BRIDGFORD FOODS CORP 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock and Dividend Data Our common stock is traded on the Nasdaq Global Market under the symbol “BRID”. As of January 12, 2021, there were 718 shareholders of record in our common stock. The payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend upon future earnings, financial requirements, and other factors. Unregistered Sales of Equity Securities During the period covered by this Report, we did not sell or issue any equity securities that were not registered under the Securities Act of 1933, as amended. Repurchases of Equity Securities by the Issuer During fiscal year 2020, we did not repurchase any shares of our common stock pursuant to our stock repurchase program previously authorized by the Board of Directors. The following table provides information regarding our repurchases of common stock in each of the four periods comprising the fourth quarter of fiscal year 2020. Period (1) Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (2) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) July 11, 2020 – August 7, 2020 - $ - - 120,113 August 8, 2020 – September 4, 2020 - - - 120,113 September 5, 2020 – October 2, 2020 - - - 120,113 October 3, 2020 – October 30, 2020 - - - 120,113 Total - $ - - (1) The periods shown are our fiscal periods during the sixteen-week quarter ended October 30, 2020. (2) All repurchases reflected in the foregoing table were made on the open market. Our stock repurchase program was approved by the Board of Directors in November 1999 (1,500,000 shares authorized, disclosed in a Form 10-K filed on January 26, 2000) and was expanded in June 2005 (500,000 additional shares authorized, disclosed in a press release and Form 8-K filed on June 17, 2005). Under the stock repurchase program, we are authorized, at the discretion of management and the Board of Directors, to purchase up to an aggregate of 2,000,000 shares of our common stock on the open market. Such purchases of common stock may occur from time to time, in open market transactions pursuant to Rule 10b-18 of the Exchange Act. The daily purchase quantity is defined as a number of shares up to, but not to exceed, each day’s applicable Rule 10b-18 maximum volume limit (i.e. 25% of the prior four calendar weeks’ average daily trading volume); however, once per week a block of stock may be purchased that exceeds the Rule 10b-18 average daily trading volume condition. As of October 30, 2020, the total maximum number of shares that may be purchased under the Purchase Plan is 120,113 at a purchase price not to exceed $10.00 per share for a total maximum aggregate price (exclusive of commission) of $1,201,130. However, our agreement with Citigroup lapsed on its own (by its terms) on October 14, 2019. Item 6. Selected Financial Data Not applicable for a smaller reporting company. 11 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations For a complete understanding, this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements contained in this Report. Certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 (refer to Part I., Item 1. Business for more information). Results of Operations (in thousands except percentages) Fiscal Year Ended October 30, 2020 (52 weeks) Compared to Fiscal Year Ended November 1, 2019 (52 weeks) Net Sales-Consolidated Net sales in fiscal year 2020 increased $9,185 (4.9%) when compared to the prior fiscal year. The changes in net sales were comprised as follows: Impact on Net Sales-Consolidated % $ Selling price per pound -1.0 (2,068 ) Unit sales volume in pounds 5.3 10,697 Returns activity 0.5 883 Promotional activity 0.1 (327 ) Increase in net sales 4.9 9,185 Net Sales-Frozen Food Products Segment Net sales in the Frozen Food Products segment in fiscal year 2020 decreased $9,993 (19.5%) compared to the prior fiscal year. The changes in net sales were comprised as follows: Impact on Net Sales-Frozen Food Products % $ Selling price per pound 2.8 1,604 Unit sales volume in pounds -23.5 (13,524 ) Returns activity -0.1 10 Promotional activity 1.3 1,917 Decrease in net sales -19.5 (9,993 ) The decrease in net sales in fiscal year 2020 was attributable to lower unit sales volume partially offset by a higher selling price per pound. The decrease in net sales was primarily driven by a significant decrease in volume in our shelf-stable sandwich business to institutional customers partially offset by an increase in selling prices implemented in the first quarter of fiscal year 2019. Other institutional Frozen Food Product sales, including sheet dough and rolls, decreased 29% by volume while retail sales volume increased 38%. During fiscal year 2020, demand shifted from foodservice to