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"). These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report or incorporated by reference into this Report are forward-looking statements. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items; plans or expectations with respect to our business strategy; statements concerning industry trends; statements regarding anticipated demand for our products, or the products of our competitors; statements relating to manufacturing forecasts; statements relating to forecasts of our liquidity position or available cash resources; statements regarding the anticipated impact of the COVID-19 pandemic and statements relating to the assumptions underlying any of the foregoing. Throughout this Report, we have attempted to identify forward-looking statements by using words such as "may," "believe," "will," "could," "project," "anticipate," "expect," "estimate," "should," "continue," "potential," "plan," "forecasts," "goal," "seek," "intend," other forms of these words or similar words or expressions or the negative thereof (although not all forward-looking statements contain these words). 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 the COVID-19 pandemic; 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 as well as in our other filings with theSecurities and Exchange Commission (the "SEC"). In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business. We have based our forward-looking statements on our current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. 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") as well as our other filings with theSEC with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. If we do update or correct any forward-looking statements, readers should not conclude that we will make additional updates or corrections. COVID-19
We are monitoring and responding to the evolving nature of state and local
government actions related to the global novel coronavirus ("Covid-19") pandemic
and its impact on each of our production plant locations as well as our customer
base. We coordinate with our local managers for the primary purpose of
maintaining the health and safety of our team members, ensuring our ability to
operate our processing facilities and maintaining the liquidity of our business.
We are experiencing multiple challenges related to the pandemic. These
challenges may increase our operating costs and negatively impact our volumes
for at least the remainder of fiscal year 2020.
Operationally, we have faced temporary idling of production facilities to ensure
team member safety. As a result, we have experienced lower levels of
productivity and higher costs of production. This will likely continue in the
short term until the effects of the pandemic diminish. Both of our business
segments have experienced a shift in demand from foodservice to retail. In our
frozen-food segment, the volume increases in retail have not been sufficient to
offset the losses in foodservice and as a result, we expect decreased volume in
the second half of fiscal 2020 in this segment. Our Refrigerated and Snack Food
segment has experienced significant volume increases in the short-term. We
currently expect that we will remain profitable in the second half of fiscal
2020 on a consolidated basis, although the combination of operational challenges
and volume impacts will likely negatively impact overall earnings.
? Team Members - The health and safety of our team members is our top priority.
To protect our team members, we have implemented safety measures recommended by
the Centers for Disease Control and Prevention ("CDC") and the Occupational
Safety and Health Administration ("OSHA") in our facilities and have implemented
social distancing, temperature checks of team members, increasing efforts to
deep clean and sanitize facilities, the use of protective face coverings in
certain environments and making protective face coverings and other protective
equipment available to team members. We encourage team members who feel sick to
stay at home and provide relaxed attendance policies in some instances. We
continue to explore and implement additional ways to promote social distancing
in our production facilities by creating additional breakroom space and allowing
extra time between shifts to reduce interaction of team members, as well as
erecting dividers between workstations or increasing the space between workers
on the production floor.
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? Customers and Production - The most significant impact from business shutdowns
relates to channel shifts and lower production in our Frozen-Foods segment. We
are committed to doing our best to ensure the continuity of our business and the
availability of our products to customers. We have seen a shift in demand from
our foodservice to our retail sales channels as schools and in-dining
restaurants have closed across the country. Our production capabilities,
including our large scale and geographic proximities, allow us to adapt some of
our facilities to the changing demand by shifting certain amounts of production
from foodservice to retail. Not all of our facilities can be modified and as a
result we expect a net negative impact on our foodservice volumes for the
remainder of fiscal year 2020. In addition, our production facilities are
experiencing varying levels of production impacts, including reduced volumes,
worker absenteeism and temporary COVID-19-related closures at some of our
production facilities. Additionally, we are anticipating the temporary idling of
certain production lines that service the foodservice channel as we balance the
shifting demand between foodservice and retail sales channels.
? Supply Chain - Our supply chain has stayed largely intact. Although we have
experienced some minor disruptions, these events have not significantly impacted
our production to date. We have experienced volatility in commodity inputs, in
part due to impacts caused by COVID-19 related business disruptions, and we
expect this volatility to continue, which may impact our future input costs.
Recent high levels of pork and beef facility closures have increased the
likelihood of raw material shortages which would limit production capability of
in our Refrigerated and Snack Food Division.
On April 28, 2020 , President Trump issued an Executive Order stating the
importance of the continued operation of meat and poultry processing facilities
and directing the Secretary of Agriculture to issue rules and orders to ensure
the continued supply of meat and poultry, consistent with the guidance for the
operations of meat and poultry processing facilities jointly issued by theCDC andOSHA . ? Insurance and CARES Act - Although we maintain insurance policies for various risks, we do not believe most COVID-19 impacts will be covered by these policies. OnMarch 27, 2020 ,President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferral of the employer portion of social security payments, and expanded income tax net operating loss carryback provisions. While we continue to examine the potential impacts of these actions, we anticipate new regulations related to federal income tax will have a significant impact on our financial statements and cash flow. Late in the second quarter of fiscal 2020 we began implementing the deferral of the employer portion of social security payments and intend to continue this deferral for the duration of its availability which will have a favorable impact on short-term liquidity. We currently estimate that the fiscal 2020 deferral amount will be approximately$1,258 . We are currently evaluating the refundable payroll tax credit provision but are not able to quantify the impact at this time. ? Liquidity - We used$733 in operating cash flows during the twenty-four weeks endedApril 17, 2020 . As of that date we had approximately$42,678 of net working capital, which included availability under our revolving line of credit and$13,703 of cash and cash equivalents. We have$8,850 of current debt. Combined with the cash expected to be generated from the Company's operations, income tax refunds and deferral of social security taxes, we anticipate that we will maintain sufficient liquidity to operate our business for the remainder of fiscal year 2020 and also complete a major plant expansion inChicago, Illinois . We are also evaluating additional borrowing through securing real estate or taking advantage of government sponsored lending programs. 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.
