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 1, 2024 (52 weeks) Compared to Fiscal Year Ended November 3, 2023 (53 weeks) Net Sales-Consolidated Net sales in fiscal year 2024 decreased $27,991 (11.1%) 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 -0.4 (1,138 ) Unit sales volume in pounds -8.8 (23,988 ) Returns activity -0.1 377 Promotional activity -1.8 (3,242 ) Decrease in net sales -11.1 (27,991 ) Net Sales-Frozen Food Products Segment Net sales in the Frozen Food Products segment in fiscal year 2024 increased $770 (1.3%) 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 3.2 2,117 Unit sales volume in pounds -1.3 (837 ) Returns activity 0.3 177 Promotional activity -0.9 (687 ) Increase in net sales 1.3 770 The increase in net sales for fiscal year 2024 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 decreased 8%. Returns activity decreased compared to the 2023 fiscal year. Promotional activity was higher in fiscal year 2024 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 2024 decreased $28,761 (14.8%) 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 -1.6 (3,254 ) Unit sales volume in pounds -11.1 (23,152 ) Returns activity -0.3 200 Promotional activity -1.8 (2,555 ) Decrease in net sales -14.8 (28,761 ) Net sales of Snack Food Products decreased due to lower sales through our direct-store-delivery distribution channel during the fiscal year 2024. The weighted average selling price per pound decreased compared to fiscal year 2023 due to changes in product mix. Unit sales volume in pounds was lower 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 lower in dollars but higher as a percentage of sales compared to the 2023 fiscal year. Promotional offers increased due to higher promotional deductions and billbacks by customers compared to fiscal year 2023. 12 Cost of Products Sold and Gross Margin-Consolidated Cost of products sold from continuing operations decreased on a consolidated basis by $13,962 (7.7%) during fiscal year 2024 compared to the prior fiscal year. The gross margin decreased from 28.0% to 25.2% during fiscal year 2024 compared to the prior fiscal year. Change in Cost of Products Sold by Segment $ Consolidated % Commodity $ (Decrease) Increase Frozen Food Products Segment (776 ) -0.4 (522 ) Snack Food Products Segment (13,186 ) -7.3 4,900 Total (13,962 ) -7.7 4,378 Cost of Products Sold and Gross Margin–Frozen Food Products Segment Cost of products sold in the Frozen Food Products segment decreased by $776 (1.8%) in fiscal year 2024 compared to the prior fiscal year. Lower unit sales volume in pounds and changes in the product mix were the primary contributing factors to this decrease. The cost of purchased flour decreased approximately $522 contributing to the decrease in costs of goods sold. The gross margin percentage increased from 25.1% to 27.4% during fiscal year 2024 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 $13,186 (9.5%) during fiscal year 2024 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 increased approximately $4,900 during fiscal year 2024 compared to the prior fiscal year due to unfavorable fluctuations in commodity markets. We increased our net realizable value reserve by $1,174 during fiscal year 2024 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 $1,467 on products as of November 1, 2024. The gross margin earned in this segment decreased from 28.8% to 24.4% during fiscal year 2024. Selling, General and Administrative Expenses-Consolidated Selling, general and administrative expenses (“SG&A”) in fiscal year 2024 decreased $3,118 (4.8%) when compared to the prior fiscal year. The decrease in this category did not directly correspond to the change in sales. The table below summarizes the primary expense variances in this category: November 1, 2024 (52 Weeks) November 3, 2023 (53 Weeks) Expense (Decrease) Increase Wages and bonus $ 23,464 $ 26,716 $ (3,252 ) Pension cost (248 ) (1,160 ) 912 Product advertising 7,935 8,732 (797 ) Healthcare cost 3,331 2,721 610 Outside consultants 2,773 2,322 451 Vehicle repairs and maintenance 1,820 1,590 230 Other SG&A 23,374 24,646 (1,272 ) Total - SG&A 62,449 65,567 (3,118 ) Lower sales commissions paid on reduced sales resulted in lower wages and bonus expenses in the 2024 fiscal year compared to the 2023 fiscal year. The increase in pension cost was a result of lower values in pension plan assets caused by the performance of the underlying markets that support them as well as lower pension discount rates resulting in higher liability. Costs for product advertising decreased mainly as a result of lower payments under brand licensing agreements in the Snack Food Products segment during fiscal year 2024. Healthcare costs have increased due to unfavorable claim trends. Outside consulting costs increased due to higher legal fees, advisory services, inspection and product testing fees. Vehicle repairs and maintenance on vehicles have increased compared to the prior fiscal 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 decrease of “Other SG&A” expenses were lower provision for doubtful accounts, lower postage and insurance expenses and higher rental income partially offset by higher travel and business expense. 