Bob Evans Farms, Inc.
BOB EVANS FARMS INC (Form: 10-K, Received: 06/23/2016 15:19:06)
 
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 29, 2016
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   þ     No  ¨
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.    þ
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 23, 2015 (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 $915,522,220 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 June 17, 2016
Common Stock, $.01 par value per share
 
19,752,584
DOCUMENTS INCORPORATED BY REFERENCE
Document
 
Parts Into Which Incorporated
Portions of the registrant’s Proxy Statement for the 2016 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. In addition, it is our policy generally not to endorse any projections regarding future performance that may be made by third parties.
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 E. Coli, Listeria, etc.) 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, eggs and corn among others), labor, supply, fuel, utilities, distribution and other operating costs;
development costs, including plant construction and renovation costs;
availability of qualified corporate, 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 production or distribution;
availability and cost of insurance;
adverse weather conditions;
availability, terms (including increases in interest rates) and deployment of capital;
changes in, and our ability to comply with, legal, regulatory or similar requirements, including payment credit 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;
the difficulty in implementing the Company’s plan to reduce its general and administrative expense, finding future cost reductions and the future impact on the Company’s earnings;

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the ability to generate sufficient cash flow to meet increased debt service obligations, compliance with operational and financial covenants, and restrictions on the Company’s ability to implement strategic plans in the future;
completing the implementation of our new enterprise resource planning and point of sales systems and;
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.
Readers are cautioned not to place undue reliance on forward-looking statements made in this report, since the statements speak only as of the report’s date . Except as may be required by law, we have no obligation or intention to publicly update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any future public disclosures that we may make on related subjects in reports that we file with or furnish to the SEC or in our other public disclosures.


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Table of Contents
Note 8 — Commitments and Contingencies
Note 9 — Goodwill and Other Intangible Assets

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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 direct and indirect subsidiaries.
We maintain a website at bobevans.com. We make available free of charge through our website our periodic and other reports filed with or furnished to the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. Information on our website is not deemed to be incorporated by reference into this Annual Report on Form 10-K or any other filings that we make from time to time with the SEC.
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.
Background
We are both a full-service restaurant company that as of April 29, 2016, operated 527 Bob Evans Restaurants in 18 states, and 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. Our food products are distributed primarily to customers throughout the United States. Additionally, we manufacture and sell similar products to foodservice customers, including Bob Evans Restaurants and other restaurants and food sellers.
Our business began in 1948 when our founder began making sausage on his southeastern Ohio farm to serve at his 12-stool, 24-hour diner. Our business grew from there and was incorporated in Ohio in 1957. We became a publicly traded company on June 6, 1963. Our current parent company was incorporated in Delaware on November 4, 1985.
Major changes to the business as operated today include:
In 1987, we expanded our business by acquiring Owens Country Sausage, Inc.
In 1991, we established the Bob Evans foodservice division, which sold food products directly to distributors and institutions.
In 2003, Owens Country Sausage purchased a food production plant in Sulfur Springs, Texas and began major renovations.
In 2004 we expanded our business by acquiring SWH Corporation, which owned and operated the Mimi's Café restaurant chain. We sold our Mimi’s Café restaurant chain in February 2013 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 2010, as part of an optimization program, we closed our fresh sausage plant in Galva, Illinois and eliminated direct store deliveries with a change to shipping products directly to customer warehouses. We also formed BEF Management, Inc. to act as a management company. In 2011 we sold our distribution center in Springfield, Ohio.
In 2011 we launched the Farm Fresh Remodel ("FFR") program for Bob Evans Restaurants; a program we completed in 2014. We also completed a restructuring of the foods segment by creating BEF Foods, Inc. which consolidated all of the food production and operations under one company.
In 2012 we purchased a 100,000 square foot food production facility in Lima, Ohio, where we primarily produce potato and pasta-based side dishes.

In 2013, as part of an optimization restructuring, we closed our fresh sausage plant in Richardson, Texas and our production facility in Bidwell, Ohio. We also began the first phase of an expansion at our Lima, Ohio, production facility, and began an expansion at the Sulphur Springs, Texas, production facility

In October 2013 we moved into our new corporate support center in New Albany, Ohio.
In 2014 we closed our production facility in Springfield, Ohio and also completed the expansions at the Lima, Ohio, and Sulphur Springs, Texas production facilities.

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In October 2015 we entered into a sale leaseback transaction on our Lima, Ohio, and Sulphur Springs, Texas, production facilities. The lease agreement includes an initial 20 year term and two ten-year renewal options.
In April 2016 we entered into sale leaseback transactions on 143 restaurant properties. The lease agreements include an initial 20 year term, and five, five-year renewal options.
We are currently in the process of completing a fourth production line at the Lima, Ohio, plant. This expansion is expected to be operational in the second quarter of fiscal 2017.
We have a 52 or 53-week fiscal year that ends on the last Friday in April. When we refer to 2016, 2015 and 2014, or fiscal 2016 , fiscal 2015 and fiscal 2014 , we are referring to our fiscal years that ended on April 29, 2016 , April 24, 2015 , and April 25, 2014 , respectively. Our fiscal 2016 year that ended on April 29, 2016, was a 53-week fiscal year. Other years presented are comprised of 52 weeks.
Our Strategy
We believe every initiative, investment and expenditure the company undertakes must not only deliver an acceptable financial return; it must also support and empower our team members to execute our brand promise:  high quality food delivered consistently with hospitality and integrity, whether in restaurants or to our retailers.  Historically, hospitality and quality differentiated the Bob Evans brand, and we are committed to reestablishing our leadership in those areas.  Product innovation, menu redesign and refinements to pricing and discounting are all important elements of our strategy, but hospitality and quality are the linchpins that will allow us to leverage those initiatives, and the investments they require, to drive transaction growth at Bob Evans Restaurants and continued profitable sales growth at BEF Foods.
Further, we will continue to evaluate our asset base by periodically reviewing our assets and taking appropriate investment and disposal actions when necessary.  We will also continue to review our Selling, General and Administrative expenses ("S,G&A") and certain other cost structures to identify sustainable cost savings and establish an enterprise-wide culture of service and efficiency.
Our vision for the Company is to be the family dining and grocery products brand of choice, a desirable and engaging employer for current and prospective talent, a valued partner in the community and a sound and lucrative investment for shareholders. It is our mission to bring families and friends together for farm-fresh goodness at our table or yours. With the successful execution of our business objectives and business strategy, we believe we will achieve our vision and mission.
Bob Evans Restaurant Segment
As of April 29, 2016 , we operated 527 Bob Evans Restaurant locations. Through our restaurant concept, we offer our customers a variety of high-quality, reasonably priced breakfast, lunch and dinner items for either dine-in, carryout or catering occasions in family-friendly settings.
Our vision for Bob Evans Restaurants is to be 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. We focus on the basics and try to simplify our operations to allow our restaurant teams to deliver on that premise. Bob Evans Restaurants are founded on quality, farm-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 sausage gravy & biscuits and our farm fresh egg combination breakfasts. We are striving to take advantage of this heritage and focus on delivering "Best In Class Breakfast." We want our customers to always feel right at home with us, so we “Treat Strangers Like Friends and Friends Like Family.”
Breakfast entrées are served all day and feature traditional favorites such as sausage, bacon and eggs, as well as specialty offerings like Sweet & Stacked Hotcakes, omelets and our signature coffee highlighting the importance of "Best in Class Breakfast" execution. 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 slow-roasted pot roast, slow-roasted turkey and country fried steak.
Bob Evans Restaurants feature an 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.
We believe our Bob Evans Restaurants draw people who want a delicious meal at a fair price in a family-friendly atmosphere. Our average annual store sales were $1.7 million for Bob Evans Restaurants in fiscal 2016 . Average dine-in, per-guest checks for fiscal 2016 for breakfast, lunch and dinner were $9.35, $9.72 and $9.78 respectively, for an average dine-in, per-guest check of $9.61 for all day parts. The average per-guest check has increased primarily due to a mix shift towards

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higher price items as well as price increases implemented during fiscal 2016. 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. Starting in fiscal 2015, we opened on Thanksgiving Day with regular hours. During fiscal 2016 , breakfast, lunch and dinner accounted for 32%, 37% and 31% percent, respectively, of total Bob Evans Restaurants’ revenue. Weekend sales, defined as Saturday and Sunday, accounted for approximately 39% of a typical week’s revenue during fiscal 2016 . Off-premise sales (carryout, catering, bakery, retail and on-line ordering) are approximately 16% of the total Bob Evans Restaurants segment revenue and have grown by approximately 8% as compared to the prior year.
Bob Evans Restaurants is focused on growing sales and profits in key product areas. Exciting new products like Deep Fried Chicken and Brioche French Toast are geared to drive dine-in traffic and sales. Family Meals to Go and $5/$6 Soup and Sides To Go have become major sellers. Catering is also becoming a significant sales layer. Our Farmhouse Feasts that serve eight people, featured on Easter, Thanksgiving and Christmas, are holiday favorites. We will continue to focus efforts on increasing both our dine-in and off-premise business in fiscal 2017 .
Restaurant Operations and Management
We believe that quality restaurant management is critical to the success of our 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 quality, service, cleanliness and top-line growth and bottom-line profitability.
The Bob Evans Restaurants leadership focuses efforts on the overall growth and development of the concept, with particular focus on hospitality. Our restaurant leaders are incented to “act like owners.”
Each Bob Evans Restaurants location employs on average, approximately 50 hourly employees, and is led by a general manager, an assistant general manager, and one or more assistant managers, depending on the size, location and sales volume of the restaurant. A Bob Evans Restaurants general manager reports to a director of operations who oversees an area of approximately 8-12 restaurants. The director of operations reports to a region vice president, who is responsible for approximately 8-12 areas. The region vice presidents report to the senior vice president of operations excellence. Bob Evans Restaurants are visited regularly by all levels of management to ensure they are operating effectively and adhering to our standards.
Restaurant Locations
As of April 29, 2016 , Bob Evans Restaurants were located in 18 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 target segments which include families and frequent restaurant diners. During fiscal 2016 , we opened one new Bob Evans Restaurant, compared to seven in fiscal 2015 , and four in fiscal 2014 . During fiscal 2016 we also closed 41 Bob Evans Restaurants and announced the expected closure of six additional leased restaurants in fiscal 2017, compared to one in fiscal 2015 , and three in fiscal 2014 .

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The following table sets forth the number and location of our Bob Evans Restaurants as of the end of fiscal 2016 :
Restaurants in Operation at April 29, 2016
 
Bob Evans
Restaurants
Delaware
7
Florida
47
Illinois
14
Indiana
53
Kansas
1
Kentucky
22
Maryland
27
Michigan
49
Missouri
14
New Jersey
1
New York
8
North Carolina
7
Ohio
192
Pennsylvania
34
South Carolina
4
Tennessee
2
Virginia
15
West Virginia
30
Total
527
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 qualified 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 periodically evaluate performance of our existing restaurants to determine whether any restaurants should be closed. In April 2016, management adopted a plan and committed to close 27 underperforming restaurants, including 21 owned and six leased locations. The 21 owned locations were closed in fiscal 2016 and we expect the leased locations to close in fiscal 2017. We believe these closures free up resources for other uses, and will strengthen our restaurant portfolio and improve overall returns.
Supply Chain and Distribution
Controlling our supply costs is a critical component of improving margins with a focus 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 standards.

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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 2016 , and we expect modest increases during fiscal 2017 . Our operating margins are also affected by changes in the price of utilities, such as electricity and natural gas, upon which 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 that are also beneficial to our restaurants. 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, on average, twice per week to our restaurants by third parties. 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, through multiple distribution centers, furnishes the majority of inventory items to our restaurants, we believe other distributors could readily provide this inventory.
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. At the start of fiscal 2016, our prices to purchase eggs began to increase, a result of the avian influenza that has significantly impacted poultry farms in the Midwest. Refer to Management Discussion and Analysis section for further discussion on the impact of food costs to our fiscal 2016 results.
Due to the rapid turnover of perishable food items, our restaurants maintain inventories with a modest (approximately $10 thousand of perishable inventory per restaurant) aggregate cost in relation to revenues.
Advertising and Marketing
We spent approximately $30 million on restaurant advertising and marketing during fiscal 2016 . Most of our advertising budget was spent on television, radio, print and outdoor advertising. We focus our advertisements on new promotions and 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 ." We also distribute coupons through multiple channels and support in-store merchandising, menus, kids’ marketing programs, and local store marketing. During fiscal 2016 we made a strategic shift in the depth of discounts offered and eliminated the use of "buy one get one free" offerings. This change reduced guest traffic by approximately five percent. Total discounts, recognized as a reduction of gross sales for Bob Evans Restaurants, were $40.0 million, $53.6 million and $46.5 million in fiscal 2016 , 2015 and 2014 , respectively.
Research and Development
As part of our effort to consistently drive sales growth we frequently 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 strive to maintain a 12 to 24 month product development pipeline focused on creating and introducing innovative menu items and retail food products, as well as enhancements to our existing offerings.
In order to keep our menu and retail food products fresh and appealing to our guests’ preferences, our product development team concentrates 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. New products are market tested before they are introduced. Research and development expenses for our restaurant concept and BEF Foods operations are generally not material.
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. Bob Evans Restaurants operates in the family dining segment.

