Bridgford Foods Corp: Form 10-Q for the period ended Jul 12, 2024

(dollars in thousands)

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included within in this Report, and the information and documents incorporated by reference with this Report, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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 operational challenges, including as a result of global supply chain disruptions and labor shortages; statements regarding inflationary pressures and the resulting impact on our results of operations; statements regarding new regulations related to federal income tax and the impact on our financial statements and cash flow; statements regarding the impact of the adoption of recent accounting pronouncements on our business; 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 our actual results, performance, or achievements 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; macroeconomic conditions, including global financial pressures, inflation, market volatility, and recessionary concerns; success of operating initiatives; development and operating costs; trends impacting the purchasing behavior of our customers and consumers; 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, including the effects of climate change and changes in the regulatory environment and consumer demand to mitigate these effects; construction schedules; the impact of the COVID-19 pandemic on our production facilities, supply chain, consumer demand, and cost of products sold; the impact of competitive products and pricing, and other factors referenced in this Report as well as in our other filings with the Securities 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 ended November 3, 2023 (the “Annual Report”) as well as our other filings with the SEC 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.

Critical Accounting Policies and Management Estimates

The preparation of our Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles in the 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 of Bridgford Foods Corporation is measured annually and based on the Citigroup Pension Discount Rate. The Citigroup Pension Discount Rate as of July 31, 2024, was 5.22% as compared to 5.96% as of November 3, 2023. 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 allowance for credit losses on accounts receivable is based on historical trends and current collection risk. We have significant receivables with a couple of 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.

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.

On May 22, 2024, we transitioned our pension plan assets held with Morgan Stanley Smith Barney LLC to align with our updated investment policy statement to shift away from equities to fixed income. This derisking strategy helps establish a basis for our investment results as well as helping to ensure that assets of the Plan are managed in accordance with the Employment Retirement Income Security Act (“ERISA”) of 1974 and regulations pertaining thereto.

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. 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 current 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 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. Our health care plans as they exist in 2024 are compliant with all applicable regulations that currently exist. As we look to the future, we anticipate that future legislative action will impact the plans offered to active and retired participants. As we have done in the past, our executive team will continue to assess the accounting implications of the PPACA and potential future legislation to determine the impact on our financial position and results of operations. The potential future effects and cost of complying with the legislative changes are not currently determinable.

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 thirty-six weeks ended July 12, 2024, and July 7, 2023, respectively.

The table below shows customers that accounted for more than 20% of consolidated accounts receivable or 10% of consolidated sales for the twelve weeks ended July 12, 2024, and July 7, 2023, respectively.

Revenue recognition

Revenues are recognized in accordance with ASC 606 – Revenue from 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, common carrier, or through a Company owned direct store delivery system.

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 — Segment Information 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 the 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 or third-party logistic providers/carriers. We leverage relationships with regional sales managers, and we maintain a network of independent food service and retail brokers covering most of the United States. Brokers are compensated on a commission basis. We believe that our brokers, 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 often with the assistance of our broker partners.

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 160 different items through a direct-store-delivery network and customer-owned distribution centers serving approximately 20,000 supermarkets, mass merchandise and convenience retail stores located in 50 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 sale. 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 sold to the end consumer.

Results of Operations for the Twelve Weeks Ended July 12, 2024, and July 7, 2023

Net Sales-Consolidated

Net sales decreased by $4,926 (9.1%) to $49,263 in the third twelve-week period of the 2024 fiscal year compared to the same twelve-week period in fiscal year 2023. The changes in net sales were comprised as follows:

Net Sales-Frozen Food Products Segment

Net sales in the Frozen Food Products segment increased by $665 (6.1%) to $11,517 in the third twelve-week period of the 2024 fiscal year compared to the same twelve-week period in fiscal year 2023. The changes in net sales were comprised as follows:

Net sales for the Frozen Food Products segment increased due to higher selling prices per pound partially offset by lower unit sales volume in pounds compared to the same period in the prior year. Other institutional Frozen Food Products dollar sales, including sheet dough and rolls, increased 11% and retail dollar sales volume decreased by 9%. We believe sales increased due to continued willingness by consumers to visit foodservice establishments despite inflationary conditions. Returns activity decreased slightly compared to the same twelve-week period in the 2023 fiscal year. Promotional activity was higher during the fiscal year 2024 period.