13 Selling, General and Administrative Expenses-Frozen Food Products Segment SG&A expenses in the Frozen Food Products segment decreased by $241 (1.7%) during fiscal year 2024 compared to the prior fiscal year. The overall decrease in SG&A expenses was due to lower unit sales volume in pounds, lower equipment rental 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 decreased by $2,877 (5.6%) during fiscal year 2024 compared to the prior fiscal year. Most of the decrease was due to the significantly lower unit sales volume in pounds and the corresponding decrease in wages and bonuses, and lower payments under brand licensing agreements. Loss on Sale of Property, Plant and Equipment Losses on the sale of property, plant and equipment were due to the ordinary disposal of assets located in both the Frozen Food Products segment, $96 and $75, for fiscal years 2024 and 2023, respectively, and Snack Food Products segments, $50 and $86, for fiscal years 2024 and 2023, respectively. Income Taxes Income tax for fiscal years 2024 and 2023, respectively, was as follows: November 1, 2024 November 3, 2023 (Benefit on) provision for income taxes $ (1,311 ) $ 1,021 Effective tax rate 27.9 % 22.7 % We recorded a tax benefit of $1,311 and tax provision of $1,021, for fiscal years 2024 and 2023, respectively, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective tax rate was 27.9% and 22.7% for fiscal years 2024 and 2023, respectively. In addition, the effective tax rates for fiscal years 2024 and 2023 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 included within this Report for more information). Liquidity and Capital Resources (dollars in thousands) The principal source of operating cash flows 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. 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. On November 30, 2024, we entered into a sixth 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, 2025. As of November 1, 2024, we had $1,084 of current debt on equipment loans, $61,536 of net working capital and $7,500 available under our revolving line of credit with Wells Fargo Bank, N.A. Refer to Note 5 to the Consolidated Financial Statements and the “Revolving Credit Facility” and “Loan Covenants” included within this Report for further information. The Company was in compliance with all loan covenants as of November 1, 2024. All of our operating segments have been impacted by inflation, including higher costs for labor, freight and specific materials related to product manufacturing and delivery through fiscal year 2024. Additionally, commodity costs, including meat and flour costs, have and may continue to fluctuate due to both political and economic conditions, including the ongoing conflict between Ukraine and Russia. Despite higher commodity costs like we experienced in fiscal year 2024, we may not be able to increase our product prices in a timely manner or sufficiently to offset such increased commodity or other costs due to consumer price sensitivity, pricing in relation to competitors and the reluctance of retailers to accept a price increase. Instances of higher interest rates, general price inflation or deflation, raw materials costs, labor shortages or supply chain issues could adversely affect the Company’s financial results and its liquidity. Higher product prices and promotions 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 or exercise a portion of the line of credit 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. 