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Key competitive factors in the industry include the quality and value of menu offerings, quality and speed of service, attractiveness of facilities, advertising, 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. Additionally some concepts have recently begun to offer all day breakfast options.
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 relationships with a portfolio of convenient meal solutions that meet consumer needs. We offer a variety of quality, wholesome food products to retail and foodservice customers. We sell our retail food products under the Bob Evans, Owens and Country Creek brand names. Our food products provide “farm-fresh goodness” and convenient meal solutions that uphold our commitment to premium quality. Our food products include approximately 60 varieties of branded fresh, smoked and fully cooked pork and turkey sausage, ham and hickory-smoked bacon products. Varieties include Bob Evans Fresh Sausage (in rolls, patties or links, all in a variety of seasonings), Bob Evans Sausage (including Sweet Italian, Savory Sage, Brown Sugar and Honey, Maple, as well as Naturally!), Bob Evans Fully Cooked Maple Links, Bob Evans Fully Cooked Turkey Sausage Patties or Fully Cooked Turkey Sausage Links, and Bob Evans Grilling Sausage (Original Bratwurst, Beer Bratwurst, Sweet Italian and Hot Italian). We also offer over 100 complementary, convenience food items in the refrigerated and frozen areas of grocery stores such as mashed potatoes (different varieties in various sizes), our Oven Bake Scalloped Potatoes, Oven Bake Macaroni & Cheese and Oven Bake Double Cheddar Pasta with Applewood Smoked Bacon, our sides such as Homestyle Broccoli & Cheese, Seasoned Homestyle Stuffing, Six Cheese Pasta, Original Green Bean Casserole, Sliced Glazed Apples, our Handheld Breakfast Items such as Bob Evans Sausage, Egg & Cheese Biscuits, Bob Evans Sausage, Egg & Cheese Croissant, our Breakfast Burritos, Breakfast Bowls, Owens Kolaches, as well as our Soups (Original Chicken & Noodles and Original Sausage Chili), and Sausage Gravies.
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 enhancements to existing items to address evolving consumer demands.
Production
We produce food products in four manufacturing facilities. We produce fresh sausage products at our plants located in Hillsdale, Michigan, and Xenia, Ohio. Ready-to-eat products, such as sandwiches, soups and gravies, are produced at our Sulphur Springs, Texas, plant, and our Lima, Ohio, plant produces refrigerated side dishes. 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.
In August 2012, we purchased Kettle Creations, which included 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. During the second quarter of fiscal 2014, we completed the expansion at the Lima, Ohio, production facility, including an additional 57,000 square feet of production facility and constructing an additional production line at a cost of approximately $24 million. We are currently in the process of completing an additional $20 million expansion in production capacity to add a fourth side-dish production line at the Lima, Ohio, plant. The line is expected to be operational in the second quarter of fiscal 2017.
As part of our plant optimization program, 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 of ready-to-eat food products, as well as added capacity for soups and gravies. This plant expansion was completed during the second quarter of fiscal 2014.
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 risks during production. We have a team dedicated to food safety and quality assurance. We also follow the British Retail

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Consortium global food safety initiatives to help ensure insure food safety and quality standards are practiced in our manufacturing facilities, as well as in the co-pack facilities that supply us.
We have third parties to manufacture or “co-pack” some of the Bob Evans and Owens products that are not produced in our own facilities or to supplement production in peak demand periods. 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 2016 , representing approximately 10% of pounds produced.
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. This consolidation is expected to continue. 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 retail brand of refrigerated mashed potatoes in the United States (by volume, based on Information Resource Inc.'s total U.S. grocery data for 52 weeks ended April 29, 2016 ) and has been since 2007. 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 the leading national and regional retail chains. Retail sales are approximately 85% of net sales, while foodservice sales account for approximately 15 % of net sales.
A relatively small number of customers account for a large percentage of our BEF Foods sales. For fiscal 2016 , our 10 largest BEF Foods accounts represented approximately 20% of our consolidated company sales, with the top two customers representing approximately 10% of consolidated company sales. We use national account teams to address the needs of our key retailers on a long-term basis.
Items for our foodservice customers include sausage, sausage gravy, breakfast sandwiches and side dishes. Foodservice sales provide us with incremental volume in our production plants to leverage operating efficiencies. Volumes in foodservice business declined in fiscal 2016 as compared to the prior year, primarily due to a planned shift of resources towards our growing side dish business.
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 2016 , Bob Evans or Owens brand products were available for purchase in grocery stores in all 50 states, the District of Columbia and parts of Canada. Our Owens brand products were available for purchase primarily in Oklahoma, Louisiana 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
One of the most important raw materials used in our food products business is live sows (an adult female pig), which we depend upon to produce our pork sausage products. We produce sausage using the same premium ingredients that Bob Evans used when he started the Company. Sow meat is a high-value product compared to other types of pig meat because it has a better texture and is pink, unlike other pork, which tends to be chewy when made into sausage.
We procure live sows at prevailing market prices from terminals, local auctions, country markets and corporate and family farms in various US locations. The live sow market is 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

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prices (the major food supply for sows), weather and farmers’ access to capital. We procure sows in a variety of ways, including through supply contracts. Due to the structure of the sow market however, including the limited availability of sows, there is generally not a way to “lock” in prices contractually in advance for sows nor any commercially feasible, financial hedging products for sow prices to “fix” prices in advance, unlike the financial hedging products that are available for “lean hogs” or “pork bellies” prices.
During fiscal 2014 and part of fiscal 2015, sow costs reached record high prices in part driven by porcine epidemic diarrhea virus ("PEDv"), which reduced the supply of sows for slaughter due to the impact PEDv had on young piglets. The supply reduction did not significantly affect our ability to procure the live sows needed to meet our needs for customer demand, however it significantly impacted the cost beginning in the second quarter of fiscal 2014 through the third quarter of fiscal 2015. We benefitted from a significant decline in sow costs starting in the latter part of fiscal 2015 that extended through the entirety of fiscal 2016. The price decline was due primarily to the producers' ability to control PEDv, their rebuilding of their sow herds, as well as due to low customer demand.  In fiscal 2017 we expect the size of the breeding herd to stabilize and feed costs to be lower, but that export demand will increase. As a result, we expect sow prices in fiscal 2017 to be higher than they were in fiscal 2016.
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 the price fluctuates according to availability. Such shortages did not have a material impact on net sales or operating income in fiscal 2016. Generally, we purchase these items under supply contracts with periodic pricing reviews with our suppliers. We occasionally engage in commitments for certain commodity based items when market conditions indicate that taking a future position will have a favorable financial impact. 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.
Eggs are key ingredient in some of our frozen products. With the avian influenza virus impacting the poultry and egg markets in fiscal 2016, we did not experience any supply disruptions on these raw materials from our suppliers. We did experience some price increases on egg-based raw materials from our suppliers during this time, but not to the degree that was initially anticipated.
Most of our food products are perishable and require proper refrigeration. Product shelf life ranges from 18 to 60 days for refrigerated products. Due to the 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. Many of our breakfast and dinner sausage items can be frozen for shipping to warehouses. Shipping frozen product allows our retailers added flexibility to slack-out product as needed to meet consumer demand and allows us to build inventory for heavy consumption periods.
Advertising and Marketing
During fiscal 2016 , we spent approximately $6.7 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 and digital advertising 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. Trade promotions and discounts, which are recorded as a reduction to net sales, were $79.3 million, $56.6 million and $49.1 million in fiscal years 2016, 2015 and 2014, respectively. A decline in sow costs as compared to the last year caused the increase in fiscal 2016 trade promotions and discounts, allowing us to remain price competitive in a low sow cost environment. Trade promotions are generally more prevalent for fresh sausage than for refrigerated sides and represented approximately 62%, 53% and 58% of total of trade promotions in fiscal years 2016, 2015 and 2014, respectively.
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.


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Items That Impact Both the Bob Evans Restaurants Segment and Our BEF Foods Segment
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 and thunderstorms), natural disasters (such as flooding, hurricanes and tornadoes) and similar conditions can impact restaurant sales volumes in most of the markets in which we operate.
Our BEF Foods 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 can be significantly impacted by the cost and availability of raw materials, especially live sows. Our consolidated quarterly results are also impacted by restaurant closures and the associated impact on revenues and operating 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. In addition to the marks mentioned above, the following marks are trademarks and service marks of Bob Evans: All the Feast. None of The Fuss.; BE Fit; BE Mail; Big Farm; Bob Evans Farm Fresh Ideas; Bob Evans Grocery; Bob Evans Naturally; Bob Evans Oven Bake; Bob Evans Restaurant; Bob Evans Wildfire; Border Scramble; Discover Farm-Fresh Goodness; Endless Farmhouse Lunch; Farm-Fresh Goodness; Farmhouse Feast; Fit From the Farm; Get in on Something Good; Kettle Creations; Signature Coffee by Bob Evans; Simple Goodness of the Farm; Sunshine Skillet; and Taste of the Farm. 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 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 bobevans.com, beffoods.com, kettlecreations.net, and owensfoods.com. 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.
As part of the roll out of our Broasted Chicken® platform, we have licensed the use of the Broasted ® , Broaster Chicken ® , Genuine Broaster Chicken ® and Broasted Chicken trademarks from The Broaster Company.  Our Development Agreement provides us with limited exclusivity rights to use these licensed trademarks and proprietary Broaster equipment for a period of 10-years within the domestic family dining segment.
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

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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 segment. 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.
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. The Affordable Care Act enacted in March, 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 final regulations that currently have an effective date of December 1, 2016.
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 an insurance carrier, as we attempt to manage overall health care costs. In the first years under the Affordable Care Act (calendar years 2014 and 2015) we experienced a more significant increase in costs than we had anticipated and were unable to mitigate the cost to the Company by re-distributing the cost of the coverage between the Company and employees. Continued, significant cost increases and administrative burdens will continue to 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 and health care regulations. We employ both salaried exempt and hourly nonexempt employees at our restaurants, which require us to 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.
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

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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.
Employees
As of April 29, 2016 , we employed 30,625 employees including approximately 6,400 full-time employees. None of our employees are covered by collective bargaining agreements. We consider overall relations with our employees to be satisfactory.
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 800-SEC-0330. The SEC maintains a website ( www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our website 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 website.
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:

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A.    OPERATIONS
General economic, business and societal conditions as well as those specific to the restaurant or retail industries that are largely out of our control may adversely affect our business, financial condition and results of operations.
Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control. These factors include, among others, consumer income, interest rates, inflation, consumer credit availability, consumer debt levels, tax rates and policy, minimum wage laws, unemployment trends and other matters that influence consumer confidence and spending. The full-service dining sector of the restaurant industry, purchase of food products, and the retail industry, are affected by changes in national, regional and local economic conditions, seasonal fluctuation of sales volumes, consumer preferences, including changes in consumer tastes and dietary habits and the level of consumer acceptance of our restaurant and food products concepts, and consumer spending patterns.
Discretionary consumer spending, which is critical to our success, is influenced by general economic conditions and the availability of discretionary income. Global economic factors and a weak economic recovery have reduced consumer confidence and affected consumers’ ability or desire to spend disposable income. Deterioration in the economy or other economic conditions affecting disposable consumer income, such as unemployment levels, reduced home values, investment losses, inflation, fuel and other energy costs, consumer debt levels, lack of available credit, consumer confidence, interest rates, tax rates and changes in tax laws, may adversely affect our business. This would be due to a reduction in overall consumer spending or by causing customers to reduce the frequency with which they shop and dine out. This could also cause a shift of their spending to our competitors or to products sold by us that are less profitable than other product choices, all of which could result in lower revenues, decreases in inventory turnover, greater markdowns on inventory, and a reduction in profitability due to lower margins.
Concerns relating to food safety, food-borne illness, pandemics and other diseases could reduce customer traffic to our restaurants, or cause us to be the target of litigation, which could materially adversely affect our financial performance.
We dedicate substantial resources and provide training to ensure the safety and quality of the food we serve or sell. Nevertheless, we face food safety risks, including the risk of food-borne illness and food contamination, which are common both in the restaurant and food products industries, and the food supply chain, and cannot be completely eliminated. We rely on our network of suppliers and co-packers to properly handle, store and transport our ingredients, until delivery to our restaurants and plants. Any failure by our suppliers, or their suppliers, could cause our ingredients to be contaminated, which could be difficult to detect and put the safety of our food in jeopardy. We freshly prepare many of our menu items at our restaurants, which may put us at greater risk for food-borne illness outbreaks than some of our competitors who use processed foods. The risk of food-borne illness may also increase whenever our menu items are served outside of our control, such as by third party food delivery services, customer take out or at catered events.
If a pathogen (i.e., Ebola, “mad cow disease,” “SARS,” “swine flu,” Zika virus, avian influenza, porcine epidemic diarrhea virus, norovirus or other virus), or bacteria (i.e., such as salmonella, listeria or E.coli, or if parasites or other toxins, infect the food supply or are believed to have infected the food supply), the demand, availability and price of certain food items may be adversely impacted. Additionally, if our customers or employees become infected with a pathogen that is transmittable by human-to-human, food-to-human or human-to-food contact, customers may avoid our restaurants or it may become difficult to adequately staff our restaurants, the occurrence of either or both of which may materially adversely affect our financial performance. Any adverse food safety occurrence may result in litigation against us by consumers, governmental authorities and others. Although we carry liability and other insurance coverage to mitigate against these risks, not all risks of this nature are fully insurable and, even if insured, the negative publicity associated with such an event may cause a decrease in customer patronage which may materially adversely affect our financial performance.
In addition, any adverse food safety event could result in mandatory or voluntary product withdrawals or recalls and regulatory and other investigations, any of which could disrupt our operations, increase our costs, require us to respond to findings from regulatory agencies that may divert resources and assets, and result in potential civil fines and penalties as well as other legal action. In extreme cases, adverse findings could lead to criminal fines and penalties.
We are dependent upon attracting and retaining qualified employees while also controlling labor and health care costs.
Our performance is dependent on attracting and retaining a large number of qualified restaurant and plant employees. Availability of employees varies widely from location to location. The industries we do business in experience high levels of turnover, which is further impacted by the fact many employees are in entry-level or part-time positions, which also are typically impacted with high rates of turnover. If restaurant or plant management and staff turnover were to increase, we could suffer higher direct costs associated with recruiting, training and retaining replacement personnel. Management turnover as well as general shortages in the labor pool can cause our restaurants to be operated with reduced staff, which negatively affects our

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ability to provide appropriate service levels to our customers. Competition for qualified employees exerts upward pressure on wages paid to attract such personnel, resulting in higher labor costs, together with greater recruiting and training expenses.
Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, minimum wage legislation, health care legislation, payroll taxes and changing demographics. Many of our employees are hourly workers whose wages are affected by increases in the federal or state minimum wage or changes to tip credits. Tip credits are the amounts an employer is permitted to assume an employee receives in tips when the employer calculates the employee’s hourly wage for minimum wage compliance purposes. Increases in minimum wage levels and changes to the tip credit regulations have been made and continue to be proposed at both federal and state levels. As minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline.
Health care costs, in particular, continue to rise and are especially difficult to project. Material increases in costs associated with medical claims or an unusually high number of severe medical claims or other unfavorable fluctuations in the severity or frequency of such claims may cause health care costs to vary substantially from quarter-to-quarter and year-over-year. We act as a self-insurer under our health and dental plans and mitigate losses by carrying stop loss coverage. However, given the unpredictable nature of actual claims trends, including the severity or frequency of claims, in any given year our health care costs could significantly exceed our estimates, which could materially adversely affect our financial performance. The Patient Protection and Affordable Care Act as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (“PPACA”) was enacted in 2010. Until the uncertainty surrounding PPACA is finally resolved and the implementation and administration of PPACA is more fully matured, there remains a risk that PPACA may cause our health care costs to rise in the near and long-term future.
The price and availability of operating resources, and for commodities such as food, ingredients, and utilities used by our restaurants and plants could adversely affect our revenues and results of operations.
We are subject to the general risks of inflation, and our operating profit margins and results of operations depend significantly on our ability to anticipate and react to changes in the price, quality and availability of food and other commodities, ingredients, utilities and other related costs over which we have limited control. Fluctuations in economic conditions, weather, demand and other factors affect the availability, quality and cost of the ingredients and products that we buy. The increased global demand for corn, wheat and dairy products has increased feed costs for poultry and livestock. Additionally, the cost of commodities subject to governmental regulation, such as dairy and corn, can be even more susceptible to price fluctuation than other products. Some climatologists predict that the long-term effects of climate change may result in more severe, volatile weather, which could result in greater volatility in product supply and price. Furthermore, many of the products that we use and their costs are interrelated.
With the primary exception of sows, substantially all of our food and supplies are available from multiple qualified suppliers, which helps to mitigate our risk of commodity availability and obtain competitive prices. We negotiate agreements for some of our principal commodity, supply and equipment requirements, depending on market conditions and expected demand. We also periodically evaluate hedging vehicles to assist us in managing our risk and variability in these categories. Although these vehicles and markets may be available to us, we may choose not to enter into contracts due to pricing volatility, excessive risk premiums, hedge inefficiencies or other factors.
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 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 such commodities as corn and soybean meal prices (the major food supply for sows), weather and farmers’ access to capital. We also use pork trimmings. The pork trimmings market is also volatile in terms of availability and market price. Higher sow and pork trimmings costs could 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.
In addition, food safety concerns, widespread outbreaks of livestock and poultry diseases, and product recalls, all of which are out of our control, and, in many instances, unpredictable, could also increase our costs and possibly affect the supply of livestock and poultry products. Our operating margins are also affected, whether as a result of general inflation or otherwise, by fluctuations in the price of utilities such as natural gas and electricity, on which our locations depend for much of their energy supply.
Our ability to anticipate and respond effectively to one or more adverse changes in any of these operating costs could have a significant adverse effect on our results of operations. In addition, because we provide a moderately-priced product, we

