ADA Amendments Act of 2008 (“ADA”) and related state statutes. In pertinent part, the ADA prohibits discrimination on the basis of disability with respect to public accommodations and employment. Under the ADA and related state laws, when constructing new restaurants and facilities or undertaking significant remodeling of existing restaurants and facilities, we must ensure each restaurant and facility meets the accessibility requirements of all applicable laws and regulations. We also must make reasonable accommodations for the employment of people with disabilities.
As a manufacturer and distributor of food products, our BEF Foods segment is subject to a number of food safety regulations, including regulations promulgated by the U.S. Department of Agriculture (“USDA”) and the FDA. These agencies enact and enforce regulations relating to the manufacturing, labeling, packaging, distribution and safety of food in the United States. Among other matters, these agencies: enforce statutory prohibitions against misbranded and adulterated foods; establish safety standards for food processing; establish standards for ingredients and manufacturing procedures for certain foods; establish standards for identifying certain foods; determine the safety of food additives; establish labeling standards and nutrition labeling requirements for food products; and enforce regulations to prevent the introduction, transmission or spread of communicable diseases. In addition, various states regulate our operations by: enforcing federal and state standards for selected food products; grading food products; licensing and inspecting plants and warehouses; regulating trade practices related to the sale of food products; and imposing their own labeling requirements on food products. Some of the food commodities we use in our operations are also subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to Congressional and administrative review.
Through our sausage manufacturing operations, our BEF Foods segment is subject to the requirements of the Packers & Stockyards Act (the “P&S Act”). The general purpose of the P&S Act is to: (1) assure fair competition and fair trade practices; (2) safeguard farmers and ranchers; (3) protect consumers; and (4) protect members of the livestock, meat and poultry industries from unfair, deceptive, unjustly discriminatory and monopolistic practices. The P&S Act is administered by the Grain Inspection, Packers & Stockyards Administration (“GIPSA”), which is part of the USDA. Among other requirements, the P&S Act requires meat packers, such as our BEF Foods segment, to be bonded, which provides trust protection for producers in the event they are not paid for livestock by a meat packer, and requires that livestock producers be paid promptly by meat packers for the sale of livestock. Violations of the P&S Act may be resolved through a notice of violation, a stipulation agreement with GIPSA, administrative actions and court actions.
We are subject to federal and state environmental regulations, including various laws concerning the handling, storage and disposal of hazardous materials, such as cleaning solvents. These regulations have not had a material adverse effect on our operations to date. We do not anticipate that compliance with federal, state and local provisions regulating the discharge of materials into the environment, or which otherwise relate to the protection of the environment, will have a material adverse effect upon our capital expenditures, revenues or competitive position.
U.S. federal, state and local laws and regulations are increasingly being enacted to address concerns about the effects that carbon dioxide emissions and other identified greenhouse gases (“GHG”) may have on the environment and climate worldwide. These effects are widely referred to as “Climate Change.” One or more of our BEF Foods segment manufacturing facilities could be covered by such new legislation. As in virtually every industry, GHG emissions occur at several points across our operations, including production, transportation and processing. Compliance with future legislation, if any, and compliance with currently evolving regulation of GHGs by the EPA and states may result in increased compliance costs, capital expenditures, and operating costs. In the event that any future compliance requirements at any of our facilities require more than the sustainability measures that we are currently undertaking to monitor emissions and improve our energy efficiency, we may experience increases in our costs of operation. These regulatory changes may also lead to higher cost of goods and services, which may be passed on to us by suppliers. Based on information currently available to us, we believe that compliance with these regulations will not have a material adverse effect on us.
From time to time, we receive notices and inquiries from regulatory authorities and others asserting that we are not in compliance with particular laws and regulations. In some instances, litigation ensues. In addition, individuals may initiate litigation against us. Many of our facilities are subject to environmental permits and other regulatory requirements, violations of which are subject to civil and criminal sanction. In some cases, third parties may also have the right to sue to enforce compliance.

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Employees
As of April 25, 2014 , we employed 34,470 persons (7,973 full-time and 26,497 part-time). None of our employees are currently covered by collective bargaining agreements, and we have never experienced an organized work stoppage, strike or labor dispute. We believe our working conditions and compensation packages are generally comparable with those offered by our competitors. We consider overall relations with our employees to be favorable.
Available Information
We are subject to the informational requirements of the Exchange Act, and, accordingly, we file reports, proxy statements, and other information with the SEC. Such reports, proxy statements, and other information are publicly available and can be read and copied at the reference facilities maintained by the SEC at the Public Reference Room, 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site ( www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our Web site is www.bobevans.com. We make available at this address, free of charge, press releases, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports for transactions in the Company stock by insiders on Forms 3, 4 and 5, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. In addition, we provide periodic investor relations updates and our corporate governance materials at our Web site.
Upon the written request of a stockholder, we will provide without charge a copy of this Annual Report on Form 10-K, including the financial statements and financial statement schedules included herein. In addition, upon the written request of a stockholder, we will provide a copy of any exhibit to this Annual Report on Form 10-K upon the payment of a reasonable fee. Written requests should be delivered to Bob Evans Farms, Inc., Attention: Investor Relations, 8111 Smith's Mill Road, New Albany, Ohio 43054.
ITEM 1A.     RISK FACTORS.
The risk factors presented below may have a material adverse effect on our future operating results, financial position and cash flows. The categories listed below are for information purposes only and do not signify that any risk should or should not be included in one or more of the other categories, or that any category or risk is more significant than any other risk. In addition to the risk factors presented below, changes in general economic conditions, consumer tastes and discretionary spending patterns, demographic trends and consumer confidence in the economy, which affect consumer behavior and spending for restaurant dining occasions and retail purchases in general, may have a material adverse effect on us. Our actual results could vary significantly from any results expressed or implied by any forward-looking statements contained in this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission ("SEC") depending upon a variety of factors, including, but not limited to, the following risks and uncertainties:
I.    STRATEGIC
Our failure to achieve and maintain positive same-store sales for an extended period of time could have a material adverse effect upon our financial condition, results of operation and cash flows.
Same-store sales are a key measure of the financial health of our company, as well as our individual restaurants. Same-store sales growth may be affected by a number of factors, including:
local and national economic conditions affecting consumer spending habits;
gasoline prices;
customer trends;
intense competition in the restaurant business;
customer satisfaction;
extraordinary events such as weather or natural disasters; and
pricing pressure.

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We depend on consumer acceptance of our menu offerings, food products, prices, atmosphere, convenience and service procedures.
Our success in creating demand for our restaurant menu offerings and food products is dependent on our ability to continue to accurately predict consumer dining and taste preferences and adapt our menu and food products to trends in food consumption. If customer eating habits change significantly and we are unable to respond with appropriately priced menu offerings and food products, as well as convenience and service procedures, it could have a material adverse effect on demand for our menu offerings and food products, which could result in lost customers and a material adverse effect on our business and results of operations. Our success is also dependent upon our ability to provide outstanding customer service and convenience and to keep the atmosphere of our Bob Evans Restaurants segment differentiated from our competitors, and relevant and appealing to our customers. If we change our restaurant concept or customer service technique, we may lose customers who do not prefer the changed concept or customer service technique, and we may not be able to attract a sufficient new customer base to produce the revenue needed to make the concept or technique profitable.
We depend on initiatives designed to improve the efficiencies, costs and effectiveness of our operations, as well as increase revenues, and failure to fully achieve or sustain these initiatives could adversely affect our results of operations.
We have had, and expect to continue to have, initiatives related to cost efficiencies and revenue generation in various stages of testing, evaluation and implementation, upon which we expect to rely on to improve our results of operations and financial condition. Many of these initiatives are inherently risky and uncertain in their application to our business in general, even when tested successfully on a more limited scale. It is possible that successful testing can result partially from resources and attention that cannot be duplicated in broader implementation. Testing and general implementation also can be affected by other risk factors described herein that reduce the results expected. Successful system-wide implementation of these initiatives across hundreds of restaurants and involving tens of thousands of employees relies on consistency of training, stability of workforce, ease of execution, changes in market conditions and the absence of offsetting factors that can adversely influence results. Failure to achieve successful implementation of our initiatives could adversely affect our results of operations.
Our long-term growth strategy depends on opening new restaurants. Our ability to expand our restaurant base is influenced by factors beyond our control, which may slow restaurant expansion and impair our growth strategy.
We are pursuing a disciplined long-term growth strategy which, to be successful, will depend in large part on our ability to open new restaurants and operate those restaurants on a profitable basis. In fiscal 2015 we intend to increase the construction of new restaurants and plan on opening up to eight new restaurants and licensing up to ten Bob Evans Express locations. We cannot guarantee that we will be able to achieve our expansion goals or operating results similar to those of our existing restaurants. One of our biggest challenges in meeting our long-term growth objectives will be to locate and secure an adequate supply of suitable new restaurant sites. We have experienced delays in opening some of our restaurants and may experience delays in the future. Delays or failures in opening new restaurants could have a material adverse effect on our planned long-term growth strategy.
The success of any restaurant expansion will depend upon numerous factors, many of which are beyond our control, including the following:
our ability to generate a suitable level of return on the money we invest in new restaurants;
the availability and hiring of qualified personnel;
our ability to appropriately train employees and staff the restaurants;
our ability to identify available and suitable restaurant sites, including appropriate locations for Bob Evans Express;
competition for restaurant sites;
negotiation of favorable purchase or lease terms for restaurant sites;
negotiation of favorable license and royalty terms for Bob Evans Express sites;
timely development of new restaurants, including the availability of construction materials and labor;
management and control of construction and development costs of new restaurants;
our ability to manage construction delays related to the opening of any facility;
our ability to manage the local, state or other regulatory, zoning and licensing processes in a timely manner, or at all;

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cost and availability of capital;
competition in our markets;
consumer acceptance of our restaurants in new markets; and
general economic conditions.
In addition, we plan to continue entering new markets in which we have no operating experience. These new markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns compared to our existing markets, which may cause the new restaurants to be less successful in these new markets than in our existing markets.
Our long-term growth strategy may strain our management, financial and other resources. For instance, our existing restaurant management systems and procedures, financial controls, information systems, management resources and human resources may be inadequate to support our planned expansion. Also, we may not be able to respond on a timely basis to all of the changing demands that the planned expansion will impose on our infrastructure and other resources. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls and locate, hire, train and retain management and operating personnel.
We may experience higher-than-anticipated costs associated with the opening of new restaurants or with the closing, relocating or remodeling of existing restaurants, which may adversely affect our results of operations.
Our sales and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocating and remodeling of existing restaurants. We incur substantial preopening expenses each time we open a new restaurant and other expenses when we close, relocate or remodel existing restaurants. The expenses of opening, closing, relocating or remodeling any of our restaurants may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations.
Our restaurant business is dependent upon satisfactory customer service, and we may have difficulty hiring and retaining a sufficient number of qualified employees to deliver appropriate service.
Our restaurant business depends in part upon our ability to attract, train, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers who can meet the high standards necessary to deliver the levels of food quality and service on which our restaurant segment is based upon. The short supply of qualified individuals in some areas could strain our restaurant operations, delay new restaurant openings or require us to increase wages to attract desired individuals, which could have a material adverse effect on our financial position or results of operations. Also, high rates of employee turnover could have a negative impact on food quality, recruiting and training costs, and customer service, which would result in an adverse effect on our restaurant business and results of operations.
We depend on our ability to compete effectively in the restaurant and food products industries.
The restaurant industry is highly competitive and is affected by changes in the public’s eating habits and preferences, population trends, traffic patterns and weather conditions, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond our control. Key competitive factors in the restaurant industry include the quality and value of the menu items offered, food preparation and consistency of the preparation from restaurant to restaurant, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant locations. Many of our competitors are well-established national, regional or local chains, and some have substantially greater financial, marketing and other resources than we have, which may give them competitive advantages. We compete with many restaurant operators and other retail establishments for site locations and restaurant employees. We also compete with grocery store chains that offer cooked and prepared products for the consumer. We expect competition to intensify as our competitors expand operations in our markets and quick-service restaurant chains expand their breakfast offerings. This increased competition could have a material adverse effect on our financial position or results of operations.
The food products industry is also highly competitive and is affected by changes in the public’s eating habits and preferences, as well as by local and national economic conditions affecting consumer spending habits. Key competitive factors in the industry include the quality, flavor and value of the food products offered, advertising and name brand awareness. Our competitors include well-established national, regional and local producers and wholesalers of similar products, many of whom have substantially greater name recognition and financial, marketing and other resources than we have, which may give them competitive advantages. We are facing increased competition from private label sausage products and side dishes. We expect competition to intensify in our BEF Foods segment as other food companies introduce refrigerated side dishes to compete with

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our successful potato and pasta side dishes. This increased competition could have a material adverse effect on our financial position or results of operations.
Our marketing and branding strategies may not be successful, which could negatively affect our business.
Our marketing and branding strategies continue to evolve to maximize our appeal to customers and compete effectively. We do not have any assurance that our marketing strategies will be successful. If new advertising, modified branding, and other marketing programs are not successful, we may not generate the level of restaurant and food products sales we expect and the expenses associated with these programs will negatively affect our financial results. Moreover, many of our competitors have successfully used national marketing strategies, including network and cable television advertising in the past, and we may not be able to successfully compete against those established programs.
The growth of our BEF Foods segment’s sales and profits is dependent upon our ability to expand into existing and new markets.
The successful growth of our BEF Foods segment depends on our ability to add new retail customers, as well as expand the number of products sold through existing retail customers by expanding the number of our items they offer for sale and product placement within the refrigerated meat and the frozen products departments. The expansion of the BEF Foods business segment depends on our ability to obtain and retain large-account customers, such as grocery store chains and warehouse customers. Our failure to obtain and retain new large-account customers or maintain our relationships with existing large-account customers could have a material adverse effect on the BEF Foods segments’ business and results of operations.
The financial performance and results of operations of the BEF Foods segment could be adversely affected by availability of and price we pay for sows and pork trimmings.
Sows are the most important raw material used to produce our pork sausage products in our BEF Foods segment. We procure live sows at prevailing market prices from terminals, local auctions, country markets and corporate and family farms in many states and Canada. The live sow market is highly volatile in terms of the number of sows available and the current market price. The live sow market is dependent upon supply and demand for pork products, as well as corn and soybean meal prices (the major food supply for sows), weather and farmers’ access to capital. We also use pork trimmings and the pork trimmings market is also highly volatile in terms of availability and the current market price.
We believe our BEF Foods segment will continue to be challenged by sow and pork trimmings costs that are significantly higher than historical averages. Higher sow and pork trimmings costs adversely affect the BEF Foods segment’s profitability, and we cannot guarantee that we will be able to pass along any portion of the increased costs to our consumers in a timely manner or at all.
Our BEF Foods segment’s business is dependent upon a limited number of suppliers for the production of a significant number of items and relies upon a relatively small number of customers for a large percentage of its sales.
Our BEF Foods segment’s business is dependent upon a limited number of suppliers, and we have not always identified secondary suppliers for food products manufactured in our plants, or secondary suppliers with sufficient capacity. Our prolonged inability to provide products to fill orders in a timely manner could have an adverse effect on both our Bob Evans Restaurants and the BEF Foods segments’ businesses and our results of operations. Our BEF Foods segment’s business also relies upon a relatively small number of customers for a large percentage of its sales. Our inability to maintain strong relationships with our key customers and meet their requests could result in a loss of business, which could have a material adverse effect on our BEF Foods business and our results of operations.
Our BEF Foods business has undergone and will continue to undergo major efficiency changes in the form of acquiring other businesses, closing inefficient facilities and by expanding the remaining facilities, but our failure to successfully integrate an acquired business or run our expanded facilities efficiently could adversely affect our company.
We regularly evaluate expansion opportunities such as acquiring other businesses or taking actions to make our remaining facilities operate more efficiently. Plant expansion involves risks such as additional debt, integrating the acquired business or new equipment into our operations. In evaluating expansion opportunities, we carefully consider the effect that financing the opportunity will have on our financial condition. Successful expansion depends on our ability to integrate the acquired business or efficiently run the remodeled plant. If we are unable to effectively implement expansion opportunities, we could adversely affect our operations, financial results and prospects.