Net Sales-Snack Food Products Segment

Net sales in the Snack Food Products segment decreased by $5,591 (12.9%) to $37,746 in the third twelve-week period of the 2024 fiscal year compared to the same twelve-week period in fiscal year 2023. The changes in net sales were comprised as follows:

Net sales of Snack Food Products decreased due to lower unit sales volume in pounds through our direct-store-delivery distribution channel and lower selling prices per pound during the third quarter of fiscal year 2024. We believe demand decreased primarily due to inflationary pressures on consumer spending habits as consumers have pulled back on snack foods including meat product purchases. The weighted average selling price per pound decreased compared to the same twelve-week period in the prior fiscal year due to changes in product mix. Returns activity decreased compared to the same twelve-week period in the 2023 fiscal year. Promotional activity was higher than the same twelve-week period in fiscal year 2023 due to programs related to changes in packaging sizes.

Cost of Products Sold and Gross Margin-Consolidated

Cost of products sold decreased by $859 (2.2%) to $38,039 in the third twelve-week period of the 2024 fiscal year compared to the same twelve-week period in fiscal year 2023. The gross margin decreased to 22.8% in the third twelve-weeks of fiscal year 2024 compared to 28.2% in the same twelve-week period in fiscal year 2023.

17 of 27

Cost of Products Sold-Frozen Food Products Segment

Cost of products sold in the Frozen Food Products segment decreased by $139 (1.6%) to $8,670 in the third twelve-week period of the 2024 fiscal year compared to the same twelve-week period in fiscal year 2023. The cost of purchased flour decreased based on global economic conditions for approximately $114 in the third twelve-week period of fiscal year 2024 compared to the same twelve-week period in fiscal year 2023. The gross margin increased to 24.7% in the third twelve-weeks of fiscal year 2024 compared to 18.8% in the same twelve-week period in fiscal year 2023. Gross overhead increased as a result of continued upward pressures on input costs impacted by inflation.

Cost of Products Sold-Snack Food Products Segment

Cost of products sold in the Snack Food Products segment decreased by $720 (2.4%) to $29,369 in the third twelve-week period of the 2024 fiscal year compared to the same twelve-week period in fiscal year 2023 due to lower sales volume in our direct store delivery distribution channel. The cost of significant meat commodities increased partially due to a limited supply of cattle ready for market by approximately $1,171 in the third twelve-week period of fiscal year 2024 compared to the same period in fiscal year 2023. The gross margin decreased to 22.2% in the third twelve-weeks of fiscal year 2024 compared to 30.6% in the same twelve-week period in fiscal year 2023. We increased our net realizable value reserve by $991 during the twelve weeks ended July 12, 2024, in consideration of higher meat commodity costs and lower gross margins. We maintain a net realizable reserve of $1,343 on products as of July 12, 2024, after determining that the market value on some meat products could not cover the costs associated with completion and sale of the product.

Selling, General and Administrative Expenses-Consolidated

Selling, general and administrative expenses (“SG&A”) decreased by $212 (1.4%) to $14,445 in the third twelve-week period of fiscal year 2024 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:

Lower sales commissions due to lower sales volume in pounds resulted in lower wages and bonus expenses in the third twelve weeks of the 2024 fiscal year compared to the same period in the prior fiscal year. The increase in the provision for bad debt was mainly the result of recent slowing in certain customer payments beyond terms. The decrease in insurance expenses was driven by exiting unfavorable insurance policies early to take advantage of more competitive pricing. Outside consulting costs increased due to higher legal fees, advisory services, inspection and product testing fees. Rental costs for storage units that house inventory decreased due to a sell down of inventory to meet lower demand in the direct store delivery route system. 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 product advertising and legal expenses partially offset by lower repairs and maintenance costs on production equipment.

Selling, General and Administrative Expenses-Frozen Food Products Segment

SG&A expenses in the Frozen Food Products segment increased by $163 (5.6%) to $3,063 in the third twelve-week period of fiscal year 2024 compared to the same twelve-week period in the prior fiscal year. The overall increase in SG&A expenses was due to an increase in product advertising and healthcare expenses.