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may not seek to or we may be unable to pass along price increases to our customers sufficient to completely offset cost increases
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, credit and debit card authorization and processing, gift card sales and balance tracking, employee payroll card services, health care and workers’ compensation claims processing, wage and related tax credit documentation and approval, guest satisfaction survey programs, employee engagement surveys and externally hosted 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.
We rely on certain technology licensed from third parties and may be required to license additional technology in the future for use in managing our Internet sites and providing services to our guests and employees. These third-party technology licenses may not continue to be available to us on acceptable terms or at all. The inability to enter into and maintain these technology licenses could adversely affect our business.
Unfavorable publicity could harm our business. In addition, our failure to recognize, respond to and effectively manage the impact of social media could materially impact our business.
Businesses such as ours can be adversely affected by publicity resulting from complaints or litigation alleging poor food quality, poor service, food-borne illness, product defects, personal injury, adverse health effects (including obesity), data breaches or other concerns. Even when the allegations or complaints are not valid, unfavorable publicity relating to a limited number of our restaurants or products, or only to a single restaurant or product, could adversely affect public perception of the entire brand. Additionally, negative publicity from online social network postings may also result from actual or alleged incidents taking place in our restaurants. Adverse publicity and its effect on overall consumer perceptions of food safety or customer service could have a material adverse effect on our business, financial condition and results of operations.
Our ability to successfully and sufficiently raise menu and food products prices to offset increased commodity and labor costs could result in a decline in margins.
We utilize price increases for menu offerings and food products to help offset commodity cost increases, including increased costs for wholesale food, raw materials, distribution, minimum wages, employee benefits, construction, fuel, utility, and other costs. We may not be able to pass through these or other additional costs to customers in the form of increased pricing. 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.
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, severe weather and other events.
The concentration of many of our existing 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. 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. These conditions would impact our transaction counts in our restaurants and could adversely affect our business and results of operations.
Our BEF Foods segment’s business is dependent upon our ability to produce 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 our ability to produce most of the products that we sell, and we have not always identified secondary suppliers for food products manufactured in our plants, or secondary suppliers with

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sufficient capacity. A 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.
B.    FINANCIAL
Our annual and quarterly operating results may fluctuate significantly and could fall below the expectations of investors and securities analysts due to a number of factors, some of which are beyond our control, resulting either in volatility or a decline in the price of our securities.
Our business is not static; it changes periodically as a result of many factors, including those discussed above and:
increases and decreases in average weekly sales, restaurant and retail sales and restaurant profitability;
changes in advertising and promotional activities and expansion into new markets; and
impairment of long-lived assets and any loss on restaurant closures.
Our quarterly operating results and restaurant and retail sales may fluctuate as a result of any of these or other factors. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year, and restaurant and retail sales for any particular future period may decrease. 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 annual or quarterly operating results fall below the expectations of securities analysts and investors due to the factors discussed above, this could result in the price of our securities fluctuating dramatically over time or could decrease generally.
Our capital structure contains substantial indebtedness, and we have material agreements, which may decrease our flexibility, increase our borrowing and other costs and adversely affect our liquidity and cash flow. In addition, we cannot provide any guaranty of future cash dividend payments or that we will be able to actively repurchase our common stock pursuant to a share repurchase program.
Our consolidated indebtedness and our leverage ratio may have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing borrowing costs. There are various financial covenants and other restrictions in our Credit Agreement, as well as in our sale leaseback transaction agreements and in the mortgage on our corporate support center. A default under one or all of these agreements may significantly affect our ability to obtain additional or alternative financing. For example, the lenders’ ongoing obligation to extend credit under the Credit Agreement is dependent upon our compliance with these covenants and restrictions. At April 29, 2016, we were in compliance with these covenants.
Our ability to make scheduled payments under material agreements, as well as principal and interest payments or to refinance our obligations with respect to indebtedness, 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. Our inability to refinance our indebtedness when necessary or to do so upon attractive terms could materially and adversely affect our liquidity and our ongoing results of operations.
In recent years, we have increased the quarterly cash dividends on our common stock. Any determination to pay cash dividends on our common stock in the future will be based primarily upon our financial condition, results of operations, business requirements and our Board of Directors’ conclusion that the declaration of cash dividends is in the best interest of our shareholders and is in compliance with all laws and agreements applicable to the dividend. Furthermore, there can be no assurance that we will be able to actively repurchase our common stock and we may discontinue plans to repurchase common stock at any time.
Failure of our internal control over financial reporting could adversely affect our business and financial results.
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 the United States generally accepted accounting principles (“GAAP”). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that

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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.
Our current insurance programs expose us to unexpected costs, which could have a material adverse effect on our financial condition and results of operations.
Our insurance coverage is structured to include deductibles, self-insured retentions, limits of liability, stop loss limits and similar provisions that we believe prudent based on our operations. However, there are types of losses we may incur against which we cannot be insured or which we believe are not economically reasonable to insure or where the risk is considered low, such as losses due to acts of terrorism and some natural disasters, including floods. If we incur such losses, our business could suffer. In addition, we self-insure a significant portion of expected losses under our workers’ compensation, general liability and group health insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses, including unexpected increases in medical and indemnity costs, could result in materially different amounts of expense than expected under these programs.
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, and we would suffer associated costs related to the matter, such as legal costs associated with any claims.
Many factors, including those over which we have no control, affect the trading price of our stock.
A number of factors may significantly affect the market price of our common stock. These include, but are not limited to: actual or anticipated variations in our operating results or those of our competitors as compared to analyst expectations; changes in financial estimates by research analysts with respect to us or others in the restaurant or food production industries; announcements of significant transactions (including mergers or acquisitions, divestitures, joint ventures or other strategic initiatives) by us or others in the restaurant industry; and actions by activist shareholders. In addition, the equity markets have experienced price and volume fluctuations that affect the stock price of companies in ways that have been unrelated to an individual company’s operating performance. The price of our common stock may continue to be volatile, based on factors specific to our company and industry, as well as factors related to the equity markets overall.
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 non-operating 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.
Our dividend program, as well as stock repurchase program (if any), requires the use of a substantial amount of our free cash flow. Assuming the authorization of either by our Board of Directors, our ability to pay dividends over time, or repurchase stock from time to time, will depend on our ability to generate sufficient cash flows from operations and capacity to borrow funds, which may be subject to economic, financial, competitive and other factors that are beyond our control. Any failure to pay our dividends over time may negatively impact investor confidence in us, and may negatively impact our stock price.
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 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, part of the consideration we received in the transaction was a promissory note, (the "Note")

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which has a principal balance of $30.0 million, an annual interest rate of 1.5%, a term of seven years and a principal and interest payment date of February, 2020. Mimi’s Café is wholly owned by Le Duff America, Inc. (“Le Duff”), which is a U.S.-based subsidiary of Groupe Le Duff, a global bakery and restaurant company headquartered in France.
Partial prepayments are required prior to maturity if the buyer reaches certain levels of EBITDA during specified periods. No partial prepayments have been received on this Note as of April 29, 2016. Our right to repayment under the Note is subordinated to third party lenders as well as funding that may be provided by the parent company. In the event of a sale or liquidation of Mimi’s Café by its parent company, our right to repayment may be subordinated to payments owed to the parent company and potentially reduced based on the funds available for repayment. Because the Note is subordinated under certain conditions, it is possible that the principal amount of the Note may not be paid in full or at all. Full repayment of the Note on its due date is dependent on Mimi’s ability to generate sufficient cash flow up to and at the maturity date of the Note. Refer to Note 1 in our consolidated financial statements for more information.
C.    STRATEGIC
Our plans depend significantly on our strategic priorities and business initiatives designed to enhance our menu and retail offerings, support our brand, improve operating margins and improve the efficiencies and effectiveness of our operations. Failure to achieve or sustain these plans could adversely affect our results of operations.
We have had, and expect to continue to have, priorities and initiatives in various stages of testing, evaluation and implementation, upon which we expect to rely to improve our results of operations and financial condition. These priorities and initiatives include, but are not limited to, improving the quality of food and food products, re-engineering restaurant, plant and corporate processes to reduce costs and improve margins, applying technology to improve the guest experience and operational reporting, evolving our marketing messaging to support the brand across the restaurant and food products segments, the introduction of new as well as tiered menu pricing, increasing same store sales as well as expanding the markets served by our food products. It is possible that our focus on these priorities and initiatives and constantly changing consumer preferences could cause unintended changes to our current results of operations. Additionally, many of these initiatives contain risks 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. Failure to achieve successful implementation of our initiatives could adversely affect our results of operations.
Our long-term growth strategy depends on successfully executing our current strategic efforts to turnaround our restaurant business and results. Our ability to complete our turnaround efforts is influenced by factors beyond our control, which may impact our turnaround efforts and impair our long-term growth.
We are pursuing a disciplined strategy which depends in large part on our ability to execute our current restaurant turnaround efforts that are focused on improving food quality, consistency of execution and improving hospitality to deliver a highly satisfied guest experience on each visit. If we are unable to execute the turnaround efforts, our long-term opportunities could be impaired. As part of our long term strategy we have completed certain strategic transactions, including the mortgage of our New Albany, Ohio corporate support center, and the sale leaseback of our BEF Foods manufacturing facilities in Lima, Ohio, and Sulphur Springs, Texas, and of 143 of our Bob Evans Restaurant locations. There is no guarantee that these transactions, or others in the future, will have a positive impact on our long-term strategy or results of operations.
The loss of key executives or difficulties in recruiting and retaining qualified personnel could jeopardize our future growth and success.
We have assembled a senior management team which has substantial background and experience in the restaurant, retail and food products industries. Our future growth and success depends substantially on the contributions and abilities of our senior management and other key personnel, and we design our compensation programs to attract and retain key personnel and facilitate our ability to develop effective succession plans. If we fail to retain senior management or other key personnel or to attract key personnel, our succession planning and operations could be materially and adversely affected. We must continue to recruit, retain and motivate management and other employees sufficient to maintain our current business and support our projected growth. A loss of key employees or a significant shortage of high quality restaurant employees could jeopardize our ability to meet our business goals.
We face intense competition, and if we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected.
The restaurant and food products industries are highly competitive and are 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 include the

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quality and value of the items offered, food preparation and consistency of the product preparation, 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 companies, and some have substantially greater financial, marketing and other resources than we have, which may give them competitive advantages. We compete with many restaurant and food product operators and other retail establishments for site locations and restaurant employees. We also face competition as a result of the convergence of grocery, deli, retail and restaurant services, particularly in the supermarket industry. We expect competition to intensify as our competitors expand operations in our markets and quick-service restaurant chains expand their breakfast offerings, as well as the introduction, marketing and distribution of refrigerated side dishes. This increased competition could have a material adverse effect on our financial position or results of operations
Our failure to turn-around our restaurant segment and generate growth in customer traffic or transaction for an extended period of time could have a material adverse effect upon our financial condition, results of operations and cash flows.
Same-store sales and average unit volumes are key measures of the financial health of our company, as well as our individual restaurants. A number of factors, including the following, may affect same-store sales growth:
local and national economic conditions affecting consumer spending habits;
customer trends;
customer traffic increases or decreases;
intense competition in the restaurant business;
menu mix and pricing shifts
customer satisfaction;
extraordinary events such as weather or natural disasters; and
pricing pressure.
If we are unable to maintain or grow same-store sales, and our costs increase, or if same-store sales decrease and costs remain flat or increase, the effect, over time, is to spread costs across a lower level of sales, or seek to identify additional cost reductions, which could materially adversely affect our financial performance.
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 our current strategy to aggressively reduce discounting, use of new advertising, modification of our 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, cable television, and social media, advertising in the past, and we may not be able to successfully compete against those established and newly developed programs.
The growth of our BEF Foods segment’s sales and profits is dependent upon our ability to expand existing market penetration and enter into new markets.
The successful growth of our BEF Foods segment depends in part on our ability to add new retail customers, expand our existing production capabilities (including but not limited to our expansion of the Lima, Ohio facility), as well as expand the number of products sold through existing retail customers. This would include expanding the number of our items they offer for sale and product placement within the refrigerated meat and side dish 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 retain and obtain 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.
Our inability to improve our informational systems in fiscal 2017 to provide increased operational capabilities, to complete the implementation of our core enterprise resource planning system (“ERP”), and for greater access for customers, could negatively impact our results of operations.
Operational excellence and the continued improvement of our customer experience are among our highest priorities. During fiscal 2015 and 2016 we made investments, and will continue to make investments in 2017, as we continue to complete

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the implementation of a new ERP system and restaurant technology platform (including point of sale (“POS”) processing), as part of our overall technology infrastructure, as well as training the employees necessary to support it. These improvements are designed to more effectively collect and process our enterprise information and data for resource planning. They will also improve 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 ERP and POS 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.
A material disruption in our information technology, network infrastructure and telecommunication systems could adversely affect our business and results of operations.
We rely extensively on our information technology across our operations, including, but not limited to, our in-restaurant and enterprise-wide computer systems and network infrastructure across our operations. These include POS processing, supply chain management, retail merchandise allocation and distribution, labor productivity, plant management and expense management, among others. As an example, the POS system we are implementing, and back-office systems, provide information regarding daily sales, cash receipts, inventory, food and beverage costs, labor costs and other controllable operating expenses. Our business depends significantly on the reliability and capacity of our information technology systems to process these transactions, summarize results, manage and report on our business and our supply chain. Our information technology systems are subject to damage or interruption from power outages, computer, network, cable system, Internet and telecommunications failures, computer viruses, security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by our employees. If our information technology and telecommunication systems are damaged or cease to function properly, we may have to make a significant investment to repair or replace them, and we could suffer loss of critical data and interruptions or delays in our operations in the interim. Any material interruption in our information technology and telecommunication systems could adversely affect our business or results of operations.
Events out of our control may disrupt our business and could adversely affect our businesses, and their revenues and results of operations.
We are a highly automated business and rely on our production facilities, our network infrastructure, the Internet, our website and mobile apps 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 systems loss or interruptions, cessation or limitations on operations and services, disruption in our product production, breaches of data security and loss of critical data.
Many of our corporate systems and processes and corporate support for our restaurant and foods segments 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 digital and other forms of data and information. However, if we are unable to implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, experience delays in required reporting and compliance, fail to adequately support field operations and experience other breakdowns in normal communication and operating procedures. These 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 had to close or delay production of all or part of the operations at one or more of these plants for an extended period of time, we would likely be unable to increase production at our other plants or with our third-party co-packers in a timely manner, which could have a material adverse effect on our results of operations.
Failure to maximize or to successfully assert our intellectual property rights could adversely affect our business and results of operations.
We rely on trademark, trade secret and copyright laws to protect our intellectual property rights. We cannot guarantee that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own, or, where appropriate, license intellectual property rights necessary to support new product introductions or other brand extensions. We cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future. Our failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have an adverse effect on our business and results of operations.
Our Certificate of Incorporation and Bylaws, as well as Delaware law, may discourage potential acquirers of the Company.