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Our actual operating and financial results in any given period may differ from guidance we provide to the public, including our most recent public guidance.     
From time to time, in press releases, SEC filings, public conference calls and other contexts, we have provided guidance to the public regarding current business conditions and our expectations for our future financial results. We expect that we will provide guidance periodically in the future. Our guidance is based upon a number of assumptions, expectations and estimates that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In providing our guidance, we also make various assumptions with respect to our future business decisions, some of which will change. Our actual financial results, therefore, may vary from our guidance due to our inability to meet the assumptions upon which our guidance is based and the impact on our business of the various risks and uncertainties described in these risk factors and in our public filings with the SEC. Variances between our actual results and our guidance may be material. To the extent that our actual financial results do not meet or exceed our guidance, the trading prices of our securities may be materially adversely affected.
Because many of our restaurants are concentrated in certain geographic areas, there could be a material adverse effect on our operations by regional economic conditions and events.
The concentration of many of our existing and planned restaurants in particular regions of the United States could affect our operating results in a number of ways. For example, our results of operations may be adversely affected by economic conditions in that region, the local labor market and regional competition. Also, adverse publicity relating to our restaurants in a region in which they are concentrated could have a more pronounced adverse effect on our overall revenue than might be the case if our restaurants were more broadly dispersed.
A majority of our Bob Evans Restaurants are located in Ohio and other parts of the Midwest, which makes us particularly sensitive to economic conditions, natural disasters, severe weather and other events in this region. Our business is subject to seasonal adverse weather conditions (especially between October and March) that may at times affect regions in which our restaurants are located, regions that produce raw ingredients for our restaurants, or locations of our distribution network. As a result our quarterly and yearly results have varied in the past, and we believe that our quarterly operating results will vary in the future. In addition, adverse weather conditions could cause us to experience closures, repair and restoration costs, food spoilage, and other significant reopening costs as well as increased food costs and delayed supply shipments, any of which would adversely affect our business. Additionally, during periods of extreme temperatures (either hot or cold) or precipitation, many individuals choose to stay indoors. This impacts transaction counts in our restaurants and could adversely affect our business and results of operations.
We believe same-store sales at our Bob Evans Restaurants are particularly sensitive to economic conditions in the Midwest, which has been hit particularly hard by the downturn in the United States’ economy, the troubled auto industry, increased unemployment and lower home values. We have 242 Bob Evans Restaurants located in Michigan and Ohio where the impact of job loss in the automotive industry (manufacturers and suppliers) could have a material adverse effect on our sales.
Our ability to align our corporate culture to adapt to evolving business changes and requirements could have a material adverse effect on us.
Our results may be adversely affected if we are unable to execute on the key elements of our strategic plan to improve our delivery execution, resource utilization, and decision making processes. As with any organization with over 34,000 employees, effecting significant changes in operational regimes and corporate culture is a challenge. If we are unable to change and instill within our entire organization the appropriate operational regimes of our corporate culture, we may not be able to gain the anticipated improvements and increase our profitability. The implementation of our strategic plan will require, among other things, expending capital, developing and adopting new technologies, recruiting talented employees and changing our corporate culture. If we are unable to successfully execute any or all of the initiatives of our strategic plan, our revenues, operating results and profitability may be adversely affected.
II.    OPERATIONS
Our business could suffer if we are the subject of negative publicity or litigation regarding allegations of food-related contaminations or illnesses.
As a business with a restaurant segment and a food production segment, we can be adversely affected by complaints or litigation from consumers alleging illness, injury or other food quality, adverse health effects (including obesity) or operational concerns. Our reputation and business can also be adversely affected by negative publicity resulting from such complaints or litigation. Food-related contaminations and illnesses may be caused by a variety of food-borne pathogens, such as e-coli or salmonella, from a variety of illnesses transmitted by restaurant workers, such as hepatitis A, and from contamination of food

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by foreign substances. Contamination and food-borne illness incidents could also be caused by food suppliers and distributors. As a result, we cannot control all of the potential sources of contamination or illness that can be contained in or transmitted from food. If any person becomes injured or ill, or alleges becoming injured or ill, as a result of eating our food, we may temporarily close some restaurants or a BEF Foods segment plant, which would decrease our revenues, and we may be liable for damages, be subject to governmental regulatory action and/or receive adverse publicity, regardless of whether we are at fault, any of which could have long-lasting, negative effects on our reputation, financial position and results of operations.
Unfavorable publicity, or a failure to respond effectively to adverse publicity, could harm our reputation and adversely impact our guest counts and sales.
The good reputation of our restaurant and foods brands is a key factor in the success of our business. Actual or alleged incidents at any of our restaurants or plants could result in negative publicity that could harm our brands. Given the extensive use of the Internet and various forms of social networking Web sites, as well as our own Web site, unfavorable publicity can spread world-wide in only hours. Even incidents occurring at restaurants operated by our competitors or in the supply chain generally could result in negative publicity that could harm the restaurant and food processing industry overall and, indirectly, our own brands. Negative publicity may result from allegations of illegal, unfair or inconsistent employment practices, guest discrimination, illness, injury, or any of the other matters discussed above that could give rise to litigation. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a limited number of our restaurants or plants, or only to a single restaurant or plant, could adversely affect public perception of the entire brand. Negative publicity also may result from health concerns including food safety and flu outbreaks, publication of government or industry findings concerning food products, environmental disasters, crime incidents, data privacy breaches, scandals involving our employees, or operational problems at our restaurants or plants, all of which could make our brands less appealing to our guests and customers, and negatively impact our guest counts and sales.
Adverse publicity and its effect on overall consumer perceptions of our brands, or our failure to respond effectively to adverse publicity, could have a material adverse effect on our business.
Catastrophic events may disrupt our business and could adversely affect our revenues and results of operations.
We are a highly automated business and rely on our production facilities and our network infrastructure and our Web site for our development, marketing, operational, support, hosted services and sales (including online ordering) activities. A disruption, infiltration or failure of these systems or third-party hosted services in the event of a major natural disaster, fire, power loss, telecommunications failure, cyber-attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data.
Many of our corporate systems and processes and corporate support for our restaurant operations are centralized at one Ohio location.   We have disaster recovery procedures and business continuity plans in place to address most events of a crisis nature, including tornadoes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.
Our BEF Foods segment operates four manufacturing plants. If we were forced to close or delay production at one or more of these plants due to a natural disaster or significant labor issue, we may be unable to increase production at our other plants in a timely manner, which could have a material adverse effect on our results of operations.

A catastrophic event that results in the destruction or disruption of our data center or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected. We have deployed a robust disaster recovery plan and backup systems to reduce the potentially adverse effect of such events.
We rely heavily on information technology and any material failure, interruption, or security breach in our systems could adversely affect our business.
We rely heavily on information technology systems across our operations, including for the order and delivery from distributors, point-of-sale processing in our restaurants, gift and loyalty cards, online business, and various other processes and transactions, including the storage of employee and customer information. Our ability to effectively manage our business and coordinate the production, distribution, and sale of our products depends significantly on the reliability and capacity of our

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information technology systems to process these transactions, summarize results and manage and report on our business. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product sales and reduced efficiency of our operations, which could have a material adverse effect on our results of operations, and significant capital investments could be required to remediate the problem. Additionally, if a person is able to circumvent the security measures intended to protect our employee or customer private data, he or she could destroy or steal valuable information or disrupt our operations, which could significantly harm our reputation or result in litigation against us or the imposition of penalties.
In addition, our ability to accept credit cards as payment in our restaurants and for online gift card orders depends on us remaining compliant with standards set by the PCI Security Standards Council. These standards require certain levels of system security and procedures to protect our customers’ credit card and other personal information. We employ both internal resources and external consultants to conduct auditing and testing to reduce the likelihood of any security failures or breaches. However, we can provide no assurance that these security measures will be successful. If these security measures are not successful, we may become subject to litigation against us or the imposition of regulatory penalties, which could result in negative publicity and significantly harm our reputation, any of which could have a material adverse effect on our financial performance.

Our inability to improve our systems in fiscal 2015 to provide greater access for customers, increase operational capabilities, and to replace our core enterprise resource planning systems could negatively impact our results of operations.
Operational excellence and the continued improvement of our customer experience are among our highest priorities. As a result, we expect to make increased investments during fiscal 2015 in our technology infrastructure, and the labor necessary to support this technology, in areas designed to more effectively collect and process our enterprise information and data for resource planning, as well as positively impacting the way in which our customers interact with us, including through the ordering process, food production and finally through the delivery of food to the customer. Our inability to effectively implement our core enterprise resource planning systems replacement, as well as the other changes to our technology infrastructure could negatively impact our operations and processes and could have a negative impact on our financial results.
If we lose the services of any of our key management personnel, our business could be negatively impacted.
We depend on the continued services and performance of our key management personnel. Our future performance will depend on our ability to motivate and retain these and other key officers and key team members, particularly regional and area managers and restaurant general managers. Competition for high-quality employees is intense. The loss of the services from our senior management or key team members or the inability to attract additional qualified personnel as needed could harm our business.
Our restaurant and food products businesses are dependent on timely delivery of fresh ingredients by our suppliers and distributors.
Our restaurant operations and food products business are dependent on timely deliveries of fresh ingredients, including fresh produce, dairy products and meat. The cost, availability and quality of the ingredients we use to prepare our food are subject to a variety of factors, many of which are beyond our control. Fluctuations in weather, supply and demand, the economy and political conditions could adversely affect the cost, availability and quality of our ingredients. If the variety or quality of the food we offer declines due to the lack or lower quality of our ingredients or due to interruptions in the flow of fresh ingredients, customer traffic or food product orders may decline and negatively affect our sales. We have contracted with one primary and other third-party distributors for the delivery of food and other products to our restaurants. If our primary distributor or these contracts were suddenly and unexpectedly terminated, supply costs could increase and disruptions in distribution could occur during the transition to other third-party distributors which could negatively impact our results of operations.
The price and availability of food, ingredients and utilities used by our restaurants could adversely affect our revenues and results of operations.
Our results of operations depend significantly on our ability to anticipate and react to changes in the price and availability of food, ingredients, utilities, and other related costs over which we may have little control. Fluctuations in economic conditions, weather and demand, as well as natural disasters can adversely affect the availability, quality and cost of the ingredients and products that we buy. We require fresh produce, dairy products and meat, and therefore are subject to the risk that shortages or interruptions in supply of these food products could develop. Our operating margins are subject to changes in the price and availability of food commodities. For example, as discussed in greater detail above, the profitability of our BEF Foods segment is sensitive to sow and pork trimmings costs, which have been volatile but generally increasing over the past few years. The effect of, introduction of, or changes to tariffs or exchange rates on imported retail products or food products could increase our costs and possibly affect the supply of those products. Our operating margins are also affected by fluctuations in the price of utilities such as natural gas, whether as a result of inflation or otherwise, on which our restaurants

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depend for much of their energy supply. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations. In addition, because we provide a moderately priced product, we may not seek or be able to pass along price increases to our guests sufficient to offset cost increases.
Market supply and demand and the prices we receive for our products may fluctuate due to competition from other food producers and processors, as well as the availability or price of competing proteins.
We face competition from other food producers and processors. Some of the factors on which we compete and which may drive demand for our products include:
product safety and quality;
brand identification;
breadth and depth of product offerings; and
availability of our products and competing products.
Demand for our products also is affected by competitors’ promotional spending, the effectiveness of our advertising and marketing programs, and the availability or price of competing proteins.
Our inability to successfully and sufficiently raise menu and food products prices to offset increased costs could result in a decline in margins.
We utilize price increases for menu offerings and food products to help offset cost increases, including increased costs for wholesale food, raw materials, distribution, minimum wages, employee benefits, construction, fuel, utility, and other costs. During fiscal 2014 , we implemented menu price increases at Bob Evans Restaurants to help offset operating and supply cost increases. Further federal legislation to increase the minimum wage as well as the tip credit wage we pay to certain staff members receiving guest gratuities is possible, and there may be similar increases implemented in other jurisdictions in which we operate or seek to operate. We may not be able to anticipate and react to changing costs by adjusting our purchasing practices and prices to sufficiently account for increased costs, especially further minimum wage increases at the federal and/or state level. Also, because we offer moderately priced food, we may not be able to, or we may choose not to, pass along price increases to our customers, which could have a material adverse effect on our business and results of operations.
We outsource certain business processes and product manufacturing to third-party vendors that subjects us to risks, including disruptions in business and increased costs.
Some of our business processes and the manufacturing of certain products are currently outsourced to third parties. Such processes include distribution of food and retail products to our restaurant locations, manufacturing of certain products, credit card authorization and processing, gift card tracking and authorization, health care and workers’ compensation insurance claims processing and externally hosted systems and business software applications. We cannot ensure that all providers of outsourced services are observing proper internal control practices, such as redundant processing facilities, and there are no guarantees that failures will not occur. Failure of third parties to provide adequate services could have an adverse effect on our financial condition and results of operations.
III.    COMPLIANCE
The restaurant and food products industries are heavily regulated, and compliance with applicable laws and regulations may be more costly than we expect.
The restaurant industry and the food products industry are subject to various federal, state and local laws and regulations relating to health, sanitation, safety and fire standards, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act of 1938, the Immigration Reform and Control Act of 1986, the Patient Protection and Affordable Care Act ("PPACA"), the Health Care and Education Reconciliation Act of 2010 and applicable requirements concerning minimum wage, overtime, healthcare coverage, family leave, medical privacy, tip credits, working conditions, safety standards and immigration status), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990, as amended by the ADA Amendments Act of 2008. Compliance with these legal requirements may be more costly than we expect. The failure to obtain and/or retain licenses, permits or other regulatory approvals could delay or prevent the opening of a restaurant and/or the continued operation of a particular restaurant or food products manufacturing facility. Our failure to comply with applicable laws and regulations could also result in fines or legal actions that could adversely affect our business, results of operations and financial position. Significant legal and regulatory issues affecting our business include:

