SEC Company Response from TASTY BAKING CO (CIK 0000096412) — Jul 29, 2005
TASTY BAKING CO (CIK 0000096412)
Date: July 29, 2005 · CIK: 0000096412 · Accession: 0000950159-05-000868
AI Filing Summary & Sentiment
Referenced dates: July 12, 2005
Letter
July 29, 2005 Via EDGAR Transmission ---------------------- Ms. Jill S. Davis Branch Chief Division of Corporation Finance Mail Stop 7010 United States Securities and Exchange Commission Washington, DC 20549-7010
Re: Tasty Baking Company Form 10-K for Fiscal Year Ended December 25, 2004 Filed March 25, 2005 Form 14A Filed April 8, 2005 Form 10-Q for Fiscal Quarter Ended March 26, 2005 Filed May 5, 2005 File No. 1-05084
Dear Ms. Davis:
Thank you for your letter dated July 12, 2005 reflecting comments resulting from your review of our filings on Form 10-K for the fiscal year ended December 25, 2005, Schedule 14A for the 2005 Annual Meeting of Shareholders, and on Form 10-Q for the fiscal quarter ended March 25, 2005 (the "Comment Letter").
We have reviewed your comments carefully and set forth our detailed responses below. For ease of reference, the text of each numbered comment is reproduced immediately preceeding our corresponding response.
Having reviewed the referenced filings in light of your comments, the company continues to believe that these filings comply with the applicable disclosure requirements. However, the company plans to incorporate in its future filings additional information identified in the Comment Letter that may enhance its overall disclosure by providing additional detail to investors. On or about July 29, 2005, the company will file its Report on Form 10-Q for the fiscal quarter ended June 25, 2005. As indicated specifically below, the guidance provided in the Comment Letter regarding opportunities for enhanced disclosure will be reflected in the forthcoming Form 10-Q and in subsequent periodic filings, as appropriate.
Form 10-K for the Fiscal Year Ended December 25, 2004 -----------------------------------------------------
Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations, page 9 ------------------------------
<PAGE> Ms. Jill S. Davis Securities and Exchange Commission July 29, 2005 Page 2
Critical Accounting Policies, page 9 ------------------------------------
Comment 1 "We note that you identify several accounting policies that "....are considered to be critical in that (i) they are most important to the depiction of the financial condition and results of operations of the company and (ii) their application requires management's most subjective judgment in making estimates about the effect of matters that are inherently uncertain." However, your disclosures do not refer to specific accounting estimates and the assumptions and uncertainties underlying such estimates. Please expand your disclosures to explain how the assumptions that you have made compare to other assumptions that could have reasonably been made, under the circumstances, and to address the specific uncertainties that are reasonably likely to give rise to material effects in the course of resolution. Please provide information about the quality and potential variability of your earnings and cash flow so that investors may ascertain the extent to which your reported financial information is indicative of your future results. We generally find that disclosures including both sensitivity analyses and discussions of historical experience in making the critical estimates are effective in meeting this Management's Discussion and Analysis objective. Please refer to the guidance in FRC Section 501.14 if you require further clarification."
Response to #1: The company believes that it has adequately disclosed appropriate information related to Critical Accounting Policies based on "Interpretation: Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations" published December 19, 2003, in reference to FR-72. To further enhance our disclosure, the company will incorporate responses a, b, c, e and f into the Form 10-Q filing for the fiscal quarter ended June 25, 2005.
a. Customer Sales and Discounts and Allowances
The company gives allowances and offers various sales incentive programs to customers and consumers that are accounted for as a reduction of sales. The company records estimated reductions to sales for:
o Price promotion discounts at the time the product purchased by the independent sales distributor is sold to the final retail customer o Distributor discounts at the time revenue is recognized o Coupon expense at the estimated redemption date o Customer rebates at the time revenue is recognized o Cooperative advertising at the time the company's obligation to the customer is incurred o Product returns received from independent sales distributors
Price promotion discount expense is recorded when the related product being discounted is sold by the independent sales distributor to the retail customer. The amount of the price promotion is captured in the hand held computer system when the independent sales distributor sells product to the retail customer. The price promotion discount is based upon actual discounts per case based upon an approved price promotion calendar. Any variation in price discounts is due primarily to the company selling more volume on discount than estimated, but that variation is recorded each month. Independent sales distributors receive a purchase discount equal to a percentage of the wholesale price of product sold to retailers and other customers, adjusted for price promotions and product returns. Direct retail customers receive a purchase discount equal to a percentage of the wholesale price of product received. Discounts to independent distributors and retail customers are based on agreed upon rates, and amounts vary based upon volume.