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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 could also delay or make more difficult a merger, tender offer or proxy contest involving our Company. This includes Section 203 of the Delaware General Corporation Law, which prohibits a Delaware 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. These provisions, either alone or in combination with each other, give our current directors and executive officers a substantial ability to influence the outcome of a proposed acquisition of the Company. These provisions would apply even if an acquisition, or other significant corporate transaction, was considered beneficial by some of our shareholders. If a change in control or change in management is delayed or prevented by these provisions, the market price of our securities could decline.
Our business could be negatively affected as a result of the actions of activist shareholders .
In 2014 Castlerigg Global Equity Special Event Master Fund, Ltd., one of our stockholders affiliated with the Sandell Asset Management Corp. (together with its affiliates, "Sandell Group"), conducted a proxy contest with us and elected four individuals to our board of directors at our 2014 annual meeting of shareholders. The Sandell Group has continued to contact the Company and release public statements regarding the Company and its’ strategic decisions, as well as indicating it might seek further board representation. While the Sandell Group and its affiliates have not nominated director candidates for election at our 2016 Annual Meeting of Shareholders, the actions of the Sandell Group and its affiliates or another activist shareholder in the future could adversely affect our business because:
responding to public proposals 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
pursuit of an activist shareholder’s agenda may adversely affect our ability to effectively implement our business strategy and create additional value for our shareholders.
D.    COMPLIANCE
We are subject to a number of risks relating to federal, state and local regulation of our business, including the areas of food processing, health care reform, employment including minimum wage, and environmental matters, and an insufficient or ineffective response to government regulation may increase our costs and decrease our profit margins.
The restaurant and food industries are subject to extensive federal, state and local laws and regulations, including but not limited to those relating to food processing and safety, minimum wage and other labor issues including unionization, health care, menu labeling and building and zoning requirements and those relating to the preparation and sale of food as well as certain retail products.
Our plant operations, and our food products which are manufactured in third-party facilities, are subject to extensive inspection and regulation by the United States Department of Agriculture (the “USDA”), the Food and Drug Administration (the “FDA”), and by other federal, state, and local authorities. These regulations relate to the processing, packaging, storage, transportation, distribution, and labeling of products that we manufacture, produce and process.
The Federal Trade Commission and other authorities regulate how we market and advertise our products. Changes in these laws or regulations or the introduction of new laws or regulations could increase the costs of doing business for us or our customers or suppliers or restrict our actions, causing our results of operations to be adversely affected. We also face risks from new and changing laws and regulations relating to gift cards, nutritional content, nutritional labeling, product safety and menu labeling.
The development and operation of our restaurants and plants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements.
We are also subject to licensing and regulation by state and local authorities 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, Patient Protection and Affordable Care Act, and applicable requirements concerning minimum wage, overtime, health care coverage, family leave, medical privacy, tip credits, working conditions, safety standards and immigration status). As well as 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. In addition, we are

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subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
Increases in the federal minimum wage, including recent proposals to increase the federal minimum wage and index future increases to inflation, or other changes in these laws could increase our labor costs. Our ability to respond to minimum wage increases by increasing menu prices will depend on the responses of our competitors and customers. Our distributors and suppliers also may be affected by higher minimum wage and benefit standards and tracking costs, which could result in higher costs for goods and services supplied to us.
In March 2010, the PPACA was enacted and, in June 2012, the U.S. Supreme Court upheld the constitutionality of the law except for certain parts related to the expansion of Medicaid. Although we cannot predict with certainty the financial and operational impacts the law will have on us, such changes could affect our business, financial condition and results of operations. The law requires restaurant companies such as ours to disclose calorie information on their menus. We do not expect to incur any material costs from compliance with this provision of the law, but cannot anticipate the changes in guest behavior that could result from the implementation of this provision, which could have an adverse effect on our sales or results of operations.
The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings. Also, the failure to obtain and maintain required licenses, permits and approvals could adversely affect our operating results.
Our inability to respond appropriately to changes in consumer health and disclosure regulations could negatively impact our operations and competitive position, which could materially adversely affect our financial performance.
PPACA requires restaurant operators with twenty or more locations to make certain nutritional information available to customers. The nutritional disclosure requirements under PPACA are intended to preempt a patchwork of state and local laws regarding nutritional content disclosures that became prevalent over the past several years. Establishments covered by the nutritional disclosure requirements under PPACA have until December 1, 2016 to comply with the new rules. Until the new rules are implemented and enforced, uncertainty with respect to certain details of the new rules and how they will be enforced will continue. Additionally, until the new rules take effect in December 2016, many states, counties and cities are expected to continue to enforce their own nutritional content disclosure requirements. The continued uncertainty relating to nutritional content disclosure and ongoing need to comply with a patchwork of various state and local disclosure requirements continues to be a challenge for us, raising our compliance cost and exposing us to risk of non-compliance. Also, since our menus are printed on a periodic basis, the timing of implementation of new requirements can affect our ability to timely and accurately comply with such legislation, especially when it is subject to continuous changes in interpretation and delays in implementation.
Some states and local governments also have enacted legislation regulating or prohibiting the sales or disclosure of certain types and/or levels of ingredients in food served in restaurants, such as trans fats, sodium, GMOs and gluten, and are considering taxing and/or otherwise regulating high fat, high sugar and high sodium foods. The success of our restaurant and food operations depends, in part, upon our ability to respond effectively to changes in consumer health and disclosure regulations and to adapt our menu offerings and food product selections to changes in governmental requirements. If consumer health regulations change significantly, we may be required to modify or discontinue certain menu items. Our inability to respond with appropriate changes to our menu and food products offerings in response to regulations governing the sale or disclosure of certain ingredients could result in us being unable to sell certain products or menu items in certain jurisdictions. It could also lead to negative publicity about our products or menu items, which, in turn, could materially affect customer demand for our concepts and could materially adversely affect our financial performance.
A privacy breach could adversely affect our business.
The protection of customer, employee and company data is critical to us. We are subject to laws relating to information security, privacy, cashless payments, consumer credit, and fraud. Additionally, an increasing number of government and industry groups have established laws and standards for the protection of personal and health information. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Our ability to accept credit cards as payment in our restaurants and for on-line gift card orders depends on us remaining compliant with standards set by the PCI Security Standards Council (“PCI”). These standards require certain levels of cyber environment security and procedures to protect our customers’ credit card and other personal

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information. We continue to evaluate additional security enhancements and have implemented point-to-point encryption for our credit card transactions in our restaurants and end-to-end encryption and tokenization for our on-line credit card transactions. We employ both internal resources and external consultants to conduct auditing and testing for weaknesses in our cyber environment to reduce the likelihood of any security incident. We have developed a multi-disciplined security incident response plan to help ensure that our executives are fully and accurately informed and managing, with the help of content experts, the discovery, investigation, auditing and recovery stages of any security incidents. However, we can provide no assurance that our security measures will be successful in the event of an attempted or actual security incident. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new administrative processes.
In addition, customers and employees have a high expectation that we will adequately protect their personal information. Third parties may have the technology or know-how to breach the security of this confidential 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 the laws and regulations regarding privacy and security or experience a security breach, 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.
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, 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.
Labor organizing could harm our operations and competitive position in the restaurant industry, which could materially adversely affect our financial performance.
Our staff members and others may attempt to unionize our workforce, establish boycotts or picket lines or interrupt our supply chains which could limit our ability to manage our workforce effectively and cause disruptions to our operations, which could materially adversely affect our financial performance. A loss of our ability to effectively manage our workforce and the compensation and benefits we offer to our employees could significantly increase our labor costs, which could materially adversely affect our financial performance.
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 29, 2016 .
Our corporate support center is located at 8111 Smith’s Mill Road, New Albany, Ohio. The support center consists of three buildings located on approximately 41-acres of land. We own the property.
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 2016 , we owned the real estate for 305 of our Bob Evans Restaurants and leased the real estate for the remaining 222 locations, which includes 143 properties that were sold and leased back in April, 2016. 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 2016 . 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 43 closed restaurants and other properties.



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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 Kettle Creations, which included a 100,000 square foot food production facility in Lima, Ohio. Kettle Creations previously was a co-packer for us. The Lima plant produces refrigerated mashed potatoes and other potato-based side dishes, macaroni and cheese and other pasta side dishes. During the second quarter of fiscal 2014, we completed the first phase of expansion at the Lima, Ohio, 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. We are currently in the process of constructing an additional production line at the Lima, Ohio, facility. We expect the additional production line to cost approximately $20 million and to be completed in the second quarter of fiscal 2017.
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 the Hillsdale, Michigan, and Xenia, Ohio, properties. Subsequent to the sale-leaseback transaction completed in the second quarter of fiscal 2016, we lease the Sulphur Springs, Texas and Lima, Ohio production facilities. We also 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.
The Division of Enforcement of the SEC is conducting a formal investigation relating to disclosures set forth in our filings on Form 8-K and Form 10-Q/A both filed on December 3, 2014. Those filings addressed the correction of our error in the classification of our borrowings under our credit agreement as a current liability rather than as a long-term liability, as reported in our Form 10-Q filed on August 27, 2014. We are cooperating fully with the SEC in this matter. The Company cannot predict the duration, scope or outcome of the SEC’s investigation.
ITEM 4.     MINE SAFETY DISCLOSURES.
Not applicable.

27


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 23, 2016. The following “executive officers” are the Company's “Section 16 officers,” both as defined pursuant to the Securities Exchange of 1934, as of such date.
Name
 
Age
 
Years of
Service
as Officer
 
Background
T. Alan Ashworth
 
56

 
4

 
Senior Vice President, Corporate Development and Finance, and Treasurer of Bob Evans Farms, Inc. since July 2015; Vice President, Corporate Development and Finance, and Treasurer of Bob Evans Farms, Inc. from June 2014 to July 2015; Chief Financial Officer (Interim) of Bob Evans Farms, Inc. from May 2014 to June 2014; Vice President, Corporate Development and Finance of Bob Evans Farms, Inc. from August 2012 to June 2014; Senior Director, Finance of Bob Evans Farms, Inc. from December 2011 to August 2012; Vice President, Finance, Convergys Corporation from 2008 to 2011.


Douglas N. Benham
 
59

 
Less than one year

 
Executive Chair of Bob Evans Farms, Inc. since January 2016; Executive Chair (chief executive officer) of Bob Evans Farms, Inc. from August 2015 to December 2015; President and Chief Executive Officer of DNB Advisors, LLC, since 2006.

Colin M. Daly
 
44

 
4

 
Executive Vice President, General Counsel and Corporate Secretary of Bob Evans Farms, Inc. since December 2014; Senior Vice President, General Counsel and Corporate Secretary of Bob Evans Farms, Inc. from May 2012 to December 2014; General Counsel of O’Charley’s Inc. from February 2008 to May 2012; Secretary of O’Charley’s Inc. from March 2009 to May 2012.


Drew Domecq
 
42

 
Less than one year

 
Senior Vice President and Chief Information Officer, of Bob Evans Farms, Inc. since February 2016; Vice President, Enterprise Solutions for The Wendy’s Company, from December 2013 to February 2016; Chief Information Officer and Chief Technology Officer of Vox Mobile, from September 2012 to December 2013; Assistant Vice President, Operations Strategy and Implementation for Safelite Group, Inc. from April 2012 to September 2012; and Assistant Vice President, Information Technology for Safelite Group, Inc. from March 2002 to April 2012.

John J. Fisher

 
53

 
2

 
President, Bob Evans Farms, LLC (dba Bob Evans Restaurants) since March 2016; Executive Vice President and Chief Concept Officer of Bob Evans Farms, LLC from February 2015 to March 2016; Senior Vice President and Chief Concept Officer of Bob Evans Farms, LLC from November 2013 to February 2015; and Senior Vice President, Merchandising, Marketing, and Restaurant Operations of The Pantry, Inc. (dba Kangaroo Express) from March 2010 to March 2013.


Richard D. Hall
 
60

 
20

 
Executive Vice President, Supply Chain Management of Bob Evans Farms, Inc. since September 2008.

Mark E. Hood

 
63

 
2

 
Chief Financial and Administrative Officer of Bob Evans Farms, Inc., since September 2015; Member, Chief Executive Officer’s Office of Bob Evans Farms, Inc. from December 2014 to August 2015; Chief Financial Officer of Bob Evans Farms, Inc. since June 2014; Consultant from July 2012 to June 2014; Senior Vice President and Chief Financial Officer, Caleres Inc., (formerly Brown Shoe Company, Inc.) from 2006 to 2012.


Saed Mohseni
 
53

 
Less than one year

 
President and Chief Executive Officer, Bob Evans Farms, Inc. since January 2016; Chief Executive Officer of Bravo Brio Restaurant Group, Inc. August 2014 to December 2015; President and Chief Executive Officer of Bravo Brio Restaurant Group, Inc. from September 2009 to August 2014.

Beth A. Rauschenberger
 
51

 
Less than one year

 
Senior Vice President, Chief Accounting Officer and Controller of Bob Evans Farms, Inc. since March 2016; Vice President, Internal Audit for the Nationwide Mutual Insurance Company from August 2011 to March 2016; and Associate Vice President, Enterprise Reporting, for the Nationwide Mutual Insurance Company from December 2007 to August 2011.




