BRIDGFORD FOODS CORPORATION (dollars in thousands)
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements ofBridgford Foods Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the impact of competitive products and pricing; success of operating initiatives; development and operating costs; advertising and promotional efforts; adverse publicity; acceptance of new product offerings; consumer trial and frequency; changes in business strategy or development plans; availability, terms and deployment of capital; availability of qualified personnel; commodity, labor, and employee benefit costs; changes in, or failure to comply with, government regulations; weather conditions; construction schedules; and other factors referenced in this Report. Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our business, financial position, results of operations and cash flows. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein and to consider other risks detailed more fully in our Annual Report on Form 10-K for the fiscal year endedNovember 1, 2019 (the "Annual Report"). We undertake no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence
of unanticipated events.
Critical Accounting Policies and Management Estimates
The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles inthe United States of America 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. Some of the estimates needed to be made by management include the allowance for doubtful accounts, promotional and returns allowances, inventory reserves, the estimated useful lives of property and equipment, and the valuation allowance for the Company's deferred tax assets. Actual results could materially differ from these estimates. We determine the amounts to record based on historical experience and various other assumptions that we view as reasonable under the circumstances and consider all relevant available information. The results of this analysis form the basis for our conclusion as to the value of assets and liabilities that are not readily available from other independent sources. 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 which vary from our current estimates. Current accounting principles require that our pension benefit obligation be measured using an internal rate of return ("IRR") analysis to be included in the discount rate selection process. The IRR calculation for the Retirement Plan for Employees ofBridgford Foods Corporation is measured annually and based on the Citigroup Pension Discount Rate. The Citigroup Pension Discount Rate as ofJanuary 31, 2020 was 2.91% as compared to 3.00% as ofNovember 1, 2019 . The discount rate applied can significantly affect the value of the projected benefit obligation as well as the net periodic benefit cost. Our credit risk is diversified across a broad range of customers and geographic regions. Losses due to credit risk have recently been immaterial. The provision for doubtful accounts receivable is based on historical trends and current collection risk. We have significant receivables with a few large, well known customers which, although historically secure, could be subject to material risk should these customers' operations suddenly deteriorate. We monitor these customers closely to minimize the risk of loss. The table below shows customers that accounted for more than 20% of consolidated accounts receivable ("AR") or 10% of consolidated sales for the twelve weeks endedJanuary 24, 2020 andJanuary 25, 2019 , respectively.
Customer Concentration > 20% of AR or 10% of Sales *
Wal-Mart Dollar General
Sales AR Sales AR
January 24, 2020 36.4 % 34.2 % 7.4 % 21.3 %
January 25, 2019 35.6 % 33.4 % 9.7 % 23.6 %
* = No other customer accounted for more than 20% of consolidated accounts
receivable or 10% of consolidated sales for the twelve weeks ended
Revenues are recognized in accordance with ASC 606 - Contracts with Customers upon passage of title to the customer, typically upon product pick-up, shipment or delivery to customers. Products are delivered to customers primarily through our own long-haul fleet or through a Company owned direct store delivery system. 12 of 21
We record the cash surrender or contract value for life insurance policies as an adjustment of premiums paid in determining the expense or income to be recognized under the contract for the period.
We provide tax reserves for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes and timing, and is a subjective estimate. Although the outcome of these tax audits is uncertain, in management's opinion adequate provisions for income taxes have been made for potential liabilities, if any, resulting from these reviews. Actual outcomes may differ materially from these estimates.
