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
Net Sales-Consolidated
Net sales in fiscal year 2019 increased
Impact on Net Sales-Consolidated % $ Selling price per pound 2.7 4,991 Unit sales volume in pounds 6.8 12,582 Returns activity -0.2 (589 ) Promotional activity -1.0 (2,456 ) Increase in net sales 8.3 14,528
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products segment in fiscal year 2019 increased
Impact on Net Sales-Frozen Food Products % $ Selling price per pound 4.5 2,356 Unit sales volume in pounds 5.3 2,788 Returns activity -0.2 (125 ) Promotional activity -1.2 (1,051 ) Increase in net sales 8.4 3,968 The increase in net sales in fiscal year 2019 was attributable to higher unit sales volume and higher selling price per pound. The increase in net sales was primarily driven by a significant increase in volume in our shelf-stable sandwich business to institutional and retail customers. Other institutional Frozen Food Product sales, including sheet dough and rolls, increased 3% by volume while retail sales volume decreased 4%. Changes in returns were slightly higher compared to the prior fiscal year. Promotional activity increased due to higher bid price reductions, rebates and menu allowances as a percentage of
sales. 11
Net Sales-Snack Food Products Segment
Net sales in the Snack Food Products segment in fiscal year 2019 increased
Impact on Net Sales-Snack Food Products % $ Selling price per pound 2.0 2,635 Unit sales volume in pounds 7.3 9,794 Returns activity -0.2 (463 ) Promotional activity -0.8 (1,406 ) Increase in net sales 8.3 10,560 The increase in net sales in fiscal year 2019 was attributable to a significant increase in new product offerings including smokehouse sausage sticks introduced during the second quarter of fiscal year 2018. The increase in net sales occurred mainly in our direct store delivery distribution channel while warehouse shipments decreased. The weighted average selling price per pound increased compared to the prior fiscal year due to higher per pound selling prices for new items. Promotional offers increased corresponding to the increase in unit sales volume. Returns activity increased slightly compared to the 2018 fiscal year.
Cost of Products Sold and Gross Margin-Consolidated
Cost of products sold from continuing operations increased by$9,370 (8.0%) 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. Overhead spending increased due to significant increases in hourly wages and bonus, insurance expenses, repairs and maintenance, healthcare expenses and indirect operating supplies. Costs related to an additional production facility currently under construction also increased overhead expenses. A decrease in commodity costs during fiscal year 2019 partially offset the increase in cost of goods sold. The gross margin increased from 32.4% to 32.7% during fiscal year 2019 compared to the prior fiscal year. Commodity $ Change in Cost of Products Sold by Segment $ % Decrease Frozen Food Products Segment 2,452 2.1 (111 ) Snack Food Products Segment 6,918 5.9 (1,725 ) Total 9,370 8.0 (1,836 )
Cost of Products Sold and Gross Margin-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products segment increased by$2,452 (7.9%) to$33,444 in fiscal year 2019 compared to the prior fiscal year. Increased volume and changes in product mix were the primary contributing factors to the increase. Cost of products sold was partially offset by lower flour commodity costs of approximately$111 . The gross margin percentage increased from 34.4% to 34.7% during fiscal year 2019 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$6,918 (8.0%) compared to the prior fiscal year due primarily to a substantial increase in sales volume. Higher hourly wages including increased production labor impacted the cost of products sold as did higher healthcare, insurance and repair and maintenance expense. The cost of meat commodities decreased approximately$1,725 during fiscal year 2019 compared to the prior fiscal year. The gross margin earned in this segment increased from 31.7% to 31.9% during fiscal year 2019 primarily as a result of lower commodity costs.