J. Michael Townsley
 
57

 
13

 
President, BEF Foods, Inc. since June 2008; Member, Chief Executive Officer’s Office of Bob Evans Farms, Inc. from December 2014 to August 2015.


28



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 our peer group.
Our peer group is 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) whose attributes closely align with ours. 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.
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.

29


CUMULATIVE VALUE OF $100 INVESTMENT
 
2011
2012
2013
2014
2015
2016
Peer Group (1)
$
100.00

$
124.31

$
140.52

$
167.95

$
209.53

$
184.48

Standard & Poor’s 500
$
100.00

$
105.16

$
121.27

$
145.85

$
169.15

$
168.63

Bob Evans Farms, Inc.
$
100.00

$
127.03

$
143.62

$
161.93

$
160.86

$
166.54

(1) The peer group includes the following companies: 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, DineEquity, Inc., Flowers Foods, Inc., Panera Bread Co., Popeyes Louisiana Kitchen, Inc. (formerly known as AFC Enterprises), Red Robin Gourmet Burgers Inc., Ruby Tuesday, Inc., Sanderson Farms, Inc., Seneca Foods Corp., Snyder's Lance, Inc., Texas Roadhouse, Inc., The Cheesecake Factory Inc., The Hain Celestial Group, Inc., The Wendy's Company and Treehouse Foods, Inc. Diamond Foods, Inc., which was previously part of the peer group was acquired by Snyder’s-Lance, Inc. in the past year.
Issuer Repurchases of Equity Securities
On February 25, 2014, the Board of Directors authorized a stock repurchase program for up to $100.0 million. The program authorized the Company to repurchase its outstanding common stock pursuant to plans approved by the Board under SEC Rules 10b-18 and 10b5-1, and in the open market or through privately negotiated transactions. The ability to repurchase stock and complete the repurchase program is dependent upon the Company having available funds and complying with the financial covenants and other restrictions contained within the Company’s Credit Agreement and the repurchase authorization.
On August 20, 2014, the Board of Directors increased the authorization for the current stock repurchase program to $150.0 million and extended the authorization period through fiscal 2016.
On November 19, 2015, the Board of Directors approved an additional $100.0 million share repurchase program. The program authorizes the Company to repurchase its outstanding common stock pursuant to plans approved by the Board under SEC Rules 10b-18 and 10b5-1, and in the open market or through privately negotiated transactions. The share repurchase authorization expires on December 31, 2016. We repurchased shares through this program after we completed the initial $150.0 million of authorized repurchases.
In the fourth quarter of fiscal 2016 we repurchased approximately 0.4 million shares for $14.9 million. In the full year fiscal 2016 we repurchased 3.9 million shares for $171.5 million. The following table provides information regarding the purchases of shares of Common Stock of Bob Evans made by the Company during each fiscal month of the three months ended April 29, 2016:
Period (Fiscal Month)
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Shares Purchased as part of Publicly Announced Plans or Programs

 
Maximum Value of Shares that May Yet be Purchased Under the Plans or Programs

January 23, 2016 - February 19, 2016
 
266,723

 
$
39.84

 
266,723

 
$
82,721,149

February 20, 2016 - March 18, 2016
 
101,348

 
$
41.76

 
101,348

 
$
78,488,857

March 19, 2016 - April 29, 2016
 

 

 

 
$
78,488,857

 
 
368,071

 
$
40.37

 
368,071

 
 

30


ITEM 6.     SELECTED FINANCIAL DATA
Consolidated Financial Review
Bob Evans Farms, Inc. and Subsidiaries
(in thousands, except per share and shareholder amounts)
2016
 
2015
 
2014
 
2013
 
2012
Operating Results
 
 
 
 
 
 
 
 
 
Net Sales
$
1,338,827


$
1,349,190


$
1,328,552

 
$
1,330,226

 
$
1,287,210

Operating Income
$
36,221


$
17,686


$
33,125

 
$
87,954

 
$
106,475

Income From Continuing Operations Before Income Taxes
$
25,421


$
9,037


$
31,111

 
$
76,469

 
$
98,591

Provision (Benefit) for income taxes
$
1,199


$
(7,516
)

$
143

 
$
(6,084
)
 
$
28,406

Income From Continuing Operations
$
24,222


$
16,553


$
30,968

 
$
82,553

 
$
70,185

Income from Discontinued Operations, Net of Income Taxes
$


$


$
2,717

 
$
(83,374
)
 
$
2,757

Net Income
$
24,222


$
16,553


$
33,685

 
$
(821
)
 
$
72,942

Earnings Per Share - Income from Continuing Operations
 
 
 
 
 
 
 
 
 
Basic
$
1.14


$
0.70


$
1.17

 
$
2.94

 
$
2.38

Diluted
$
1.13


$
0.70


$
1.16

 
$
2.90

 
$
2.35

Earnings Per Share - Income from Discontinued Operations
 
 
 
 
 
 
 
 
 
Basic
$


$


$
0.10

 
$
(2.97
)
 
$
0.09

Diluted
$


$


$
0.10

 
$
(2.93
)
 
$
0.09

Earnings Per Share - Net Income
 
 
 
 
 
 
 
 
 
Basic
$
1.14


$
0.70


$
1.27

 
$
(0.03
)
 
$
2.48

Diluted
$
1.13


$
0.70


$
1.26

 
$
(0.03
)
 
$
2.44

Financial Position
 
 
 
 
 
 
 
 
 
Working capital
$
(57,820
)
 
$
(45,014
)
 
$
(486,499
)
 
$
(190,426
)
 
$
(92,305
)
Property, plant and equipment — net
$
629,280

 
$
853,721

 
$
878,482

 
$
797,272

 
$
890,589

Debt:
 
 
 
 
 
 
 
 
 
Short-term
$
3,419

 
$
409

 
$
458,898

 
$
201,433

 
$
38,571

Long-term
$
335,638

 
$
450,676

 
$
835

 
$
816

 
$
97,145

Stockholders’ Equity
$
216,444

 
$
379,991

 
$
389,219

 
$
594,775

 
$
672,135

 
 
 
 
 
 
 
 
 
 
Supplemental Information for the Year
 
 
 
 
 
 
 
 
 
Capital expenditures from continuing operations
$
65,694

 
$
74,517

 
$
190,995

 
$
118,200

 
$
81,863

Depreciation and amortization from continuing operations
$
79,607

 
$
80,074

 
$
79,456

 
$
69,319

 
$
60,264

Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
21,336

 
23,489

 
26,450

 
28,066

 
29,464

Diluted
21,494

 
23,649

 
26,704

 
28,488

 
29,925

Cash dividends per share
$
1.300

 
$
1.240

 
$
1.205

 
$
1.075

 
$
0.950

Common stock market closing prices:
 
 
 
 
 
 
 
 
 
High
$
51.88

 
$
59.64

 
$
58.86

 
$
45.36

 
$
39.71

Low
$
37.51

 
$
42.70

 
$
42.60

 
$
34.45

 
$
27.41

Supplemental Information at Year-End
 
 
 
 
 
 
 
 
 
Employees
30,625

 
32,341

 
34,470

 
34,023

 
33,763

Registered stockholders
15,719

 
16,578

 
17,689

 
18,927

 
19,776

Market price per share at closing
$
45.54

 
$
45.29

 
$
46.80

 
$
42.52

 
$
38.67

Book value per share
$
10.96

 
$
16.23

 
$
16.69

 
$
21.68

 
$
23.49

In fiscal 2014 we adjusted our consolidated financial statements to reflect the Mimi's Café operations as a discontinued operation for that year and all prior periods presented. The selected financial data for fiscal 2014 and prior years reflect Mimi's Café as a discontinued operation.

31


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 may contain 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 herein.
We have two reporting segments, Bob Evans Restaurants and BEF Foods, which is reflected in management's discussion and analysis of financial condition and result of operations. As of  April 29, 2016 , we operated  527 full-service Bob Evans Restaurants in 18 states. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. In the BEF Foods segment we produce and distribute a variety of complementary home-style, refrigerated side dish convenience food items and pork sausage under the Bob Evans, Owens and Country Creek brand names. These food products are available throughout the United States. We also manufacture and sell similar products to foodservice accounts, including Bob Evans Restaurants and other restaurants and food sellers.
All direct costs related to our two reporting segments are included in segment results. Effective with the first quarter of fiscal year 2016, the results of operations of our reporting segments exclude expenses from certain corporate and other functions which we consider overall corporate costs, or costs not reflective of the reporting segment’s core operating business. Prior year amounts have been adjusted to reflect the change in presentation. Refer to Note 9 for additional reporting segment information.
References herein to 2016 , 2015 and 2014 refer to fiscal years. Fiscal year 2016 is a 53 week period, while fiscal years 2015 and 2014 were 52 week periods.
Bob Evans Farms, Inc. Consolidated Overview

Net sales were $1,338.8 million in fiscal 2016, a decrease of $10.4 million as compared to the corresponding period last year, primarily due to lower store count and negative restaurant same store sales and partially offset by higher BEF Foods sales volumes and the sales impact of our 53rd week. Operating income was $36.2 million in fiscal 2016, an increase of $18.5 million as compared to the corresponding period last year. The increase in operating income as compared to the prior year was primarily due to a $31.0 million increase in BEF Foods operating income, $8.9 million of lower corporate and other costs and a $3.7 million benefit driven by the 53rd week, partially offset by a decrease of $21.4 million in the operating income of Bob Evans Restaurants.
Bob Evans Restaurants' fiscal 2016 results were positively impacted by $9.0 million of cost savings as compared to last year, driven primarily by S,G&A savings from above-restaurant headcount reductions and other non-food supply chain savings. Bob Evans Restaurants’ fiscal 2016 results were adversely impacted by a 2.5% decline in same store sales, a $9.6 million loss on the sale-leaseback of 143 restaurant properties, $7.8 million of impairment and severance costs related to store closings and $7.2 million of costs to settle a litigation matter. Bob Evans Restaurants fiscal 2015 results include $3.4 million of charges related to store closings and $6.0 million of costs related to the same litigation matter referenced above. BEF Foods results were positively impacted by $3.3 million of cost savings as compared to last year, primarily related to headcount reductions and manufacturing efficiencies. Corporate and other costs were positively impacted by $7.8 million of cost savings as compared to last year, resulting primarily from headcount reductions.
Pretax income in the fiscal year 2016 was $25.4 million as compared to a $9.0 million in the corresponding period last year. The effective tax rate was 4.7% in fiscal 2016 as compared to a benefit of 83.2% in the corresponding period last year. Earnings per diluted share was $1.13 in fiscal 2016 as compared to $0.70 in the corresponding period last year. Excluding the impact of the 53rd week, earnings per diluted share was $1.00 in fiscal 2016. Refer to the sections below for analysis on our fiscal 2016 operating results as compared to fiscal 2015.

32


Fiscal Year Ended April 29, 2016 (“fiscal 2016 ” or " 2016 ") as Compared to Fiscal Year Ended April 24, 2015 (“fiscal 2015 ” or " 2015 ")
The following tables reflect data for fiscal 2016, compared to the prior year. The consolidated information is derived from the accompanying Consolidated Statements of Net Income. The table also includes data for our two reporting segments - Bob Evans Restaurants and BEF Foods and Corporate and Other costs. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amounts.
 
Consolidated Results
 
Bob Evans Restaurants
(in thousands)
2016
 
2015
 
2016
 
2015
Net Sales
$
1,338,827

 
 
 
$
1,349,190

 

 
$
951,212



 
$
969,877

 
 
Cost of sales
425,585

 
31.8
%
 
457,744

 
33.9
%
 
252,611


26.6
%
 
258,677

 
26.7
%
Operating wage and fringe benefit expenses
427,148

 
31.9
%
 
423,539

 
31.4
%
 
384,977


40.5
%
 
381,874

 
39.4
%
Other operating expenses
222,060

 
16.6
%
 
217,991

 
16.2
%
 
169,630


17.8
%
 
169,018

 
17.4
%
Selling, general and administrative expenses
139,822

 
10.5
%
 
143,295

 
10.6
%
 
46,984


4.8
%
 
40,733

 
4.2
%
Depreciation and amortization expense
79,607

 
5.9
%
 
80,074

 
5.9
%
 
53,833


5.7
%
 
57,236

 
5.9
%
Impairments
8,384

 
0.6
%
 
8,861

 
0.7
%
 
8,384


0.9
%
 
6,100

 
0.6
%
Operating Income
$
36,221

 
2.7
%
 
$
17,686

 
1.3
%
 
$
34,793


3.7
%
 
$
56,239

 
5.8
%
 
BEF Foods
 
Corporate and Other
(in thousands)
2016
 
2015
 
2016
2015
Net Sales
$
387,615



 
$
379,313

 
 
 
$

 
$

Cost of sales
172,974


44.6
%
 
199,067

 
52.5
%
 

 

Operating wage and fringe benefit expenses
42,171


10.9
%
 
41,665

 
11.0
%
 

 

Other operating expenses
52,430


13.5
%
 
48,974

 
12.9
%
 

 

Selling, general and administrative expenses
32,805


8.5
%
 
29,712

 
7.9
%
 
60,033

 
72,849

Depreciation and amortization expense
16,224


4.2
%
 
17,141

 
4.5
%
 
9,550

 
5,697

Impairments


%
 
2,761

 
0.7
%
 

 

Operating Income
$
71,011


18.3
%
 
$
39,993

 
10.5
%
 
$
(69,583
)
 
$
(78,546
)
Sales
Consolidated net sales decreased 0.8% , to $1,338.8 million , in fiscal 2016 , compared to $1,349.2 million last year. The net sales decrease was comprised of a decrease of $18.7 million in Bob Evans Restaurants, partially offset by an increase of $8.3 million in BEF Foods.
Bob Evans Restaurants' net sales decreased $18.7 million , or 1.9% , in fiscal 2016 , as compared to last year. Same-store sales declined 2.5%, primarily the result of lower traffic including a 3.4% decline in on-premise dining. Additionally, there was an $11.0 million reduction of net sales due to lower net store count, resulting from one new store opening in the third quarter offset by 41 store closings, including 21 in the fourth quarter. These reductions in sales were partially offset by the $16.7 million impact of sales in the 53rd week.
Same-store sales computations for a comparable calendar period are based on net sales of restaurants that are open for at least 18 months prior to the start of that period. Net sales of closed restaurants are excluded from the same-store sales computation in the period in which the restaurants are closed.