Selling, General and Administrative Expenses-Snack Food Products Segment

SG&A expenses in the Snack Food Products segment decreased by $375 (3.2%) to $11,382 in the third twelve-week period of fiscal year 2024 compared to the same twelve-week period in the prior fiscal year. Most of the decrease was due to lower wages and bonuses and decreased fees paid under brand licensing agreements partially offset by higher product advertising and healthcare expenses.

Income Taxes-Consolidated

Income tax for the twelve weeks ended July 12, 2024, and July 7, 2023, respectively, was as follows:

We recorded a benefit for income taxes of $752 for the twelve-week period ended July 12, 2024, and a provision for income taxes of $258 for the twelve-week period ended July 7, 2023, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective income tax rate differed from the applicable mixed statutory rate of approximately 26.4% due to non-deductible meals and entertainment, non-taxable gains and losses on life insurance policies, and state income taxes.

Results of Operations for the Thirty-Six Weeks Ended July 12, 2024, and July 7, 2023

Net Sales-Consolidated

Net sales decreased by $19,902 (11.6%) to $151,419 in the thirty-six-week period ended July 12, 2024, compared to the same period thirty-six-week period in fiscal year 2023. The changes in net sales were comprised as follows:

Net Sales-Frozen Food Products Segment

Net sales in the Frozen Food Products segment increased by $1,665 (4.5%) to $38,821 in the thirty-six-week period ended July 12, 2024, compared to the same thirty-six-week period in fiscal year 2023. The changes in net sales were comprised as follows:

The increase in net sales for the thirty-six-week period ended July 12, 2024 primarily relates to higher selling prices per pound coupled with a higher unit sales volume in pounds. The increase in net sales was primarily driven by an increase in volume to institutional customers and an increase in selling prices due to price increases implemented during the fourth quarter of fiscal year 2023. Other institutional Frozen Food Products sales, including sheet dough and rolls, increased 7% by volume while retail sales volume was flat. Returns activity decreased compared to the same thirty-six-week period in the 2023 fiscal year. Promotional activity was higher as a percentage of sales.

Net Sales-Snack Food Products Segment

Net sales in the Snack Food Products segment decreased by $21,567 (16.1%) to $112,598 in the thirty-six-week period ended July 12, 2024, compared to the same thirty-six-week period in fiscal year 2023. The changes in net sales were comprised as follows:

19 of 27

Net sales of Snack Food Products decreased due to lower unit sales volume in pounds through our direct-store-delivery distribution channel and lower selling prices per pound during the thirty-six weeks period ended July 12, 2024. We believe demand decreased primarily due to inflationary pressures on consumer spending habits as consumers have pulled back on meat product purchases. The weighted average selling price per pound decreased compared to the same thirty-six-week period in the prior fiscal year due to changes in product mix. Returns activity decreased as a percent of sales but was lower in absolute dollars compared to the same thirty-six-week-period in the 2023 fiscal year. Promotional activity increased during the first thirty-six-week period in fiscal year 2024 compared to the same period in the prior fiscal year.

Cost of Products Sold and Gross Margin-Consolidated

Cost of products sold decreased by $10,076 (8.2%) to $113,431 in the thirty-six-week period ended July 12, 2024 compared to the same thirty-six-week period in fiscal year 2023. The gross margin decreased to 25.1% during the fiscal year 2024 period compared to 27.9% in the comparable prior fiscal year period.

Cost of Products Sold-Frozen Food Products Segment

Cost of products sold in the Frozen Food Products segment decreased by $579 (2.0%) to $28,453 in the first thirty-six-week period of the 2024 fiscal year compared to the same thirty-six-week period in fiscal year 2023. Changes in the product mix and lower commodity costs were the primary contributing factors to this decrease. The cost of purchased flour decreased approximately $387 in the first thirty-six-week period of fiscal year 2024 compared to the same thirty-six-week period in fiscal year 2023.

