Bridgford Foods 10-Q 2009
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
As of August 20, 2009 the registrant had 9,376,194 shares of common stock outstanding.
Part I. Financial Information
Item 1. a.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Item 1. b.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Item 1. c.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Item 1. d.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Item 1. e.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands, except percentages, share and per share amounts)
Note 1 - Summary of Significant Accounting Policies:
The unaudited consolidated condensed financial statements of Bridgford Foods Corporation (the "Company", "we", "our", "us") for the twelve and thirty-six weeks ended July 10, 2009 and July 11, 2008 have been prepared in conformity with the accounting principles described in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2008 (the "Annual Report") and include all adjustments considered
necessary by management for a fair presentation of the interim periods. Such adjustments consist only of normal recurring items. This report should be read in conjunction with the Annual Report. Due to seasonality and other factors, interim results are not necessarily indicative of the results for the full year. New accounting pronouncements and their effect on the Company are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q.
The October 31, 2008 balance sheet within these interim condensed consolidated financial statements were derived from the audited fiscal 2008 financial statements.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported revenues and expenses during the reporting periods.
Actual results may vary from these estimates. Some of the estimates needed to be made by management include the allowance for doubtful accounts, inventory reserves and the estimated useful lives of property and equipment, and the valuation allowance for the Company’s deferred tax asset. Actual results could materially differ from these 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 which vary from our current estimates.
Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities. The carrying amount of these instruments approximate fair market value due to the short maturity of these instruments. At July 10, 2009, the Company had accounts in excess of the Federal Deposit Insurance Corporation insurance coverage limit. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. The Company issues credit to a significant number of customers that are diversified over a wide geographic area. The Company monitors the payment histories of its customers and maintains an allowance for doubtful accounts which is reviewed for adequacy on a quarterly basis. The Company does not require collateral from its customers.
For the thirty-six weeks ended July 10, 2009 and July 11, 2008, Wal-Mart® accounted for 11.7% and 13.1%, respectively of consolidated revenues or 15.2% and 16.4% of consolidated accounts receivable. For the twelve weeks ended July 10, 2009 and July 11, 2008, Wal-Mart® accounted for 17.3% and 13.6%, respectively of consolidated revenues or 15.2% and 16.4% of consolidated accounts receivable.
Note 2 - Inventories:
Inventories are comprised of the following at the respective periods:
Inventories are valued at the lower of cost (which approximates actual cost on a first-in, first-out basis) or market. Costs related to warehousing, transportation and distribution to customers are considered when computing market value. Inventories include the cost of raw materials, labor and manufacturing overhead. We regularly review inventory quantities on hand and write down any excess or obsolete inventories to estimated net realizable value. An inventory reserve is created when potentially slow-moving or obsolete inventories are identified in order to reflect the appropriate inventory value. Changes in economic conditions, production requirements, and lower than expected customer demand could result in additional obsolete or slow-moving inventory that cannot be sold or may need to be sold at reduced prices and could result in additional reserve provisions.
Note 3 - Basic and Diluted Earnings Per Share:
The employee stock option plan expired by its terms on April 29, 2009 and no further stock options are available for grant under the plan. The Company had 250,000 employee stock options outstanding through April 29, 2009 and the thirty-six week periods ended July 11, 2008. The effect of the employee stock options outstanding for the thirty-six weeks ended July 10, 2009 and July 11, 2008 was not included in the calculation of diluted shares and diluted earnings per share as to do so would be anti-dilutive. No stock options were granted during the first thirty-six weeks ended July 10, 2009 and July 11, 2008.
Note 4 - Retirement and Other Benefit Plans:
The Company has noncontributory-trusteed defined benefit retirement plans for sales, administrative, supervisory and certain other employees. The benefits under these plans are primarily based on years of service and compensation levels. Our general funding policy is to make contributions which are at least equal to the minimum required contributions needed to avoid a funding deficiency for our funding plans in accordance with the Employee Retirement Income Security Act. The measurement date for the plans is the Company's fiscal year end.
Net pension cost consisted of the following:
The expected Company contribution to the plans within the next twelve months is $1,260. We have funded the plans in the amount of $361 through the third quarter of fiscal 2009.