33


The following table summarizes the restaurant openings and closings during the last eight quarters for Bob Evans Restaurants:
 
Beginning
 
Opened
 
Closed
 
Ending
Fiscal 2016
 
 
 
 
 
 
 
4th quarter
548

 

 
21

 
527

3rd quarter
547

 
1

 

 
548

2nd quarter
549

 

 
2

 
547

1st quarter
567

 

 
18

 
549

Fiscal 2015
 
 
 
 
 
 
 
4th quarter
564

 
4

 
1

 
567

3rd quarter
562

 
2

 

 
564

2nd quarter
562

 

 

 
562

1st quarter
561

 
1

 

 
562

The BEF Foods segment net sales increased by $8.3 million , or 2.2% , in fiscal 2016 , as compared to last year. Net sales increased by 7.8% due to higher volumes. Total pounds sold increased by 7.8%, including a 17.3% increase in refrigerated side dish products and an 11.8% increase in sausage products, partially offset by a 19.8% decrease in food service. The increase in pounds sold was partially offset by 5.6% as a result of lower net sausage pricing and the change in sales mix. Average sow costs were $44.31 in fiscal 2016 as compared to $69.41 in the prior year. This decline in sow costs drove a $22.8 million increase in trade spending offered to customers, reducing our net sales and allowing us to remain price competitive in a low sow cost environment. The following table summarizes pounds sold by category in fiscal 2016 and the corresponding period last year:
(in thousands)
2016
 
2015
Category
 
 
 
 
 
 
 
Refrigerated Sides
119,328

 
54.5
%
 
101,746

 
50.0
%
     Sausage
54,864

 
25.0
%
 
49,072

 
24.1
%
     Food Service
27,940

 
12.7
%
 
34,856

 
17.1
%
     Frozen
9,318

 
4.2
%
 
9,946

 
4.9
%
     Other
7,997

 
3.6
%
 
7,955

 
3.9
%
Total
219,447

 
 
 
203,575

 


Cost of Sales
Consolidated cost of sales was $ 425.6 million , or 31.8% of net sales fiscal 2016 , compared to $ 457.7 million , or 33.9% of net sales, last year. The change in cost of sales as a percentage of total sales was driven by a 10 bps weighted decrease in Bob Evans Restaurants and a 200 bps weighted decrease in BEF Foods.
Bob Evans Restaurants' cost of sales, predominately food costs, was $ 252.6 million , or 26.6% of net sales, fiscal 2016 , compared to $ 258.7 million , or 26.7% of net sales, last year. The improvement in food costs as a percentage of sales as compared to last year was driven primarily by a $3.0 million impact of reduced discounting and a $2.3 million impact of price increases which were used to offset commodity cost increases. These improvements were partially offset by a $4.0 million negative impact from the change in sales mix, driven in part by lower beverage sales.
BEF Foods cost of sales was $ 173.0 million , or 44.6% of net sales, in fiscal 2016 , compared to $ 199.1 million , or 52.5% of net sales, last year. The decrease in cost of sales as a percentage of sales was primarily due to the $21.1 million positive impact from an increase in sales of our higher margin refrigerated side dish products. Cost of sales as a percentage of sales was also impacted by a $24.1 million benefit of lower sow costs as compared to the prior year, however that benefit was largely offset by a $22.8 million increase in trade spending, primarily on sausage products. Sow costs averaged $44.31 per hundredweight in fiscal 2016, compared to $69.41 per hundredweight last year.

34


Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses ("operating wages") were $427.1 million , or 31.9% of net sales, in fiscal 2016 , compared to $423.5 million , or 31.4% of net sales, last year. The 50 bps increase in the operating wages ratio was driven by a weighted increase from Bob Evans Restaurants.
Bob Evans Restaurants' operating wages were $385.0 million , or 40.5% of net sales, in fiscal 2016 , compared to $381.9 million , or 39.4% of net sales, last year. The increase in total wage and fringe benefit expenses was the result of $6.9 million in additional costs related to our 53rd week. Adjusting for this impact, total operating wage and fringe benefit expenses declined $3.8 million. This decline was driven by a $6.0 million impact from the net store count reduction, and partially offset by higher wage rates and investments in labor hours to improve the guest experience.
BEF Foods' operating wages were $42.2 million , or 10.9% of net sales, in fiscal 2016 , compared to $41.7 million , or 11.0% of net sales, last year. Wages increased $0.5 million due to the 53rd week. Excluding the impact of the 53rd week, wages were flat. Higher net benefit costs of $0.9 million, including incentive compensation, were incurred primarily due to the segment's increased profitability and were partially offset by lower contract labor costs.
Other Operating Expenses
Consolidated other operating expenses were $222.1 million , or 16.6% of net sales, in fiscal 2016 , compared to $218.0 million , or 16.2% of net sales, last year. The 40 bps increase in the other operating expenses ratio was driven by a 20 bps weighted increase from both Bob Evans Restaurants and BEF Foods. The most significant components of other operating expenses are utilities, advertising costs, repairs and maintenance, restaurant supplies, BEF Foods' shipping and handling costs, credit and gift card processing fees and non-income based taxes.
Bob Evans Restaurants' other operating expenses were $169.6 million , or 17.8% of net sales, in fiscal 2016 , compared to $169.0 million , or 17.4% of net sales, last year. The increase in other operating expenses as a percentage of sales resulted from the impact of lower sales driven by the 2.5% decline in same-store sales. Total other operating expenses increased $2.6 million as a result of the 53rd week. Excluding this impact, other operating expenses decreased by $2.0 million. This decline was driven by a $4.1 million decrease in utilities costs, a $2.1 million decrease in occupancy costs and a $2.5 million reduction in advertising and pre-opening expenses, partially offset by a $4.8 million increase in supplies and repairs and maintenance costs and a $1.9 million increase in other costs including insurance.
BEF Foods' other operating expenses were $52.4 million , or 13.5% of net sales, in fiscal 2016 , compared to $49.0 million , or 12.9% of net sales, last year. The increase of $3.4 million was primarily the result of a $3.1 million increase in advertising costs and $2.2 million in rent expense attributable to the two production facilities that were sold and leased back in the second quarter of fiscal 2016. These costs were partially offset by a $2.2 million reduction in transportation costs, driven by lower fuel costs and other cost savings.
Selling, General and Administrative Expenses
Consolidated S,G&A expenses were $139.8 million , or 10.5% of net sales, in fiscal 2016 , compared to $143.3 million , or 10.6% of net sales, last year. The 10 bps decrease in the S,G&A ratio was driven by reductions in corporate and other S,G&A, partially offset by increases in S,G&A from Bob Evans Restaurants and BEF Foods.
S,G&A expenses for Bob Evans Restaurants include above-restaurant management and restaurant executive leadership. Bob Evans Restaurants' S,G&A was $47.0 million, or 4.8% of net sales, in fiscal 2016 , compared to $40.7 million, or 4.2% of net sales, last year. The increase of $6.3 million is primarily due to the $9.6 million loss on certain restaurants included in the sale leaseback transaction completed in the fourth quarter of fiscal 2016. The increase was partially offset by gains on sales of non-operating properties, primarily related to restaurants closed in the first quarter of fiscal 2016, and cost savings from headcount reductions in above-restaurant management and support functions.
S,G&A expenses for BEF Foods include costs of our BEF Foods sales organization, and BEF Foods executive leadership. BEF Foods' S,G&A was $32.8 million, or 8.5% of net sales, in fiscal 2016 , compared to $29.7 million, or 7.9% of net sales, last year. The increase was primarily driven by the $3.6 million of expenses incurred related to the sale leaseback of two of our production facilities in the second quarter of fiscal 2016.
Corporate and other costs that are not allocated to our reporting segments include information technology, finance, legal, human resources, supply chain and other corporate functions, and includes costs such as ongoing IT infrastructure costs, third-party legal and professional fees and other costs. Corporate and other costs were $60.0 million in fiscal 2016 , as compared to $72.8 million last year. The decrease in corporate and other S,G&A was primarily the result of a $10.6 million decrease in third-party legal and professional fees, a $3.2 million decrease from separation costs incurred in fiscal 2015, related to our

35


former CEO and a $1.8 million charge incurred in the prior year for the loss on sale of our interest in a jointly owned aircraft. These cost reductions as well as savings driven primarily by headcount reductions were partially offset by higher employee benefit costs, including incentive compensation costs driven by improved performance and costs related to our deferred compensation plans, as well as service costs related to our new ERP system.
Depreciation and Amortization
Consolidated depreciation and amortization expenses ("D&A") were $79.6 million , or 5.9% of net sales, in fiscal 2016 , compared to $80.1 million , or 5.9% of net sales, last year.
Bob Evans Restaurants' D&A expenses were $53.8 million , or 5.7% of net sales, in fiscal 2016 , compared to $57.2 million , or 5.9% of net sales, last year. The decrease was primarily driven by stores that were closed in fiscal 2016 and are classified as held for sale on our Consolidated Balance Sheet, and a decline related to assets on accelerated depreciation methods.
BEF Foods D&A expenses were $16.2 million , or 4.2% of net sales, in fiscal 2016 , compared to $17.1 million , or 4.5% of net sales, last year. The decrease is a result of the sale leaseback of our Lima, Ohio, and Sulphur Springs, Texas, manufacturing facilities in the second quarter of fiscal 2016.
D&A expenses for unallocated corporate assets were $9.6 million in fiscal 2016 , compared to $5.7 million last year. The increase is primarily driven by depreciation and amortization on the first phase of our ERP system, which was put in service on the first day of fiscal 2016.
Impairments
Impairments were $8.4 million in fiscal 2016 , compared to $8.9 million last year. In the current year we recorded impairment charges on 26 restaurant properties, primarily the result of our fourth quarter decision to close 27 restaurants. In the corresponding period last year we recorded impairment charges on 22 restaurant properties for $6.1 million and a $2.8 million impairment related to a BEF Foods trade name that was no longer being used.
Interest
Net interest expense was $10.8 million in fiscal 2016 , as compared to $8.6 million last year. The increase is primarily by higher average borrowings on our Credit Agreement during fiscal 2016 as compared to the corresponding period last year, as well as an increase in amortization of deferred financing costs incurred as part of our second and third amendments to the Credit Agreement and the Mortgage Loan.
Income Taxes
The provision for income taxes is based on our current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The Company’s effective income tax rate was a provision of 4.7%, in fiscal 2016 , as compared to a benefit of 83.2%, for the corresponding period a year ago. The effective income tax rates in fiscal 2016 and 2015 were substantially different than the statutory rate due to the Company’s domestic production activities deduction and the utilization of tax credits. In fiscal 2015, the effective tax rate was also significantly impacted by the effect of permanent items on varying levels of pretax earnings.

36


Fiscal Year Ended April 24, 2015 (“fiscal 2015 ” or " 2015 ") as Compared to Fiscal Year Ended April 25, 2014 (“fiscal 2014 ” or " 2014 ")
Net sales were $1,349.2 million in the twelve months ended April 24, 2015 , an increase of $20.6 million compared to the prior year. Operating income was $17.7 million in fiscal 2015, a decrease of $15.4 million as compared to the corresponding period last year. The decrease in operating income was driven primarily by higher S,G&A and operating wage costs and partially offset by the impact of higher sales and lower impairment costs.
Pretax income in the twelve months ended April 24, 2015 , was $9.0 million as compared to a pretax income of $31.1 million in the corresponding period last year. We had an income tax benefit of $7.5 million in fiscal 2015 as compared to income tax expense from continuing operations of $0.1 million fiscal 2014. Earnings-per-diluted-share was $0.70 per share in fiscal 2015, as compared to $1.16 per share from continuing operations in fiscal 2014. Refer to the sections below for analysis on our year-to-date fiscal 2015 operating results as compared to the comparable prior year period.
 
Consolidated Results
 
Bob Evans Restaurants
(in thousands)
2015

2014
 
2015
 
2014
Net Sales
$
1,349,190

 

 
$
1,328,552

 
 
 
$
969,877

 
 
 
$
956,579

 
 
Cost of sales
457,744

 
33.9
%
 
451,777

 
34.0
%
 
258,677

 
26.7
%
 
244,871

 
25.6
%
Operating wage and fringe benefit expenses
423,539

 
31.4
%
 
406,307

 
30.6
%
 
381,874

 
39.4
%
 
365,698

 
38.2
%
Other operating expenses
217,991

 
16.2
%
 
218,904

 
16.5
%
 
169,018

 
17.4
%
 
164,901

 
17.2
%
Selling, general and administrative expenses
143,295

 
10.6
%
 
122,133

 
9.1
%
 
40,733

 
4.2
%
 
26,626

 
2.9
%
Depreciation and amortization expense
80,074

 
5.9
%
 
79,456

 
6.0
%
 
57,236

 
5.9
%
 
60,446

 
6.3
%
Impairments
8,861

 
0.7
%
 
16,850

 
1.3
%
 
6,100

 
0.6
%
 
13,850

 
1.4
%
Operating Income
$
17,686

 
1.3
%
 
$
33,125

 
2.5
%
 
$
56,239

 
5.8
%
 
$
80,187

 
8.4
%
 
BEF Foods
 
Corporate and Other
(in thousands)
2015

2014
 
2015
 
2014
Net Sales
$
379,313

 
 
 
$
371,973

 
 
 
$

 
$

Cost of sales
199,067

 
52.5
%
 
206,906

 
55.6
%
 

 

Operating wage and fringe benefit expenses
41,665

 
11.0
%
 
40,609

 
10.9
%
 

 

Other operating expenses
48,974

 
12.9
%
 
54,003

 
14.5
%
 

 

Selling, general and administrative expenses
29,712

 
7.9
%
 
30,506

 
8.3
%
 
72,849

 
65,001

Depreciation and amortization expense
17,141

 
4.5
%
 
14,514

 
3.9
%
 
5,697

 
4,496

Impairments
2,761

 
0.7
%
 
3,000

 
0.8
%
 

 

Operating Income
$
39,993

 
10.5
%
 
$
22,435

 
6.0
%
 
$
(78,546
)
 
$
(69,497
)
Sales
Consolidated net sales increased 1.6% , to $1,349.2 million , for the twelve months ended April 24, 2015 , as compared to $1,328.6 million fiscal 2014. The net sales comprised of an increase of $13.3 million in Bob Evans Restaurants and an increase of $7.3 million in BEF Foods.
Bob Evans Restaurants' net sales increased $13.3 million , or 1.4% , in the twelve months ended April 24, 2015 , as compared to fiscal 2014. The increase in net sales was the result of a 0.9% increase in same-store sales, primarily due to a 1.2% increase in average menu prices. We also opened seven new restaurants during the year, including four in the fourth quarter, which increased sales by approximately $4.8 million over the comparable period.
BEF Foods' net sales increased by $7.3 million , or 2.0% , in the twelve months ended April 24, 2015 , compared to fiscal 2014. The increase in net sales was primarily due to $11.3 million of net sausage pricing increases implemented to offset higher sow costs compared to the prior year. Side dish volumes increased by approximately 13%, but were offset by lower sausage and foodservice volumes. The decrease in sausage is related to a decline in category demand due to higher pork prices, which began last year and did not recover despite the decline in sow costs in the second half of fiscal 2015. The decline in foodservice volumes is primarily due to a shift of resources towards our growing side dish business. Refer to the table below for pounds sold by category in the year ended April 24, 2015 , and corresponding period last year.