Cost of Products Sold-Snack Food Products Segment

Cost of products sold in the Snack Food Products segment decreased by $9,497 (10.1%) to $84,978 in the first thirty-six-week period of the 2024 fiscal year compared to the same thirty-six-week period in fiscal year 2023 due to lower sales volume in our direct store delivery distribution channel. The decrease in cost of products sold was primarily due to a decrease in sales volume was partially offset by an increase in the cost of meat commodities of approximately $4,050 in the thirty-six-week period of fiscal year 2024 compared to the same period in fiscal year 2023. We increased our net realizable value reserve by $1,050 during the thirty-six weeks ended July 12, 2024 in consideration of higher meat commodity costs and lower gross margins. We maintain a net realizable reserve of $1,343 on products as of July 12, 2024 after determining that the market value on some meat products could not cover the costs associated with completion and sale of the product.

Selling, General and Administrative Expenses-Consolidated

Selling, general and administrative expenses decreased by $1,946 (4.3%) to $43,446 in the thirty-six-week period ended July 12, 2024 compared to the same thirty-six-week period in the prior fiscal year. The table below summarizes the significant expense increases (decreases) included in this category:

Lower sales commissions resulted in lower wages and bonus expenses in the first thirty-six weeks of the 2024 fiscal year compared to the same period in the prior fiscal year. Costs for product advertising decreased mainly as a result of lower payments under brand licensing agreements in the Snack Food Products segment during the thirty-six weeks ended July 12, 2024. Outside consulting costs increased due to higher legal fees, advisory services, inspection and product testing fees. Healthcare costs have increased due to unfavorable claim trends. Vehicle repairs and maintenance on vehicles have increased compared to the prior fiscal year period mainly due to an aging fleet. 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 provision for bad debt, higher travel expenses and lower other income.

Selling, General and Administrative Expenses-Frozen Food Products Segment

SG&A expenses in the Frozen Food Products segment decreased by $57 (0.6%) to $9,729 in the first thirty-six-week period of fiscal year 2024 compared to the same thirty-six-week period in the prior fiscal year. The overall decrease in SG&A expenses was due to lower vehicle repairs and maintenance as a result of shifting away from Company-leased vehicles towards less costly transportation methods such as common carriers, lower fuel and computer maintenance and workers’ compensation costs partially offset by higher healthcare costs.

Selling, General and Administrative Expenses-Snack Food Products Segment

SG&A expenses in the Snack Food Products segment decreased by $1,889 (5.3%) to $33,717 in the first thirty-six-week period of fiscal year 2024 compared to the same thirty-six-week period in the prior fiscal year. Most of the decrease was due to the significantly lower unit sales volume in pounds and the corresponding decrease in wages and bonuses.

Income Taxes-Consolidated

Income tax for the thirty-six weeks ended July 12, 2024, and July 7, 2023, respectively, was as follows:

We recorded a benefit for income taxes of $1,119 for the thirty-six-week period ended July 12, 2024, and a provision for income taxes of $820 for the thirty-six-week period ended July 7, 2023, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective income tax rate differed from the applicable mixed statutory rate of approximately 26.4% due to non-deductible meals and entertainment, non-taxable gains and losses on life insurance policies and state income taxes.

Liquidity and Capital Resources

The principal source of operating cash flows is cash receipts from the sale of our products, net of costs to manufacture, store, market and deliver such products. We normally fund our operations from cash balances and cash flow generated from operations. Additionally, we have maintained a revolving line of credit with Wells Fargo Bank, N.A. pursuant to the terms of the credit agreement dated March 1, 2018, as amended to date. On November 30, 2023, we entered into a fifth amendment to the credit agreement with Wells Fargo Bank, N.A., and also executed a new revolving line of credit note pursuant to the amendment. Under the terms of this amendment and the revolving line of credit note, we may borrow up to $7,500 from time to time up to November 30, 2024. As of July 12, 2024, we had $1,075 of current debt on equipment loans, $64,180 of net working capital and $7,500 available under our revolving line of credit with Wells Fargo Bank, N.A. Refer to Note 6 to the Condensed Consolidated Financial Statements included within this Report for further information. The Company was in compliance with all loan covenants as of July 12, 2024.