<PAGE> Ms. Jill S. Davis Securities and Exchange Commission July 29, 2005 Page 3
Coupon expense estimates are based upon the number of coupons dropped to consumers and the estimated redemption percentage. The estimated redemption percentages are based on data obtained from the company's third party coupon processor, and their experience with similar coupon drops. The estimate is updated monthly upon receipt of the actual coupon redemption report. Estimates for customer rebates assume that customers will meet the required quantities to qualify for payment. If the customers fall above or below the estimate as the year progresses, this could impact the estimate. Cooperative advertising expense is recorded based on the estimated advertising cost of the underlying program. Product returns are recorded as product is received back to the company. At quarter end, an estimated reserve for product returns is recorded based upon sales and actual return experience in the last month of the quarter. Actual returns may vary from this estimate. An estimate for the product return reserve must be used at month end in order to prepare the financial statements on a timely basis since actual product returns come in subsequent to month end.
Some customers take deductions when they make payments to the company. Based on historical experience, it is the company's current policy to reserve for these deductions at the time they are taken by the customer. If it is determined by the company that a deduction may not be valid, the deduction is evaluated with the customer and the reserve could be reversed.
Total sales discounts and allowances approximated $25 million per quarter in 2004. Since the company obtains updated information on every discount and allowance account each month, the risk that estimates are not properly recorded are generally limited to a percentage of one month's activity. This activity approximated $8 million for 2004. Historically, actual discounts and allowances have not varied significantly from estimates.
b. Collections
The company aggressively pursues collection of accounts receivable balances. The company performs ongoing credit evaluations of customers' financial condition and makes quarterly estimates of its collectibility of its accounts receivable balances. Management specifically analyzes accounts receivable trends and historical bad debts, customer concentrations, customer credit worthiness, levels of customer deductions, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
The provision for doubtful accounts is recorded as a selling, general and administrative expense. The allowance for doubtful accounts has two components. The first component is a reserve against all accounts receivable balances based on the last five years of write-off experience for the company. The second component is for specifically identified accounts receivable balances from customers whose ability to pay is in question, such as customers who file bankruptcy while they have an outstanding balance due the company. Although the total allowance for doubtful accounts reflects the estimated risk for all customer balances, if any one of our top twenty customers' accounts receivable balances became fully uncollectible, that would have a material impact on our consolidated statement of operations, and would negatively impact cash flow.
<PAGE> Ms. Jill S. Davis Securities and Exchange Commission July 29, 2005 Page 4
c. Long-lived asset impairment
In accordance with SFAS No.144, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In instances where the carrying amount may not be recoverable, the review for potential impairment utilizes estimates and assumptions of future cash flows directly related to the asset. Cash flow estimates are typically derived from the company's historical experience and internal business plans.
For assets where there is no plan for future use, the review for impairment includes estimates and assumptions of the fair market value of the asset, which is based on the best information available. The company uses market prices, when available, and independent appraisals as appropriate to determine fair value. These assets are recorded at the lower of their book value or market value.
Adverse changes in future market conditions could result in losses or an inability to recover the carrying value of the asset.
d. Pension and Postretirement Plans
The following response will not be included in future filings.
We have carefully reviewed our disclosures related to pension and postretirement plans and believe that all key information required has been included. In reaching our conclusion, we point out to the Staff that Footnotes No. 8 and No. 9 include sensitivity analysis and other information regarding assumptions requested in the comment. We believe that the cross-reference included in the Critical Accounting Policy to these footnotes along with the additional information currently included in the Critical Accounting Policy is sufficient.
e. Workers' Compensation Expense
Accounting for workers' compensation expense requires the use of estimates and assumptions regarding numerous factors, including the ultimate severity of injuries, the timeliness of reporting injuries, and health care cost increases. The company insures for workers' compensation liabilities under a large deductible program where losses are incurred by the company up to certain specific and aggregate amounts. Accruals for claims under the large deductible insurance program are recorded as claims are incurred. We estimate our liability based on total incurred claims and paid claims, adjusted by loss development factors which account for the development of losses over time. Loss development factors are based on prior loss experience and on the age of incurred claims, and are reviewed by a third party claim loss specialist. The company's estimated liability is the difference between the amounts the company expected to be paid and the amounts the company had already paid for those years, adjusted for the limits on the aggregate amounts. We evaluate our estimated liability on a continuing basis and adjust it accordingly. Included in the estimate of liability is an estimate for expected changes in inflation and health care costs.
If there are an excessive number of workers' compensation claims in a given accounting period and the actual results vary from the company's assumptions, this could have a material impact on our consolidated statement of operations.