37


(in thousands)
2015
 
2014
Category
 
 
 
 
 
 
 
Refrigerated Sides
101,746

 
50.0
%
 
90,062

 
44.2
%
     Sausage
49,072

 
24.1
%
 
53,136

 
26.1
%
     Food Service
34,856

 
17.1
%
 
42,044

 
20.6
%
     Frozen
9,946

 
4.9
%
 
10,718

 
5.3
%
     Other
7,955

 
3.9
%
 
7,829

 
3.8
%
Total
203,575

 
 
 
203,789

 
 
Cost of Sales
Consolidated cost of sales was $457.7 million , or 33.9% of net sales, in the twelve months ended April 24, 2015 , compared to $451.8 million , or 34.0% of net sales, in fiscal 2014. The 10 bps decrease in the cost of sales ratio was driven by an 80 bps weighted increase in Bob Evans Restaurants and a 90 bps weighted decrease in BEF Foods.
Bob Evans Restaurants' cost of sales, predominately food costs, were $258.7 million , or 26.7% of net sales, in the twelve months ended April 24, 2015 , compared to $244.9 million , or 25.6% of net sales, in fiscal 2014. The increase in the cost of sales ratio was primarily the result of the $5.1 million margin impact of higher food costs and the $4.3 million impact of a shift in menu mix towards higher cost items, as well as the impact from increased discounting and increased carryout sales, partially offset by the $2.6 million impact of menu price increases.
BEF Foods' cost of sales was $199.1 million , or 52.5% of net sales, in the twelve months ended April 24, 2015 , compared to $206.9 million , or 55.6% of net sales, in fiscal 2014. Our cost of sales favorability was primarily due to price increases implemented to offset higher sow costs in the first half of fiscal 2015, lower sow costs in the second half of fiscal 2015, improved production yields, and the effect of a higher sales mix of our refrigerated side dish products. Sow costs averaged $69.41 per hundredweight in fiscal 2015, as compared to $73.23 per hundredweight in fiscal 2014.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses ("operating wages") was $423.5 million , or 31.4% of net sales, in the twelve months ended April 24, 2015 , compared to $406.3 million , or 30.6% of net sales, in fiscal 2014. The 80 bps increase in the operating wage and fringe benefit expenses ratio was driven by Bob Evans Restaurants.
Bob Evans Restaurants' operating wages were $381.9 million , or 39.4% of net sales, in the twelve months ended April 24, 2015 , compared to $365.7 million , or 38.2% of net sales, in fiscal 2014. The increase is primarily the result of $13.4 million in higher restaurant wages, driven by higher wage rates and higher staffing levels resulting from increased carryout business, higher sales volumes and extended holiday hours. Net benefit expenses also increased $2.8 million compared to fiscal 2014.
BEF Foods' operating wages were $41.7 million , or 11.0% of net sales, in the twelve months ended April 24, 2015 , compared to $40.6 million , or 10.9% of net sales, in fiscal 2014. The increase is primarily due to a $1.1 million increase in health insurance costs.
Other Operating Expenses
Consolidated other operating expenses were $218.0 million , or 16.2% of net sales, in the twelve months ended April 24, 2015 , compared to $218.9 million , or 16.5% of net sales, in fiscal 2014. The 30 bps decrease in the operating wages ratio was driven by a 10 bps weighted increase in Bob Evans Restaurants and a 40 bps weighted decrease in BEF Foods.
Bob Evans Restaurants' other operating expenses were $169.0 million , or 17.4% of net sales, in the twelve months ended April 24, 2015 , compared to $164.9 million , or 17.2% of net sales, in fiscal 2014. The increase in other operating expenses in fiscal 2015 was primarily a result of $4.6 million in additional advertising costs, as well as net $2.6 million of higher other costs including utilities, credit card fees driven by higher sales, rent and real estate taxes. These increases were partially offset by a $3.1 million reduction in preopening expenses, primarily related to costs associated with the Farm Fresh Refresh remodeling initiative that was completed in fiscal 2014.
BEF Foods' other operating expenses were $49.0 million , or 12.9% of net sales, in the twelve months ended April 24, 2015 , compared to $54.0 million , or 14.5% of net sales, in fiscal 2014. The decrease in other operating expenses is due to $1.6 million of lower transportation costs in fiscal 2015, $1.1 million of lower production and repairs and maintenance costs and $2.3 million of lower other costs including advertising and insurance.

38


Selling, General and Administrative Expenses
Consolidated S,G&A expenses were $143.3 million , or 10.6% of net sales, in the twelve months ended April 24, 2015 , compared to $122.1 million , or 9.1% of net sales, in fiscal 2014. The 150 bps increase in the S,G&A ratio was driven primarily by higher corporate and other costs, as well as higher Bob Evans Restaurant S,G&A costs.
S,G&A expenses incurred by Bob Evans Restaurants include above-restaurant management and restaurant executive leadership. Bob Evans Restaurants' S,G&A was $40.7 million, or 4.2% of net sales, for the twelve months ended April 24, 2015 , compared to $26.6 million, or 2.9% of net sales, in fiscal 2014. The increase is primarily due to a $6.0 million charge related to a class-action lawsuit, $4.3 million of higher management wages and benefit costs, including health insurance and incentive compensation, $2.5 million of higher severance costs and $1.3 million of higher costs related to the development of our carryout program.
S,G&A expenses incurred by BEF Foods include costs of our BEF Foods sales organization, and BEF Foods executive leadership. BEF Foods' S,G&A was $29.7 million, or 7.9% of net sales, for the twelve months ended April 24, 2015 , compared to $30.5 million, or 8.3%, of net sales in fiscal 2014. The decrease was due to lower selling wage and benefit costs, including lower severance costs as compared to the prior year.
Corporate and other costs that are not allocated to our reporting segments include information technology, finance, legal, human resources, supply chain and other corporate functions, and includes costs such as ongoing IT infrastructure costs, third-party legal and professional fees and other costs. Corporate and other costs were $72.8 million for the twelve months ended April 24, 2015 , as compared to $65.0 million in fiscal 2014. The increase in corporate and other S,G&A was primarily the result of $3.8 million of costs related to the separation of our former CEO, a $1.8 million charge incurred in fiscal 2015 for the loss on sale of our interest in a jointly owned aircraft and $2.2 million of other higher costs including legal and professional fees.
Depreciation and Amortization
Consolidated depreciation and amortization expenses ("D&A") was $80.1 million , or 5.9% of net sales, in the twelve months ended April 24, 2015 , compared to $79.5 million , or 6.0% of net sales, in fiscal 2014.
Bob Evans Restaurants' D&A expenses were $57.2 million , or 5.9% of net sales, in the twelve months ended April 24, 2015 , compared to $60.4 million , or 6.3% of net sales, in fiscal 2014. The primary driver of the decrease in depreciation expenses was the $3.2 million impact of the fiscal 2015 change in useful lives of Farm Fresh Refresh assets.
BEF Foods' D&A expenses were $17.1 million , or 4.5% of net sales, in the twelve months ended April 24, 2015 , compared to $14.5 million , or 3.9% of net sales, in fiscal 2014. The increase in D&A ratio is primarily the result of an increase in depreciable assets related to our Lima, Ohio, and Sulphur Springs, Texas, plant expansions, which were completed in the prior year.
D&A expenses for unallocated corporate assets were $5.7 million for the twelve months ended April 24, 2015 , compared to $4.5 million in fiscal 2014. The increase is primarily driven by depreciation and amortization on our corporate support center.
Impairments
Impairments were $8.9 million in fiscal 2015 as compared to $16.9 million in fiscal 2014. In fiscal 2015 we recorded impairment charges on 22 restaurant properties for $6.1 million and also recorded a $2.8 million impairment on a BEF Foods trade name that was no longer being used. In fiscal 2014 we recorded $13.9 million of impairment charges on 36 restaurant properties, of which 28 were sold prior to the end of fiscal 2014. We also recorded a $3.0 million impairment charge to BEF Foods related to our Richardson, Texas, production facility that was closed in fiscal 2014.
Interest
Net interest expense was $8.6 million for the twelve months ended April 24, 2015 as compared to $2.0 million in fiscal 2014. The increase in net interest expense in fiscal 2015 was the result of higher average interest rates on our borrowings as compared to the prior year as well as higher average outstanding borrowings on our Credit Agreement as compared to last year.
Provision for Income Taxes
The effective tax rate for fiscal 2015 was an 83.2% benefit in fiscal 2015 as compared to a 0.5% expense for fiscal 2014. The effective income tax rate in fiscal 2015 was substantially different than the statutory rate due to the Company’s domestic

39


production activities deduction and the utilization of tax credits. The effective income tax rate in fiscal 2014 was substantially different than the statutory rate due to the utilization of tax credits, the Company’s domestic production activities deduction, and favorable state settlements. In fiscal 2015 and 2014 the effective tax rate was also significantly impacted by the effect of permanent items on varying levels of pretax earnings.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from operating activities, the borrowing capacity under our Credit Agreement and the proceeds received from sale leaseback transactions completed in fiscal 2016.
Historically, our working capital requirements have been minimal. Overall, our current liabilities 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' sales for cash or third-party credit or debit cards; the relatively short trade credit terms with our BEF Foods' customers as well as most of our major suppliers and distributors; and the quick turnover of our inventories in both of our reporting segments.
Capital expenditures were $ 65.7 million and $ 74.5 million respectively, for the fiscal years ended April 29, 2016, and April 24, 2015. In fiscal 2016, capital expenditures primarily related to the next phase of our ERP system, a new restaurant point-of-sale system, an additional refrigerated side dish production line at our Lima, Ohio, plant, other IT infrastructure projects and general restaurant improvements. In fiscal 2015, capital expenditures primarily related to new restaurant construction and our ERP system. In fiscal  2017 , capital expenditures are expected to approximate $75 million to $80 million and include expenditures for the items discussed above.
During fiscal 2016 , we paid an annual cash dividend of $1.30 per share, compared to $1.24 for fiscal 2015 . While we expect to continue paying regular quarterly cash dividends, the declaration, amount and timing of future dividends are at the discretion of our Board of Directors.
On August 20, 2014, the Board of Directors increased the authorization of our stock repurchase program for up to $150.0 million through fiscal 2016. The program authorizes the Company to repurchase its outstanding common stock pursuant to plans approved by the Board under SEC Rules 10b-18 and 10b5-1, and in the open market or through privately negotiated transactions. The ability to repurchase stock and complete the repurchase program is dependent upon our having available funds and complying with the financial covenants and other restrictions contained in our Credit Agreement and the repurchase authorization.
On November 19, 2015, the Board of Directors approved an additional $100.0 million authorization under our share repurchase program, for a total authorization of $250.0 million. The program authorizes the Company to repurchase its outstanding common stock pursuant to plans approved by the Board under SEC Rules 10b-18 and 10b5-1, and in the open market or through privately negotiated transactions, while maintaining prudent leverage levels. The share repurchase authorization was extended to expire on December 31, 2016.
In fiscal 2016 we repurchased approximately 3.9 million shares for $171.5 million. The repurchases were funded primarily through additional borrowings on our Credit Agreement, cash from operations and the net proceeds from the sale leaseback transactions of 143 restaurant properties and two production facilities. As of April 29, 2016, we have $78.5 million remaining on our share repurchase authorization. Additional repurchases during fiscal 2017 will depend on valuation and maintaining a prudent leverage ratio.
On January 2, 2014, we entered into the Credit Agreement, which represents a syndicated secured revolving credit facility. We incurred financing costs of $2.1 million associated with this Credit Agreement, which are being amortized over the remaining term of the agreement. As a result of the  Third Amendment to the Credit Agreement , effective October 21, 2015, and discussed further below, up to $650.0 million of borrowings are available, including a letter of credit sub-facility of $50.0 million, and an accordion provision that permits the Company to request an additional $300.0 million for certain transactions, which could increase the revolving credit commitment to $950.0 million. The Credit Agreement is secured by the stock pledges of certain of our material subsidiaries. Borrowings under the Credit Agreement bear interest, at our option, at a rate based on LIBOR or the Base Rate, plus a margin based on the Leverage Ratio, ranging from 1.00% to 2.75% per annum for LIBOR, and ranging from 0.00% to 1.75% per annum for Base Rate. The Base Rate means for any day, a fluctuating per annum rate of interest equal to the highest of (a) the Federal Funds Open Rate, plus 0.50%, (b) the Prime Rate, or (c) the Daily LIBOR Rate, plus 1.00%. We are also required to pay a commitment fee of 0.15% per annum to 0.25% per annum of the average unused portion of the total lender commitments then in effect. As of April 29, 2016 , we had $307.0 million of outstanding borrowings under the Credit Agreement and $14.6 million reserved for certain standby letters of credit.