We assess the recoverability of our long-lived assets on a quarterly basis or whenever adverse events or changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. If undiscounted cash flows are not sufficient to support the recorded assets, we recognize an impairment to reduce the carrying value of the applicable long-lived assets to their estimated fair value. We participate in "multiemployer" pension plans administered by labor unions on behalf of their employees. We pay monthly contributions to union trust funds, a portion of which is used to fund pension benefit obligations to plan participants. The contribution amount may change depending upon the ability of participating companies to fund these pension liabilities as well as the actual and expected returns on pension plan assets. Should we withdraw from the union and cease participation in a union plan, federal law could impose a penalty for additional contributions to the plan. The penalty would be recorded as an expense in the consolidated statement of operations. The ultimate amount of the withdrawal liability is dependent upon several factors including the funded status of the plan and contributions made by other participating companies. We are subject to the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the "PPACA"). Requirements of the law include the removal of the lifetime limits on active and retiree medical coverage, expanding dependent coverage to age 26 and the elimination of pre-existing conditions that may impact other postretirement benefits costs. In addition, the PPACA includes potential excise tax on the value of benefits that exceed a pre-defined limit which may require changes in benefit plan levels in order to minimize this additional cost. Finally, the PPACA includes provisions that require employers to offer health benefits to all full-time employees (defined as 30 hours per week). The health coverage must meet minimum standards for the actuarial value of the benefits offered and employee affordability. Both the administration and congress have made recent attempts to replace the PPACA with an alternative system. However, we do not anticipate significant changes in the rules that compel an employer such asBridgford Foods to offer affordable coverage to all of its employees. The recent tax law changes removed the individual mandate provision that is included in the PPACA and requires all individuals to have health insurance or pay a penalty. Despite this change, the recent tax changes did not adjust or remove the employer mandate. We cannot anticipate further changes at this point in time. We believe that our current plans meet the existing requirements. We will continue to assess the accounting implications of the PPACA and its impact on our financial position and results of operations as more legislative and interpretive guidance becomes available. The potential future effects and cost of complying with the provisions of the PPACA are not determinable at this time.
Overview of Reporting Segments
We operate in two business segments - the processing and distribution of frozen food products (the Frozen Food Products segment), and the processing and distribution of snack food products (the Snack Food Products segment). For information regarding the separate financial performance of the business segments refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this Report. We manufacture and distribute an extensive line of food products, including biscuits, bread dough items, roll dough items, dry sausage products and beef jerky.
Frozen Food Products Segment
Our Frozen Food Products segment primarily manufactures and distributes biscuits, bread dough items, roll dough items and shelf stable sandwiches. All items within this segment are considered similar products and have been aggregated at this level. Our frozen food business coversthe United States . Products produced by the Frozen Food Products segment are generally supplied to food service and retail distributors who take title to the product upon shipment receipt through company leased long-haul vehicles. In addition to regional sales managers, we maintain a network of independent food service and retail brokers covering most ofthe United States . Brokers are compensated on a commission basis. We believe that our broker relationships, in close cooperation with our regional sales managers, are a valuable asset providing significant new product and customer opportunities. Regional sales managers perform several significant functions for us, including identifying and developing new business opportunities and providing customer service and support to our distributors and end purchasers through the effective use of our broker network. 13 of 21 Snack Food Products Segment
Our Snack Food Products segment primarily distributes products manufactured by us. All items within this segment are considered similar products and have been aggregated at this level. The dry sausage division includes products such as jerky, meat snacks, sausage and pepperoni products. Our Snack Food Products segment sells approximately 120 different items through a direct store delivery network serving approximately 17,000 supermarkets, mass merchandise and convenience retail stores located in 49 states. These customers are comprised of large retail chains and smaller "independent" operators. Products produced or distributed by the Snack Food Products segment are supplied to customers through either direct-store-delivery or direct delivery to customer warehouses. Product delivered using the company-owned fleet direct to the store is considered a direct-store-delivery. In this case, we provide the service of setting up and maintaining the display and stocking our products. Products delivered to customer warehouses are distributed to the retail store and stocked by the customer where it is then resold to the end consumer.
Results of Operations for the Twelve-Weeks Ended
Net Sales-Consolidated Net sales increased by$1,601 (3.6%) to$46,642 in the first twelve-week period of the 2020 fiscal year compared to the same twelve-week period in fiscal year 2019. The changes in net sales were comprised as follows: Impact on Net Sales-Consolidated % $ Selling price per pound -1.1 (549 ) Unit sales volume in pounds 4.5 2,177 Returns activity 0.6 238 Promotional activity -0.4 (265 ) Increase in net sales 3.6 1,601
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products segment decreased by
Impact on Net Sales-Frozen Food Products % $ Selling price per pound 3.4 455 Unit sales volume in pounds -7.8 (1,053 ) Returns activity 0.2 29 Promotional activity -0.2 51 Decrease in net sales -4.4 (518 )
The decrease in net sales for the twelve-week period endedJanuary 24, 2020 primarily relates to lower unit sales volume partially offset by higher selling price per pound. The decrease in net sales was primarily driven by a significant decrease in volume for our shelf-stable sandwich business to institutional and retail customers partially offset by an increase in selling prices implemented in the second quarter of fiscal year 2019. Other institutional Frozen Food Product sales, including sheet dough and rolls, increased 1% by volume while retail sales volume increased 15%. Promotional activity increased due to higher bid price reductions, rebates and menu allowances as a percent of sales. Returns activity decreased slightly compared to the same twelve-week period in the
2019 fiscal year.