<PAGE> Ms. Jill S. Davis Securities and Exchange Commission July 29, 2005 Page 5
f. Income Tax Valuat
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
July 29, 2005
Via EDGAR Transmission
----------------------
Ms. Jill S. Davis
Branch Chief
Division of Corporation Finance
Mail Stop 7010
United States Securities and
Exchange Commission
Washington, DC 20549-7010
Re: Tasty Baking Company
Form 10-K for Fiscal Year Ended December 25, 2004
Filed March 25, 2005
Form 14A
Filed April 8, 2005
Form 10-Q for Fiscal Quarter Ended March 26, 2005
Filed May 5, 2005
File No. 1-05084
Dear Ms. Davis:
Thank you for your letter dated July 12, 2005 reflecting
comments resulting from your review of our filings on Form 10-K for the fiscal
year ended December 25, 2005, Schedule 14A for the 2005 Annual Meeting of
Shareholders, and on Form 10-Q for the fiscal quarter ended March 25, 2005 (the
"Comment Letter").
We have reviewed your comments carefully and set forth our
detailed responses below. For ease of reference, the text of each numbered
comment is reproduced immediately preceeding our corresponding response.
Having reviewed the referenced filings in light of your
comments, the company continues to believe that these filings comply with the
applicable disclosure requirements. However, the company plans to incorporate in
its future filings additional information identified in the Comment Letter that
may enhance its overall disclosure by providing additional detail to investors.
On or about July 29, 2005, the company will file its Report on Form 10-Q for the
fiscal quarter ended June 25, 2005. As indicated specifically below, the
guidance provided in the Comment Letter regarding opportunities for enhanced
disclosure will be reflected in the forthcoming Form 10-Q and in subsequent
periodic filings, as appropriate.
Form 10-K for the Fiscal Year Ended December 25, 2004
-----------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations, page 9
------------------------------
<PAGE>
Ms. Jill S. Davis
Securities and Exchange Commission
July 29, 2005
Page 2
Critical Accounting Policies, page 9
------------------------------------
Comment 1 "We note that you identify several accounting policies that "....are
considered to be critical in that (i) they are most important to the depiction
of the financial condition and results of operations of the company and (ii)
their application requires management's most subjective judgment in making
estimates about the effect of matters that are inherently uncertain." However,
your disclosures do not refer to specific accounting estimates and the
assumptions and uncertainties underlying such estimates. Please expand your
disclosures to explain how the assumptions that you have made compare to other
assumptions that could have reasonably been made, under the circumstances, and
to address the specific uncertainties that are reasonably likely to give rise to
material effects in the course of resolution. Please provide information about
the quality and potential variability of your earnings and cash flow so that
investors may ascertain the extent to which your reported financial information
is indicative of your future results. We generally find that disclosures
including both sensitivity analyses and discussions of historical experience in
making the critical estimates are effective in meeting this Management's
Discussion and Analysis objective. Please refer to the guidance in FRC Section
501.14 if you require further clarification."
Response to #1: The company believes that it has adequately disclosed
appropriate information related to Critical Accounting Policies based
on "Interpretation: Commission Guidance Regarding Management's
Discussion and Analysis of Financial Condition and Results of
Operations" published December 19, 2003, in reference to FR-72. To
further enhance our disclosure, the company will incorporate responses
a, b, c, e and f into the Form 10-Q filing for the fiscal quarter ended
June 25, 2005.
a. Customer Sales and Discounts and Allowances
The company gives allowances and offers various sales
incentive programs to customers and consumers that are
accounted for as a reduction of sales. The company records
estimated reductions to sales for:
o Price promotion discounts at the time the product
purchased by the independent sales distributor is sold
to the final retail customer
o Distributor discounts at the time revenue is recognized
o Coupon expense at the estimated redemption date
o Customer rebates at the time revenue is recognized
o Cooperative advertising at the time the company's
obligation to the customer is incurred
o Product returns received from independent sales
distributors
Price promotion discount expense is recorded when the related
product being discounted is sold by the independent sales
distributor to the retail customer. The amount of the price
promotion is captured in the hand held computer system when
the independent sales distributor sells product to the retail
customer. The price promotion discount is based upon actual
discounts per case based upon an approved price promotion
calendar. Any variation in price discounts is due primarily to
the company selling more volume on discount than estimated,
but that variation is recorded each month. Independent sales
distributors receive a purchase discount equal to a percentage
of the wholesale price of product sold to retailers and other
customers, adjusted for price promotions and product returns.
Direct retail customers receive a purchase discount equal to a
percentage of the wholesale price of product received.
Discounts to independent distributors and retail customers are
based on agreed upon rates, and amounts vary based upon
volume.
<PAGE>
Ms. Jill S. Davis
Securities and Exchange Commission
July 29, 2005
Page 3
Coupon expense estimates are based upon the number of coupons
dropped to consumers and the estimated redemption percentage.
