BRIDGFORD FOODS CORP 10-K

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 28, 2022 (52 weeks) Compared to Fiscal Year Ended October 29, 2021 (52 weeks) Net Sales-Consolidated Net sales in fiscal year 2022 increased $25,468 (10.6%) 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 8.5 21,705 Unit sales volume in pounds 3.0 7,597 Returns activity -0.2 (831 ) Promotional activity -0.7 (3,003 ) Increase in net sales 10.6 25,468 Net Sales-Frozen Food Products Segment Net sales in the Frozen Food Products segment in fiscal year 2022 increased $14,744 (35.5%) 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 8.5 3,949 Unit sales volume in pounds 28.1 13,060 Returns activity 0.2 55 Promotional activity -1.3 (2,320 ) Increase in net sales 35.5 14,744 The increase in net sales for fiscal year 2022 primarily relates to higher unit sales volume in pounds coupled with a higher selling price per pound. The increase in net sales was primarily driven by a significant increase in volume to institutional customers and an increase in selling prices due to price increases implemented during the fourth quarter of fiscal year 2021 and second quarter of fiscal year 2022. Other institutional Frozen Food Products sales, including sheet dough and rolls, increased 44% by volume and retail sales volume decreased 6%. Demand has shifted from retail to foodservice sales channels as schools and in-dining restaurants have reopened in response to the lifting of restrictions caused by the COVID-19 pandemic. Returns activity decreased compared to the 2021 fiscal year. Promotional activity was higher in fiscal year 2022 as a percentage of sales due to increased sales to high promotion customers. Net Sales-Snack Food Products Segment Net sales in the Snack Food Products segment in fiscal year 2022 increased $10,724 (5.4%) 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 8.5 17,756 Unit sales volume in pounds -2.6 (5,463 ) Returns activity -0.4 (886 ) Promotional activity -0.1 (683 ) Increase in net sales 5.4 10,724 Net sales of Snack Food Products increased due to higher average selling prices per pound compared to fiscal year 2021. Price increases were implemented in the second quarter of fiscal year 2022 in response to record high meat commodity input costs. Unit sales volume in pounds through our direct store delivery distribution channel decreased due to lower demand caused by inflationary pressures on consumer spending habits. Returns activity was higher compared to the 2021 fiscal year. Promotional offers increased slightly compared to fiscal year 2021. 12 Cost of Products Sold and Gross Margin-Consolidated Cost of products sold from continuing operations increased by $4,791 (2.5%) compared to the prior fiscal year. The gross margin increased from 21.4% to 27.1% during fiscal year 2022 compared to the prior fiscal year. Change in Cost of Products Sold by Segment $ % Commodity $ Increase Frozen Food Products Segment 11,553 6.1 1,844 Snack Food Products Segment (6,762 ) -3.6 7,949 Total 4,791 2.5 9,793 Cost of Products Sold and Gross Margin–Frozen Food Products Segment Cost of products sold in the Frozen Food Products segment increased by $11,553 (39.1%) in fiscal year 2022 compared to the prior fiscal year. Higher commodity costs, increased volume and changes in product mix were the primary contributing factors to this increase. The cost of purchased flour increased approximately $1,844, which contributed to the increase in costs of goods sold. The gross margin percentage decreased from 28.8% to 26.9% during fiscal year 2022 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 decreased by $6,762 (4.2%) compared to the prior fiscal year due primarily to lower unit sales volume. Meat commodity costs increased during fiscal year 2022 partially offsetting the decrease in cost of products sold. The cost of meat commodities increased approximately $7,949 during fiscal year 2022 compared to the prior fiscal year. As a result, a net realizable value reserve of $131 was recorded during the fiscal year after determining that the market value on some meat products was less than the costs associated with production and sale of the product. Higher depreciation on processing equipment impacted the cost of products sold. The gross margin earned in this segment increased from 19.8% to 27.1% during fiscal year 2022. Selling, General and Administrative Expenses-Consolidated Selling, general and administrative expenses (“SG&A”) in fiscal year 2022 increased $5,107 (8.5%) 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 28, 2022 (52 Weeks) October 29, 2021 (52 Weeks) Expense Increase (Decrease) Wages and bonus $ 27,937 $ 25,086 $ 2,851 Pension (income) expense (904 ) 772 (1,676 ) Fuel expense 2,524 1,738 786 Product advertising 8,733 8,160 573 Healthcare cost 3,265 2,790 475 Other income (104 ) (508 ) 404 Vehicle repairs and maintenance 1,374 1,000 374 Storage unit rent 2,420 2,056 364 Travel expense 2,151 1,963 188 Outside storage 909 736 173 Other SG&A 16,930 16,334 596 Total - SG&A 65,235 60,127 5,108 Higher sales commissions resulted in higher wages and bonus expenses in the 2022 fiscal year compared to the 2021 fiscal year. The decrease in pension expense was a result of an increase in pension plan assets caused by the performance of the underlying markets that support them as well as higher pension discount rates resulting in lower liability. The increase in fuel expense was driven by per gallon fuel price increases compared to the prior year as a result of higher cost trends in petroleum markets. 