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 ofApril 30, 2020 was 2.91% as compared to 2.80% 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. Due to the uncertainty of the coronavirus pandemic, several customers have requested extended payment terms ranging from an additional 10 to 35 days. 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. 14 of 26
Customer Concentration > 20% of AR or 10% of Sales *
The table below shows customers that accounted for more than 20% of consolidated
accounts receivable ("AR") or 10% of consolidated sales for the twenty-four
weeks ended
Wal-Mart Dollar General
Sales AR Sales AR
April 17, 2020 37.7 % 35.5 % 12.7 % 24.4 %
April 19, 2019 36.1 % 36.9 % 9.8 % 21.0 %
* = No other customer accounted for more than 20% of consolidated accounts
receivable or 10% of consolidated sales for the twenty-four 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.
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. 15 of 26
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. 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$1,556 (3.8%) to$42,999 in the second 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 -1.7 (765 ) Unit sales volume in pounds 6.0 2,674 Returns activity - (29 ) Promotional activity -0.5 (324 ) Increase in net sales 3.8 1,556
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products segment decreased by$2,602 (22.5%) to$8,944 in the second 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-Frozen Food Products % $ Selling price per pound 3.1 410 Unit sales volume in pounds -25.8 (3,371 ) Returns activity 0.2 16 Promotional activity - 343 Decrease in net sales -22.5 (2,602 ) The decrease in net sales for the twelve-week period endedApril 17, 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, decreased 19% by volume while retail sales volume increased 46%. Demand has shifted from foodservice to retail sales channels as schools and in-dining restaurants have closed across the country in response to the COVID-19 pandemic. Promotional activity remained steady as a percentage of sales. Returns activity decreased slightly compared to the same twelve-week period in the 2019 fiscal year. 16 of 26
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 -3.7 (1,176 ) Unit sales volume in pounds 19.0 6,045 Returns activity 0.2 (44 ) Promotional activity -1.6 (667 ) Increase in net sales 13.9 4,158
Net sales of Snack Food Products increased due to higher sales through our direct store delivery distribution channel during the second 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 significant volume increases in high volume, low margin accounts. Promotional offers increased due to increased sales to high-volume, high-promotion 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 $ % Increase
Frozen Food Products Segment (968 ) -3.5 43
Snack Food Products Segment 4,015 14.8 1,273
Total 3,047 11.3 1,316
Cost of Products Sold-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products segment decreased by$968 (13.2%) to$6,382 in the second 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 increased approximately$43 in the second twelve-week period of fiscal year 2020 compared to the same twelve-week period in fiscal year 2019. In our Frozen Food Product Segment, the volume increases in retail have not been sufficient to offset the losses in foodservice and as a result, decreased volume has resulted in an increase in overhead per case of product.
Cost of Products Sold-Snack Food Products Segment
Cost of products sold in the Snack Food Products segment increased by$4,015 (20.4%) to$23,707 in the second 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 depreciation on processing equipment impacted the cost of products sold. The cost of significant meat commodities increased approximately$1,273 in the second 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 increased by$1,972 (17.0%) to$13,580 in the second twelve-week period of fiscal year 2020 compared to the same twelve-week period in the prior fiscal year. The table below summarizes the significant expense increases (decreases) included in this category: 12 Weeks Ended Expense April 17, 2020 April 19, 2019 Increase (Decrease) Cash surrender value $ 823 $ (439 ) $ 1,262 Wages and bonus 5,007 5,552 (545 ) Product advertising 2,133 1,701 432 Pension expense 115 (92 ) 207 Healthcare costs 627 788 (161 ) Workers' compensation expense 13 167 (154 ) Outside consultants 604 437 167 Other SG&A 4,258 3,494 764 Total - SG&A$ 13,580 $ 11,608 $ 1,972 17 of 26
The cash surrender value of life insurance policies decreased substantially due to stock market losses compared to the same twelve-week period in fiscal year 2019. Lower profit sharing accruals resulted in lower wages and bonus expenses in the second twelve weeks of the 2020 fiscal year compared to the same period in the prior year. Costs for product advertising increased mainly as a result of higher payments under brand licensing agreements in the Snack Food Products segment during the twenty-four weeks endedApril 17, 2020 . The increase in pension expense was due to lower pension discount rates being used to compute the future liability estimate. Healthcare costs have decreased due to recent favorable claim activity. The Company's workers' compensation expense decreased as a result of favorable claim trends compared to the same twenty-four-week period in fiscal 2019. Outside consulting costs increased due to higher real estate advisory services and other related legal fees. 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 provision for doubtful accounts, estimated customer fines and higher office supplies.
Selling, General and Administrative Expenses-Frozen Food Products Segment
SG&A expenses in the Frozen Food Products segment increased by$302 (9.7%) to$3,404 in the second twelve-week period of fiscal year 2020 compared to the same twelve-week period in the prior fiscal year. The overall increase in SG&A expenses was due to a higher allocated loss 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$1,670 (19.6%) to$10,176 in the second twelve-week period of fiscal year 2020 compared to the same twelve-week period in the prior fiscal year. Most of the increase was due to higher unit sales volume and higher expenses related to wages and bonuses including an increase in sales commissions and higher product advertising partially coupled with an allocated loss on cash surrender value of life insurance policies.
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