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 (dollars in thousands) Fiscal Year Ended November 3, 2023 (53 weeks) Compared to Fiscal Year Ended October 28, 2022 (52 weeks) Net Sales-Consolidated Net sales in fiscal year 2023 decreased $14,262 (5.4%) 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 1.5 4,218 Unit sales volume in pounds -5.4 (15,410 ) Returns activity -0.8 (1,752 ) Promotional activity -0.7 (1,318 ) Decrease in net sales -5.4 (14,262 ) Net Sales-Frozen Food Products Segment Net sales in the Frozen Food Products segment in fiscal year 2023 increased $1,384 (2.5%) 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 5.3 3,345 Unit sales volume in pounds -1.6 (994 ) Returns activity -0.2 (123 ) Promotional activity -1.0 (844 ) Increase in net sales 2.5 1,384 The increase in net sales for fiscal year 2023 primarily relates to higher selling prices per pound partially offset by lower unit sales volume in pounds. The increase in net sales was primarily driven by a significant increase in volume to institutional customers and an increase in selling price per pound due to price increases implemented during the fourth quarter of fiscal year 2023. Other institutional Frozen Food Products sales, including sheet dough and rolls, increased 8% by volume and retail sales volume increased 2%. Returns activity increased compared to the 2022 fiscal year. Promotional activity was higher in fiscal year 2023 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 2023 decreased $15,646 (7.5%) 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 0.4 873 Unit sales volume in pounds -6.5 (14,416 ) Returns activity -1.0 (1,629 ) Promotional activity -0.4 (474 ) Decrease in net sales -7.5 (15,646 ) Net sales of Snack Food Products decreased due to lower sales through our direct-store-delivery distribution channel during the fiscal year 2023. The weighted average selling price per pound increased compared to fiscal year 2022 due to price increases implemented in response to increased meat commodity input costs experienced in fiscal year 2022. Unit sales volume in pounds was lower as compared to the prior fiscal year. We believe demand decreased primarily due to inflationary pressure on consumer spending habits as consumers have pulled back on meat product purchases. Returns activity was higher compared to the 2022 fiscal year. Promotional offers increased slightly compared to fiscal year 2022. 11 Cost of Products Sold and Gross Margin-Consolidated Cost of products sold from continuing operations decreased by $12,558 (6.5%) during fiscal year 2023 compared to the prior fiscal year. The gross margin increased from 27.1% to 28.0% during fiscal year 2023 compared to the prior fiscal year. Change in Cost of Products Sold by Segment $ Consolidated % Commodity $ Decrease Frozen Food Products Segment 2,080 1.1 (164 ) Snack Food Products Segment (14,638 ) -7.6 (7,737 ) Total (12,558 ) -6.5 (7,901 ) Cost of Products Sold and Gross Margin–Frozen Food Products Segment Cost of products sold in the Frozen Food Products segment increased by $2,080 (5.1%) in fiscal year 2023 compared to the prior fiscal year. Increased volume and changes in the product mix were the primary contributing factors to this increase. The cost of purchased flour decreased approximately $164, which partially offset the increase in costs of goods sold. The gross margin percentage decreased from 26.9% to 25.1% during fiscal year 2023 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 $14,638 (9.6%) during fiscal year 2023 compared to the prior fiscal year due primarily to lower unit sales volume in our direct-store-delivery distribution channel. The cost of meat commodities decreased approximately $7,737 during fiscal year 2023 compared to the prior fiscal year due to favorable fluctuations in commodity markets. We increased our net realizable value reserve by $161 during fiscal year 2023 after determining that the market value on some meat products was less than the costs associated with production and sale of the product. We maintained a net realizable reserve of $513 on products as of November 3, 2023. The gross margin earned in this segment increased from 27.1% to 28.8% during fiscal year 2023. Selling, General and Administrative Expenses-Consolidated Selling, general and administrative expenses (“SG&A”) in fiscal year 2023 increased $332 (0.5%) 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: November 3, 2023 (53 Weeks) October 28, 2022 (52 Weeks) Expense Increase (Decrease) Wages and bonus $ 26,716 $ 27,937 $ (1,221 ) Outside storage 1,630 909 721 Insurance expenses 2,069 1,355 714 Healthcare cost 2,721 3,265 (544 ) Travel expenses 2,570 2,151 419 Fuel expenses 2,119 2,524 (405 ) Pension cost (1,160 ) (904 ) (256 ) Postage expenses 472 685 (213 ) Storage unit rent 2,638 2,420 218 Vehicle repairs and maintenance 1,590 1,374 216 Other SG&A 24,202 23,519 683 Total - SG&A 65,567 65,235 332 Lower sales commissions resulted in lower wages and bonus expenses in the 2023 fiscal year compared to the 2022 fiscal year. Outside storage increased primarily as a result of the need for additional warehouse capacity to store products. The increase in insurance expenses was driven by higher premiums on property insurance and increased reserves on aged claims. Healthcare costs have decreased due to favorable claim trends. Travel expenses increased due to participation in food shows and in-person business meetings. The decrease in fuel expense was driven by per gallon fuel price decreases compared to the prior year as a result of lower cost trends in petroleum markets and to a lesser extent due to a reduction in the number of company-owned long-haul trucks. The decrease in pension cost 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. Postage expenses have decreased due to partnering with outside distributors and carriers to transport products to minimize postage expenses. Rent for storage units that house inventory increased due to inflationary price pressure. Vehicle repairs and maintenance on vehicles have increased compared to the prior year period mainly due to an aging fleet. 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 product advertising expenses, sales taxes, office supplies and professional fees. 12 Selling, General and Administrative Expenses-Frozen Food Products Segment SG&A expenses in the Frozen Food Products segment decreased by $171 (1.2%) during fiscal year 2023 compared to the prior fiscal year. The overall decrease in SG&A expenses was due to lower unit sales volume and lower fuel expenses related to a reduction in the number of company-owned long-haul trucks partially offset by an increase in insurance expenses and broker commissions. Selling, General and Administrative Expenses-Refrigerated and Snack Food Products Segment SG&A expenses in the Snack Food Products segment increased by $503 (1.0%) during fiscal year 2023 compared to the prior fiscal year. Most of the increase was due to higher property insurance expense, higher outside storage fees and higher vehicle repairs partially offset by lower fuel and healthcare costs. Loss (Gain) on Sale of Property, Plant and Equipment The loss during fiscal year 2023 and gain during fiscal year 2022 was due to ordinary disposal of assets and the sale of real property located at 170 N. Green Street in Chicago, respectively. Income Taxes Income tax for fiscal years 2023 and 2022, respectively, was as follows: November 3, 2023 October 28, 2022 Provision for (benefit on) income taxes $ 1,021 $ 16,341 Effective tax rate 22.7 % 26.6 % We recorded a tax provision of $1,021 and $16,341, for fiscal years 2023 and 2022, respectively, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective tax rate was 22.7% and 26.6% for fiscal years 2023 and 2022, respectively. In addition, the effective tax rates for fiscal years 2023 and 2022 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 (dollars in thousands) 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. However, on June 1, 2022, we received approximately $60,000 in gross proceeds, from the closing of the sale of real property located at 170 N. Green Street in Chicago pursuant to the terms of the Purchase and Sale Agreement dated March 16, 2020, as amended, between Bridgford Food Processing Corporation and CRG Acquisition, LLC (the “CRG Purchase Agreement”). Additionally, we have maintained a revolving line of credit with Wells Fargo Bank, N.A. pursuant to the terms of the credit agreement dated March 1, 2018, as amended to date. We borrowed an aggregate of $18,000 under such revolving line of credit from inception through January 24, 2022. The line of credit was paid off on June 7, 2022, using $18,000 in proceeds from the sale of real property at 170 N. Green Street. The revolving line of credit continued in effect per its terms until November 30, 2023, when it was replaced with a new revolving line of credit as described below. Further, we entered into a bridge loan with Wells Fargo Bank, N.A. 