40


In the first quarter of fiscal 2015, we entered into a First Amendment to the Credit Agreement dated July 23, 2014. The terms of the Credit Agreement that were amended related to: (a) an increase to the Maximum Leverage Ratio for the period starting July 25, 2014, through July 22, 2016, (b) add certain restricted payment requirements related to share repurchases, and (c) an update to the Pricing Grid, which determines variable pricing and fees, to reflect changes in the allowable Maximum Leverage Ratio. We incurred financing costs of $1.3 million associated with this amendment, which are being amortized using the straight line method, which approximates the effective interest method.
In the first quarter of fiscal 2016, we entered into a Second Amendment to the Credit Agreement dated May 11, 2015. The amendment has an effective date of April 24, 2015. The terms of the Credit Agreement were amended related to: (a) an increase of the Maximum Leverage Ratio for the period starting April 24, 2015, through the remaining term of the Credit Agreement, (b) a change in the restrictions related to payments for share repurchases, and (c) a change in the definition of the LIBOR and Daily LIBOR rates that are used to calculate interest on outstanding borrowings. We incurred and paid fees of $1.7 million associated with this amendment, which will be amortized over the remaining term of the Credit Agreement using the straight line method, which approximates the effective interest method.
We entered into an Agreement Regarding Financial Covenant Calculation ("Agreement") on August 10, 2015, with an effective as date of April 24, 2015, in which the terms of the Credit Agreement were clarified regarding the treatment of certain noncash charges in the calculation of our Maximum Leverage Ratio. The Agreement had no impact on our financial covenants.
In the second quarter of fiscal 2016, we entered into a Third Amendment to the Credit Agreement dated and effective as of October 21, 2015. The terms of the Credit Agreement were amended related to: (a) increase the level of permitted indebtedness in connection with sale leaseback transactions of assets from $100.0 million to $300.0 million, (b) removal of the $150.0 million share repurchase restriction during the 2016 fiscal year, (c) decrease the size of the facility from $750.0 million to $650.0 million, (d) modification of the definition of the leverage ratio to account for rent expense from leases so that the leverage ratio will be calculated as consolidated indebtedness plus 600% of annual rent expense versus consolidated EBITDAR, and (e) inclusion of an add back to the leverage ratio calculation for costs related to the settlement of a class action lawsuit. We incurred and paid fees of $0.8 million associated with this amendment, which will be amortized over the remaining term of the Credit Agreement using the straight line method, which approximates the effective interest method.
Our Credit Agreement contains financial and other various affirmative and negative covenants that are typical for financings of this type. It requires us to maintain a specified minimum coverage ratio and maximum leverage ratio at April 29, 2016, of (a) a minimum coverage ratio of not less than 3.00 to 1.00; and (b) a maximum leverage ratio that may not exceed 4.50 to 1.00. As of April 29, 2016, our leverage ratio was 2.44 , and our coverage ratio was 11.64 , as defined in our Credit Agreement. Our Credit Agreement also limits repurchases of our common stock and the amount of dividends that we pay to holders of our common stock in certain circumstances. The Credit Agreement also allows for a sale leaseback of our real estate of up to $300.0 million, of which approximately $51 million is still available as of April 29, 2016, and mortgage indebtedness on our corporate support center of up to $50.0 million. A breach of any of these covenants could result in a default under our Credit Agreement, in which all amounts under our Credit Agreement may become immediately due and payable, and all commitments under our Credit Agreement to extend further credit, terminated. We were in compliance with the financial covenant requirements of our Credit Agreement as of April 29, 2016.
The outstanding borrowings on our Credit Agreement were $307.0 million and $447.6 million as of April 29, 2016 and April 24, 2015, respectively. We used cash flow from operations and proceeds from our sale leaseback transactions and Mortgage Loan to pay down borrowings on our Credit Agreement.
Beginning in fiscal 2015, management has worked closely with the Board of Directors and its strategic advisers to assess various alternatives to increase shareholder value. In particular, the Company determined it would pursue several transactions with respect to its real estate assets. In the second quarter of fiscal 2016, we entered into an agreement pursuant to which we sold our manufacturing properties located in Lima, Ohio, and Sulphur Springs, Texas, for $51.6 million.  We received net proceeds of $50.0 million, after consideration of closing and other transaction costs. Concurrent with the sale, we entered into a lease agreement pursuant to which we leased both the Lima and Sulphur Springs manufacturing properties for an initial 20-year term at an annual, straight-line rent expense of $4.1 million, inclusive of the amortized deferred gain on the Lima, Ohio, location. The master lease agreement includes two ten-year renewal options.
On February 9, 2016, we entered into a $30.0 million loan and mortgage on our corporate support center in New Albany, Ohio. The loan has a ten-year term and is amortized over that period. The rate of interest is variable and is initially set at 5.1%. The Company and several wholly owned subsidiaries have provided guaranties for the loan. We used the net proceeds from this loan to pay down debt under the Company's Credit Agreement and for other corporate purposes.
On April 14, 2016, the Company entered into an agreement pursuant to which we sold 143 restaurant properties for a combined $197.2 million. We received net proceeds of $191.7 million, after consideration of closing and other transaction

41


costs. The closing of the sale leaseback transactions are expected to provide us with after tax proceeds of approximately $164 million. As part of the transactions, Bob Evans Restaurants entered into absolute net master leases for the portfolio properties, for an initial term of 20 years, with five renewal options of five years each, at an annual rent of 6.65% of the purchase price for the first year. Certain of the properties include a CPI-based rent escalator with a maximum 1.5% annual increase, while others include a 1.5% annual rent escalator. In addition, the Company and BEF Foods, Inc. entered into payment and performance guaranties. The net proceeds were used to pay down debt under the Company’s credit agreement and for other corporate purposes.
We believe that our cash flow from operations, as well as the available borrowings under our Credit Agreement, will be sufficient to fund anticipated capital expenditures, working capital requirements, dividend payments and share repurchases.
Operating activities
Net cash provided by operating activities was $123.6 million and $103.1 million for fiscal 2016 and fiscal 2015 , respectively. The increase in cash provided by operating activities as compared to a year ago is primarily due to an increase in net income from operations, an increase in tax refunds received and improved working capital management.
Investing activities
Cash provided by investing activities was $196.3 million in fiscal 2016 as compared to cash used in investing activities of $64.6 million in the corresponding period last year. The increase in cash provided by investing activities was primarily due to the $ 257.2 million of proceeds from sale of property, plant and equipment, including $241.7 million of net proceeds received from our sale leaseback transactions and $14.9 million of net proceeds from the sale of nonoperating restaurant properties. In addition, capital expenditures decreased $8.8 million as compared to the prior year, primarily driven by the completion of the first phase of our ERP system in the fourth quarter of fiscal 2015. We also liquidated $5.2 million of rabbi trust assets during the twelve months ended April 29, 2016 .
Financing activities
Cash used in financing activities was $313.4 million for fiscal 2016 , while cash used by financing activities was $40.0 million for fiscal 2015 . The increase in cash used by financing activities was primarily due to the $171.5 million of repurchases of our common stock in fiscal 2016 as well as the $111.0 million of net pay downs of debt, funded by our sale-leaseback transactions.
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 29, 2016 , are as follows (in thousands):
(in thousands)
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Operating leases (1)
 
$
21,445

 
$
21,602

 
$
21,745

 
$
21,843

 
$
21,748

 
$
304,283

 
$
412,666

Short-term debt (2)
 
3,419

 

 

 

 

 

 
3,419

Long-term debt (3)
 

 
3,419

 
310,419

 
3,419

 
3,543

 
14,963

 
335,763

Purchase obligations (4)
 
58,886

 

 

 

 

 

 
58,886

Deferred compensation (5)
 
2,128

 
2,179

 
1,980

 
1,605

 
1,925

 
10,072

 
19,889

Capital project obligations (6)
 
16,322

 
2,892

 
2,892

 
2,892

 
2,892

 
837

 
28,727

Other (7)
 
573

 

 

 

 

 

 
573

Totals
 
$
102,773

 
$
30,092

 
$
337,036

 
$
29,759

 
$
30,108

 
$
330,155

 
$
859,923

(1)
Obligations for operating leases include payments through the end of current lease terms and do not include the impact of any available renewal periods.
(2)
The balance represents the current portion of our Mortgage Loan and Research and Development Investment Loan.
(3)
The balances represent principle payments on our Mortgage and Research and Development Investment Loans, the outstanding borrowings on our Credit Agreement, which matures in Fiscal 2019 and an interest free loan which matures in 2022. The amounts exclude expected interest payments on our Credit Agreement, which can fluctuate based on the amount outstanding borrowings in any given period.

42


(4)
Purchase obligations are comprised of $11.3 million of food purchase commitments for Bob Evans Restaurants and $47.6 million of raw material purchase commitments for BEF Foods, all of which are expected to be satisfied in the next 12 months. Many of these agreements do not obligate us to purchase any specific volumes and include provisions that would allow us to cancel such agreements with appropriate notice. For such agreements, amounts included in the table above represent our estimate of expected purchases prior to any cancellation of these contracts with appropriate notice.
(5)
Deferred compensation obligations in future years may change due to additional participant deferral, returns on participant investments and changes in distribution elections by our plan participants. The obligations above exclude share based obligations, see Note 7 for more details.
(6)
Capital project obligations in fiscal 2017 include $9.6 million of obligated expenditures related to our new restaurant POS system and $6.7 million of commitments related to the production line expansion at our Lima, Ohio, plant. The commitments in fiscal 2018 and thereafter are primarily service contract commitments related to our new restaurant POS system.
(7)
The balance relates to 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.
Business Outlook
Our outlook for fiscal 2017 relies on a number of assumptions, as well as the risk factors included in our SEC filings.
We anticipate consolidated net sales to approximate $1.28 billion to $1.33 billion .
We project net interest expense of approximately $12 million to $14 million .
We anticipate a tax rate of approximately 24% to 25% .
We project weighted-average diluted shares outstanding to be approximately 20 million shares and expect diluted EPS to be $1.95 to $2.12. This guidance range does not include the impact of potential share repurchase activity during fiscal year 2017.
We expect capital expenditures to approximate $75 million to $80 million , while depreciation and amortization expense should approximate $71 million to $75 million .
We expect Bob Evans Restaurants full-year same-store sales will be negative low single digits to flat.
We expect BEF Foods net sales of $400 million to $ 420 million.
We anticipate that sow costs will be between $52 and $55 per hundredweight.
Critical Accounting Policies and Estimates
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 that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience, current trends and conditions and various other facts and conditions that we believe to be reasonable under the circumstances.
Our significant accounting policies are described in Note 1 to our consolidated financial statements. 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.

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Gift Card Revenue
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 reasonable change in our gift card breakage estimates would not result in a material change to net sales.
BEF Foods Sales Promotions (Trade Spend)
We engage in promotional (sales incentive) programs in the form of “off-invoice” deductions, billbacks, cooperative advertising and coupons, collectively referred to as trade spend programs, 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 trade programs 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 and profitability. A change in actual sales volume and sow costs from our estimates will impact sales, and ultimately, profitability of the BEF Foods segment.
Long-Lived Asset Impairment
We evaluate the carrying amount of long-lived assets held and used in the business semi-annually and when events and circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying value of the asset, or asset group, to the undiscounted future cash flows expected to be generated by the asset. A long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds its fair value. The impairment loss recognized is the excess of carrying value of the asset or asset group above its fair value. To estimate fair value for restaurant locations where we own the land and building, we obtain appraisals from third party real estate valuation firms. The appraised values are based on recent sales of similar assets in the areas where the restaurant is located. To estimate fair value for leased locations we estimate discounted future cash flows. The assumptions used to estimate the recoverability and fair value of long-lived assets require a high degree of judgment and may be affected by many factors, including changes in economic conditions and changes in operating performance. If these assumptions change in the future we may be required to record additional impairment charges on these assets.
Goodwill and Other Intangible Assets
Goodwill is not amortized and is tested for impairment during the fourth quarter each year or on a more frequent basis when indicators of impairment exist. Our goodwill is primarily the result of our acquisition of Kettle Creations in fiscal 2013.
Other intangible assets, also recorded in our BEF Foods segment, represent a non-compete agreement related to the Kettle Creations acquisition. The non-compete agreement is a definite lived intangible asset and is amortized over the term of the agreement.
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 estimated future discounted cash flows expected to be generated by the BEF Food segment. Significant assumptions used to determine the fair value of our BEF Foods segment includes forecasted trends in sales, operating and allocated expenses, capital expenditures and an appropriate discount rate. Under the market-based approach, fair value is determined by using earnings multiples to compare the value of the BEF Foods segment to similar businesses or guideline companies whose securities are actively traded in public markets. If the BEF Foods segment's future operating performance is materially different from the forecast we may be required to record impairment related to goodwill, however in fiscal 2016 there was significant headroom between the fair value and carrying value of the BEF Foods segment.

44


Self-insurance Reserves
We record estimates for health, workers’ compensation and general liability 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. We utilize stop loss insurance to limit our exposure on a per person basis for health insurance and on a per claim basis for workers’ compensation and general liability insurance. Estimates for health, workers’ compensation and general liability are calculated utilizing claims development estimates based on historical experience and other factors. Future changes from the actuarial estimates regarding the frequency and severity of claims or settlement practices may result in insurance reserves that are materially different than what is recorded today.
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.
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 jurisdiction 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.
Interest Rate Risk
At April 29, 2016 , our outstanding debt included $ 307.0 million outstanding on the Credit Agreement, and $32.1 million of other outstanding notes. A change in market interest rates will impact our Credit Agreement when there is an outstanding balance. For example, a one percent increase in the benchmark rate used for our Credit Agreement would increase our annual interest expense by approximately $3.1 million , assuming the $307.0 million outstanding at the end of fiscal 2016 was outstanding for the entire year.
Commodities Prices
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. Long term fluctuations in commodity prices could significantly impact the profitability of both our Bob Evans Restaurants and BEF Foods segments.

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ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
BOB EVANS FARMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
 
April 29, 2016
 
April 24, 2015
Assets
Current Assets





Cash and equivalents
$
12,896


$
6,358

Accounts receivable, net
28,893


26,100

Inventories
24,997


24,620

Federal and state income taxes receivable


23,722

Prepaid expenses and other current assets
9,307


5,035

Current assets held for sale
31,644


22,243

Total Current Assets
107,737

 
108,078

Land
145,453

 
214,692

Buildings and improvements
585,218

 
839,148

Machinery and equipment
500,469

 
445,718

Construction in process
32,273

 
38,354

Total Property, Plant and Equipment
1,263,413


1,537,912

Less accumulated depreciation
665,777


732,697

Net Property, Plant and Equipment
597,636

 
805,215

Other Assets





Deposits and other
4,622


3,756

Notes receivable
20,886


18,544

Rabbi trust assets
20,662


32,302

Goodwill and other intangible assets
19,829


19,986

Deferred income tax assets
29,002


4,836

Long-term assets held for sale


26,263

Total Other Assets
95,001

 
105,687

Total Assets
$
800,374

 
$
1,018,980

Liabilities and Stockholders’ Equity
Current Liabilities





Current portion of long-term debt
$
3,419


$
409

Accounts payable
37,518


30,019

Accrued property, plant and equipment purchases
5,308


4,820

Accrued non-income taxes
15,696


14,951

Accrued wages and related liabilities
26,358


34,529

Self-insurance reserves
20,169


18,900

Deferred gift card revenue
14,147


13,714

Current taxes payable
9,473

 

Current reserve for uncertain tax provision
1,481


1,594

Other accrued expenses
31,988


34,156

Total Current Liabilities
165,557

 
153,092

Long-Term Liabilities





Deferred compensation
17,761


22,481

Reserve for uncertain tax positions
2,752


2,767

Deferred income tax liabilities


4,218

Deferred rent and other
5,851


5,755

Deferred gain on sale leaseback transactions
56,371

 

Credit facility borrowings and other long-term debt
335,638


450,676

Total Long-Term Liabilities
418,373

 
485,897

Stockholders’ Equity





Common stock, $.01 par value; authorized 100,000 shares; issued 42,638 shares at April 29, 2016, and April 24, 2015
426


426

Capital in excess of par value
244,304


235,958

Retained earnings
832,323


836,362

Treasury stock, 22,881 shares at April 29, 2016, and 19,231 shares at April 24, 2015, at cost
(860,609
)

(692,755
)
Total Stockholders’ Equity
216,444

 
379,991

Total Liabilities and Stockholders' Equity
$
800,374

 
$
1,018,980