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 2022. Healthcare costs have increased due to unfavorable claim trends. Other income decreased due to a gain on life insurance proceeds caused by the passing of a former executive employee during the fourth quarter of fiscal year 2021. Vehicle repairs and maintenance on vehicles have increased compared to the prior year period mainly due to an aging fleet. Rent for storage units that house inventory increased due to inflationary price pressure. Travel expenses increased due to the lifting of travel restrictions and stay-at-home orders which had been imposed in response to the COVID-19 pandemic. Outside storage costs to warehouse products prior to shipment increased due to reaching storage capacity at our new Chicago facility as a result of higher sales volume. None of the changes individually or as a group of expenses in “Other SG&A” were significant enough to merit separate disclosure. The major components comprising the increase of “Other SG&A” expenses were higher sales taxes, office supplies and professional fees. 13 Selling, General and Administrative Expenses-Frozen Food Products Segment SG&A expenses in the Frozen Food Products segment increased by $2,664 (22.3%) compared to the prior fiscal year. The overall increase in SG&A expenses was due to higher sales volume and corresponding increased wages and bonus and product advertising partially offset by lower pension expense. Selling, General and Administrative Expenses-Refrigerated and Snack Food Products Segment SG&A expenses in the Snack Food Products segment increased by $2,444 (5.1%) during fiscal year 2022 compared to the prior fiscal year. Most of the increase was due to higher licensing fees, travel expense and taxes. Gain on Sale of Property, Plant and Equipment The gain during fiscal years 2022 and 2021 was due the sale of the Green Street facility and ordinary gain on disposal of assets, respectively. Income Taxes Income tax for fiscal years 2022 and 2021, respectively, was as follows: October 28, 2022 October 29, 2021 Provision for (benefit on) income taxes $ 16,341 $ (1,779 ) Effective tax rate 26.6 % 24.4 % We recorded a tax provision of $16,341 and benefit of $1,779, for fiscal years 2022 and 2021, respectively, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective tax rate was 26.6% and 24.4% for fiscal years 2022 and 2021, respectively. In addition, the effective tax rates for fiscal years 2022 and 2021 were impacted by such items as 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 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 received $60,000 in gross proceeds on June 1, 2022, from the closing of the sale of the Green Street Property pursuant to the terms of the CRG Purchase Agreement. We borrowed $2,000 under our line of credit with Wells Fargo Bank, N.A. on December 2, 2020, $2,000 on April 27, 2021, $2,000 on July 1, 2021, $3,000 on July 19, 2021, $3,000 on October 15, 2021, $2,000 on November 1, 2021, $2,000 on December 16, 2021, and $2,000 on January 24, 2022, for a combined total of $18,000. The line of credit was paid off on June 7, 2022, using $18,000 in proceeds from the sale of the Green Street Property. The revolving line of credit continues in effect per its terms to March 1, 2023. We entered into a bridge loan with Wells Fargo on August 30, 2021, for up to $25,000, of which we used $18,653 to pay off a portion of our existing equipment loans as they came out of the lock out period and could be repaid. We repaid and terminated the bridge loan on June 2, 2022, using $18,653 in proceeds from the sale of real property at the Green Street Property. As of October 28, 2022, we had $1,089 of current debt on equipment loans, $66,076 of net working capital and $15,000 available under our revolving line of credit with Wells Fargo Bank, N.A. Refer to Note 5 - Line of Credit and Borrowing Agreements of the Notes to the Condensed Consolidated Financial Statements included within this Report for further information. Despite higher commodity costs, we may not be able to increase our product prices in a timely manner or sufficiently to offset increased commodity costs due to consumer price sensitivity, pricing in relation to competitors and the reluctance of retailers to accept the price increase. Higher product prices could potentially lower demand for our product and decrease volume. Management believes there are various options available to generate additional liquidity to repay debt or fund operations such as mortgaging real estate, should that be necessary. Our ability to increase liquidity will depend upon, among other things, our business plans, the performance of operating divisions and economic conditions of capital markets, or circumstances related to the COVID-19 global pandemic. If we are unable to increase liquidity through mortgaging real estate, or generate positive cash flow necessary to fund operations, we may not be able to compete successfully, which could negatively impact our business, operations, and financial condition. With the cash expected to be generated from the Company’s operations, we anticipate that we will maintain sufficient liquidity to operate our business for at least the next twelve months. We will continue to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times. 