(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 global novel coronavirus ("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 of
COVID-19
We are monitoring and responding to the evolving nature of state and local government actions related to the 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 continue to experience multiple challenges related to the pandemic. These challenges may continue to increase our operating costs and negatively impact our volumes.
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 at least
for 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 Products segment, the volume increases in retail have not
been sufficient to offset the losses in foodservice and as a result, we expect
decreased volume for the remainder of fiscal 2021 in this segment. During the
second and third quarters of fiscal year 2021, the Frozen Food Products segment
has seen a lessening of pandemic related restrictions on food service venues.
Our Snack Food Products segment has experienced significant volume increases and
commodity cost increases caused in part by supply and demand constraints related
to reopening the economy from pandemic restrictions. The cost of significant
meat commodities increased approximately
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? 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
? Customers and Production - The most significant impact from business shutdowns relates to channel shifts and lower production in our Frozen Food Products 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 2021. 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.
Commodity costs increased approximately
? Insurance and CARES Act - Although we maintain insurance policies for various
risks, we believe most COVID-19 impacts will not be covered by these policies.
On
? Liquidity - Operations used
Critical Accounting Policies and Management Estimates
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles in
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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 of
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.
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
Walmart(1) Dollar General Sales AR Sales AR July 9, 2021 37.3 % 5.7 % 14.7 % 45.7 % July 10, 2020 38.7 % 33.9 % 11.9 % 22.7 %
* = No other customer accounted for more than 20% of consolidated accounts
receivable or 10% of consolidated sales for the thirty-six weeks ended
(1) = Walmart accounts receivable represented a lower percentage of sales as of
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. The PPACA law also includes a potential excise tax on the value of benefits that exceed a pre-defined limit. Fortunately, this potential tax has been indefinitely deferred and we do not see significant financial exposure from the so called "Cadillac Tax". 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. We believe that the Biden administration seems more likely to enhance the scope and coverage associated with PPACA than to repeal or significantly change this law. The recent legislative packages related to pandemic relief included some minor
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provisions that will impact health benefits in the future. These changes most
prominently focus on the impact of surprise balance bills from out-of-network
providers. When these changes become law in 2022, the
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 covers
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 130 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
Impact on Net Sales-Consolidated % $ Selling price per pound 8.1 3,615 Unit sales volume in pounds 25.9 11,608 Returns activity 0.4 51 Promotional activity 1.3 (396 ) Increase in net sales 35.7 14,878
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products segment increased by
Impact on Net Sales-Frozen Food Products % $ Selling price per pound 0.9 79 Unit sales volume in pounds 2.1 184 Returns activity 0.9 69 Promotional activity -1.7 (152 ) Increase in net sales 2.2 180 17 of 27
The increase in net sales for the twelve-week period ended
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 9.9 3,536 Unit sales volume in pounds 31.9 11,424 Returns activity 0.4 (18 ) Promotional activity 1.6 (244 ) Increase in net sales 43.8 14,698
Net sales of Snack Food Products increased due to higher unit sales volume through our direct store delivery distribution channel during the third quarter of fiscal year 2021. The weighted average selling price per pound increased compared to the same twelve-week period in the prior fiscal year due to selling price increases and reductions in packaging size. Returns activity was lower compared to the same twelve-week period in the 2020 fiscal year. Promotional offers decreased as a percentage of sales although there were higher sales to high-volume, high-promotion customers.
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 479 1.6 88 Snack Food Products Segment 14,420 48.7 3,797 Total 14,899 50.3 3,885
Cost of Products Sold-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products segment increased by
Cost of Products Sold-Snack Food Products Segment
Cost of products sold in the Snack Food Products segment increased by
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Selling, General and Administrative Expenses-Consolidated
Selling, general and administrative expenses increased by
12 Weeks Ended Expense July 9, 2021 July 10, 2020 Increase (Decrease) Product advertising$ 2,210 $ 1,479 $ 731 Healthcare costs 635 87 548 Fuel 400 206 194 Travel 443 254 189 Other SG&A 10,456 9,011 1,445 Total - SG&A$ 14,144 $ 11,037 $ 3,107
Costs for product advertising increased mainly as a result of higher payments under brand licensing agreements in the Snack Food Products segment during the third twelve-week period of fiscal year 2021. Healthcare costs have increased due to recent unfavorable claim activity. The increase in fuel expense was driven by per gallon fuel price increases compared to the prior year as a result of higher trends in petroleum markets. Travel expenses increased due to the gradual lifting of travel restrictions and stay-at-home orders in response to the COVID-19 pandemic. 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 outside storage expense, repairs and maintenance, customer fines, display rack expense and postage costs.
Selling, General and Administrative Expenses-Frozen Food Products Segment
SG&A expenses in the Frozen Food Products segment increased by
Selling, General and Administrative Expenses-Snack Food Products Segment
SG&A expenses in the Snack Food Products segment increased by
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