All of our operating segments have been impacted by inflation, including higher costs for labor, freight and specific materials related to product manufacturing and delivery. We expect this trend to continue through the remainder of fiscal year 2024. Additionally, commodity costs, including meat and flour costs, have and may continue to fluctuate due to both political and economic conditions, including the ongoing conflict between Ukraine and Russia. Despite higher commodity costs like we experienced in fiscal year 2022 and again in the first and second quarters of fiscal 2024, we may not be able to increase our product prices in a timely manner or sufficiently to offset such increased commodity or other costs due to consumer price sensitivity, pricing in relation to competitors and the reluctance of retailers to accept the price increase. Instances of higher interest rates, general price inflation or deflation, raw materials costs, labor shortages or supply chain issues could adversely affect the Company’s financial results and its liquidity. Higher product prices could potentially lower demand for our product and decrease volume. Management believes there are various options available to generate additional liquidity to repay debt or fund operations such as mortgaging real estate, should that be necessary. Our ability to increase liquidity will depend upon, among other things, our business plans and the performance of operating divisions and economic conditions of capital markets. If we are unable to increase liquidity through mortgaging real estate or additional borrowing, or generate positive cash flow necessary to fund operations, we may not be able to compete successfully, which could negatively impact our business, operations, and financial condition. With the cash expected to be generated from the Company’s operations, we anticipate that we will maintain sufficient liquidity to operate our business for at least the next twelve months. We will continue to monitor the impact of inflation and interest rate volatility on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times.

Cash flows from operating activities for the thirty-six weeks ended:

For the thirty-six weeks ended July 12, 2024, net cash provided by operating activities was $3,202, $3,107 less cash used than during the same period in fiscal year 2023. The increase in net cash provided by operating activities primarily relates to a decrease in inventory of $5,661 and a decrease in accounts receivable of $2,809, partially offset by a net loss of $2,730, an increase in refundable income taxes of $2,452 and an increase in other non-current assets of $2,704. During the thirty-six-week period ended July 12, 2024, we did not contribute towards our defined benefit pension plan. Plan funding strategies may be adjusted depending upon economic conditions, investment options, tax deductibility, or recent legislative changes in funding requirements.

Our cash conversion cycle (defined as days of inventory and trade receivables less days of trade payables outstanding) was equal to 85 days for the thirty-six-week period ended July 12, 2024. The increase in the cash conversion cycle from 84 days for the thirty-six-week period ended July 7, 2023 was minimal and overall was consistent with performance in the prior fiscal year period.

Cash flows from investing activities for the thirty-six weeks ended:

Expenditures for property, plant and equipment include the acquisition of equipment, upgrading of facilities to maintain operating efficiency and investments in cost effective technologies to lower costs. In general, we capitalize the cost of additions and improvements and expense the cost for repairs and maintenance. We may also capitalize costs related to improvements that extend the life, increase the capacity, or improve the efficiency of existing machinery and equipment. Specifically, capitalization of upgrades of facilities to maintain operating efficiency include acquisitions of machinery and equipment used on packaging lines and refrigeration equipment used to process food products.

The table below highlights additions to property, plant and equipment for the thirty-six weeks ended:

Cash flows from financing activities for the thirty-six weeks ended:

Our stock repurchase program was approved by our Board of Directors in November 1999 and was expanded in June 2005. Under the stock repurchase program, we are authorized, at the discretion of management and our Board of Directors, to purchase up to an aggregate of 2,000,000 shares of our common stock on the open market. As of July 12, 2024, 120,113 shares remained authorized for repurchase under the program.

Revolving Credit Facility

On November 30, 2023, we entered into a fifth amendment to the credit agreement with Wells Fargo Bank, N.A. dated March 1, 2018, as amended, and also executed a revolving line of credit note pursuant to the amendment. The revolving line of credit note replaces the existing note that expired by its terms on November 30, 2023. Under the terms of this amendment and the revolving line of credit note, we may borrow up to $7,500 from time to time up to November 30, 2024, at an interest rate equal to (a) the daily simple secured overnight financing rate plus 2.0%, or if unavailable, or (b) the prime rate, in each case as determined by the bank. The line of credit has an unused commitment fee of 0.35% of the available loan amount, payable on a quarterly basis. Amounts may be repaid and reborrowed during the term of the note. Accrued interest is payable on the first day of each month and the outstanding principal balance and remaining interest are due and payable on November 30, 2024.

Equipment Notes Payable

On each of December 26, 2018, April 18, 2019, December 19, 2019, March 5, 2020, and April 17, 2020, we entered into master collateral loan and security agreements with Wells Fargo Bank, N.A. (collectively referred to as the “Wells Fargo Loan Agreements”).