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employment laws, including minimum wage requirements, overtime pay requirements and exemptions, meal and rest break requirements, paid “sick days” or other paid time off, unemployment tax rates, discrimination laws, workers’ compensation rates and citizenship and immigration requirements;
national health care reform legislation passed by the U.S. Congress in March 2010 and its provisions will require nutritional information labeling on restaurant menus, menu boards, and drive-through displays;
permit, licensing and other regulatory requirements for the sale of food and beverages;
health, safety and fire regulations;
zoning, land and environmental regulations;
a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials;
sales tax;
new and changing laws and regulations relating to gift cards;
food safety regulations governing the manufacture (including composition and ingredients), labeling, packaging and safety of food in the United States and Canada; and
laws governing public access and employment for people with disabilities.
In March 2010, the President signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, “Health Care Reform Acts”). Although we are preparing for and have developed business processes to deal with and mitigate the costs associated with the Health Care Reform Acts, which may result in significant modifications to our employment and benefits policies and practices, we cannot predict with certainty the financial and operational impacts the new law will have on us. We do expect that our expenses will increase as a result of the Health Care Reform Acts. Any such increases could materially and adversely affect our business, financial condition and results of operations, such modifications to our business practices may be disruptive to our operations and impact our ability to attract and retain personnel.
The effect of material changes to healthcare laws in the United States may significantly increase our healthcare costs and negatively impact our financial results.
We offer eligible U.S. employees the opportunity to enroll in healthcare coverage subsidized by us. For various reasons, many of our eligible employees currently choose not to participate in our healthcare plans. However, changes to the U.S. healthcare laws that become effective in 2014 may lead some eligible employees who currently do not participate in our healthcare plans to enroll for coverage. Such changes in the law include the imposition of a penalty on an individual who does not obtain healthcare coverage and provisions making certain individuals who can obtain employer coverage ineligible for healthcare premium tax subsidies that would otherwise be available in connection with the purchase of coverage through an exchange. If a significant number of eligible employees who do not currently participate in our healthcare plans, or who currently participate in our lower cost limited coverage plan, choose to enroll once the changes in law come into effect, our healthcare costs may increase significantly and negatively impact our financial results.
Significant increases in health care costs continue to occur, and we can provide no assurance that our cost containment efforts in this area will be effective. Also, while we have analyzed the anticipated impact of PPACA on our cost structure, we will not know for certain the impact on our health care benefit costs until PPACA is fully implemented. Increases in costs due either to the PPACA or general health care cost increases could have a material adverse impact our financial performance, as there is no assurance that we would be able to absorb and/or pass through such costs.
Our federal, state, and local tax returns have been, and may in the future be, selected for audit by the tax authorities, which may result in tax assessments or penalties that could have a material adverse impact on our consolidated financial position and results of operations.
We are subject to federal, state, and local taxes in the United States, including income, sales, use, and other applicable taxes. Significant judgment is required in determining the provision for taxes. Additionally, sales and use tax requirements are often fact-specific, complex and vary from jurisdiction to jurisdiction, which complicates monitoring and compliance. Although we believe our tax estimates are reasonable and our procedures for collecting sales taxes are appropriate, from time to time, federal, state, and local tax authorities have challenged, and may in the future challenge, positions we have taken on our tax

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returns or our sales tax collection policies. If we are unable to resolve these challenges favorably, we could incur additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication, or resolution of any disputes, could have a material impact on our consolidated financial position and results of operations.
Legislation and regulations requiring the display and provision of nutritional information for our menu offerings in our restaurants could increase our operating costs, affect consumer preferences, increase the likelihood of litigation, and negatively impact our results of operations.
Some of our Bob Evans Restaurants are already subject to state menu-labeling laws. The Health Care Reform Acts contain provisions that require restaurants with 20 or more locations to post calorie information on menus and additional nutritional information in writing at the restaurant. The FDA released Proposed Regulations implementing this legislation on April 6, 2011. The FDA was expected to release Final Regulations prior to December 31, 2011, but did not, and no release date is currently set. The Final Regulations are anticipated to specify when the FDA will commence enforcement of the Final Regulations which is expected to be between six months to one year after publication. Although the new federal legislation would preempt state and local legislation already enacted (e.g., California, Maine, Massachusetts, Montgomery County, Maryland, New Jersey, Oregon, Nashville, Tennessee, New York City, New York and Philadelphia, Pennsylvania), some of these jurisdictions are requiring compliance with their regulations until the FDA begins enforcing the federal regulations.
Menu labeling regulations could have a material and adverse effect on our results of operations and financial condition due to the potential impact on our sales and profitability if the disclosures change guest preferences and menu mix, as well as increased operating costs incurred to comply with these regulations. Moreover, we could become subject to litigation arising from our nutritional disclosures, such as claims that our nutritional disclosures are inaccurate or that our menu offerings are harmful to human health.
Health concerns and government regulations relating to the consumption of trans-fats, pork, beef, chicken and other food products could affect consumer preferences and could negatively impact our results of operations.
Consumer food preferences could be affected by health concerns regarding the consumption of various types of food, such as trans-fats, pork, beef or chicken. While we have eliminated all artificial and synthetic trans-fats from our restaurant menu offerings and our food products, some foods, such as bacon, naturally contain trans-fats. Some government authorities have proposed increasing regulations regarding naturally occurring trans-fats and sodium. These regulations could, if adopted, require us to limit naturally occurring trans-fats or sodium amounts in our menu offerings and/or food products in the future. This could require us to switch to higher cost ingredients, stop offering certain products, or could hinder our ability to operate in certain markets.
Negative publicity concerning “mad cow” and “foot-and-mouth” disease relating to the consumption of beef and other meat products, “H1N1” or “swine flu” related to pork products, “H5N1” and “H7N9” “avian or bird flu” related to poultry products, and the publication of government, academic or industry findings about health concerns relating to menu items served by any of our restaurants could also affect consumer food preferences. These types of health concerns and negative publicity concerning our food products may adversely affect the demand for our food and negatively impact our business and results of operations.
Since the second quarter of 2013 pork producers in the United States have been experiencing an outbreak of PEDv. It is important to note that PEDv affects piglets but does not create a food safety issue. Since first reported in the United States in the second quarter of 2013, PEDv has continued to spread and has now been reported in at least 30 states. According to recent reports, the outbreak has impacted up to 50% of the sows in the United States. We are closely monitoring the evolution of this on-going outbreak and its impact on the swine industry and on business in fiscal year 2015. We are currently unable to predict the extent to which PEDv may negatively impact our operations or sow market prices in the future.

Our business could be adversely impacted if we are the subject of increased litigation regarding personal injuries suffered on our premises, discrimination, harassment or other labor matters.
Employee and customer claims against us based on, among other things, personal injury, discrimination, harassment, wage and hour disputes or wrongful termination may divert our financial and management resources from operating our businesses. Restaurant companies have been the target of class actions and other lawsuits alleging, among other things, violation of federal and state law. Like many employers, we have been faced with allegations of purported class-wide labor violations in Ohio, and we have taken charges related to the settlement of these cases. An unfavorable verdict or a significant settlement in a future class-action lawsuit could have a material adverse effect on our financial position, cash flows and results of operations.

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We identified material weaknesses and significant deficiencies in our internal control over financial reporting during the years ended April 25, 2014, and April 26, 2013. If we fail to maintain an effective system of internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with Generally Accepted Accounting Principles ("GAAP"). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We have identified certain material weaknesses in our internal control over financial reporting in current and prior years, including those described in Item 9A of this Annual Report on Form 10-K. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
In addition, we continue to implement an enterprise resource planning system (“ERP”), which is not yet operational. Any impact from the issues we experienced or additional delays in the implementation of this system could cause further disruption of our internal control over financial reporting and cause delays in our ability to adequately assess our internal control over financial reporting.
The Audit Committee has provided and continues to provide the oversight of management's plans to document and remediate our internal control system. Implementation of these plans to document and remediate our internal control system has and will continue to divert management’s attention from other aspects of our business and place a strain on our management, operational and financial resources due to the costs associated with remediation, which includes both management and Audit Committee time and also the costs associated with third party consultants and required higher levels of audit effort by our independent auditors.
If we fail to remediate any material weakness or significant deficiency, maintain effective internal control over our financial reporting or comply with the federal securities rules and regulations applicable to us, including the Sarbanes-Oxley Act and our SEC reporting obligations related to our internal control over financial reporting, our financial statements may be inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely affected, we may be unable to obtain an unqualified audit opinion, and our access to the capital markets may be restricted. In addition, we may, in the future, identify further material weaknesses or significant deficiencies in our internal control over financial reporting. Each of the foregoing could impact the reliability and timeliness of our financial reports and could cause investors to lose confidence in our reported financial information, which could have a negative effect on our business and the value of our securities. We may also be required to restate our financial statements from prior periods.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our results of operations and financial condition.
Our financial statements are prepared in accordance with generally accepted accounting principles. The FASB, the American Institute of Certified Public Accountants ("AICPA") and other accounting standard-setting bodies may periodically issue changes to, interpretations of or guidance with respect to GAAP. The adoption of such guidance may have an adverse effect on our results of operations and financial position.
IV.    OTHER
Economic conditions in the United States adversely impacted our business and financial results in fiscal 2014, and uncertainty regarding the economic recovery could have a material adverse effect on us in the future.
The restaurant and food products industry is dependent upon consumer discretionary spending. The economic downturn in the United States and uncertainty regarding the economic recovery has reduced consumer confidence impacting the public’s ability and desire to spend discretionary dollars, resulting in lower levels of guest traffic in our restaurants and sales of our food products. When gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage and other borrowing costs increase, our guests and customers have less disposable income and may reduce the frequency with which they dine out or purchase our products. Although there has been some improvement in certain economic indicators, recent reports indicate that consumer uncertainty may persist during 2014 and beyond, so our ability to increase sales may be negatively impacted in the future. If this difficult economic situation continues for a prolonged period of time or deepens in magnitude, our

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business and results of operation could be materially and adversely affected, and our customers may continue to remain apprehensive about the economy and maintain or further reduce their already lowered level of discretionary spending. This could result in spreading fixed costs across a lower level of sales, and could, in turn cause downward pressure on our profitability.
A privacy breach could adversely affect our business.
The protection of customer, employee and company data is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new administrative processes. In addition, customers have a high expectation that we will adequately protect their personal information. For example, in connection with credit and debit card sales, we transmit confidential credit card information. Third parties may have the technology or know-how to breach the security of this customer information, and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. If we fail to comply with these laws and regulations or experience a significant breach of customer, employee or company data, we could be exposed to risks of data loss, fines, a loss of the ability to process credit and debit card payments, litigation and serious disruption of our operations. Additionally, any resulting negative publicity could significantly harm our reputation, which could have a material adverse effect on our financial performance.
Failure to comply with laws, regulations and third party contracts regarding the collection, maintenance and processing of information may result in adverse publicity and adversely affect the operation of our business and results of operations.
We collect, maintain and process certain information about customers and employees. Our use and protection of this information is regulated by various laws and regulations, as well as by third party contracts. If our systems or employees fail to comply with these laws, regulations or contract terms, it could require us to notify customers, employees or other groups, resulting in adverse publicity, loss of sales and profits, increased fees payable to third parties, and penalties or remediation and other costs that could adversely affect the operation of our business and results of operations.
The inappropriate use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications from the improper collection of personal information.
Negative posts or comments about us on any social networking Web site could seriously damage our reputation. In addition, the disclosure of nonpublic company sensitive information through external media channels could lead to information loss as there might not be structured processes in place to secure and archive this information. Identifying new points of entry as social media continues to expand presents new challenges.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to a variety of other factors, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of several factors, including:
fluctuations in food and commodity prices, including sow costs;
the timing of new restaurant openings and related expenses;
restaurant operating costs for our newly opened restaurants, which are often materially greater during the first several months of operation;
labor availability and costs for hourly and management personnel;
profitability of our restaurants, especially in new markets;
impairments of long-term assets;
trends in same-store sales;
adverse weather conditions, especially during peak winter holiday sales seasons;
special items, such as property purchases or sales;
class action or litigation settlements;
local and national economic conditions, including gasoline and other energy costs; and

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changes in consumer preferences and competitive conditions.
Our Bob Evans Restaurants and our BEF Foods business segments are also subject to seasonal fluctuations. As a result, our quarterly and annual operating results, same-store sales and comparable food products sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any fiscal year. If our quarterly operating results fall below the expectations of securities analysts and investors due to the factors discussed above, this could result in a decline in our stock price.
Many factors, including those over which we have no control, affect the trading price of our stock.
Factors such as reports on the economy or the price of commodities, as well as negative or positive announcements by competitors, regardless of whether the report relates directly to our business, could have an impact on the trading price of our common stock. The market price of our common stock may also be affected by stock market conditions, including price and trading fluctuations on the NASDAQ Stock Market, the New York Stock Exchange or other exchanges. In addition to investor expectations about our prospects, trading activity in our common stock can reflect the portfolio strategies and investment allocation changes of institutional holders, as well as nonoperating initiatives such as share repurchase programs. Any failure to meet market expectations for our financial performance, particularly with respect to comparable restaurant sales, revenues, operating margins and earnings per share, would likely cause our stock price to decline.
Disruptions in the financial markets may adversely impact the availability and cost of credit and consumer spending patterns.
Our ability to make scheduled payments or to refinance our debt and to obtain financing for general corporate purposes will depend on our operating and financial performance which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. There can be no assurances that we will be able to arrange credit on terms we believe are acceptable or that permit us to finance our business with historical margins. These events have also adversely affected the U.S. and world economy, and any new or continuing disruptions in the financial markets may also adversely affect the U.S. and world economy, which could negatively impact consumer spending patterns. There can be no assurances that various U.S. and world government responses to the disruptions in the financial markets in the near future will restore consumer confidence, stabilize the markets, or increase liquidity or the availability of credit. There can be no assurances as to how or when this unprecedented period of turmoil will be resolved.
Restrictive covenants in our debt instruments could restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely affect us.
Our credit facility contains various covenants that limit, among other things, our ability to incur liens on our assets; merge or consolidate with other entities; transfer or sell a substantial part of our assets; substantially change the nature of our business; pay dividends or initiate stock repurchases under certain circumstances; and enter into transactions with affiliates, among other restrictions. The covenants contained in our credit facility could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger, acquisition or other corporate opportunities, to fund our business operations or to successfully implement our current and future operating strategies. The credit facility also requires us to maintain certain financial covenants. At April 25, 2014, we were in compliance with these covenants. However, any failure to maintain these financial covenants or have sufficient liquidity to either repay or refinance the then outstanding balance upon violation of the covenants could have a material adverse effect on our financial condition if we were unable to obtain an amendment or waiver from our bank group or access alternative sources of capital.
A breach of a covenant in our debt instruments could cause acceleration of a significant portion of our outstanding indebtedness.
A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other agreements. In addition, the agreements governing our credit facility require us to maintain certain financial ratios. Our ability to comply with these covenants may be affected by events beyond our control (such as uncertainties related to the current economy), and we cannot be sure that we will be able to comply with these covenants at all times in the future. Upon the occurrence of an event of default under any of our debt instruments, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we cannot be sure that our assets would be sufficient to repay in full our outstanding indebtedness.

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If we are unable to continue to pay dividends or repurchase our stock as expected by the market, our earnings per share (“EPS”) and stock price may be harmed.
Our dividend and stock repurchase programs require the use of a significant portion of our cash flow or may exceed our cash flow. Our ability to pay dividends and repurchase stock will depend on our ability to generate sufficient cash flows from operations and our capacity to borrow funds, which may be subject to economic, financial, competitive and other factors that are beyond our control. Any failure to pay dividends or repurchase stock after we have announced our intention to do so may negatively impact investor confidence in us, thereby negatively impacting our EPS and stock price.

Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
We believe that our trademarks, service marks and other proprietary rights are important to our success and our competitive position. Our primary trademarks, “Bob Evans,” "Bob Evans Restaurants" and “Owens,” are key components of our operating and marketing strategies. As a result, we devote appropriate resources to the protection of our trademarks and other proprietary rights. The protective actions that we take, however, may not be sufficient to prevent unauthorized usage or imitation by others, which could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, could cause us to incur significant legal costs.
In addition, third parties might claim that our trademarks or menu offerings infringe upon their proprietary rights. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.
As a result of the provisions of the Membership Interest Purchase Agreement dated January 28, 2013, pursuant to which the sale of the Mimi’s Café restaurant chain was sold, we may incur expenses for liabilities we retained and indemnification we provided to the buyer, and we may not receive all or part of the purchase price evidenced by the $30.0 million promissory note from the buyer.
As part of the terms of the Membership Interest Purchase Agreement dated January 28, 2013, pursuant to which we sold the Mimi’s Café restaurant chain, we retained certain liabilities for the presale operations of the Mimi’s Café restaurant chain, including potential claims and most existing litigation, as well as agreeing to indemnify the buyer against the costs of the same. As a result, we are likely to incur expenses for such claims and liabilities related to periods up to the date of sale.
Part of the consideration we received in the transaction was a promissory note, (the "Note") which has a principal balance of $30.0 million, an annual interest rate of 1.5%, and a term of seven years. The Note is payable 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 $10.0 million 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. Because the maker of the Note is a newly formed entity with limited capital and because of the subordinated nature of our claims under the Note, if the Mimi’s Café restaurant chain should have limited profitability or losses, it is possible that the principal amount of the Note may not be paid in full or at all.
Our current insurance loss estimates may not be adequate and, if claims exceed such estimates, it could have a material adverse effect on our profitability.
We are self-insured for a significant portion of our current exposures related to our workers’ compensation, general, auto and property liabilities and employee health insurance programs. Although we base our loss estimates on actuarial data, as well as on our historical trends, we may not be able to accurately predict the number or value of the claims that occur. In particular, health insurance costs have increased significantly over the last 10 years. In the event that our actual liability exceeds our estimate for any given period, or if we are unable to control rapidly increasing health care costs, there could be a material adverse effect on our level of profitability.
Our Certificate of Incorporation and Bylaws, as well as Delaware law, may have anti-takeover effects.
Provisions of our Certificate of Incorporation and Bylaws may have the effect of discouraging, delaying or preventing a merger, tender offer or proxy contest, which could have an adverse effect on the market price of our common stock. In addition, certain provisions of Delaware law applicable to us could also delay or make more difficult a merger, tender offer or proxy contest involving our company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware

28


corporation from engaging in any business combination with any “interested shareholder” (as defined in the statute) for a period of three years unless certain conditions are met. In addition, our senior management is entitled to certain payments and rights upon a change in control of our Company, which could result in expenses that may deter a potential merger, tender offer or other acquisition of our Company.
Our business could be negatively affected as a result of a proxy fight and the actions of activist shareholders.
We recently received a notice from Castlerigg Global Equity Special Event Master Fund, Ltd., one of our stockholders affiliated with the Sandell Asset Management Corp. (together with its affiliates, "Sandell"), that indicates Sandell's intention to nominate eight individuals for election to our board of directors at our 2014 annual meeting of shareholders. If a proxy contest involving Sandell ensues, or if we become engaged in a proxy contest with another activist shareholder in the future, our business could be adversely affected because:
responding to proxy contests and other actions by activist shareholders can disrupt our operations, be costly and time-consuming, and divert the attention of our management and employees;
perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and
if individuals are elected to our board of directors to pursue an activist shareholder's particular agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our shareholders
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.     PROPERTIES
The following provides a brief summary of the location and general character of our principal plants and other physical properties as of April 25, 2014 .
In March 2013, we sold our former corporate headquarters located at 3776 S. High St., Columbus, Ohio. We purchased approximately 41-acres of property in New Albany, Ohio, in December 2011 for the purpose of building a new corporate headquarters. The building and grounds were completed in October 2013.
We also own the Bob Evans Farm, a 937-acre farm located in Rio Grande, Ohio, and the Spring Creek Farm, a 30-acre farm located in Richardson, Texas. The Rio Grande, Ohio location supports our Bob Evans brand heritage and image through educational and tourist activities. The Richardson farm location is currently classified as held for sale, along with our Richardson, Texas, food production plant.
Bob Evans Restaurants Segment
At the end of fiscal 2014 , we owned the real estate for 480 of our Bob Evans Restaurants and leased the real estate for the remaining 81 locations. The table located in Item 1 of this Annual Report on Form 10-K shows the location of all of our Bob Evans Restaurants in operation as of the end of fiscal 2014 . The initial terms for the majority of our Bob Evans Restaurants’ leases are 20 years and include options to extend the terms. Additionally, we own or lease properties for 20 closed restaurants and other storage facilities.
BEF Foods Segment
Our BEF Foods segment currently produces food products in our four manufacturing facilities. We produce fresh sausage products at our plants located in Hillsdale, Michigan, and Xenia, Ohio. Our Sulphur Springs, Texas, plant produces ready-to-eat products, such as sandwiches, soups and gravies, and our Lima, Ohio, plant produces refrigerated side dishes.
During fiscal 2011, we closed a food product manufacturing plant located in Galva, Illinois, which we sold in 2013, and closed the fresh sausage production portion of our Bidwell, Ohio, plant. In fiscal 2013, we sold the Bidwell and Springfield, Ohio, food production plants, but continued to lease and operate them through December and February of fiscal 2014, respectively.
In August 2012, we purchased the Kettle Creations brand and a 100,000 square foot food production facility in Lima, Ohio. Kettle Creations previously was a co-packer for us. The Lima plant produces, or will produce, refrigerated mashed potatoes and other potato-based side dishes, macaroni and cheese and other pasta side dishes. During the second quarter of

29


fiscal 2014, we completed the first phase of expansion at the Kettle Creations production facility, which included expanding the production facility by 57,000 square feet and constructing an additional production line, at a cost of approximately $24 million.
During fiscal 2014, we also invested approximately $36 million of capital to expand, modify and add production lines to our food production facility in Sulphur Springs, Texas, which increased production capacity for ready-to-eat food products, as well as added capacity for soups and gravies.
We own all of these properties. We lease various other locations throughout our BEF Foods marketing territory, which serve as regional and divisional sales offices.
We believe our facilities have adequate capacity with our recent capital additions, which will position the BEF Foods segment for growth.
ITEM 3.     LEGAL PROCEEDINGS.
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.
ITEM 4.     MINE SAFETY DISCLOSURES.
Not applicable.

30



SUPPLEMENTAL ITEM.     EXECUTIVE OFFICERS OF BOB EVANS FARMS, INC.
The following table sets forth certain information for the “executive officers” of Bob Evans Farms, Inc. for the past five years as of June 19, 2014. The executive officers are appointed by and serve at the pleasure of the Board of Directors of Bob Evans Farms, Inc.
Name
 
Age
 
Years of
Service
as Officer
 
Background
Steven A. Davis
 
56

 
8

 
Chairman of the Board and Chief Executive Officer since May 2006.
Mark E. Hood
 
61

 

 
Chief Financial Officer since June 19, 2014; Consultant from July 2012 to June 2014; Senior Vice President and Chief Financial Officer, Brown Shoe Company, Inc. from 2006 to 2012 (NYSE:BWS)
T. Alan Ashworth
 
54

 
2

 
Vice President, Corporate Development and Finance and Treasurer from June 2014; Vice President, Corporate Development and Finance from August 2012 to June 2014; Senior Director, Finance from December 2011 to August 2012; Vice President, Finance, Convergys Corporation from 2008 to 2011 (NYSE:CVG)
Colin M. Daly
 
42

 
2

 
Senior Vice President, General Counsel and Corporate Secretary since May 2012; Secretary since March 2009 and General Counsel since February 2008, O’Charley’s Inc., Senior Corporate Counsel from April 2006 to January 2008, O’Charley’s Inc.
Joseph R. Eulberg
 
56

 
6

 
Executive Vice President, Human Resources since June 2010; Senior Vice President, Human Resources March 2008 to June 2010.
Richard D. Hall
 
58

 
18

 
Executive Vice President, Supply Chain Management since September 2008; Senior Vice President, Corporate Procurement from August 2006 to September 2008.
Randall L. Hicks (1)
 
54

 
19

 
President, Bob Evans Restaurants since February 2009; Executive Vice President, Bob Evans Restaurants Operations from 2004 to February 2009.
Kevin C. O’Neil
 
59

 
4

 
Vice President, Associate General Counsel and Assistant Secretary since May 2012; Vice President, General Counsel and Corporate Secretary, from July 2011 to May 2012; Sr. Director, Corporate Counsel from April 2010 to July 2011; Senior Counsel, Vorys, Sater, Seymour & Peas, from November 2009 to April 2010; Vice President, Executive Counsel, Corporate, M&A and Corporate Finance, Convergys Corporation (NYSE:CVG), from October 2007 to November 2009.
Sylvester J. Johnson
 
54

 

 
Senior Vice President, Chief Accounting Officer and Controller since September 2013; Chief Accounting Officer, Dex One Corporation from 2009-2013.
Geraldine R. Schlueter
 
51

 
2

 
Senior Vice President and Chief Information Officer since April 2013; Vice President of Application Development, DSW, Inc., May 2012 to February 2013; Vice President of Enterprise Systems Development, Advance Auto Parts, Inc. (NYSE:AAP), January 2006 to May 2012.
Scott C. Taggart
 
44

 
4

 
Vice President, Investor Relations since September 2011; Senior Director, Finance from January 2010 to September 2011. Director of Financial Communications, The Icon Group from January 2003 to January 2010.
J. Michael Townsley
 
55

 
11

 
President, BEF Foods, Inc. since June 2008; Executive Vice President, BEF Foods from November 2006 to June 2008.
(1) On March 4, 2014, Mr. Hicks, the President of Bob Evans Restaurants, announced his retirement effective July 1, 2014.
The “executive officers” are our “Section 16 officers,” both as defined pursuant to the Securities Exchange of 1934.

31



PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
Market Information, Holders of Common Equity and Dividends
The information required by Item 201(a) through (c) of Regulation S-K is incorporated herein by reference to Note 12  — Quarterly Financial Data (Unaudited) , to our consolidated financial statements which are included in Item 8 of this Annual Report on Form 10-K.
Comparison of Five-Year Cumulative Total Return
The following line graph compares the yearly percentage change in our cumulative total stockholder return on our common stock over our preceding five fiscal years against the cumulative total return of the Standard & Poor’s 500 Stock Index (“S&P 500”) and two weighted average peer groups, one "former" that we have been using and the other "new" we have started using this year.
Both our former and new peer groups are comprised of restaurant companies listed on The NASDAQ Stock Market (weighted 70 percent) and a group of meat producers listed on either The NASDAQ Stock Market or the New York Stock Exchange (weighted 30 percent). We measure cumulative stockholder return by dividing (a) the sum of (i) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (ii) the difference between the price of our common stock at the end and the beginning of the measurement period by (b) the price of our common stock at the beginning of the measurement period.
We have adopted the new peer group for several reasons. With our divestiture of the Mimi’s Café restaurant chain and our increased focus on our BEF Foods segment thorough capital investment, we added several additional food companies to the peer group, such as B&G Foods, Flowers Foods and Treehouse Foods. We also determined to remove several companies from the peer group whose market cap was significantly larger than ours, such as McDonald’s Corp., The J.M. Smucker Company and Yum!Brands. The remaining changes were based on forming a peer group with companies with attributes more closely aligned with the Company.
The subsequent performance graph is being furnished as part of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish our stockholders with such information, and therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act or the Exchange Act.

32


CUMULATIVE VALUE OF $100 INVESTMENT
 
2009
2010
2011
2012
2013
2014
New Peer Group (1)
$
100.00

$
130.21

$
177.36

$
214.89

$
241.48

$
290.09

Old Peer Group (2)
$
100.00

$
134.76

$
160.95

$
200.28

$
224.55

$
241.90

Standard & Poor’s 500
$
100.00

$
139.93

$
164.03

$
172.49

$
198.92

$
239.23

Bob Evans Farms, Inc.
$
100.00

$
127.01

$
132.22

$
167.96

$
189.90

$
214.11

(1) The new peer group includes the following companies: AFC Enterprises Inc., B&G Foods Inc., Biglari Holdings Inc., BJ's Restaurants, Inc., Bloomin' Brands, Inc., Brinker International, Inc. Buffalo Wild Wings Inc., Chipotle Mexican Grill, Inc., Cracker Barrel Old Country Store, Inc., Denny's Corporation, Diamond Foods, Inc., DineEquity, Inc., Flowers Foods, Inc., Panera Bread Co., Red Robin Gourmet Burgers Inc., Ruby Tuesday, Inc., Sanderson Farms, Inc., Seneca Foods Corp., Snyder's Lance, Inc., Texas Roadhouse, Inc., The Cheesecake Factory Incorporated, The Hain Celestial Group, Inc., The Wendy's Company, Treehouse Foods, Inc.
(2) The old peer group includes the following companies: Biglari Holdings Inc., BJ's Restaurants, Inc., Brinker International, Inc. Buffalo Wild Wings Inc., Carrols Restaurant Group, Inc., Cheesecake Factory Inc., Cracker Barrel Old Country Store, Darden Restaurants, Inc., Denny's Corporation, DineEquity, Inc., Domino's Pizza, Inc., Famous Dave's of America Inc., Frisch's Restaurants Inc., Lance, Inc., McCormick & Co. Inc., McDonald's Corp., Panera Bread Co., Papa John's International Inc., Red Robin Gourmet Burgers Inc., Ruby Tuesday, Inc., Sanderson Farms, Inc., The Hain Celestial Group, Inc., The J.M. Smucker Company, The Wendy's Company, Yum!Brands, Inc.
Issuer Repurchases of Equity Securities
We repurchased 4,392,572 shares of our common stock for $225.0 million during fiscal 2014 .
On June 18, 2013, the Board of Directors authorized a stock repurchase program of up to $25.0 million. On August 16, 2013, the Board of Directors authorized an additional stock repurchase program of up to $150.0 million for the period ending April 25, 2014. On December 4, 2013, the Board of Directors increased the authorization for the current stock repurchase program to $225.0 million for the period ending April 25, 2014. This program repurchased shares pursuant to Section 10b-18 and Section 10b5-1 Plans. The program authorized Bob Evans to repurchase its outstanding common stock in the open market or through privately negotiated transactions. This program was fully expended in April 2014.
On February 25, 2014, the Board of Directors authorized a stock repurchase program for fiscal 2015 of up to $100.0 million. The fiscal 2015 program will authorize the Company to repurchase its outstanding common stock pursuant to plans

33


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 fiscal 2015 repurchase program is dependent upon the Company’s having available funds and complying with the financial covenants and other restrictions contained within the Company’s credit facility and the repurchase authorization.
The following table provides information on Bob Evans’ purchases of its common stock during the three fiscal months ended April 25, 2014 :
Period

Total Number of
Shares Purchased

Average Price Paid
Per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Approximate Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs
1/25/14-2/21/14

994,486


$
48.97


994,486


$
62,255,226

2/22/14-3/21/14

632,352


49.75


632,352


30,797,901

3/22/14-4/25/14

605,564


50.85


605,564



Total

2,232,402


$
49.70


2,232,402


 


34


ITEM 6.     SELECTED FINANCIAL DATA
Consolidated Financial Review
Bob Evans Farms, Inc. and Subsidiaries
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
 
Dollars and shares in thousands, except per share amounts
 
 
 
(as adjusted)
 
(as adjusted)
 
(as adjusted)
 
(as adjusted)
Operating Results
 
 
 
 
 
 
 
 
 
Net sales from continuing operations
$
1,328,552

 
$
1,330,226

 
$
1,287,210

 
$
1,296,706

 
$
1,321,926

Asset impairment charges from continuing operations (1)
16,850

 
4,409

 
3,286

 
1,896

 
6,195

Operating income from continuing operations
33,125

 
87,954

 
106,475

 
92,351

 
104,092

Income from continuing operations before income taxes
31,111

 
76,469

 
98,591

 
83,484

 
94,002

Provision (benefit) for income taxes
143

 
(6,084
)
 
28,406

 
27,311

 
24,554

Income from continuing operations
30,968

 
82,553

 
70,185

 
56,173


69,448

Income (loss) from discontinued operations, net of income taxes
2,717

 
(83,374
)
 
2,757

 
(2,101
)
 
7,993

Net income (loss)
33,685

 
(821
)
 
72,942

 
54,072


77,441

Earnings Per Share - Income from Continuing Operations
 
 
 
 
 
 
 
 
 
Basic
$
1.17

 
$
2.94

 
$
2.38

 
$
1.88

 
$
2.28

Diluted
$
1.16

 
$
2.90

 
$
2.35

 
$
1.85

 
$
2.25

Earnings Per Share — Income (Loss) from Discontinued Operations
 
 
 
 
 
 
 
 
 
Basic
$
0.10

 
$
(2.97
)
 
$
0.09

 
$
(0.07
)
 
$
0.26

Diluted
$
0.10

 
$
(2.93
)
 
$
0.09

 
$
(0.07
)
 
$
0.26

Earnings per share - Net Income (Loss)
 
 
 
 
 
 
 
 
 
Basic
$
1.27

 
$
(0.03
)
 
$
2.48

 
$
1.81

 
$
2.55

Diluted
$
1.26

 
$
(0.03
)
 
$
2.44

 
$
1.78

 
$
2.51

Financial Position
 
 
 
 
 
 
 
 
 
Working capital
(483,543
)
 
(190,426
)
 
(92,305
)
 
(52,343
)
 
(116,733
)
Property, plant and equipment — net
878,482

 
797,272

 
890,589

 
910,402

 
973,293

Total assets
1,068,316

 
1,020,953

 
1,075,670

 
1,107,994

 
1,123,492

Debt:
 
 
 
 
 
 
 
 
 
Short-term
458,898

 
201,433

 
38,571

 
13,571

 
40,905

Long-term
835

 
816

 
97,145

 
135,716

 
149,287

Stockholders’ Equity
385,588

 
594,775

 
672,135

 
679,570

 
654,239

Supplemental Information for the Year
 
 
 
 
 
 
 
 
 
Capital expenditures from continuing operations
190,995

 
118,200

 
81,863

 
38,739

 
41,781

Depreciation and amortization from continuing operations
79,456

 
69,319

 
60,264

 
60,061

 
67,302

Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
26,450

 
28,066

 
29,464

 
29,921

 
30,425

Diluted
26,704

 
28,488

 
29,925

 
30,422

 
30,890

Cash dividends paid per share
$
1.205

 
$
1.075

 
$
0.950

 
$
0.780

 
$
0.680

Common stock market closing prices:
 
 
 
 
 
 
 
 
 
High
$
58.86

 
$
45.36

 
$
39.71

 
$
34.59

 
$
33.61

Low
$
42.60

 
$
34.45

 
$
27.41

 
$
23.18

 
$
23.38

Supplemental Information at Year-End
 
 
 
 
 
 
 
 
 
Employees
34,470

 
34,023

 
33,763

 
34,386

 
35,627

Registered stockholders
17,689

 
18,927

 
19,776

 
20,675

 
22,659

Market price per share at closing
$
46.80

 
$
42.52

 
$
38.67

 
$
31.36

 
$
30.93

Book value per share
$
16.43

 
$
21.68

 
$
23.49

 
$
22.48

 
$
21.54

(1) Includes asset impairments on both assets held for sale and assets held and used.

35


We have recast the consolidated financial statements to reflect the Mimi's Café operations as a discontinued operation for all periods presented. We have also restated the financial statements for the impact of prior period error corrections after reflecting the impact of the discontinued operations. The as adjusted column reflects Mimi's Café as a discontinued operation and the impact of the error corrections.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
In this 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. This MD&A contains forward-looking statements that set forth our expectations and anticipated results based on management’s plans and assumptions. These statements are often indicated by words such as “expects,” “anticipates,” “believes,” “estimates,” “intends” and “plans.” 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 this Annual Report on Form 10-K under the heading “Item 1A. Risk Factors.” The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Please refer to “Part I, Item 1. Business.” of this Form 10-K for more information regarding forward-looking statements.
We operate in two segments, Bob Evans Restaurants and BEF Foods, which is reflected in management's discussion and analysis. Refer to Note 13 for additional reporting segment information.
As of April 25, 2014 , we operated 561 full-service Bob Evans Restaurants in 19 states and licensed two Bob Evans Express locations. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. Revenue at Bob Evans Restaurants is recognized at the point of sale.
Effective February 15, 2013, we completed the sale of the Mimi’s Café restaurant chain to Le Duff America, Inc., ("Le Duff") a U.S.-based subsidiary of Groupe Le Duff, a global bakery and restaurant company headquartered in France. Mimi’s Café results are included in our Consolidated Statements of Net Income as discontinued operations.
We produce and distribute pork sausage and a variety of complementary home-style convenience food items under the Bob Evans, Owens and Country Creek brand names. These food products are delivered to warehouses that distribute to grocery stores throughout the United States. We also manufacture and sell similar products to foodservice accounts, including Bob Evans Restaurants and other restaurants and food sellers.
References herein to 2014 , 2013 and 2012 refer to fiscal years. All years presented are 52-week years.
Results of Operations
The following table reflects data for our fiscal year ended April 25, 2014 , compared to the preceding two fiscal years. The consolidated information is derived from the accompanying Consolidated Statements of Net Income. The table also includes data for two reporting segments — Bob Evans Restaurants and BEF Foods. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amount.
We have recast the consolidated financial statements to reflect the Mimi's Café operations as a discontinued operation for all periods presented. We have also restated the financial statements for the impact of prior period error corrections after reflecting the impact of the discontinued operations. The as adjusted column reflects Mimi's Café as a discontinued operation and the impact of the error corrections.

36


 
Consolidated Results from Continuing Operations
 
Fiscal 2014
 
Fiscal 2013
 
Fiscal 2012
 
 
 
(as adjusted)
 
(as adjusted)
Net sales
$
1,328,552

 
$
1,330,226

 
$
1,287,210

Operating income
33,125

 
87,954

 
106,475

Cost of sales
33.8
%
 
31.8
%
 
32.6
%
Operating wages and fringe benefit expenses
30.2
%
 
30.5
%
 
30.9
%
Other operating expenses
15.0
%
 
14.4
%
 
13.8
%
Selling, general and administrative expenses
11.6
%
 
11.5
%
 
9.7
%
Depreciation and amortization expense
6.0
%
 
5.2
%
 
4.7
%
Impairment of assets held for sale
0.9
%
 
%
 
%
Operating income
2.5
%
 
6.6
%
 
8.3
%
Segment Results
 
Bob Evans Restaurants
 
BEF Foods
 
FY 2014
 
FY 2013
 
FY 2012
 
FY 2014
 
FY 2013
 
FY 2012
 
 
 
(as adjusted)
 
(as adjusted)
 
 
 
(as adjusted)
 
(as adjusted)
Net sales
$
956,579

 
$
981,418

 
$
972,490

 
$
371,973

 
$
348,808

 
$
314,720

Operating income
27,134

 
69,317

 
86,269

 
5,991

 
18,637

 
20,206

Cost of sales
25.6
%
 
25.0
%
 
24.5
%
 
54.9
%
 
50.8
%
 
57.5
%
Operating wages and fringe benefit expenses
37.7
%
 
37.5
%
 
38.0
%
 
10.9
%
 
10.7
%
 
8.9
%
Other operating expenses
17.2
%
 
16.6
%
 
16.4
%
 
9.1
%
 
8.0
%
 
6.0
%
S,G&A (1)
9.0
%
 
8.0
%
 
7.0
%
 
18.5
%
 
21.5
%
 
18.3
%
Depreciation and amortization expense
6.7
%
 
5.8
%
 
5.2
%
 
4.2
%
 
3.6
%
 
3.0
%
Impairment of assets held for sale
1.0
%
 
%
 
%
 
0.8
%
 
%
 
%
Operating income
2.8
%
 
7.1
%
 
8.9
%
 
1.6
%
 
5.3
%
 
6.4
%
(1)  
Selling, general and administrative expenses (“S,G&A”)
Restaurant Industry Overview
The ongoing industry-wide factors most relevant to our restaurants include: the economy, sales trends, labor and fringe benefit expenses, commodity prices, energy prices, competition, same-store sales, consumer acceptance, restaurant openings and closings, governmental initiatives, food safety and weather.
Bob Evans Farms, Inc. Overview
Fiscal 2014 was a year of tremendous change for Bob Evans Farms, Inc. The Company completed many significant strategic actions during fiscal 2014 that impacted profitability including: consolidation of ready-to-eat production at the Sulphur Springs, Texas, facility; the expansion of the Lima, Ohio, plant, entering into an amended five-year credit facility; moving into the new corporate headquarters; professional expenditures related to responses to an activist shareholder and strengthening our internal processes and controls over financial reporting; and other restructuring activities.
The pretax net income from continuing operations for fiscal 2014 was $31.1 million and the provision for income taxes was $0.1 million. Earnings per basic share from continuing operations was $1.17 while earnings per diluted share from continuing operations was $1.16 per share. Net earnings per basic share was $1.27 and net earnings per diluted share was $1.26 for fiscal 2014.
Bob Evans Restaurants Segment Overview
The factors that had the greatest impact on Bob Evans Restaurants’ performance in fiscal 2014 were the costs associated with adverse severe winter weather conditions, completing our Farm Fresh Refresh remodeling initiative, launching the Bob Evans Express concept, commodity cost increases, the implementation of a new restaurant workforce management initiative and other operating expenses, which include snow removal, utilities, facility repair and other maintenance related items.

37


During fiscal 2014 the Farm Fresh Refresh initiative was completed for all remaining Bob Evans Restaurants selected for the remodeling initiative. During fiscal 2015 , we expect to open up to eight new restaurants.
BEF Foods Segment Overview
The ongoing industry-wide factors most relevant to the BEF Foods segment include: sow costs, including the impact of Porcine Epidemic Diarrhea ("PEDv") on costs and availability, other commodity costs, transportation and energy costs, governmental regulations, food safety, the economy and consumer acceptance.
We are focused on delivering top line growth in the BEF Foods segment. We expect to attain this goal through expanded distribution of side dishes, frozen and precooked sausage product lines, and increasing the volume of foodservice sales which includes products insourced to our restaurants.
Fiscal Year Ended April 25, 2014 (“fiscal 2014 ”) as Compared to Fiscal Year Ended April 26, 2013 (“fiscal 2013 ”)
Net Sales
Consolidated net sales from continuing operations decreased $ 1.7 million , or 0.1 percent, in fiscal 2014 compared to fiscal 2013 . The fiscal 2014 decrease was the result of decreases of $24.8 million in the Bob Evans Restaurants segment net sales, offset partially by an increase of $23.2 million in the BEF Foods segment.
Same-store sales computations for a given year are based on net sales of restaurants that are open for at least 18 months prior to the start of that year. Net sales of restaurants to be rebuilt are excluded for all periods in the same-store sales computation when construction commences on the replacement building. Net sales of closed restaurants are excluded from the same-store sales computation in the period in which the restaurants are closed; with the exception of closed restaurant days for restaurants undergoing the Farm Fresh Refresh, which are included in the same-store sales base.
Bob Evans Restaurants reported net sales of $956.6 million in fiscal 2014 , a 2.5 percent decrease compared to $981.4 million in fiscal 2013 . Same-store sales at Bob Evans Restaurants decreased 2.1 percent in fiscal 2014 , with average menu prices up 2.6 percent. The decrease in net sales is a result of negative same-store sales in each fiscal quarter of 2014 . During fiscal 2014 , Bob Evans Restaurants opened four new restaurants, remodeled 229 existing locations and closed three underperforming restaurants.
The negative same-store sales in fiscal 2014 was primarily due to the impact of severe and sustained winter weather, which had a -1.6% impact on same store sales, and also more than 1,400 lost sales days, which includes 108 incremental lost sales days for the Farm Fresh Refresh remodeling initiative. Bob Evans Restaurants that undergo a Farm Fresh Refresh remodel are closed an average of five to seven days, which equated to a loss in net sales of approximately $5.5 million in fiscal 2014 compared to $6.3 million in the corresponding period last year. As of April 25, 2014 , the Farm Fresh Refresh remodeling initiative was completed except for the six general store-format restaurants, which we have decided to exclude from the Farm Fresh Refresh program, and any recently built restaurants.
Our Farm Fresh Refresh initiative is designed to drive dine-in sales and expand high growth layers, such as bakery, catering and carryout sales. In fiscal 2014 , bakery, catering and carryout sales increased 18.5 percent, 13.1 percent and 1.8 percent, respectively, compared to fiscal 2013 . Our broad value platform offers value and menu innovation across breakfast, lunch and dinner day parts at Bob Evans Restaurants. We offer Three-Course Dinners starting at $9.99, $19.99 Family Meals-to-go and Soups-to-go starting at $5. In fiscal 2014, we introduced a $7.99 Knife & Fork Sandwich and Sweet and Stacked Hotcakes value platforms. In fiscal 2015, we plan to execute our new restaurant expansion program by opening up to eight new restaurants, which will provide another source for top-line growth.