The pension liability increased significantly during the first thirty-six weeks of fiscal 2009 primarily due to a decrease in the discount rate to 6.27% as of July 10, 2009 from 8.00% as of October 31, 2008. Statement of Financial Accounting Standards ("SFAS") No. 158 "Employers Accounting for Defined Benefit Pension and Other Postretirement Plans" amended paragraph 44 of SFAS No. 87 "Employers' Accounting for Pensions" to require that an internal rate of return analysis be included in the discount rate selection process. The discount rate was based on the Citigroup Pension Liability Index as of the end of the reporting period.
Note 5 - Commitments and Contingencies:
The Company leases certain transportation equipment under operating leases. The terms of the transportation leases provide for annual renewal options and contingent rental payments based upon mileage and adjustments of rental payments based on the Consumer Price Index. No material changes have been made to these contracts during the first thirty-six weeks of fiscal 2009.
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.
The Company purchases bulk flour under short-term fixed price contracts during the normal course of business. Under these arrangements, the Company is obligated to purchase specific quantities at fixed prices, within the specified contract period. These contracts provide for automatic price increases if agreed quantities are not purchased within the specified contract period. No significant contracts remained unfulfilled at July 10, 2009.
Note 6 - Segment Information:
The Company has two reportable operating segments, Frozen Food Products (the processing and distribution of frozen products) and Refrigerated and Snack Food Products (the processing and distribution of refrigerated meat and other convenience foods).
We evaluate each segment's performance based on revenues and operating income. Selling, general and administrative expenses include corporate accounting, information systems, human resource management and marketing, which are managed at the corporate level. These activities are allocated to each operating segment based on revenues and/or actual usage.
The following segment information is presented for the twelve and thirty-six weeks ended July 10, 2009 and July 11, 2008.
Note 7 - Income Taxes:
The Company expects its effective tax rate for the fiscal year to be minimal (giving consideration to net operating loss carryforwards and other available tax deductions). We recorded a provision for income taxes in the amount of $208 for the twelve and thirty-six week periods ended July 10, 2009 related to alternative minimum tax and state taxes.
In accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes", the Company assesses, on a quarterly basisthe realizability of its deferred tax assets. A valuation allowance must be established when, based upon the evaluation of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. SFAS No. 109 provides that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years or losses expected in early future years.
Due to three years of cumulative losses, management has recorded a full valuation allowance on all deferred tax assets through the third quarter of fiscal 2009. The Company's future realization of its deferred tax assets ultimately depends on the existence of sufficient taxable income in the carryforward periods (both federal and state). Changes in existing laws could affect the valuation of deferred tax assets for future periods.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," ("FIN 48"), an interpretation of SFAS No. 109, "Accounting for Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
We have provided a liability of $97 for unrecognized tax benefits related to various federal and state income tax matters. As of November 1, 2008, the cumulative effect of adopting this interpretation was recorded as a decrease of $92 to opening retained earnings with an offsetting increase in the accrued FIN 48 liability. This entire amount would reduce the Company's effective income tax rate if an asset is recognized in future reporting periods. As of July 10, 2009, the Company has not identified any new unrecognized tax benefits or losses.
We will recognize any future accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of July 10, 2009, we had approximately $7 in accrued interest and penalties which is included as a component of the $97 unrecognized tax benefit noted above.
We are subject to U.S. federal income tax, and are currently under audit by the Internal Revenue Service for the years ended November 1, 2002 through October 28, 2005. Our federal income tax returns are open to audit under the statute of limitations for the years ended October 29, 2004 through November 2, 2007. The Company's statute of limitations for its years ended November 1, 2002 and October 31,2003 have been extended to September 30, 2009. We believe the appropriate provisions for all outstanding issues have been made for all years under audit.
We are subject to income tax in California and various other state taxing jurisdictions. Our state income tax returns are open to audit under the statute of limitations for the years ended October 29, 2004 through October 31, 2008.