The following table reflects major components of our revolving credit facility and equipment note payable as of July 12, 2024, and November 3, 2023, respectively.

Loan Covenants

The Wells Fargo Loan Agreements and the credit agreement contain various affirmative and negative covenants that limit the use of funds and define other provisions of the loans. Material financial covenants are listed below, and the capitalized terms are defined in the applicable agreements:

• Total Liabilities divided by Tangible Net Worth not greater than 2.0 to 1.0 at each fiscal quarter end,
• Quick Ratio not less than 1.25 to 1.0 at each fiscal quarter end, and
• Fixed Charge Coverage Ratio not less than 1.25 to 1.0 at each fiscal quarter end.

The Company was in compliance with all covenants under the Wells Fargo Loan Agreements and the credit agreement as of July 12, 2024, and November 3, 2023.

Recently issued accounting pronouncements and regulations

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (ASC 326), which provides guidance on measurement of credit losses on financial instruments. This ASU adds a current expected credit loss impairment model to GAAP that is based on expected losses rather than incurred losses whereby a broader range of reasonable and supportable information is required to be utilized in order to derive credit loss estimates. The effective date of the new guidance as amended by ASU No. 2019-10 is fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU No. 2019 did not have a material or significant impact on the Company’s Consolidated Financial Statements as it has been our policy to estimate and record credit losses on trade accounts receivable.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting – Improvements to Reportable Segments Disclosures. The amendments enhance disclosures of significant segment expenses by requiring to disclose significant segment expenses regularly provided to the chief operating decision maker (CODM), extend certain annual disclosures to interim periods, and permit more than one measure of segment profit or loss to be reported under certain conditions. The amendments are effective for the Company in fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption of the amendment is permitted, including adoption in any interim periods for which financial statements have not been issued. The Company is currently evaluating the guidance and its impact to the financial statements.

In March 2024, the SEC adopted rules to develop standardized climate-related disclosures by publicly traded companies including the emission of greenhouse gases. The rules are currently effective for the Company in the fiscal years beginning in 2027. However, as a result of pending legal challenges, the actual timing of effectiveness of the rules and applicable phase-in periods, as well as whether portions of the rules remain in effect after the legal challenges, are uncertain. The Company is currently evaluating the guidance and its impact on the financial statements.

Off-Balance Sheet Arrangements

We are not engaged in any “off-balance sheet arrangements” within the meaning of Item 303(b) of Regulation S-K.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to help ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and forms, and that such information is collected and communicated to our management, including our Chairman of the Board and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation and under the supervision of our Chairman of the Board and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Report. Based on this evaluation, the Chairman of the Board and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Our management, including our Chairman of the Board and Chief Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We maintain and evaluate a system of internal accounting controls, and a program designed to provide reasonable assurance that our assets are protected and that transactions are performed in accordance with proper authorization and are properly recorded. This system of internal accounting controls is continually reviewed and modified in response to evolving business conditions and operations and to recommendations made by our independent registered public accounting firm. We have established a code of conduct. Our management believes that the accounting and internal control systems provide reasonable assurance that assets are safeguarded, and financial information is reliable.

The Audit Committee of the Board of Directors meets regularly with our financial management and counsel, and with the independent registered public accounting firm engaged by us. Internal accounting controls and the quality of financial reporting are discussed during these meetings. The Audit Committee has discussed with the independent registered public accounting firm matters required to be discussed by Statement of Auditing Standards No. 16 (Communication with Audit Committees). In addition, the Audit Committee and the independent registered public accounting firm have discussed the independent registered public accounting firm’s independence from our Company and its management, including the matters in the written disclosures required by Public Company Accounting Oversight Board Rule 3526 “Communicating with Audit Committees Concerning Independence”.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting other than those discussed above that occurred during the fiscal quarter ended July 12, 2024, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The risk factors listed in Part I “Item 1A. Risk Factors” in the Annual Report should be considered with the information provided elsewhere in this Report, which could materially adversely affect our business, financial condition, or results of operations. There have been no material changes in our assessment of risk factors affecting our business since those presented in our Annual Report.