Selling, General and Administrative Expenses-Consolidated
Selling, general and administrative expenses ("SG&A") in fiscal year 2019
increased
The table below summarizes the primary expense variances in this category:
November 1, 2019 November 2, 2018 Expense Increase (52 Weeks) (52 Weeks) (Decrease) Wages and bonus $ 23,399 $ 21,212 $ 2,187 Pension costs 232 956 (724 ) Insurance 1,116 487 629
Repairs and maintenance "SQF" expense 31
567 (536 ) Healthcare costs 3,091 2,661 430 Travel 2,397 2,113 284 Product advertising 6,303 6,136 167 Other income/expense 3 (158 ) 161
Cash surrender value gains (666 )
(816 ) 150 Other SG&A 16,931 16,771 160 Total - SG&A 52,837 49,929 2,908 12 Higher profit-sharing accruals resulted in higher wages and bonus expense in fiscal year 2019 compared to the prior year. The decrease in pension expense was due to higher pension discount rates being used to compute the future liability estimate. Insurance costs increased due to higher claim activity and the addition of a new production and warehousing facility. Repairs and maintenance expense decreased as the Company prepared itsChicago facility in fiscal year 2018 to comply with Food Safety Certification requirements created and managed by theSQF Institute . Healthcare benefit expense has increased due to recent unfavorable claim activity compared to fiscal year 2018. Travel expenses increased due to research related to construction of the new plant as well as increased travel by business development managers. 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 2019. Other income/expense increased due to a miscellaneous gain that did not reoccur in the current fiscal year. The gain on cash surrender value of life insurance policies decreased substantially due to lower stock market gains compared to fiscal year 2018. The major components comprising the increase of "Other SG&A" expenses were outside consulting fees, utilities and property taxes.
Selling, General and Administrative Expenses-Frozen Food Products Segment
SG&A expenses in the Frozen Food Products segment increased by$641 (4.5%) to$14,867 during fiscal year 2019 compared to the prior fiscal year. The overall increase in SG&A expenses was due to higher unit sales volume, profit-sharing accruals and product advertising.
Selling, General and Administrative Expenses-Refrigerated and Snack Food Products Segment
SG&A expenses in the Snack Food Products segment increased by$2,267 (6.3%) to$37,970 during fiscal year 2019 compared to the prior fiscal year. Most of the increase was due to higher unit sales volume in pounds and higher expenses related to wages and bonuses including an increase in sales commissions.
Gain on Sale of Property, Plant and Equipment
OnMarch 7, 2018 , the Company sold a parcel of land inChicago, Illinois for approximately$5,977 and recognized a non-recurring pre-tax gain in fiscal year 2018. The cost basis of the land was insignificant. Any gain or loss during fiscal year 2019 was due to ordinary gain or loss on disposal of assets. Income Taxes
The Company's effective income tax rate was 24.0% and 49.1% in fiscal years 2019 and 2018, respectively. In fiscal year 2019, the effective income tax rate differed from the applicable mixed statutory rate of approximately 23.1% primarily due to tax reform adjustment of deferred income taxes, the Domestic Production Activities Deduction and a change in the liability on unrecognized benefits related to research and development tax credits (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$7,500 during the first quarter of fiscal year 2019 to purchase specific equipment for our newChicago processing facility. We borrowed a second$7,500 subsequent to the end of the second quarter of fiscal year 2019. Historically, we expect positive operating 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:
November 1, 2019 November 2, 2018 (52 Weeks) (52 Weeks) Net income $ 6,484 $ 6,517 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,153 3,940 Provision for losses on accounts receivable 44 24 (Provision for) reduction in promotional allowances (852 ) 94 Loss (Gain) on sale of property, plant and equipment 290 (6,236 ) Deferred income taxes, net 1,889 4,940 Changes in operating working capital (4,761 ) (1,014 ) Net cash provided by operating activities $ 7,247 $
8,265 13 For the fifty-two weeks endedNovember 1, 2019 , net cash provided by operating activities was$7,247 , a decrease of$1,018 compared to the fifty-two weeks endedNovember 1, 2018 . The net decrease in cash provided by operating activities primarily related to an increase in inventory of$2,954 , lower net income of$6,484 and deferred income taxes of$1,889 partially offset by an increase in the current portion of non-current liabilities of$1,643 and payments for estimated taxes of$697 . During fiscal year 2019, we funded$875 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 67 days for the fifty-two weeks endedNovember 1, 2019 and 64 days for the fifty-two weeks endedNovember 2, 2018 . Significant customers increased the length of payment terms during fiscal year 2018 which increased the prior fiscal year's cash conversion cycle. For the fifty-two weeks endedNovember 2, 2018 , net cash provided by operating activities was$8,265 . This result was primarily related to net income and a decrease in non-current liabilities. During fiscal year 2018, we funded$3,150 towards our defined benefit pension plan.