38


The chart below summarizes the restaurant openings and closings during the last two fiscal years for Bob Evans Restaurants:
 
Beginning
 
Opened
 
Closed
 
Ending
Fiscal 2014
 
 
 
 
 
 
 
1st quarter
560

 
1

 

 
561

2nd quarter
561

 
1

 

 
562

3rd quarter
562

 
1

 
1

 
562

4th quarter
562

 
1

 
2

 
561

Fiscal 2013
 
 
 
 
 
 
 
1st quarter
565

 
2

 
2

 
565

2nd quarter
565

 

 

 
565

3rd quarter
565

 

 

 
565

4th quarter
565

 

 
5

 
560

The BEF Foods segment’s net sales increased $23.2 million , or 6.6 percent, in fiscal 2014 versus fiscal 2013 . The increase in net sales is a result of pricing and mix, offset by a decrease in total pounds sold of 2.4 percent in fiscal 2014 compared to fiscal 2013 . Sales volumes were adversely impacted by a supplier dispute related to BEF Foods' refrigerated side dish business and the sale of the SWH facility in California that had been supporting Mimi's Café.
We believe there are opportunities to increase product volume through accelerating product innovation, the expansion of existing production facilities, expanding our selection of food products at each distribution point, insourcing additional Bob Evans Restaurants needs and acquisitions. The insourcing relationship not only benefits the BEF Foods segment through potential increases in total pounds sold, it also offers consistency to our restaurant guests, reduces product preparation and helps insulate Bob Evans Restaurants from arbitrary price increases from outside suppliers.
 
On May 29, 2012, we announced a plan to close our ready-to-eat manufacturing plant in Bidwell, Ohio, and our soup and gravy manufacturing plant in Springfield, Ohio. We ceased operations at these two facilities and have consolidated the volume in Sulphur Springs, Texas, as part of that plant’s expansion in fiscal 2014.
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 to optimize our fresh sausage production network. 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 Sheets.
The expansions of our Lima, Ohio, and our Sulphur Springs, Texas, production facilities were completed during fiscal 2014 . We expect to see continued efficiencies and growth in our refrigerated side dishes and precooked food products. We anticipate the efficiencies gained will enable us to continue our focus on product innovation for future growth and margin improvements.

Cost of Sales
Consolidated cost of sales (cost of materials) from continuing operations was 33.8 percent of net sales and 31.8 percent of net sales in fiscal 2014 and fiscal 2013 , respectively.
Bob Evans Restaurants’ cost of sales was 25.6 percent of net sales in fiscal 2014 and 25.0 percent of net sales in fiscal 2013 . The increase in the cost of sales ratio was due to commodity cost increases, primarily driven by sausage and other pork-related items and beef. We responded to these commodity cost increases in fiscal 2014 by designing an updated menu that focuses on higher margin items, such as beverages, breakfasts and less costly proteins, mainly poultry. We also increased average menu prices by 2.6 percent to offset these higher costs.
BEF Foods' cost of sales was 54.9 percent of net sales and 50.8 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The increase in the cost of sales ratio in fiscal 2014 was due primarily to higher sow costs, which resulted in an increase in cost of sales of $21.1 million, partially offset by a reduction of sausage trade spending, increased pricing and the effect of the Lima, Ohio, plant acquisition in fiscal 2013. Prior to the acquisition of the Lima, Ohio, plant, substantially all costs related to acquiring product from the Lima, Ohio, plant were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition, as an owned facility, rather than as a co-packer, labor costs are included in operating wages; and utilities, freight, and hauling costs

39


are included in other operating expenses. Sow costs averaged $73.23 per hundredweight in fiscal 2014 , an increase of 35.9% as compared to $53.87 per hundredweight in fiscal 2013 .
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses (“operating wages”) from continuing operations were 30.2 percent of net sales and 30.5 percent of net sales in fiscal 2014 and fiscal 2013 , respectively.
Bob Evans Restaurants’ operating wages were 37.7 percent of net sales and 37.5 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The fiscal 2014 increase in the operating wages ratio as a percentage of sales was due to sales deleverage from same-store sales declines and implementation costs for the new workforce management program, partially offset by bonus favorability as Company results did not meet the performance-based incentive compensation requirements.
In the BEF Foods segment, operating wages were 10.9 percent of net sales and 10.7 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The increase in the operating wages ratio in fiscal 2014 is due primarily to an increase in labor hours and to additional wages and fringe benefits associated with our acquisition of the Lima, Ohio, plant during the second quarter of fiscal 2013. Prior to the acquisition of the Lima, Ohio, plant, substantially all costs related to acquiring product from the Lima, Ohio, plant were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition of the Lima, Ohio, plant, as an owned facility rather than a supplier, Lima, Ohio’s, labor costs were included in operating wages, resulting in an increase in operating wages. These increases were partially offset by bonus favorability as Company results did not meet the performance-based incentive compensation requirements.
Other Operating Expenses
Consolidated other operating expenses (“operating expenses”) from continuing operations were 15.0 percent of net sales in fiscal 2014 and 14.4 percent of net sales in fiscal 2013 . Approximately 83 percent of our consolidated operating expenses occurred in Bob Evans Restaurants in fiscal 2014 ; the most significant components of which were utilities, advertising, restaurant supplies, repair and maintenance, non-income based taxes, service contracts, credit card processing fees and insurance.
Bob Evans Restaurants’ operating expenses were 17.2 percent of net sales and 16.6 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The increase in the other operating expenses ratio in fiscal 2014 was primarily a result of sales deleverage, increases in service contracts due to additional snow removal required in fiscal 2014, utilities and preopening expenses related to our Farm Fresh Refresh remodeling initiative and our new restaurants.
BEF Foods segment’s operating expenses were 9.1 percent of net sales and 8.0 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The fiscal 2014 increase in the other operating expenses ratio was due primarily to increased utilities, start-up costs related to the expansion at our Sulphur Springs facility, and increased repair and maintenance expense, much of which is also related to the plant expansions. Additionally, prior to the acquisition of the Lima, Ohio, plant, substantially all costs related to acquiring product from the Lima, Ohio, plant, were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition of the Lima, Ohio, plant, as an owned facility rather than a supplier, cost of materials are still included in inventories and cost of sales, however, other production costs are included in other operating expenses.
Selling, General and Administrative Expenses
The most significant components of S,G&A expenses are wages and fringe benefits, BEF Foods segment’s transportation costs, legal and professional fees, broker commission fees, and BEF Foods segment’s advertising expense. Consolidated S,G&A expenses from continuing operations represented 11.6 percent of net sales and 11.5 percent of net sales in fiscal 2014 and fiscal 2013 , respectively.
Bob Evans Restaurants’ S,G&A expenses were 9.0 percent of net sales and 8.0 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The increase in SG&A expenses as a percent of net sales is primarily due to a $4.5 million increase in allocated professional fees, which includes costs related to shareholder activism and strengthening the Company’s internal processes and controls over financial reporting, and an increase of allocated corporate overhead as a result of the Company providing transition services to Mimi’s Café at less than cost.
BEF Foods segment’s, S,G&A expenses were 18.5 percent of net sales and 21.5 percent of net sales in in fiscal 2014 and fiscal 2013 , respectively. The decrease in the S,G&A ratio for fiscal 2014 was due primarily to a $5.5 million reduction in advertising expenses and a $2.8 million reduction in severance and restructuring charges, primarily related to the decision to close our Bidwell and Springfield production plants in 2013. These cost reductions were partially offset by an increase of

40


allocated corporate overhead as a result of the Company providing transition services to Mimi's Café at less than cost, and a $1.5 million increase in allocated professional fees, which includes costs related to shareholder activism and strengthening the Company's internal processes and controls over financial reporting.
Depreciation and Amortization
Consolidated depreciation and amortization (“D&A”) from continuing operations was 6.0 percent of net sales and 5.2 percent of net sales in fiscal 2014 and fiscal 2013 , respectively.
Bob Evans Restaurants’ D&A was 6.7 percent of net sales and 5.8 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The D&A ratio increased in fiscal 2014 , primarily as a result of property, plant and equipment additions from remodeling 424 existing restaurants as part of our Farm Fresh Refresh initiative in the last two years, and opening four new restaurants in fiscal 2014. The D&A ratio also increased due to sales deleverage from same-store sales declines
BEF Foods segment’s D&A was 4.2 percent of net sales and 3.6 percent of net sales in fiscal 2014 and fiscal 2013 , respectively. The fiscal 2014 D&A ratio increase was due primarily to additional depreciation expense associated with the Lima, Ohio, and Sulphur Springs, Texas, plant expansions and with our acquisition of the Lima, Ohio, plant early in the second quarter of fiscal 2013.
Impairment of Assets Held for Sale
In accordance with the Intangibles — Goodwill and Other Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360, we assess the carrying value of our long-lived asset group whenever circumstances indicate that a decline in fair value may have occurred.
Based on our purchase agreement, effective July 25, 2013, and subject to customary due diligence, to sell nonoperating property, plant and equipment at 29 locations for $3.5 million, we determined that indicators of impairment existed for our held for sale asset group at that time. This resulted in pretax noncash assets held for sale impairment charges in the Bob Evans Restaurants business segment of $9.4 million.
As of April 25, 2014 , we have closed on the sale of 28 of the 29 nonoperating properties. The remaining property was moved out of held for sale assets during the fourth quarter of fiscal 2014 as the sale of the property was determined by management not to be probable in the next year. We have resumed depreciation for this location and the resulting impact to depreciation expense was immaterial for fiscal 2014.
On September 27, 2013, we announced our plans to close our food production plant in Richardson, Texas. Based on the estimated value of the facility, we determined that the long-lived asset group’s then-current carrying value was greater than the fair value. This resulted in a pretax, noncash assets held for sale impairment charge in the BEF Foods segment of $3.0 million. 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 Sheets. Upon being classified as held for sale, depreciation ceased for these assets.
Interest
Net interest expense from continuing operations was as follows:
 
2014
 
2013
 
(In thousands)
Gross interest expense:
 
 
 
Fixed-rate debt
$
391

 
$
10,844

Variable-rate debt
4,885

 
1,672

Capitalized interest
(611
)
 
(835
)
Total Interest Expense
4,665

 
11,681

Gross interest income
 
 
 
Accretion
(1,918
)
 

Other
(733
)
 
(196
)
Total Interest Income
$
(2,651
)
 
$
(196
)
Net interest expense
$
2,014

 
$
11,485


41


The decrease in net interest expense in fiscal 2014 was the result of lower average interest rates on our borrowings as compared to the prior year. During fiscal 2013, we prepaid our outstanding Note Purchase Agreements dated July 28, 2004, as amended, and July 28, 2008, as amended, (“Private Placement Notes”). This was partially offset by an increase in variable-rate debt as our average borrowings on our credit facility increased in fiscal 2014, as well as interest income from the accretion on our long-term note receivable in fiscal 2014. As a result of the sale of Mimi’s Café to Le Duff, we received a promissory note for $30,000 . The note has an annual interest rate of 1.5% and a term of seven years . The note is discounted to its fair value, which as of April 25, 2014 was $16.0 million, and reflected as a long term asset on the Consolidated Balance Sheet. Accretion income on this note was $1,918 in fiscal 2014.
As of April 25, 2014 , we had $458.9 million outstanding on our credit facility and a $0.8 million interest-free loan ($1.0 million nominal) for the construction of our new corporate headquarters. A one percent increase in the benchmark rate used for our credit facility would increase our annual interest expense by approximately $4.7 million assuming the $458.9 million outstanding at the end of fiscal 2014 was outstanding for the entire year.
Provision (Benefit) for Income Taxes
The effective tax rate for continuing operations for fiscal 2014 was 0.5 percent compared to (8.0 percent) for fiscal 2013. The effective income tax rate in fiscal 2014 was substantially different than the statutory rate due to the Company’s domestic production activities deduction, and favorable state settlements. The effective income tax rate in fiscal 2013 was substantially different than the statutory rate primarily due to the impact of the loss on the sale of Mimi’s Café, the impairment of assets held for sale and the conversion of SWH Corporation to a limited liability company (“LLC”) implemented during the fiscal year, as discussed in the General Overview above. In both 2014 and 2013 the effective tax rate was significantly impacted by the effect of permanent items on low levels of pretax earnings.
Income (Loss) From Discontinued Operations
We sold Mimi’s Café, previously disclosed as a reporting segment, to Le Duff in the fourth quarter of fiscal 2013 . As part of the sale, we entered into a transition services agreement with Le Duff whereby we provided corporate support services and a supply agreement whereby we provided food products. The transition services agreement was originally expected to expire in December 2013 and the supply agreement was originally expected to expire in February 2014.
In accordance with FASB ASC 205-20, Discontinued Operations, there is an assessment period for one year after a component has been disposed of, whereby an entity must reassess if they have significant continuing cash flows or significant continuing involvement in the operations of the component after the disposal to assess if the segment should be classified as continuing operations. As a result of having significant continuing cash flows, due to the two agreements noted above, the Mimi’s Café reporting segment was not initially presented within discontinued operations. On July 23, 2013, the Company received a notice from SWH Mimi’s Café, LLC that it was terminating its supply agreement with BEF Foods, Inc. The transition services agreement timing did not change significantly and expired in January 2014. As a result of this termination notice, the Company determined it no longer had significant cash flows from Mimi’s Café operations, thus Mimi’s Café should be presented within discontinued operations for all years presented in the financial statements, effective with the Form 10-Q filed for the three months ended July 26, 2013.
As of April 25, 2014 , our recasted and adjusted Consolidated Statements of Net Income present income, net of tax, from discontinued operations, of $2.7 million. The prior year loss from discontinued operations, net of tax, was $83.4 million. The prior year loss was primarily the result of an impairment recorded on Mimi’s long-lived assets.
Discontinued operations only include the revenues and expenses that are specifically identified with Mimi’s Café and excludes any allocation of corporate costs, including general and administrative expenses, which represent $2.9 million for fiscal 2013 . The general and administrative expenses excluded from the loss on discontinued operations were reallocated to our Bob Evans Restaurants and BEF Foods segments in the amount of $2.2 million and $0.7 million, respectively, in fiscal 2014.