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 prepaid. We prepaid and terminated the bridge loan on June 2, 2022, using $18,653 in proceeds from the sale of real property at 170 N. Green Street. On November 30, 2023, we entered into a fifth amendment to the credit agreement with Wells Fargo Bank, N.A., and also executed a new revolving line of credit note pursuant to the amendment. Under the terms of this amendment and the revolving line of credit note, we may borrow up to $7,500 from time to time up to November 30, 2024. As of November 3, 2023, we had $1,045 of current debt on equipment loans, $69,496 of net working capital and $7,500 available under our revolving line of credit with Wells Fargo Bank, N.A. Refer to the Notes to the Condensed Consolidated Financial Statements included within this Report for further information. The Company was in compliance with all loan covenants as of November 3, 2023. Despite higher commodity costs like we experienced in fiscal year 2022, we may not be able to increase our product prices in a timely manner or sufficiently to offset such increased commodity costs due to consumer price sensitivity, pricing in relation to competitors and the reluctance of retailers to accept the price increase. Instances of higher interest rates, labor shortages or supply chain issues could result in material changes in the Company’s liquidity. 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 and the performance of operating divisions and economic conditions of capital markets. If we are unable to increase liquidity through mortgaging real estate or additional borrowing, 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 inflation and interest rate volatility on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times. 13 Cash flows provided by (used in) operating activities: November 3, 2023 (53 Weeks) October 28, 2022 (52 Weeks) Net income $ 3,474 $ 45,066 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,558 6,682 Provision for losses on accounts receivable 147 57 (Reduction in) provision for promotional allowances (679 ) (98 ) Loss (gain) on sale of property, plant and equipment 161 (57,745 ) Deferred income taxes, net (631 ) 5,070 Changes in assets and liabilities (5,045 ) (6,862 ) Net cash provided by (used in) operating activities $ 3,985 $ (7,830 ) For the fifty-three weeks ended November 3, 2023, net cash provided by operating activities was $3,985, an increase of $11,815 compared to the fifty-two weeks ended October 28, 2022. The increase in net cash provided by operating activities primarily relates to net income of $3,474 and a reduction in accounts receivable of $6,480, partially offset by a decrease in accounts payable of $6,457 and lower non-current liabilities of $1,836. During fiscal year 2023, 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-three weeks ended November 3, 2023, and 83 days for the fifty-two weeks ended October 28, 2022. For the fifty-two weeks ended October 28, 2022, net cash used in operating activities was $7,830. The result was primarily related 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. Cash flows (used in) provided by investing activities: November 3, 2023 (53 Weeks) October 28, 2022 (52 Weeks) Proceeds from sale of property, plant and equipment $ 227 $ 60,115 Additions to property, plant and equipment (2,603 ) (3,770 ) Net cash (used in) provided by investing activities $ (2,376 ) $ 56,345 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 sales proceeds on June 1, 2022, from the closing of the real estate transaction for the real property located at 170 N. Green Street, 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. 