The estimated redemption percentages are based on data
obtained from the company's third party coupon processor, and
their experience with similar coupon drops. The estimate is
updated monthly upon receipt of the actual coupon redemption
report. Estimates for customer rebates assume that customers
will meet the required quantities to qualify for payment. If
the customers fall above or below the estimate as the year
progresses, this could impact the estimate. Cooperative
advertising expense is recorded based on the estimated
advertising cost of the underlying program. Product returns
are recorded as product is received back to the company. At
quarter end, an estimated reserve for product returns is
recorded based upon sales and actual return experience in the
last month of the quarter. Actual returns may vary from this
estimate. An estimate for the product return reserve must be
used at month end in order to prepare the financial statements
on a timely basis since actual product returns come in
subsequent to month end.
Some customers take deductions when they make payments to the
company. Based on historical experience, it is the company's
current policy to reserve for these deductions at the time
they are taken by the customer. If it is determined by the
company that a deduction may not be valid, the deduction is
evaluated with the customer and the reserve could be reversed.
Total sales discounts and allowances approximated $25 million
per quarter in 2004. Since the company obtains updated
information on every discount and allowance account each
month, the risk that estimates are not properly recorded are
generally limited to a percentage of one month's activity.
This activity approximated $8 million for 2004. Historically,
actual discounts and allowances have not varied significantly
from estimates.
b. Collections
The company aggressively pursues collection of accounts
receivable balances. The company performs ongoing credit
evaluations of customers' financial condition and makes
quarterly estimates of its collectibility of its accounts
receivable balances. Management specifically analyzes accounts
receivable trends and historical bad debts, customer
concentrations, customer credit worthiness, levels of customer
deductions, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance
for doubtful accounts. If the financial condition of customers
were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances would be
required.
The provision for doubtful accounts is recorded as a selling,
general and administrative expense. The allowance for doubtful
accounts has two components. The first component is a reserve
against all accounts receivable balances based on the last
five years of write-off experience for the company. The second
component is for specifically identified accounts receivable
balances from customers whose ability to pay is in question,
such as customers who file bankruptcy while they have an
outstanding balance due the company. Although the total
allowance for doubtful accounts reflects the estimated risk
for all customer balances, if any one of our top twenty
customers' accounts receivable balances became fully
uncollectible, that would have a material impact on our
consolidated statement of operations, and would negatively
impact cash flow.
<PAGE>
Ms. Jill S. Davis
Securities and Exchange Commission
July 29, 2005
Page 4
c. Long-lived asset impairment
In accordance with SFAS No.144, long-lived assets are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. In
instances where the carrying amount may not be recoverable,
the review for potential impairment utilizes estimates and
assumptions of future cash flows directly related to the
asset. Cash flow estimates are typically derived from the
company's historical experience and internal business plans.
For assets where there is no plan for future use, the review
for impairment includes estimates and assumptions of the fair
market value of the asset, which is based on the best
information available. The company uses market prices, when
available, and independent appraisals as appropriate to
determine fair value. These assets are recorded at the lower
of their book value or market value.
Adverse changes in future market conditions could result in
losses or an inability to recover the carrying value of the
asset.
d. Pension and Postretirement Plans
The following response will not be included in future filings.
We have carefully reviewed our disclosures related to pension
and postretirement plans and believe that all key information
required has been included. In reaching our conclusion, we
point out to the Staff that Footnotes No. 8 and No. 9 include
sensitivity analysis and other information regarding
assumptions requested in the comment. We believe that the
cross-reference included in the Critical Accounting Policy to
these footnotes along with the additional information
currently included in the Critical Accounting Policy is
sufficient.
e. Workers' Compensation Expense
Accounting for workers' compensation expense requires the use
of estimates and assumptions regarding numerous factors,
including the ultimate severity of injuries, the timeliness of
reporting injuries, and health care cost increases. The
company insures for workers' compensation liabilities under a
large deductible program where losses are incurred by the
company up to certain specific and aggregate amounts. Accruals
for claims under the large deductible insurance program are
recorded as claims are incurred. We estimate our liability
based on total incurred claims and paid claims, adjusted by
loss development factors which account for the development of
losses over time. Loss development factors are based on prior
loss experience and on the age of incurred claims, and are
reviewed by a third party claim loss specialist. The company's
estimated liability is the difference between the amounts the
company expected to be paid and the amounts the company had
already paid for those years, adjusted for the limits on the
aggregate amounts. We evaluate our estimated liability on a
continuing basis and adjust it accordingly. Included in the
estimate of liability is an estimate for expected changes in
inflation and health care costs.
If there are an excessive number of workers' compensation
claims in a given accounting period and the actual results
vary from the company's assumptions, this could have a
material impact on our consolidated statement of operations.
<PAGE>
Ms. Jill S. Davis
Securities and Exchange Commission
July 29, 2005
Page 5
f. Income Tax Valuat