retail sales channels as schools and in-dining restaurants closed across the United States in response to the COVID-19 pandemic. Returns activity increased compared to the prior fiscal year. Promotional activity decreased due to lower bid price reductions, rebates and menu allowances as a percentage of sales. Net Sales-Snack Food Products Segment Net sales in the Snack Food Products segment in fiscal year 2020 increased $19,178 (13.9%) compared to the prior fiscal year. The changes in net sales were comprised as follows: Impact on Net Sales-Snack Food Products % $ Selling price per pound -2.5 (3,671 ) Unit sales volume in pounds 16.6 24,222 Returns activity 0.8 873 Promotional activity -1.0 (2,246 ) Increase in net sales 13.9 19,178 The increase in net sales in fiscal year 2020 was attributable to higher sales through our direct store delivery distribution channel. The weighted average selling price per pound decreased due to significant volume increases in high volume, low margin accounts. Promotional offers increased due to higher sales to high-volume, high-promotion customers. Returns activity decreased slightly compared to the 2019 fiscal year. 12 Cost of Products Sold and Gross Margin-Consolidated Cost of products sold from continuing operations increased by $11,331 (8.9%) compared to the prior fiscal year. Higher unit sales volume in the Snack Food Products segment was the primary contributing factor to the increase in cost of products sold. Gross overhead spending decreased but was offset by significant increases in commodity costs, higher production labor and higher inbound freight costs. Costs related to an additional production facility completed at the end of fiscal year 2020 also increased overhead expenses. An increase in commodity costs during fiscal year 2020 contributed to the increase in cost of goods sold. The gross margin decreased from 32.7% to 30.1% during fiscal year 2020 compared to the prior fiscal year. Change in Cost of Products Sold by Segment $ % Commodity $ Increase Frozen Food Products Segment (5,757 ) -4.5 70 Snack Food Products Segment 17,088 13.4 3,815 Total 11,331 8.9 3,885 Cost of Products Sold and Gross Margin–Frozen Food Products Segment Cost of products sold in the Frozen Food Products segment decreased by $5,757 (17.2%) in fiscal year 2020 compared to the prior fiscal year. Decreased volume and changes in product mix were the primary contributing factors to the decrease. Higher flour commodity costs of approximately $70 partially offset the decrease in costs of goods sold. The gross margin percentage decreased from 34.7% to 32.9% during fiscal year 2020 compared to the prior fiscal year. Cost of Products Sold and Gross Margin–Snack Food Products Segment Cost of products sold in the Snack Food Products segment increased by $17,088 (18.2%) compared to the prior fiscal year due primarily to a substantial increase in sales volume. Meat commodity costs increased during fiscal year 2020 adding to the increase in cost of products sold. The cost of meat commodities increased approximately $3,815 during fiscal year 2020 compared to the prior fiscal year. Higher depreciation on processing equipment impacted the cost of products sold. The gross margin earned in this segment decreased from 31.9% to 29.3% during fiscal year 2020 primarily as a result of higher commodity costs. Selling, General and Administrative Expenses-Consolidated Selling, general and administrative expenses (“SG&A”) in fiscal year 2020 increased $1,609 (3.0%) when compared to the prior fiscal year. The increase in this category did not directly correspond to the change in sales. The table below summarizes the primary expense variances in this category: October 30, 2020 (52 Weeks) November 1, 2019 (52 Weeks) Expense Increase (Decrease) Healthcare costs $ 1,949 $ 3,091 $ (1,142 ) Pension costs 1,333 232 1,101 Travel 1,649 2,397 (748 ) Wages and bonus 24,079 23,399 680 Outside consulting 2,369 1,785 584 Product advertising 6,714 6,303 411 Outside storage 431 133 298 Cash surrender value gains (906 ) (666 ) (240 ) Vehicle repairs 1,018 795 223 Other SG&A 15,810 15,368 442 Total - SG&A 54,446 52,837 1,609 Healthcare benefit expense has decreased due to recent favorable claim activity compared to fiscal year 2019. The increase in pension expense was due to a higher unrecognized net loss compared to the prior year. Travel expenses decreased due to travel restrictions and stay-at-home orders in response to the COVID-19 pandemic. Higher labor commissions on increased sales resulted in higher wages and bonus expense in fiscal year 2020 compared to the prior year. Outside consulting costs increased due to higher real estate advisory services and other related legal fees. Costs for product advertising increased mainly as a result of higher payments under brand licensing agreements in the Snack Food Products segment during fiscal year 2020. Outside storage costs increased due to limited space at the new facility being used to warehouse products prior to shipment. The gain on cash surrender value of life insurance policies increased substantially due to higher stock market gains compared to fiscal year 2019. Vehicle repairs increased in the Snack Food Products segment. The major components comprising the increase of “Other SG&A” expenses were computer maintenance and utilities. Selling, General and Administrative Expenses-Frozen Food Products Segment SG&A expenses in the Frozen Food Products segment decreased by $2,301 (15.5%) to $12,566 during fiscal year 2020 compared to the prior fiscal year. The overall decrease in SG&A expenses was due to lower unit sales volume, profit-sharing accruals and product advertising. 13 Selling, General and Administrative Expenses-Refrigerated and Snack Food Products Segment SG&A expenses in the Snack Food Products segment increased by $3,910 (10.3%) to $41,880 during fiscal year 2020 compared to the prior fiscal year. Most of the increase was due to higher unit sales volume partially offset by an allocated gain on cash surrender value of life insurance policies. Gain or Loss on Sale of Property, Plant and Equipment The gain or loss during fiscal years 2020 and 2019 was due to ordinary gain or loss on disposal of assets. Income Taxes The Company’s effective income tax rate was -42.7% and 24.0% in fiscal years 2020 and 2019, respectively. The effective income tax rate differed from the applicable mixed statutory rate of approximately 26.4% due to the rate differential on our net operating loss carryback available under the CARES Act, non-deductible meals and entertainment, non-taxable gains and losses on life insurance policies and state income taxes. (Refer to Note 4 of Notes to the Consolidated Financial Statements for more information). Liquidity and Capital Resources (in thousands except share amounts, percentages and ratios) The principal source of our operating cash flow is cash receipts from the sale of our products, net of costs to manufacture, store, market and deliver such products. We normally fund our operations from cash balances and cash flow generated from operations. We borrowed $15,000 during fiscal year 2019 and $18,450 during the first half of fiscal year 2020 to purchase specific equipment for our new Chicago processing facility. In addition, we borrowed $4,500 under our line of credit with Wells Fargo Bank, N.A. during the first quarter of fiscal year 2020 to fund operations which was repaid in the third quarter of fiscal 2020. We borrowed $2,000 under the line of credit subsequent to the end of fiscal year 2020 on December 2, 2020. On March 16, 2020, we entered into a Purchase and Sale Agreement with CRG Acquisition, LLC (“CRG”) as amended, pursuant to which we agreed to sell to CRG a parcel of land including an approximate 156,000 square foot four-story industrial food processing building located at 170 N. Green Street in Chicago, Illinois (the “Property”). Proceeds from the purchase price for the Property of $60,000 are anticipated subject to a due diligence period and certain closing adjustments and prorations, and is conditioned upon, among other customary closing conditions, CRG receiving zoning and other governmental approvals necessary for the construction and development of a mixed use project on the Property in accordance with certain development plans to be approved by the City of Chicago. The cost basis of the Property was immaterial. The escrow account for the transaction has received $1,350 in earnest money through October 30, 2020. We have received a total of $225 which is non-refundable earnest money and thus not part of restricted cash. Historically, we expect positive operating and cash flows in the first quarter of our fiscal year from the liquidation of inventory and accounts receivable balances related to holiday season sales. Anticipated commodity price trends may affect future cash balances. Certain commodities may be purchased in advance of our immediate needs to lower the ultimate cost of processing. Cash flows from operating activities: October 30, 2020 (52 Weeks) November 1, 2019 (52 Weeks) Net income $ 7,323 $ 6,484 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,514 4,153 (Recovery of) provision for losses on accounts receivable (8 ) 44 Reduction in promotional allowances (423 ) (852 ) Loss (Gain) on sale of property, plant and equipment (58 ) 290 Deferred income taxes, net 6,385 1,889 Changes in operating working capital (8,816 ) (4,761 ) Net cash provided by operating activities $ 9,917 $ 7,247 For the fifty-two weeks ended October 30, 2020, net cash provided by operating activities was $9,917, an increase of $2,670 compared to the fifty-two weeks ended November 1, 2019. The net increase in cash provided by operating activities primarily related to higher net income of $7,323, deferred income taxes of $6,045 and higher accounts payable of $2,509 partially offset by an increase in inventory of $2,929 and an increase in accounts receivable of $1,512. During fiscal year 2020, we did not contribute towards our defined benefit pension plan. Plan funding strategies may be adjusted depending upon economic conditions, investment options, tax deductibility, or legislative changes in funding requirements. 14 Our cash conversion cycle (defined as days of inventory and trade receivables less days of trade payables outstanding) was equal to 66 days for the fifty-two weeks ended October 30, 2020 and 67 days for the fifty-two weeks ended November 1, 2019. For the fifty-two weeks ended November 1, 2019, net cash provided by operating activities was $7,247. The result was primarily related to lower net income, an increase in inventory and deferred income taxes. During fiscal year 2019, we funded $875 towards our defined benefit pension plan. Cash used in investing activities: October 30, 2020 (52 Weeks) November 1, 2019 (52 Weeks) Proceeds from sale of property, plant and equipment $ 39 $ 61 Proceeds from deposits in escrow 1,125 - Additions to property, plant and equipment (24,482 ) (25,739 ) Net cash used in investing activities $ (23,318 ) $ (25,678 ) Expenditures for property, plant and equipment include the acquisition of equipment, upgrading of facilities to maintain operating efficiency and investments in cost effective technologies to lower costs. In general, we capitalize the cost of additions and improvements and expense the cost of repairs and maintenance. We may also capitalize costs related to improvements that extend the life, increase the capacity, or improve the efficiency of existing machinery and equipment. Specifically, capitalization of upgrades of facilities to maintain operating efficiency include acquisitions of machinery and equipment used on packaging lines and refrigeration equipment used to process food products. Proceeds from deposits in escrow of $1,125 relate to the pending sale of a parcel of land including an approximate 156,000 square foot four-story industrial food processing building located at 170 N. Green Street in Chicago, Illinois. Refer to Note 1 – Subsequent Events for more information. We have received a total of $1,350 in deposits in escrow less $225 received as non-refundable earnest money. The table below highlights the additions to property, plant and equipment for the fifty-two weeks ended: October 30, 2020 (52 Weeks) November 1, 2019 (52 Weeks) Land $ - $ - Building - - Building improvements 4,669 10,103 Furniture and fixture 208 - Temperature control 446 3,285 Processing equipment 29,466 2,019 Packaging lines 324 2,641 Vehicles for sales and/or delivery 704 1,585 Quality control and communication systems 24 156 Computer software and hardware 96 861 Forklifts - 57 Change in projects in process (11,455 ) 5,032 Additions to property, plant and equipment $ 24,482 $ 25,739 Expenditures for additions to property, plant and equipment during the fifty-two weeks ended October 30, 2020 include projects in process of $1,090 related to the new facility in Chicago. Cash provided by financing activities: October 30, 2020 (52 Weeks) November 1, 2019 (52 Weeks) Payments of capital lease obligations $ (24 ) $ (17 ) Proceeds from bank borrowings 18,450 17,000 Repayments of bank borrowings (3,076 ) (3,253 ) Net cash provided by financing activities $ 15,350 $ 13,730 Our stock repurchase program was approved by the Board of Directors in November 1999 and was expanded in June 2005. Under the stock repurchase program, we were authorized, at the discretion of management and the Board of Directors, to purchase up to an aggregate of 2,000,000 shares of our common stock on the open market. As of the end of fiscal year 2020, 120,113 shares remained authorized for repurchase under the program. The Company leases three long-haul trucks received during fiscal year 2019. The six-year leases for these trucks expire in 2025. Amortization of equipment under capital lease was $71 in 2020. The Company leased one long-haul truck for $40 during fiscal year 2020, and that lease term is two years. 