14 Cash flows used in operating activities: October 28, 2022 (52 Weeks) October 29, 2021 (52 Weeks) Net income (loss) $ 45,066 $ (5,503 ) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 6,682 6,669 Provision for losses on accounts receivable 57 125 (Reduction in) provision for promotional allowances (98 ) 319 Gain on sale of property, plant and equipment (57,745 ) (504 ) Deferred income taxes, net 5,070 1,063 Operating assets and liabilities (6,862 ) (8,161 ) Net cash used in operating activities $ (7,830 ) $ (5,992 ) For the fifty-two weeks ended October 28, 2022, net cash used in operating activities was $7,830, an increase of $1,8380 compared to the fifty-two weeks ended October 29, 2021. The increase in net cash used in operating activities primarily relates to a gain on sale of property, plant and equipment of $57,745, an increase in accounts receivable of $10,116 and an increase in inventory of $3,762, partially offset by a decrease in refundable income taxes of $4,955 and an increase in deferred taxes of $5,070. During fiscal year 2022, 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. Our cash conversion cycle (defined as days of inventory and trade receivables less days of trade payables outstanding) was equal to 83 days for the fifty-two weeks ended October 28, 2022, and 74 days for the fifty-two weeks ended October 29, 2021. For the fifty-two weeks ended October 29, 2021, net cash used in operating activities was $5,992. The result was primarily related to an increase in inventory of $7,475 and net loss of $5,503 partially offset by a decrease in refundable income taxes and deferred taxes. During fiscal year 2021, we did not contribute towards our defined benefit pension plan. Cash flows provided by (used in) investing activities: October 28, 2022 (52 Weeks) October 29, 2021 (52 Weeks) Proceeds from sale of property, plant and equipment $ 60,115 $ 520 Changes in escrow balance - (750 ) Additions to property, plant and equipment (3,770 ) (6,239 ) Net cash provided by (used in) investing activities $ 56,345 $ (6,469 ) 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 for repairs and maintenance. We received $60,000 in gross proceeds on June 1, 2022, from the closing of the real estate transaction for the Green Street Property, pursuant to the terms of the CRG Purchase Agreement. 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. 15 The table below highlights the additions to property, plant and equipment for the fifty-two weeks ended: October 28, 2022 (52 Weeks) October 29, 2021 (52 Weeks) Building improvements $ $ 61 Furniture and fixture 26 94 Temperature control 7 31 Processing equipment 711 5,586 Packaging lines 545 348 Vehicles for sales and/or delivery 808 1,288 Quality control and communication systems 43 Computer software and hardware 29 18 Forklifts 5 9 Change in projects in process 1,639 (1,239 ) Additions to property, plant and equipment $ 3,770 $ 6,239 Expenditures for additions to property, plant and equipment during the fifty-two weeks ended October 28, 2022, include projects in process of $212 related to the new facility in Chicago. Cash flows (used in) provided by financing activities: October 28, 2022 (52 Weeks) October 29, 2021 (52 Weeks) Payment of capital lease obligations $ (400 ) $ (538 ) Proceeds from bank borrowings 6,000 12,000 Repayments of bank borrowings (38,157 ) (4,053 ) Net cash (used in) provided by financing activities $ (32,557 ) $ 7,409 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 2022, 120,113 shares remained authorized for repurchase under the program. The Company leases three long-haul trucks pursuant to six-year leases that expire in 2025. Amortization of equipment under capital lease was $75 in 2022. The Company also leased one long-haul truck for $40 during fiscal year 2021, and that lease term is two years. The following table reflects major components of our line of credit and borrowing agreements as of October 28, 2022 and October 29, 2021. October 28, 2022 October 29, 2021 Revolving credit facility $ - $ 12,000 Equipment notes: 3.70% note due 12/21/26, out of lockout 12/23/21 - 2,901 3.29% note due 03/05/27, out of lockout 03/06/22 - 5,951 3.68% note due 04/16/27, out of lockout 04/17/22 4,913 5,888 SOFR plus 2.00% bridge loan due 03/01/23 - 10,329 Total debt 4,913 37,069 Less current debt (1,089 ) (1,065 ) Total long-term debt $ 3,824 $ 36,004 16 Revolving Credit Facility We maintain a revolving line of credit with Wells Fargo that extends through March 1, 2023. As of year-end October 