Net Sales-Snack Food Products Segment
Net sales in the Snack Food Products segment increased by
Impact on Net Sales-Snack Food Products % $ Selling price per pound -2.9 (1,004 ) Unit sales volume in pounds 9.3 3,230 Returns activity 0.7 209 Promotional activity -0.7 (316 ) Increase in net sales 6.4 2,119 14 of 21 Net sales of Snack Food Products increased significantly due to higher sales through our direct store delivery distribution channel during the first quarter of fiscal 2020. The weighted average selling price per pound decreased compared to the same twelve-week period in the prior fiscal year due to lower per pound selling prices for on certain items. Promotional offers increased due to the timing of programs with significant customers. Returns activity was lower compared to the same twelve-week period in the 2019 fiscal year.
Cost of Products Sold and Gross Margin-Consolidated
Cost of products sold increased by
Commodity $
Change in Cost of Products Sold by Segment $ % (Decrease) Increase
Frozen Food Products Segment (291 ) -1.0 (41 )
Snack Food Products Segment 2,492 8.5 826
Total 2,201 7.5 785
Cost of Products Sold-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products segment decreased by$291 (3.7%) to$7,673 in the first twelve-week period of the 2020 fiscal year compared to the same twelve-week period in fiscal year 2019. Decreased volume and changes in product mix were the primary contributing factors to this decrease. The cost of purchased flour decreased approximately$41 in the first twelve-week period of fiscal year 2020 compared to the same twelve-week period in fiscal year 2019.
Cost of Products Sold-Snack Food Products Segment
Cost of products sold in the Snack Food Products segment increased by$2,492 (11.6%) to$23,915 in the first twelve-week period of the 2020 fiscal year compared to the same twelve-week period in fiscal year 2019 due to a substantial increase in sales volume. Meat commodity costs started to rise during the 2020 period partially adding to the increase in cost of products sold. Higher hourly wages including increased production labor impacted the cost of products sold. The cost of significant meat commodities increased approximately$826 in the first twelve-week period of fiscal year 2020 compared to the same period in fiscal year 2019.
Selling, General and Administrative Expenses-Consolidated
Selling, general and administrative expenses decreased by
12 Weeks Ended Expense
January 24, 2020 January 25, 2019 Increase (Decrease)
Wages and bonus $ 5,643 $ 5,802 $ (159 )
Cash surrender value (403 ) 10 (413 )
Other SG&A 7,378 7,275 103
Total - SG&A $ 12,618 $ 13,087 $ (469 )
Lower profit sharing accruals resulted in lower wages and bonus expenses in the first twelve weeks of the 2020 fiscal year compared to the same period in the prior year. The gain on cash surrender value of life insurance policies increased substantially due to higher stock market gains compared to the same twelve-week period in fiscal year 2019. 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 utilities, workers compensation cost, higher storage expense and higher vehicle repairs and maintenance.
Selling, General and Administrative Expenses-Frozen Food Products Segment
SG&A expenses in the Frozen Food Products segment decreased by$595 (15.7%) to$3,203 in the first twelve-week period of fiscal year 2020 compared to the same twelve-week period in the prior fiscal year. The overall decrease in SG&A expenses was due to lower sales unit volume, lower payouts under profit sharing agreements and lower product advertising corresponding to the decrease in unit sales volume due to an allocated gain on cash surrender value of life insurance policies.
Selling, General and Administrative Expenses-Snack Food Products Segment
SG&A expenses in the Snack Food Products segment increased by$126 (1.4%) to$9,415 in the first twelve-week period of fiscal year 2020 compared to the same twelve-week period in the prior fiscal year. Most of the moderate increase was due to higher unit sales volume and higher expenses related to wages and bonus including an increase in sales commissions and higher product advertising partially offset by an allocated gain on cash surrender value of life insurance policies. 15 of 21
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