We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
Note 8 - Fair Value Measurements:
Effective November 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. The standard describes three levels of inputs that may be used to measure fair value:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(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 the Securities Act of 1933 and the Securities Exchange Act of 1934 (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 of Bridgford 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 Quarterly Report on Form 10-Q. 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 ended October 31, 2008. 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 financial statements in conformity with generally accepted accounting principles in the United States 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 which vary from our current estimates. We record promotional and returns allowances based on recent and historical trends. Management believes its current estimates are reasonable and based on the best information available at the time.
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 amounts receivable 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. Sales to Wal-Mart® comprised 11.7% of revenues in the first thirty-six weeks of fiscal year 2009 and 15.2% of accounts receivable was due from Wal-Mart® at July 10, 2009. In comparison, Wal-Mart® comprised 13.1% of revenues for the first thirty-six weeks of fiscal year 2008 and 16.4% of accounts receivable at the end of the third quarter of fiscal year 2008. A portion of deliveries to Wal-Mart and other major customers are now handled by independent third-party food distributors who pay us with the sales invoices of Bridgford products sold to these customers.
Revenues are recognized 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 our own direct store delivery system. The Company also uses independent distributors to deliver products in remote geographic areas of the country.
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.
Deferred taxes are provided for items whose financial and tax bases differ. A valuation allowance is provided against deferred tax assets when it is expected that it is more likely than not that the related asset will not be fully realized.
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 emanating from these reviews. Actual outcomes may differ materially from these estimates.
We assess the recoverability of our long-lived assets on an annual 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.
Overview of Reporting Segments
We operate in two business segments -- the processing and distribution of frozen products (the Frozen Food Products Segment), and the processing and distribution of refrigerated and snack food products, (the Refrigerated and Snack Food Products Segment). For information regarding the separate financial performance of the business segments refer to Note 6 of the Notes to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q. We manufacture and distribute products consisting of an extensive line of food products, including biscuits, bread dough items, roll dough items, dry sausage products, beef jerky and a variety of sandwiches and sliced luncheon meats. We purchase products for resale including a variety of jerky, cheeses, salads, party dips, Mexican foods, nuts and other delicatessen type food products.
Frozen Food Products Segment
In our Frozen Food Products Segment, we manufacture and distribute an extensive line of food products, including biscuits, bread dough items, roll dough items and sandwiches. All items within this Segment are considered similar products and have been aggregated at this level. Our frozen food division serves both food service and retail customers. We sell approximately 190 unique frozen food products through wholesalers, cooperatives and distributors to approximately 21,000 retail outlets and 22,000 restaurants and institutions.
Refrigerated and Snack Food Products Segment
In our Refrigerated and Snack Food Products Segment, we distribute both products manufactured by us and products manufactured or processed by third parties. 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. The deli division includes products such as ham, sandwiches, cheese, Mexican food, pastries and other delicatessen type food products. Our Refrigerated and Snack Food Products Segment sells approximately 270 different items through a direct store delivery network serving approximately 36,000 supermarkets, mass merchandise and convenience retail stores located in 49 states and Canada. These customers are comprised of large retail chains and smaller “independent” operators. Independent distributors serve approximately 1,000 stores of all types in areas impractical to serve by our Company-owned vehicles and personnel.
Results of Operations for the Twelve Weeks ended July 10, 2009 and Twelve Weeks ended July 11, 2008
(in thousands, except percentages)
Net sales decreased by $303 (1.1%) to $26,281 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period last year. Average selling prices per pound decreased 1.0%. The selling price decreases were partially offset by increased unit sales volume in the amount of 0.7%. Promotional allowances increased 0.7%, as a percent of sales, compared to the same twelve-week period last year. Product return levels decreased 0.6% as a percent of sales compared to the same twelve-week period last year.
Compared to the prior twelve-week period ended April 17, 2009 (not shown), average weekly net sales increased $54 (2.5%). The average selling price per pound decreased 0.5% during the third twelve weeks of the 2009 fiscal year compared to the previous twelve-week period while unit sales volume increased 2.6%.
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products Segment, excluding inter-segment sales, decreased by $283 (2.5%) to $11,186 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period last year. Unit sales volume decreased 3.8% offset by selling price per pound increase of 1.9% when compared to the comparative twelve-week period last year. Promotional allowances increased by approximately 0.9%, as a percent of sales, compared to the same twelve-week period last year.