15 We maintain a line of credit with Wells Fargo Bank, N.A. that extends through March 1, 2022. Under the terms of this line of credit, we may borrow up to $7,500 at an interest rate equal to the bank’s prime rate or LIBOR plus 1.5%. We borrowed $2,000 under this line of credit on November 24, 2019 and $2,500 on January 24, 2020 for a combined total of $4,500. We repaid the balance on this line of credit with Wells Fargo Bank, N.A. on May 13, 2020 of $4,500 with the proceeds from the fifth borrowing of $7,200 under the master collateral loan and security agreement with Wells Fargo Bank, N.A. described below. The Company was in compliance with all covenants as of October 30, 2020. Subsequent to October 30, 2020, we borrowed $2,000 under the line of credit on December 2, 2020. On December 26, 2018, we entered into a master collateral loan and security agreement with Wells Fargo Bank, N.A. (the “Original Wells Fargo Loan Agreement”) for up to $15,000 in equipment financing as amended to expand facility. Pursuant to the Original Wells Fargo Loan Agreement, we borrowed the following amounts. Type and Number (1) Date Funds Received Rate Amount Interest Amount and Date Equipment Loan No. 01 12/26/18 4.13 % $ 7,500 $ 103 01/31/19 Equipment Loan No. 02 04/23/19 3.98 % 7,500 102 05/31/19 Equipment Loan No. 03 12/23/19 3.70 % 3,750 54 02/03/20 Equipment Loan No. 04 03/06/20 3.29 % 7,500 100 03/13/20 Equipment Loan No. 05 04/17/20 3.68 % 7,200 97 05/15/20 Total $ 33,450 $ 456 (1) Term: 7 years for 84 installment payments. The Wells Fargo Loan Agreement as amended and line of credit, contain various affirmative and negative covenants that limit the use of funds and define other provisions of the loan. The main financial covenants are listed below: ● Total Liabilities divided by Tangible Net Worth not greater than 2.5 to 1.0 at each fiscal quarter, ● Quick Ratio not less than 1.0 to 1.0 at each fiscal quarter end, and ● Fixed Charge Coverage Ratio not less than 1.25 to 1.0 as of each fiscal quarter end, determined on a trailing 4-quarter basis. Aggregate contractual maturities of debt in future fiscal years are as follows: Fiscal Years Debt Payable 2021 $ 4,429 2022 $ 4,599 2023 $ 4,775 2024 $ 4,958 2025 $ 5,148 2026-2027 $ 5,213 The Company was in compliance with all covenants under the Wells Fargo Loan Agreement and line of credit as of October 30, 2020. Impact of Inflation Our operating results are heavily dependent upon the prices paid for raw materials. The marketing of our value-added products does not lend itself to instantaneous changes in selling prices. Changes in selling prices are relatively infrequent and do not compare with the volatility of commodity markets. While fluctuations in significant cost structure components, such as ingredient commodities and fuel prices, have had a significant impact on profitability over the last two fiscal years, the impact of general price inflation on our financial position and results of operations has not been significant. However, future volatility of general price inflation or deflation and raw material cost and availability could adversely affect our financial results. Management is of the opinion that our strong financial position and our capital resources are sufficient to provide for our operating needs and capital expenditures for fiscal year 2021. Off-Balance Sheet Arrangements We do not currently have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K. Contractual Obligations Except as described above, we had no other debt or other contractual obligations within the meaning of Item 303(a)(5) of Regulation S-K, as of October 30, 2020. Our expected future liability related to construction of the new Chicago processing facility is approximately $3,006 as of October 30, 2020. Critical Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. Amounts estimated related to liabilities for self-insured workers’ compensation, employee healthcare and pension benefits are especially subject to inherent uncertainties and these estimated liabilities may ultimately settle at amounts not originally estimated. We record promotions, returns allowances, bad debt and inventory allowances based on recent and historical trends. Management believes its current estimates are reasonable and based on the best information available at the time. 16 Disclosure concerning our policies on credit risk, revenue recognition, cash surrender or contract value for life insurance policies, deferred income tax and the recoverability of our long-lived assets are provided in Notes 1 and 4 of the Notes to the Consolidated Financial Statements. Recently Issued Accounting Pronouncements and Regulations Various accounting standard-setting bodies have been active in soliciting comments and issuing statements, interpretations and exposure drafts. For information on new accounting pronouncements and the impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.