14 Cash flows (used in) provided by operating activities: November 1, 2024 (52 Weeks) November 3, 2023 (53 Weeks) Net (loss) income $ (3,381 ) $ 3,474 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 6,540 6,558 (Recoveries on) provision for losses on accounts receivable (126 ) 147 Provision for (reduction in) promotional allowances 307 (679 ) Loss on sale of property, plant and equipment 146 161 Deferred income taxes, net (720 ) (631 ) Changes in assets and liabilities (3,263 ) (5,045 ) Net cash (used in) provided by operating activities $ (497 ) $ 3,985 For the fifty-two weeks ended November 1, 2024, net cash used in operating activities was $497, a decrease of $4,482 in cash flows compared to the fifty-three weeks ended November 3, 2023. The decrease in net cash provided by operating activities primarily relates to a net loss of $3,381, an increase in refundable income taxes of $1,240 and an increase of other non-current assets of $3,320, partially offset by a decrease in inventory of $7,235 due to selling down inventory finished goods to adjust to lower consumer demand. During fiscal year 2024, 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 84 days for the fifty-two weeks ended November 1, 2024, and 83 days for the fifty-three weeks ended November 3, 2023. For the fifty-three weeks ended November 3, 2023, net cash provided by operating activities was $3,985. The result was primarily related 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. Cash flows used in investing activities: November 1, 2024 (52 Weeks) November 3, 2023 (53 Weeks) Proceeds from sale of property, plant and equipment $ 69 $ 227 Additions to property, plant and equipment (3,902 ) (2,603 ) Net cash used in investing activities $ (3,833 ) $ (2,376 ) Additions to 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 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. The table below highlights the additions to property, plant and equipment for the fifty-two and fifty-three weeks ended: November 1, 2024 (52 Weeks) November 3, 2023 (53 Weeks) Building and leasehold improvements $ - $ 192 Furniture and fixture 92 - Temperature control - - Processing equipment 215 506 Packaging lines 2,595 205 Vehicles for sales and/or delivery 2,372 1,390 Quality control and communication systems - 66 Computer software and hardware 345 - Forklifts 52 39 Change in projects in process (1,769 ) 205 Additions to property, plant and equipment $ 3,902 $ 2,603 Expenditures for additions to property, plant and equipment during the fifty-two weeks ended November 1, 2024, include projects in process of $755 related to the production facilities in Chicago and Statesville. 15 Cash flows used in financing activities: November 1, 2024 (52 Weeks) November 3, 2023 (53 Weeks) Payment of capital lease obligations $ (103 ) $ (1,151 ) Repayments of bank borrowings (1,045 ) (1,083 ) Net cash used in financing activities $ (1,148 ) $ (2,234 ) 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 2024, 120,113 shares remained authorized for repurchase under the program. The Company leased three long-haul trucks received during fiscal year 2019. The six-year leases for these trucks would have expired in fiscal year 2025. We returned one long-haul truck on June 22, 2023, for a loss of $12 and returned remaining two long-haul trucks on July 11, 2024, for a loss of $90, in an effort to reduce the overall cost of delivering products as we transitioned deliveries to common carriers. All long-haul trucks under this lease agreement have been returned as of November 1, 2024. The Company leased one box truck for a market value of $27 on April 17, 2023, and that lease term is two years. The Company leased one refrigerated truck received on May 10, 2024, for a net present value of $166. The seven-year lease for this truck will expire in fiscal year 2031. Amortization of equipment as a finance lease was $44 during the fifty-two weeks ended November 1, 2024. Equipment Note Payable The following table reflects major components of our line of credit and borrowing agreements as of November 1, 2024, and November 3, 2023, respectively. November 1, 2024 November 3, 2023 Revolving credit facility $ - $ - Equipment notes: 3.68% note due 04/16/27, out of lockout 04/17/22 2,786 3,831 Total debt 2,786 3,831 Less current debt (1,084 ) (1,045 ) Total long-term debt $ 1,702 $ 2,786 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. Refer to Subsequent Events under Note 1 to the Consolidated Financial Statements included within this Report for further information. 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. 16 As of November 1, 2024, 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 1, 2024: Fiscal Years Debt Payable 2025 $ 1,084 2026 $ 1,124 2027 $ 578 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 2025. 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 2025. 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 1, 2024. Critical Accounting Policies and Estimates 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. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected. 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 included in this Report. 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 included within this Report.