Cash used in investing activities:
November 1, 2019 November 2, 2018 (52 Weeks) (52 Weeks)
Proceeds from sale of property, plant and equipment $ 61 $ 6,035 Additions to property, plant and equipment (25,739 ) (18,147 ) Net cash used in investing activities $ (25,678 )
$ (12,112 ) 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 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 weeks ended: November 1, 2019 November 2, 2018 (52 Weeks) (52 Weeks) Land $ - $ 55 Building - 141 Building improvements 10,103 702 Leasehold improvements - 9 Temperature control 3,285 - Processing equipment 2,019 7,915 Packaging lines 2,641 181
Vehicles for sales and/or delivery 1,585 953 Quality control and communication systems 156 43 Computer software and hardware 861 18 Forklifts 57 253 Change in projects in process 5,032 7,877 Additions to property, plant and equipment $ 25,739 $
18,147 Expenditures for additions to property, plant and equipment during the fifty-two weeks endedNovember 1, 2019 include projects in process of$13,723 related
to the new facility inChicago .
Cash provided by (used in) financing activities:
November 1, 2019 November 2, 2018 (52 Weeks) (52 Weeks)
Payments of capital lease obligations $ (17 ) $ (83 ) Proceeds from bank borrowings 17,000 - Repayments of bank borrowings (3,253 ) - Net cash provided by (used in) financing activities $ 13,730
$ (83 ) 14 Our stock repurchase program was approved by the Board of Directors inNovember 1999 and was expanded inJune 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 2019, 120,113 shares remained authorized for repurchase under the program. However, our agreement with Citigroup lapsed on its own (by its terms) onOctober 14, 2019 . We invested in OTR (over-the-road) tractors during fiscal year 2012 financed by a capital lease obligation in the amount of$1,848 . The total capital lease obligation was settled as ofNovember 1, 2019 with no remaining lease liability. We bought several of the tractors and converted to month-to-month arrangements on other tractors as needed. We plan to invest in new capital lease arrangements in fiscal 2020. We maintain a line of credit withWells Fargo Bank, N.A . that expires onMarch 1, 2020 . 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%. The borrowing agreement contains various covenants, the more significant of which require us to maintain a minimum tangible net worth, a minimum quick ratio, a minimum net income after tax and total capital expenditures less than$7,500 . The Company was in violation of the capital expenditure covenant which was subsequently waived by letter datedDecember 16, 2019 . The Company was in compliance with all other covenants as ofNovember 1, 2019 . OnDecember 26, 2018 , we entered into a master collateral loan and security agreement withWells Fargo Bank, N.A for up to$15,000 in equipment financing. Pursuant to the loan agreement, we made two borrowings of$7,500 each, to purchase specific equipment for our newChicago processing facility at a fixed rate of 4.13% and 3.98%, respectively, per annum. The loan terms are seven years and are secured by the purchased equipment. The first funding of$7,500 was received onDecember 28, 2018 . The second funding was received onApril 23, 2019 . The master collateral loan and security agreement withWells Fargo Bank, N.A . contains 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
2.5 to 1.0 at each fiscal quarter,
? Quick Ratio (as defined) not less than 1.0 to 1.0 at each fiscal quarter end,
and ? Net income after taxes not less thanone dollar on a quarterly basis, determined as of each fiscal quarter end.
The Company was in compliance with all covenants under the master collateral
loan and security agreement as of
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 2020.
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
We had no other debt or other contractual obligations within the meaning of Item
303(a)(5) of Regulation S-K, as of
Our expected future liability related to construction of the new
15 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.
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