42


Fiscal Year Ended April 26, 2013 (“fiscal 2013”) as Compared to Fiscal Year Ended April 27, 2012 (“fiscal 2012”)
Net Sales
Consolidated net sales from continuing operations increased $ 43.0 million , or 3.3 percent, in fiscal 2013 compared to fiscal 2012 . The fiscal 2013 increase was the result of increases of $ 8.9 million and $ 34.1 million in the Bob Evans Restaurants and the BEF Foods segments net sales respectively. Mimi’s Café is presented within discontinued operations for all years presented in the financial statements.
Same-store sales computations for a given year are based on net sales of restaurants that are open for at least 18 months prior to the start of that year. Net sales of restaurants to be rebuilt are excluded for all periods in the same-store sales computation when construction commences on the replacement building. Net sales of closed restaurants are excluded from the same-store sales computation in the period in which the restaurants are closed; with the exception of closed restaurant days for restaurants undergoing the Farm Fresh Refresh which are included in the same-store sales base.
Bob Evans Restaurants reported net sales of $981.4 million in fiscal 2013 , a 0.9 percent increase compared to $ 972.5 million in fiscal 2012 . Same-store sales at Bob Evans Restaurants increased 1.0 percent in fiscal 2013 , with average menu prices up 2.4 percent. The increase in net sales is a result of positive same-store sales in each fiscal quarter of 2013 . During fiscal 2013 , Bob Evans Restaurants opened two new restaurants, remodeled 195 existing locations and closed seven underperforming restaurants.
The net sales from continuing operations increase in fiscal 2013 was due to positive same-store sales, despite the more than 1,300 lost sales days, which included 684 incremental lost sales days, for the Farm Fresh Refresh remodeling initiative and elimination of our “Corner Cupboard” retail assortment. Bob Evans Restaurants that undergo a Farm Fresh Refresh remodel are closed an average of five to seven days, which equated to a loss in net sales of approximately $6.3 million in fiscal 2013 compared to $2.7 million in fiscal 2012.
We saw a sales increase provided by restaurants that underwent a Farm Fresh Refresh remodeling initiative over non-refreshed restaurants of approximately 3.7 percent, compared to non-refreshed restaurants, which recorded a same-store sales increase of 0.1 percent.
Our Farm Fresh Refresh initiative is designed to drive dine-in sales and expand high growth layers, such as bakery, catering and carryout sales. In fiscal 2013 , bakery, catering and carryout sales increased 32 percent, 20 percent and 8 percent, respectively, compared to fiscal 2012 . Our broad value platform that offers value and menu innovation across breakfast, lunch and dinner day parts also contributed to positive same-store sales at Bob Evans Restaurants. We offered $9.99 Three-Course Dinners, $6 Farmhouse Deals, $20 Family Meals-to-Go and our $5 Carryout-to-Go.
The chart below summarizes the restaurant openings and closings during fiscal 2013 and fiscal 2012 for Bob Evans Restaurants:
 
Beginning
 
Opened
 
Closed
 
Ending
Fiscal 2013
 
 
 
 
 
 
 
1st quarter
565

 
2

 
2

 
565

2nd quarter
565

 

 

 
565

3rd quarter
565

 

 

 
565

4th quarter
565

 

 
5

 
560

Fiscal 2012
 
 
 
 
 
 
 
1st quarter
563

 

 

 
563

2nd quarter
563

 
2

 
1

 
564

3rd quarter
564

 

 

 
564

4th quarter
564

 
2

 
1

 
565

The BEF Foods segment’s net sales increased $ 34.1 million , or 10.8 percent, in fiscal 2013 versus fiscal 2012 . The increase in net sales was primarily due to an increase in total pounds sold of 14.6 percent in fiscal 2013 compared to fiscal 2012 . The increase in total pounds sold was largely due to the growth of our foodservice and refrigerated side dishes categories. Our acquisition of Kettle Creations early in the second quarter of fiscal 2013 contributed 2.9 percent of the total pounds sold increase. The growth of our foodservice and refrigerated side dishes categories lessened the impact of flat sausage sales. An increase in gross sales was partially offset by an increase in promotional expenses of $7.3 million, or 15.6 percent in fiscal 2013 . Promotional expenses and other selling allowances are reflected in the Consolidated Statements of Net Income as a

43


reduction of gross sales. The increase in promotional expenses was aimed at protecting market share in the category by assisting the retailer to reduce shelf prices as a response to significantly lower second quarter fiscal 2013 sow costs.
On May 29, 2012, we announced an additional phase to our plant optimization initiatives with the plan to close our ready-to-eat manufacturing plant in Bidwell, Ohio, and our soup and gravy manufacturing plant in Springfield, Ohio.
Cost of Sales
Consolidated cost of sales (cost of materials) from continuing operations was 31.8 percent of net sales and 32.6 percent of net sales in fiscal 2013 and fiscal 2012 , respectively.
Bob Evans Restaurants’ cost of sales was 25.0 percent of net sales in fiscal 2013 and 24.5 percent of net sales in fiscal 2012 . The increase in the cost of sales ratio was due to commodity cost increases and unfavorable menu mix shifts, which were partially offset by certain efficiency initiatives, including the actual versus theoretical food cost program.
BEF Foods segment cost of sales were 50.8 percent of net sales and 57.5 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. The decrease in the cost of sales ratio in fiscal 2013 was the result of a decline in sow costs and the effect of the Kettle Creations acquisition. Prior to the acquisition of Kettle Creations, substantially all costs related to acquiring product from Kettle Creations were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition, as an owned facility, rather than as a co-packer, labor costs are included in operating wages; and utilities, freight, and hauling costs are included in other operating expenses. Sow costs averaged $53.87 per hundredweight in fiscal 2013 , a decline of 12.5 percent, compared to $61.58 in fiscal 2012 . The year-over-year decline in sow costs resulted in a decrease of about $7.9 million in cost of sales for the BEF Foods segment compared to fiscal 2012 .
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses (“operating wages”) from continuing operations were 30.5 percent of net sales and 30.9 percent of net sales in fiscal 2013 and fiscal 2012 , respectively.
Bob Evans Restaurants’ operating wages were 37.5 percent of net sales and 38.0 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. The fiscal 2013 improvement in the operating wages ratio resulted from sales leverage from improvement in same-store sales and labor efficiency initiatives, including more effective scheduling.
In the BEF Foods segment, operating wages were 10.7 percent of net sales and 8.9 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. The increase in the operating wage ratio in fiscal 2013 is due primarily to additional operating wages and fringe benefits associated with our acquisition of Kettle Creations early in the second quarter of fiscal 2013 . Prior to the acquisition of Kettle Creations, substantially all costs related to acquiring product from Kettle Creations were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition of Kettle Creations, as an owned facility rather than a supplier, labor costs were included in operating wages, resulting in an increase in operating wages. The increase in operating wages ratio in fiscal 2013 was partially offset by the sale of the Springfield, Ohio, warehouse facility in the second quarter of fiscal 2012. The fees associated with the third-party distribution agreement for continued use of the Springfield, Ohio, location as an outsourced facility in fiscal year 2013 rather than an owned facility through the first two quarters of fiscal 2012, are included in other operating expenses in the current year. In the first two quarters of fiscal 2012, when we owned the facility, there were operating wages associated with running the warehouse facility.
Other Operating Expenses
Consolidated other operating expenses (“operating expenses”) from continuing operations were 14.4 percent of net sales in fiscal 2013 and 13.8 percent of net sales in fiscal 2012 . Approximately 85 percent of our consolidated operating expenses occurred in Bob Evans Restaurants in fiscal 2013 ; the most significant components of which were utilities, advertising, restaurant supplies, non-income based taxes, repair and maintenance, credit card processing fees and rent.
Bob Evans Restaurants’ operating expenses were 16.6 percent of net sales and 16.4 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. The increase in the other operating expense ratio in fiscal 2013 was primarily a result of increases in preopening expenses and restaurant supplies as part of our Farm Fresh Refresh remodeling initiative, and also impacted by increases in service contracts, repairs and maintenance and advertising expenses.
BEF Foods segment’s operating expenses were 8.0 percent of net sales and 6.0 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. The fiscal 2013 increase in the operating expense ratio was due primarily to additional operating expenses associated with our acquisition of Kettle Creations in the second quarter of fiscal 2013 and volume-related increases

44


in hauling and freight expenses, partially offset by our lean manufacturing productivity initiatives. Prior to the acquisition of Kettle Creations, substantially all costs related to acquiring product from Kettle Creations were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition of Kettle Creations, as an owned facility rather than a supplier, cost of materials are still included in inventories and cost of sales, however, other production costs are included in other operating expenses. Additionally, the fees associated with the third-party distribution agreement for continued use of the Springfield, Ohio, location as an outsourced facility in fiscal year 2013 rather than an owned facility through the first two quarters in fiscal 2012 , are included in other operating expenses in the current year. In the first two quarters of fiscal 2012 , when we owned the facility, there were operating wages associated with running the Springfield, Ohio, warehouse facility.
Selling, General and Administrative Expenses
The most significant components of S,G&A expenses from continuing operations were BEF Foods segment’s transportation costs, BEF Foods segment’s advertising expense, wages and fringe benefits, broker commission fees, fixed asset impairment charges and gains/losses on asset sales. Consolidated S,G&A expenses from continuing operations represented 11.5 percent of net sales and 9.7 percent of net sales in fiscal 2013 and fiscal 2012 , respectively.
Bob Evans Restaurants’ S,G&A expenses were 8.0 percent of net sales and 7.0 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. In fiscal 2013 S,G&A expenses increased due to impairment charges related to organization changes, acquisition costs, employer match to the Company’s retirement plans expenses, long-term incentive plans expenses, legal fees, increased utilization of contract labor, wages, open headcount filled during fiscal 2013 and increased allocations of corporate expenses as a result of providing transition services to Mimi’s Café at less than cost. In fiscal 2013 , we impaired a total of three underperforming restaurants for a total of $1.7 million and a total of ten nonoperating locations for $2.7 million, while in fiscal 2012, we impaired a total of three underperforming restaurants for a total of $1.0 million and a total of five nonoperating locations for a total of $2.2 million.
BEF Foods segment’s S,G&A expenses were 21.5 percent of net sales and 18.3 percent of net sales in in fiscal 2013 and fiscal 2012 , respectively. The increase in the S,G&A ratio for fiscal 2013 was due primarily to the effect of the Kettle Creations acquisition, hauling and freight costs, advertising expenses, wages and fringe benefit expenses, broker commission fees and product recalls in fiscal 2013 .
Depreciation and Amortization
Consolidated depreciation and amortization (“D&A”) from continuing operations was 5.2 percent of net sales and 4.7 percent of net sales in fiscal 2013 and fiscal 2012 , respectively.
Bob Evans Restaurants’ D&A was 5.8 percent of net sales and 5.2 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. The D&A ratio increased in fiscal 2013 , as a result of property, plant and equipment additions from remodeling 195 existing restaurants as part of our Farm Fresh Refresh initiative and opening two restaurants.
BEF Foods segment’s D&A was 3.6 percent of net sales and 3.0 percent of net sales in fiscal 2013 and fiscal 2012 , respectively. The fiscal 2013 D&A ratio increase was due primarily to additional depreciation expense associated with our acquisition of Kettle Creations early in the second quarter of fiscal 2013 .
Interest
Net interest expense from continuing operations was as follows:
 
2013
 
2012
 
 
 
 
 
(In thousands)
Gross interest expense:
 
 
 
Fixed-rate debt
$
10,844

 
$
8,311

Variable-rate debt
1,672

 
217

Capitalized interest
(835
)
 
(644
)
 
11,681

 
7,884

Gross interest income
(196
)
 

Net interest expense
$
11,485

 
$
7,884


45


The increase in net interest expense in fiscal 2013 was the result of higher average borrowings in fiscal 2013 compared to fiscal 2012 , as well as the prepayment of our outstanding Note Purchase Agreements dated July 28, 2004, as amended, and July 28, 2008, as amended, (“Private Placement Notes”), which included a $6.2 million make-whole amount, during the third quarter of fiscal 2013 . We increased our total debt position by $66.5 million in fiscal 2013 . The increase in debt is due to increased borrowings under the credit facility, which was partially offset by the prepayment of our Private Placement Notes. The increase in capitalized interest is due to increased capital projects in process, primarily our new corporate headquarters and the Farm Fresh Refresh initiative, which had the effect of lowering reported interest expense.
At April 26, 2013 , our outstanding debt included $201.4 million outstanding on our variable-rate revolving credit facility and a $0.8 million interest-free loan ($1.0 million nominal) for the construction of our new corporate headquarters.
Provision (Benefit) for Income Taxes
The effective tax rate for continuing operations for fiscal 2013 was (8.0 percent) compared to 28.8 percent for fiscal 2012. The effective income tax rate in fiscal 2013 was substantially different than the statutory rate primarily due to the impact of the loss on the sale of Mimi’s Café, the impairment of assets held for sale and the conversion of SWH Corporation to a LLC implemented during the fiscal year, as discussed in the General Overview above.
Income (Loss) From Discontinued Operations
We sold the Mimi’s Café restaurant chain, previously disclosed as a reporting segment, to Le Duff in the fourth quarter of fiscal 2013 . As part of the sale, we entered into a transition services agreement with Le Duff, whereby we provided corporate support services and a supply agreement whereby we provided food products. The transition services agreement was originally expected to expire in December 2013 and the supply agreement was originally expected to expire in February 2014.
In accordance with FASB ASC 205-20, Discontinued Operations, there is an assessment period for one year after a component has been disposed of, whereby an entity must reassess if they have significant continuing cash flows or significant continuing involvement in the operations of the component after the disposal to assess if the segment should be classified as continuing operations. As a result of having significant continuing cash flows, due to the two agreements noted above, the Mimi’s Café reporting segment was not initially presented within discontinued operations. On July 23, 2013, the Company received a notice from SWH Mimi’s Café, LLC that it was terminating its supply agreement with BEF Foods, Inc. The transition services agreement timing did not change significantly and expired in January 2014. As a result of this termination notice, the Company determined it no longer had significant cash flows from Mimi’s Café operations, thus Mimi’s Café should be presented within discontinued operations for all years presented in the financial statements, effective with the Form 10-Q filed for the three months ended July 26, 2013.
As of April 26, 2013 , our recast Consolidated Statements of Net Income presents a loss, net of tax, from discontinued operations, of $ 83.4 million . The fiscal 2012 income from discontinued operations, net of tax, was $ 2.8 million . The 2013 loss was primarily the result of an impairment recorded on Mimi’s long-lived assets.
Discontinued operations only include the revenues and expenses that are specifically identified with Mimi’s Café and excludes any allocation of corporate costs, including general and administrative expenses, which represent $2.9 million for fiscal 2013 and $2.5 million in fiscal 2012 . The general and administrative expenses excluded from the loss on discontinued operations were reallocated to our Bob Evans Restaurants and BEF Foods segments in the amount of $2.2 million and $0.7 million in fiscal 2013, respectively, and $1.9 million and $0.6 million in fiscal 2012, respectively.

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 facility with a consortium of banks, with a maturity date of January 1, 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 incurred and paid were $186.0 and $191.0 million , respectively, for fiscal 2014 , compared to $129.3 and $118.2 million in the prior year. The expenditures primarily relate to completion of our accelerated Farm Fresh Refresh remodeling initiative for Bob Evans Restaurants, plant expansions for BEF Foods, completion of our new corporate

46


headquarters, the development of an ERP system, and the opening of four new Bob Evans Restaurants. In fiscal 2015 , capital expenditures are expected to approximate $85.0 million to $90.0 million and include expenditures for up to eight new restaurants, the ongoing development and integration of an ERP system, and continuing infrastructure maintenance.
During fiscal 2014 , we paid an annual cash dividend of $1.205 per share, compared to $1.075 for fiscal 2013 . 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.
Our Board of Directors authorized stock repurchases of up to $225.0 million for fiscal 2014 ; all of which was expended to repurchase approximately 4.4 million shares of our common stock. During fiscal 2013 , stock repurchases totaled $63.1 million to repurchase 1.6 million shares of our common stock.
On February 25, 2014, the Board of Directors authorized a stock repurchase program for fiscal 2015 of up to $100.0 million. The fiscal 2015 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 fiscal 2015 repurchase program is dependent upon our having available 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 ("credit facility"). The credit facility 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 facility 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 1.00% to 2.00% per annum for LIBOR, and ranging from 0.00% to 1.00% 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 0.5%, (ii) the Prime Rate, or (iii) the Daily LIBOR Rate, plus 1.0%. 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 facility was 1.48% during the year ended April 25, 2014. As of April 25, 2014, we had outstanding borrowings of $458.9 million under our credit facility and $12.3 million was reserved for certain standby letters of credit.
Our credit facility contains financial and other various affirmative and negative covenants that are typical for financings of this type. Our credit facility contains financial covenants that require us to maintain specified ratios at April 25, 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 3.75 to 1.00. As of April 25, 2014, our minimum coverage ratio was 30.99, and our maximum leverage ratio was 3.27, as defined in our credit facility. Our credit facility also limits repurchases of our common stock and the amount of dividends that we pay to holders of our common stock in certain circumstances. A breach of any of these covenants could result in a default under our credit facility, in which all amounts under our credit facility may become immediately due and payable, and all commitments under our credit facility to extend further credit may be terminated. We are in compliance with all of the financial covenant requirements of our credit facility as of April 25, 2014.
While we believe that our cash flow from operations as well as the borrowing capacity under our credit facility, will be sufficient to fund anticipated capital expenditures, working capital requirements, debt repayments, dividend payments and share repurchases during fiscal 2015, we have initiated discussions with the lenders under our credit facility to amend the credit facility to provide additional flexibility under the financial covenants. There can be no assurance that we will be able to obtain such an amendment on terms and conditions acceptable to us.
Operating activities
Net cash provided by continuing operating activities was $165.5 million and $138.1 million for fiscal 2014 and fiscal 2013 , respectively. The increase in cash provided by operating activities year over year was due primarily to the decrease in the federal and state income tax assets due to collected refunds, partially offset by the decrease in income from continuing operations.
Investing activities
Cash used in continuing investing activities was $178.1 million and $155.6 million for fiscal 2014 and fiscal 2013 , respectively. The increase was due primarily to an increase in capital expenditures of $72.8 million compared to the prior year and lower proceeds received for the sale of long-lived assets of $7.5 million , partially offset by $52.3 million of Kettle Creations acquisition costs incurred in fiscal 2013. Capital expenditures increased during fiscal 2014 primarily due to the expansions of our Lima, Ohio, and Sulphur Springs, Texas, facilities and completion of our new corporate headquarters.