Net Sales-Refrigerated and Snack Food Segment
Net sales in the Refrigerated and Snack Food Products Segment, excluding inter-segment sales, decreased by $20 (0.1%) to $15,095 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period last year. Unit sales volume increased by 4.3% and was partially offset by a selling price per pound decrease of 3.3% compared to the same twelve-week period in the prior year.
Cost of Products Sold and Gross Margin-Consolidated
Cost of products sold decreased by $2,457 (14.0%) to $15,089 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period in fiscal 2008. The gross margin before depreciation increased from 32.8% to 42.1% in the third twelve weeks of the 2009 fiscal year due to higher selling prices, lower commodity costs and slight increases in the proportion of goods processed in Company facilities when compared to the same twelve-week period in fiscal year 2008.
Compared to the prior twelve-week period ended April 17, 2009 (not shown), the average weekly cost of products sold during the third twelve weeks of fiscal year 2009 increased $35 (2.9%). This increase is consistent with the overall sales volume increase compared to the prior twelve-week period.
Cost of Products Sold-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products Segment decreased by $2,058 (24.3%) to $6,419 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period in fiscal year 2008. Lower flour costs contributed significantly to this decrease in the current year period.
Cost of Products Sold-Refrigerated and Snack Food Segment
Cost of products sold in the Refrigerated and Snack Food Products Segment decreased by $593 (6.3%) to $8,793 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period in fiscal year 2008. This decrease corresponds to lower sales levels and a reduction in meat commodity costs and increased in-sourcing of products previously purchased from outside suppliers.
Selling, General and Administrative Expenses-Consolidated
Selling, general and administrative (“SG&A”) expenses decreased by $825 (8.1%) to $9,393 in the third twelve weeks of fiscal year 2009 compared to the same twelve-week period in the prior fiscal year. The decrease in this category for the twelve-week period ended July 10, 2009 did not directly correspond to the sales decrease. The table below summarizes the primary expense increases and decreases included in this category:
When comparing the third twelve weeks of fiscal year 2009 to the prior twelve-week period ended April 17, 2009 (not shown), average weekly SG&A increased by $20 (2.6%).
Selling, General and Administrative Expenses-Frozen Food Products Segment
SG&A expenses in the Frozen Food Products Segment increased by $77 (2.1%) to $3,676 in the third twelve weeks of fiscal year 2009 compared to the same twelve week period in the prior fiscal year. Increased advertising expenses were the primary contributor to this variance.
Selling, General and Administrative Expenses-Refrigerated and Snack Food Segment
SG&A in the Refrigerated and Snack Food Products Segment decreased by $902 (13.6%) to $5,717 in the third twelve weeks of fiscal year 2009 compared to the same twelve-week period in the prior fiscal year. Significant decreases in fuel cost, healthcare and workers’ compensation contributed to the decrease in SG&A expenses when compared to the same twelve-week period in the prior fiscal year. This decline was partially offset by higher pension costs in fiscal year 2009.
Depreciation expense decreased by $222 (29.5%) to $531 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period in fiscal year 2008. The decrease in depreciation expense reflects a decline in current capital expenditure projects and routine asset disposals during the third twelve weeks of fiscal year 2009. Compared to the prior twelve-week period ended April 17, 2009 (not shown), average weekly depreciation decreased $16 (26.0%).
Depreciation Expense-Frozen Food Products Segment
Depreciation expense in the Frozen Food Products Segment decreased by $33 (18.2%) to $148 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period in fiscal year 2008. This decrease reflects lower capital spending activity in the current year period.
Depreciation Expense-Refrigerated and Snack Food Segment
Depreciation expense in the Refrigerated and Snack Food Products Segment decreased by $147 (29.5%) to $351 in the third twelve weeks of the 2009 fiscal year compared to the same twelve-week period in fiscal year 2008. This decrease reflects lower capital spending in the third twelve weeks of fiscal year 2009.
Our income tax benefits for the third twelve weeks ended July 10, 2009 and July 11, 2008 are as follows: