BRID Bridgford Foods Corp

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

12 weeks ended April 20, 2018 and April 19, 2019

(unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

Item 1. e.

BRIDGFORD FOODS CORPORATION

We recorded a tax provision of $573 for the twelve-week period ended April 19, 2019, 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% also due to non-taxable gains and losses on life insurance policies.

Net Income Consolidated

The net income of $2,220 in the twelve-week period ended April 19, 2019 includes a non-taxable gain on life insurance policies in the amount of $439. The net income of $4,634 in the twelve-week period ended April 20, 2018 included a non-recurring gain on the sale of real property for $5,977 (before taxes) and a non-taxable loss on life insurance policies in the amount of $162. Gains and losses on life insurance policies are dependent upon the performance of the underlying equities that support policy values and future results may vary considerably.

Results of Operations for the Twenty-Four Weeks Ended April 19, 2019 and April 20, 2018

Net Sales-Frozen Food Products Segment

Net sales in the Frozen Food Products segment increased by $1,817 (8.4%) to $23,418 in the twenty-four-week period ended April 19, 2019 compared to the same twenty-four-week period in fiscal year 2018. The changes in net sales were comprised as follows:

The increase in net sales for the twenty-four-week period ended April 19, 2019 primarily relates to higher unit sales volume and higher selling price per pound. The increase in net sales was primarily driven by a significant increase in volume for our shelf-stable sandwich business to institutional and retail customers. Other institutional Frozen Food Product sales, including sheet dough and rolls, increased 1% by volume while retail sales volume decreased 10%. Changes in returns were insignificant compared to the same twelve-week period in the prior fiscal year. Promotional activity increased due to higher bid price reductions, rebates and menu allowances as a percentage of sales.

Net Sales-Snack Food Products Segment

Net sales in the Snack Food Products segment increased by $5,575 (9.7%) to $63,066 in the twenty-four-week period ended April 19, 2019 compared to the same twenty-four-week period in fiscal year 2018. The changes in net sales were comprised as follows:

Net sales of Snack Food Products increased significantly due to our new product offerings including smokehouse sausage sticks introduced during the second quarter of fiscal year 2018. The increase in net sales occurred mainly in our direct sales delivery distribution channel while warehouse shipments decreased. The weighted average selling price per pound increased compared to the same twenty-four-week period in the prior fiscal year due to higher per pound selling prices for new items. Promotional offers increased slightly due to the timing of programs with significant customers. Returns activity remained unchanged compared to the same twenty-four-week period in the 2018 fiscal year.

Cost of Products Sold and Gross Margin-Consolidated

Cost of products sold increased by $3,356 (6.3%) to $56,429 in the twenty-four-week period ended April 19, 2019 year compared to the same twenty-four-week period in fiscal year 2018. The gross margin increased from 32.9% to 34.8% during the 2019 period.

Cost of Products Sold-Frozen Food Products Segment

Cost of products sold in the Frozen Food Products segment increased by $1,175 (8.3%) to $15,314 in the twenty-four-week period ended April 19, 2019 compared to the same twenty-four-week period in fiscal year 2018. Increased volume and changes in product mix were the primary contributing factors to this increase. The cost of purchased flour decreased approximately $36 in the twenty-four-week period of fiscal year 2019 compared to the same twenty-four-week period in fiscal year 2018.

Cost of Products Sold-Snack Food Products Segment

Cost of products sold in the Snack Food Products segment increased by $2,181 (5.6%) to $41,115 in the twenty-four-week period ended April 19, 2019 compared to the same twenty-four-week period in fiscal year 2018 due to a substantial increase in sales volume. Meat commodity costs started to drop during the 2019 period partially offsetting the increase in cost of products sold. Higher hourly wages including increased production labor impacted the cost of products sold. The cost of significant meat commodities decreased approximately $1,570 in the twenty-four-week period ended April 19, 2019 compared to the same period in fiscal year 2018.

Selling, General and Administrative Expenses-Consolidated

Selling, general and administrative expenses increased by $1,211 (5.2%) to $24,695 in the twenty-four-week period ended April 19, 2019 compared to the same twenty-four-week period in the prior fiscal year. The table below summarizes the significant expense increases (decreases) included in this category:

Higher profit-sharing accruals resulted in higher wages and bonus expense in the twenty-four weeks ended April 19, 2019 compared to the same period in the prior year. The decrease in pension costs was due to higher pension discount rates being used to compute the future liability estimate. Repairs and maintenance expense decreased as the Company geared up its Chicago facility in the same twenty-four-week period in fiscal year 2018 to comply with Food Safety Certification requirements created and managed by the SQF Institute. Costs for product advertising increased mainly as a result of higher payments under brand licensing agreements in the Snack Food Products segment during the twenty-four weeks ended April 19, 2019. None of the changes individually or as a group of expenses in “Other SG&A” were significant enough to merit separate disclosure. The major components comprising the increase of “Other SG&A” expenses were lower legal fees and lower bad debt expenses.

Selling, General and Administrative Expenses-Frozen Food Products Segment

SG&A expenses in the Frozen Food Products segment increased by $143 (2.1%) to $6,900 in the twenty-four-week period ended April 19, 2019 compared to the same twenty-four-week period in the prior fiscal year. The overall increase in SG&A expenses was due to higher unit sales volume, higher profit-sharing accruals and higher product advertising.

Selling, General and Administrative Expenses-Snack Food Products Segment

SG&A expenses in the Snack Food Products segment increased by $1,068 (6.4%) to $17,795 in the twenty-four-week period ended April 19, 2019 compared to the same twenty-four-week period in the prior fiscal year. Most of the increase was due to higher unit sales volume and higher expenses related to wages and bonus including an increase in sales commissions partially offset by pension expense.

We recorded a tax provision of $1,264 for the twenty-four-week period ended April 19, 2019, 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% also due to non-taxable gains and losses on life insurance policies.

Net Income Consolidated

The net income of $4,096 in the twenty-four-weeks period ended April 19, 2019 includes a non-taxable gain on life insurance policies in the amount of $428. The net income of $3,007 in the twenty-four-week period ended April 20, 2018 includes a non-recurring gain on the sale of real property for $5,977 (before taxes) and a non-taxable gain on life insurance policies in the amount of $366. Gains and losses on life insurance policies are dependent upon the performance of the underlying equities that support policy values and future results may vary considerably.

We recorded a tax provision of $5,530 for the twenty-four-week period ended April 20, 2018, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective tax rate for the second quarter of 2018 reflects impacts of the Tax Cuts and Jobs Act signed into law on December 22, 2017. These impacts include a $3,200 expense related to the remeasurement of deferred taxes, as well as a blended 23.07% statutory federal income tax rate for fiscal 2018 compared to the 35% statutory federal income tax rate effective for the prior year. The rate also reflects impact of $1,640 million of expense related to tax on the gain on sale of a land parcel in Chicago, Illinois discussed in Note 5 - Income Taxes above. Additionally, the effective income tax rate also differed from the applicable mixed statutory rate of approximately 27.55% due to non- taxable gains and losses on life insurance policies and domestic production activities deductions under Internal Revenue Code Section 199.

Liquidity and Capital Resources

The principal source of our operating cash flow is cash receipts from the sale of our products, net of costs to manufacture, store, market and deliver such products. We have remained free of interest-bearing debt (excluding capital leases and equipment financing) for twenty-nine of the last thirty years (with fiscal year 2014 being the only exception) and we normally fund our operations from cash balances and cash flow generated from operations. We borrowed $7,500 during the first quarter of fiscal year 2019 to purchase specific equipment for our new Chicago processing facility. We borrowed a second $7,500 subsequent to the end of the second quarter of fiscal year 2019. Historically, we expect positive operating cash flows in the first quarter of our fiscal year from the liquidation of inventory and accounts receivable balances related to holiday season sales. Anticipated commodity price trends may affect future cash balances. Certain commodities may be purchased in advance of our immediate needs to lower the ultimate cost of processing.