47


Financing activities
Cash provided by continuing financing activities was $8.9 million for fiscal 2014 , while cash used in financing activities was $24.6 million for fiscal 2013 . The increase in the cash provided by financing activities was primarily due to principal payments on long-term debt of $135.7 million during fiscal 2013, as compared to none in the current year, and a higher net increase in credit facility borrowing of $56.0 million as compared to the prior year, partially offset by additional repurchases of treasury stock of $161.9 million as compared to the prior year.
On May 22, 2014 , the Board of Directors approved a quarterly cash dividend of $0.31 per share. The quarterly cash dividend was paid on June 16, 2014 , to shareholders of record at the close of business on June 2, 2014 .
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements through the date of this Annual Report on Form 10-K.
Contractual Obligations
Future payments of our contractual obligations and outstanding indebtedness as of April 25, 2014 , are as follows (in thousands):
Contractual Obligations (1)
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Operating leases
 
$
4,871

 
$
4,744

 
$
4,626

 
$
4,639

 
$
4,593

 
$
43,482

 
$
66,955

Short-term debt (2)
 
$
458,898

 
$

 
$

 
$

 
$

 
$

 
$
458,898

Long-term debt (3)
 
$

 
$

 
$

 
$

 
$

 
$
1,000

 
$
1,000

Purchase obligations
 
$
14,300

 
$

 
$

 
$

 
$

 
$

 
$
14,300

Other (4)
 
$
1,387

 
$
93

 
$

 
$

 
$

 
$

 
$
1,480

(1)  
The provisions of our deferred compensation plans do not provide for specific payment dates. Therefore, our obligations under these plans were excluded from this table. Our deferred compensation obligations of $35.7 million were included in the Consolidated Balance Sheets at April 25, 2014 , as part of long-term liabilities.
(2)  
The balance represents our credit facility borrowings, which is included in the Consolidated Balance Sheets as part of current liabilities. See Note 4 for further information.
(3)  
The balance does not include interest, as this debt is interest-free. We have imputed interest based on our current borrowing rate.
(4)
The balance includes leased IT equipment used at our corporate office and $1.2 million in unrecognized tax benefits related to state exposures that may be necessary in the coming year due to settlements with taxing authorities or lapses of statutes of limitations.
We rent certain restaurant facilities under operating leases having initial terms that primarily expire approximately 20 years from inception. The leases typically contain renewal clauses of 5 to 30 years exercisable at our option. Most of the leases also contain either fixed or inflation-adjusted escalation clauses.
As of April 25, 2014 , we had contractual commitments of approximately $14.3 million for the purchase of inventory and new restaurant construction.
Business Outlook
Our outlook for fiscal 2015 relies on a number of assumptions, as well as the risk factors included in our SEC filings. We anticipate consolidate d net sales to approximate $1.38 billion to $1.40 billion in fiscal 2015 . We are projecting net interest expense of approximately $8.5 million to $10.5 million for fiscal 2015 . We estimate that our effective tax rate will approximate 30.0 percent to 31.0 percent for all of fiscal 2015 . We project weighted-average diluted shares outstanding to be approximately 23.8 million shares for fiscal year 2015 .
In fiscal 2015 , we expect capital expenditures to approximate $85 million to $90 million . The estimated expenditures include opening up to eight new Bob Evans Restaurants, the ongoing development and integration of an ERP system, and continuing infrastructure maintenance. Depreciation and amortization expense for fiscal 2015 should approximate $83 million to $87 million .

48


We expect Bob Evans Restaurants to experience a full-year same-store sales increase between 1.5 percent and 2.5 percent, driven by the sales increase from Farm Fresh Refresh remodels and value platforms. In Bob Evans Restaurants, we expect an adjusted operating margin of approximately 5.8 percent to 6.2 percent.
In the BEF Foods segment, we expect overall net sales of $430 million to $ 440 million for the full fiscal year, driven by new product introductions and distribution gains in both retail and foodservice. We anticipate that sow costs will average approximately $85 per hundredweight in fiscal 2015 for the full year. We expect BEF Foods’ fiscal 2015 operating income margin to be approximately 7.5 percent to 9.5 percent. We expect BEF Foods’ operating income to reflect the impact of ERP spending as well as the additional production expected to begin at the n ewly expanded Lima and Sulphur Springs plants.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("US GAAP"). The preparation of these financial statements requires us to make estimates and assumptions, based on our experience and current understanding of the facts and circumstances, which affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.
Additional Significant Accounting Policies are described in Note 1. Certain significant accounting policies require complex and subjective judgment as a result of estimates surrounding uncertain outcomes. While we believe that our historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, the judgments surrounding these critical accounting policies may result in materially different amounts under different financial conditions or by using different assumptions. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Revenue Recognition
Revenue is recognized for Bob Evans Restaurants at the point of sale, other than revenue from the sale of gift cards, which is deferred and recognized upon redemption. 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 sales and redemption patterns, referred to as the redemption recognition method. Gift card breakage is recognized proportionately over the period of redemption in net sales of our Bob Evans Restaurants segment in the Consolidated Statements of Net Income. The liability for unredeemed gift cards is included in deferred revenue on the Consolidated Balance Sheets.
We review our gift card breakage rates and rate of redemption periodically to ensure our estimates are reasonable. If actual redemption patterns differ from our estimates, actual gift card breakage amounts may vary from the amounts recorded. A change in our gift card breakage estimate of one percent would result in a change to our net sales of approximately $0.4 million.
We also produce and distribute pork sausage products and a variety of complementary home-style convenience food items under the Bob Evans and Owens brand names in our BEF Foods segment. These food products are distributed primarily to warehouses that distribute to grocery stores throughout the United States. Revenue in the BEF Foods segment is generally recognized when products are received by our customers. 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. Our promotions may fluctuate based on sow costs trends and during peak holiday periods. As a result, we enter into promotion agreements with our customers during distinct time periods where we expect to maximize the impact of promotions on net sales through increased volume when sow costs trends are expected to be favorable. A change in actual sales volume and sow costs from our estimates will impact sales, and ultimately, profitability of the BEF Foods segment. All revenue is presented net of sales tax.
Long-Lived Asset Impairment
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 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 discounted future operating cash flows of the asset and the expected proceeds from the sale of the asset, in accordance with the Property, Plant and Equipment Topic of the FASB ASC. We estimate the fair value based on appraisals, which we deem to be Level 3 inputs under the Fair Value Measurements and Disclosures Topic of the FASB ASC. Indicators of impairments in the Bob Evans Restaurants segment are a result of underperforming restaurants and nonoperating property, plant and equipment locations. Assumptions used to calculate impairment of long-lived assets are dependent on factors such as useful lives of long-lived assets, expected operating

49


performance, undiscounted future operating cash flows and desirability of our location. A change to any of these factors may alter our long-lived asset impairment and adversely impact our Consolidated Statements of Net Income. See Note 7 for further information.
During fiscal year 2014 and fiscal year 2013 , we recognized long-lived asset impairments in our Bob Evans Restaurants segment of $13.8 million and $ 4.4 million, respectively. We recognized $3.0 million of long-lived asset impairments in our BEF Foods segment in fiscal 2014 and did not recognize any long-lived asset impairment in our BEF Foods segment in fiscal 2013 .
Goodwill and Other Intangible Assets
Goodwill, which represents the cost in excess of fair market value of net assets acquired, is not amortized; rather it is tested annually for impairment or on a more frequent basis if there is an indicator of impairment. We perform our annual test in the fourth quarter. We have $19.6 million in goodwill in our BEF Foods segment.
In our BEF Foods segment, other intangible assets represent a trade name and non-compete agreement of $2.8 million and $0.5 million , respectively. The non-compete agreement is a definite lived intangible asset and is amortized over the term of the agreement.
Goodwill and intangible assets with indefinite lives are not amortized, but rather are tested for impairment during the fourth quarter each year or on a more frequent basis when indicators of impairment exist. Goodwill impairment testing involves a comparison of the estimated fair value of reporting units to the respective carrying amount. If the estimated fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the estimated fair value, then a second step is performed to determine the amount of impairment, if any. We perform our impairment test using a combination of income based and market based approaches. The income based approach indicates the fair value of an asset or business based on the cash flows it can be expected to generate over its remaining useful life. Under the market-based approach, fair value is determined by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets
Our assumptions used to calculate impairment of goodwill and other intangible assets are dependent on factors such as expected operating performance, undiscounted future operating cash flows, declines in our stock price and changes to consumer acceptance. A change to any of these factors may alter our evaluation of goodwill and other intangible asset impairment and adversely impact our Consolidated Statements of Net Income.
Self-insurance Reserves
We record estimates for certain health and welfare, workers’ compensation and general insurance costs that are self-insured programs. Self-insurance reserves include actuarial estimates of both claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. Estimates for health and welfare, workers’ compensation and general liability are calculated utilizing claims development estimates based on historical experience and other factors. We utilize stop loss insurance to limit our exposure to any significant exposure on a per person basis for health and welfare and on a per claim basis for workers’ compensation and general insurance. A one percent increase or decrease to the assumptions for health insurance and workers’ compensation and general average claims would increase or decrease our self-insurance accruals for worker’s compensation and health insurance by approximately $1.0 million and less than $0.1 million, respectively.
Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

50


We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Net Income. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets.
We generally file our income tax returns several months after our fiscal year end. The major jurisdictions in which the Company files income tax returns includes the U.S. federal jurisdiction and approximately 30 states in the U.S.
ITEM 7A.     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.
At April 25, 2014 , our outstanding debt included $458.9 million outstanding on the credit facility, and $0.8 million on a long-term note. A change in market interest rates will impact our credit facility when there is an outstanding balance. For example, a one percent increase in the benchmark rate used for our credit facility would increase our annual interest expense by approximately $4.7 million , assuming the $458.9 million outstanding at the end of fiscal 2014 was outstanding for the entire year.
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.

51


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
BOB EVANS FARMS, INC.
CONSOLIDATED BALANCE SHEETS
 
April 25, 2014
 
April 26, 2013
 
 
 
 
 
(Dollars and shares in thousands)
 
 
 
(as adjusted)
Assets
Current Assets
 
 
 
Cash and equivalents
$
7,826

 
$
9,010

Accounts receivable, net
33,443

 
33,958

Inventories
25,243

 
22,491

Deferred income taxes
18,656

 
16,287

Federal and state income taxes
25,824

 
63,480

Prepaid expenses
4,281

 
5,232

Current assets held for sale
3,024

 

Total Current Assets
118,297

 
150,458

Property, Plant and Equipment
 
 
 
Land
237,326

 
241,975

Buildings and improvements
880,294

 
772,361

Machinery and equipment
469,512

 
392,565

Construction in progress
20,099

 
60,864


1,607,231

 
1,467,765

Less accumulated depreciation
731,773

 
679,288

Net Property, Plant and Equipment
875,458

 
788,477

Other Assets
 
 
 
Deposits and other
3,442

 
6,624

Long-term note receivable
16,243

 
13,815

Long-term investments
31,972

 
29,723

Goodwill
19,634

 
19,634

Other intangible assets
3,270

 
3,427

Long-term assets held for sale

 
8,795

Total Other Assets
74,561

 
82,018

Total Assets
$
1,068,316

 
$
1,020,953

Liabilities and Stockholders’ Equity
Current Liabilities
 
 
 
Credit facility borrowings
$
458,898

 
$
201,433

Accounts payable
29,064

 
23,058

Accrued property, plant and equipment purchases
5,841

 
11,078

Accrued non-income taxes
17,843

 
16,346

Accrued wages and related liabilities
21,574

 
30,219

Self-insurance
19,874

 
21,072

Deferred revenue
12,967

 
12,915

Other accrued expenses
35,779

 
24,763

Total Current Liabilities
601,840

 
340,884

Long-Term Liabilities
 
 
 
Deferred compensation
35,731

 
32,140

Federal and state income taxes
4,959

 
8,914

Deferred income taxes
32,829

 
37,033

Deferred rent and other
6,534

 
6,391

Long-term debt
835

 
816

Total Long-Term Liabilities
80,888

 
85,294

Stockholders’ Equity
 
 
 
Common stock, $.01 par value; authorized 100,000 shares; issued 42,638 shares at April 25, 2014, and April 26, 2013
426

 
426

Capital in excess of par value
225,562

 
215,141

Retained earnings
849,619

 
847,819

Treasury stock, 19,175 shares at April 25, 2014, and 15,220 shares at April 26, 2013, at cost
(690,019
)
 
(468,611
)
Total Stockholders’ Equity
385,588

 
594,775

Total Liabilities and Stockholders’ Equity
$
1,068,316

 
$
1,020,953


The accompanying Notes are an integral part of these Consolidated Financial Statements.
52



BOB EVANS FARMS, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
Years Ended April 25, 2014 April 26, 2013 April 27, 2012
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
(Dollars and shares in thousands, except per share amounts)
 
 
 
(as adjusted)
 
(as adjusted)
Net Sales
$
1,328,552

 
$
1,330,226

 
$
1,287,210

Cost of sales
449,070

 
422,847

 
419,596

Operating wage and fringe benefit expenses
401,255

 
405,113

 
397,351

Other operating expenses
198,634

 
191,191

 
178,016

Selling, general and administrative expenses
154,632

 
153,802

 
125,508

Depreciation and amortization expense
79,456

 
69,319

 
60,264

Impairment of assets held for sale
12,380

 

 

Operating Income
33,125

 
87,954

 
106,475

Net interest expense
2,014

 
11,485

 
7,884

Income From Continuing Operations Before Income Taxes
31,111

 
76,469