29, 2021, under the terms of this line of credit, we could borrow up to $15,000 at an interest rate equal to the bank’s prime rate or LIBOR plus 2.0%. The line of credit has an unused commitment fee of 0.25% of the available loan amount. The line of credit is presented under non-current liabilities in the consolidated balance sheets. On December 1, 2021, Wells Fargo expanded our line of credit to $25,000 through June 15, 2022, at which time the credit limit returned to $15,000 for the balance of the term. Under the terms of this line of credit, we may borrow up to $15,000 at an interest rate equal to the bank’s prime rate or secured overnight financing rate (“SOFR”) plus 2.0%. The former benchmark interest rate of LIBOR for our line of credit has been transitioned to SOFR which could impact the cost of credit and alter the value of debt and loans. We borrowed $2,000 under this line of credit on December 2, 2020, $2,000 on April 27, 2021, $2,000 on July 1, 2021, $3,000 on July 19, 2021, $3,000 on October 15, 2021, $2,000 on November 1, 2021, and $2,000 on December 26, 2021, and $2,000 on January 24, 2022, for a combined total of $18,000. The revolving line of credit with Wells Fargo was paid off on June 7, 2022, using $18,000 in proceeds from the sale of the Green Street Property. Equipment Notes Payable On December 26, 2018, we entered into a master collateral loan and security agreement with Wells Fargo (the “Original Wells Fargo Loan Agreement”) for up to $15,000 in equipment financing which was amended and expanded as detailed below. We subsequently entered into additional master collateral loan and security agreements with Wells Fargo on each of; April 18, 2019, December 19, 2019, March 5, 2020, and April 17, 2020 (the Original Wells Fargo Loan Agreement and the subsequent agreements collectively referred to as the “Wells Fargo Loan Agreements”). Pursuant to the Wells Fargo Loan Agreements, we owe the amounts as stated in the table above. Bridge Loan On August 30, 2021, we entered into a loan commitment note for a bridge loan of up to $25,000 to obtain capital to pay off the existing equipment loans as they come out of the lock out period and may be repaid (dates detailed in the table above). The outstanding principal balances of the bridge loan became due and payable in full on the earlier of the following dates (1) August 31, 2023, or (2) one Federal Reserve business day after the closing of the real estate transactions contemplated under the CRG Purchase Agreement. We repaid $18,653 in equipment loans (equipment loans 4.13%, 3.98%, 3.70% and 3.29% in the table above) utilizing proceeds from the new bridge loan. The Company evaluated the exchange under ASC 470 and determined that the exchange should be treated as a debt modification prospectively. The Company accounted for this transaction as a debt modification and did not incur any gain or loss relating to the modification. The debt modification did not meet the greater than ten percent test and was deemed not substantial. We repaid and terminated the bridge loan and related loan commitment note on June 2, 2022, using $18,653 in proceeds from the sale of the Green Street Property pursuant to the CRG Purchase Agreement. Loan Covenants The Wells Fargo Loan Agreements contain various affirmative and negative covenants that limit the use of funds and define other provisions of the loan. Material financial covenants are listed below and the capitalized terms are defined in the Agreements: ● Total Liabilities divided by Tangible Net Worth not greater than 2.5 to 1.0 at each fiscal quarter, ● Quick Ratio not less than 0.85 to 1.0 at each fiscal quarter end, ● Net Income After Taxes not less than $500 on a quarterly basis, and ● Capital Expenditures less than $5,000. As of October 28, 2022, the Company was in compliance with all covenants under the Wells Fargo Loan Agreements. Aggregate contractual maturities of debt in future fiscal years are as follows as of October 28, 2022: Fiscal Years Debt Payable 2023 $ 1,089 2024 $ 1,041 2025 $ 1,081 2026 $ 1,121 2027-2028 $ 588 17 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. All of our operating segments have been impacted by inflation, including higher costs for labor, freight, and specific materials. We expect this trend to continue through fiscal year 2023. Management is of the opinion that the Company’s financial position and its capital resources are sufficient to provide for its operating needs and capital expenditures for fiscal year 2023. However, future volatility of general price inflation or deflation and raw material cost and availability could adversely affect our financial results. Off-Balance Sheet Arrangements We do not currently have any off-balance sheet arrangements within the meaning of Item 303(b) 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(b) of Regulation S-K, as of October 28, 2022. Our expected future liability related to construction of the new Chicago processing facility is approximately $125 as of October 28, 2022. 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. 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.