Discontinued Operations

3 Months Ended

Jul. 28, 2017

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Discontinued Operations

In the fourth quarter of fiscal 2017, we completed the sale of the Restaurants Business for an aggregate purchase price of $565,000 in cash. The Buyer also purchased our corporate headquarters as part of the transaction.

The Restaurants Transaction was effected by (i) the sale of the Restaurants Business assets by the Company’s affiliates to the Buyer and (ii) the sale by the Company of fifty percent of the equity interest in a newly formed special purpose entity that holds specified intellectual property assets used by both the Restaurants Business and the Company’s food production business. As part of the Restaurants Transaction the Company also conveyed to the Buyer the majority of working capital liabilities associated with the Restaurants Business, including outstanding payables, accrued wages, and other accrued current liabilities, other than debt.

The Company continues to supply the Restaurants Business with certain of its products under a multi-year supply agreement. Net sales to the Restaurants Business were $5,201 and $4,772 during the three months ended July 28, 2017 and July 29, 2016, respectively. Sales to the Restaurants Business in the prior year were eliminated in consolidation. Additionally, pursuant to a transition services agreement, the Company will supply certain services, primarily information technology related, to the Restaurants Business and will receive certain human resource, tax and accounting services from the Restaurants Business. These services will be provided at cost for a period up to 18 months, which can be further extended.

Results associated with the Restaurants Business are classified as income from discontinued operations, net of income taxes, in our Consolidated Statements of Net Income, and were immaterial in the first quarter of fiscal 2018. Prior year results have been recast to conform to the current presentation. Income from discontinued operations in the prior year was comprised of the following:

	Three Months Ended
(in thousands)	July 28, 2017		July 29, 2016
Net sales	$	—	$	220,376
Costs of sales	—		55,236
Other operating expenses	—		159,707
Operating income from discontinued operations	$	—	$	5,433
Net interest expense (1)	—		406
Income from discontinued operations before income taxes	—		5,027
Provision for income taxes	—		441
Net income from discontinued operations	$	—	$	4,586

(1) Interest expense associated with the mortgage loan on our corporate headquarters facility, which was sold to the Buyer as part of the Restaurants Transaction, has been allocated to discontinued operations.

Total operating and investing cash flows from discontinued operations were immaterial in the first quarter of fiscal 2018. Cash provided by operating activities from discontinued operations was $9,865 in the first quarter of fiscal 2017, while cash used in investing activities was $4,141 in the first quarter of fiscal 2017. Cash used in investing activities of discontinued operations in the first quarter of fiscal 2017 relates to $6,066 of capital expenditures, net of proceeds from the sale of closed restaurant locations.

Lease Guarantee

As part of the Restaurants Transaction, the Buyer assumed all operating leases associated with the Restaurants Business, including leases for the 143 restaurant properties that were sold as part of a sale leaseback transaction in the fourth quarter of fiscal 2016. The Company and BEF Foods, Inc. continue to guarantee certain payment and performance obligations associated with the lease agreements for those restaurant properties (the "Guarantee"). In the event the Buyer fails to meet its payment and performance obligations under these lease agreements, the Company may be required to make rent and other payments to the landlord under the requirements of the Guarantee. Should the Company, as guarantor of the lease obligations, be required to make all lease payments due for the remaining term of the lease subsequent to July 28, 2017, the maximum amount we may be required to pay is the annual rent amount, for the remainder of the lease term. The current annual rent on these leases is approximately $13,300, and will increase up to 1.5% annually based on indexed inflation. The lease term extends for approximately 19 more years as of July 28, 2017, and the Company would remain a guarantor of the leases in the event the leases are extended for a renewal period. In the event that the Company is obligated to make payments under the guarantor obligations, we believe the exposure is limited due to contractual protections and recourse available in the master lease agreements as well as the BER Sale Agreement, including a requirement of the landlord to mitigate damages by re-letting the properties in default. There have not been any events that would suggest that the Buyer will fail to continue to meet the obligations of the leases. As such, the fair value of the Guarantee is immaterial as of July 28, 2017.