14 The table below highlights the additions to property, plant and equipment for the fifty-three and fifty-two weeks ended: November 3, 2023 (53 Weeks) October 28, 2022 (52 Weeks) Building and leasehold improvements $ 192 $ Furniture and fixture - 26 Temperature control - 7 Processing equipment 506 711 Packaging lines 205 545 Vehicles for sales and/or delivery 1,390 808 Quality control and communication systems 66 Computer software and hardware - 29 Forklifts 39 5 Change in projects in process 205 1,639 Additions to property, plant and equipment $ 2,603 $ 3,770 Expenditures for additions to property, plant and equipment during the fifty-three weeks ended November 3, 2023, include projects in process of $837 related to the production facility in Chicago. Cash flows used in financing activities: November 3, 2023 (53 Weeks) October 28, 2022 (52 Weeks) Payment of capital lease obligations $ (1,151 ) $ (400 ) Proceeds from bank borrowings - 6,000 Repayments of bank borrowings (1,083 ) (38,157 ) Net cash used in financing activities $ (2,234 ) $ (32,557 ) 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 2023, 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 $96 in 2023. The Company also leased one long-haul truck for $75 during fiscal year 2022, and that lease term is two years. The following table reflects major components of our line of credit and borrowing agreements as of November 3, 2023, and October 28, 2022, respectively. November 3, 2023 October 28, 2022 Revolving credit facility $ - $ - Equipment notes: 3.70% note due 12/21/26, out of lockout 12/23/21 - - 3.29% note due 03/05/27, out of lockout 03/06/22 - - 3.68% note due 04/16/27, out of lockout 04/17/22 3,831 4,913 SOFR plus 2.00% bridge loan due 03/01/23 - - Total debt 3,831 4,913 Less current debt (1,045 ) (1,089 ) Total long-term debt $ 2,786 $ 3,824 Revolving Credit Facility On November 30, 2023, we entered into a fifth amendment to the credit agreement with Wells Fargo Bank, N.A. dated March 1, 2018, as amended, and also executed a revolving line of credit note pursuant to the amendment. The revolving line of credit note replaces the existing note that expired by its terms on November 30, 2023. Under the terms of this amendment and the revolving line of credit note, we may borrow up to $7,500 from time to time up to November 30, 2024, at an interest rate equal to (a) the daily simple secured overnight financing rate plus 2.0%, or if unavailable, (b) the prime rate, in each case as determined by the bank. The line of credit has an unused commitment fee of 0.35% of the available loan amount, payable on a quarterly basis. Amounts may be repaid and reborrowed during the term of the note. Accrued interest is payable on the first day of each month and the outstanding principal balance and remaining interest are due and payable on November 30, 2024. 15 Equipment Notes Payable On each of December 26, 2018, April 18, 2019, December 19, 2019, March 5, 2020, and April 17, 2020 (collectively referred to as the “Wells Fargo Loan Agreements”), we entered into master collateral loan and security agreements with Wells Fargo Bank, N.A. Pursuant to the Wells Fargo Loan Agreements, we owe the amounts as stated as equipment notes in the table on the previous page. 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 came out of the lock out period and could be prepaid. The outstanding principal balances of the bridge loan became due and payable in full one Federal Reserve business day after the closing of the real estate transactions contemplated under the CRG Purchase Agreement. We prepaid $18,653 in equipment loans 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 prepaid and terminated the bridge loan and related loan commitment note on June 2, 2022, using $18,653 in proceeds from the gain on the sale of a land parcel in Chicago pursuant to the CRG Purchase Agreement. Loan Covenants The Wells Fargo Loan Agreements and the credit agreement contain various affirmative and negative covenants that limit the use of funds and define other provisions of the loans. Material financial covenants are listed below, and the capitalized terms are defined in the applicable agreements: ● Total Liabilities divided by Tangible Net Worth not greater than 2.0 to 1.0 at each fiscal quarter end, ● Quick Ratio not less than 1.25 to 1.0 at each fiscal quarter end, ● Fixed Charge Coverage Ratio not less than 1.25 to 1.0 at each fiscal quarter end. As of November 3, 2023, the Company was in compliance with all covenants under the Wells Fargo Loan Agreements and the credit agreement. Aggregate contractual maturities of debt in future fiscal years are as follows as of November 3, 2023: Fiscal Years Debt Payable 2024 $ 1,044 2025 $ 1,083 2026 $ 1,124 2027 $ 580 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 2024. 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 2024. 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 November 3, 2023. 16 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.