Cash flows from operating activities for the twenty-four weeks ended:

For the twenty-four weeks ended April 19, 2019, net cash provided by operating activities was $1,469, $862 more cash provided than during the same period in fiscal year 2018. The net increase in cash provided by operating activities primarily related to higher net income of $4,096 partially offset by an increase in inventory of $1,179 and a decrease in accounts payable of $2,187 as well as payments for estimated income taxes of $551. During the twenty-four-week period ended April 19, 2019, we contributed $300 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. The Company borrowed $2,000 under this line of credit on April 15, 2019, which was repaid on April 25, 2019.

Our cash conversion cycle (defined as days of inventory and trade receivables less days of trade payables outstanding) was equal to 68 days for the twenty-four-week period ended April 19, 2019. The cash conversion cycle was 55 days for the twenty-four-week period ended April 20, 2018.

For the twenty-four weeks ended April 20, 2018, net cash provided by operating activities was $607 primarily due to a net income of $3,007 and collection of accounts receivable of $2,705 partially offset by estimated income tax payments of $1,350. During the twenty-four-week period ended April 20, 2018 we funded $601 towards our defined benefit pension plan.

Cash (used in) provided by investing activities for the twenty-four weeks ended:

In general, we capitalize the cost of additions and improvements and expense the cost for repairs and maintenance. The Company 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 twenty-four weeks ended:

Cash provided by (used in) financing activities for the twenty-four 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 April 19, 2019, 120,113 shares were authorized for repurchase under the program.

We maintain a line of credit with Wells Fargo Bank, N.A. that expires on March 1, 2020. Under the terms of this line of credit, we may borrow up to $7,500 at an interest rate equal to the bank’s prime rate or LIBOR plus 1.5%. The borrowing agreement contains various covenants, the more significant of which require us to maintain a minimum tangible net worth, a minimum quick ratio, a minimum net income after tax and total capital expenditures less than $5,000. The Company was in violation of the capital expenditure covenant which was subsequently waived (per letter dated May 24, 2019). The Company borrowed $2,000 under this line of credit on April 15, 2019, which was repaid of April 25, 2019.

On December 26, 2018, we entered into a master collateral loan and security agreement with Wells Fargo Bank, N.A for up to $15,000 in equipment financing. Pursuant to the loan agreement, we borrowed $7,500 to purchase specific equipment for our new Chicago processing facility at a fixed rate of 4.13% per annum. The loan term is seven years and is secured by the purchased equipment. The funds were received on December 28, 2018. The master collateral loan and security agreement with Wells Fargo Bank, N.A. contains various affirmative and negative covenants that limit the use of funds and define other provisions of the loan. The main financial covenants are listed below:

The Company was in compliance with all covenants under the master collateral loan and security agreement as of April 19, 2019.

Refer to “Subsequent events” section above for further detail on borrowings after April 19, 2019 under the master collateral loan and security agreement with Wells Fargo Bank, N.A.

The impact of inflation on the Company’s financial position and results of operations has not been significant. Management is of the opinion that the Company’s financial position and its capital resources are sufficient to provide for its operating needs and capital expenditures for the remainder of fiscal year 2019.

Recent Accounting Pronouncements

In May 2014, the FASB issued guidance that changes the criteria for recognizing revenue. The guidance provides for a single five-step model to be applied to all revenue contracts with customers. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts, including disaggregated revenue disclosures. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. We adopted this guidance in the first quarter of fiscal year 2019 using the modified retrospective transition method. Prior periods were not adjusted and, based on our implementation assessment, no cumulative-effect adjustment was made to the opening balance of retained earnings. The adoption of this standard did not have a material impact on our consolidated financial statements. For further description of our revenue recognition policy refer to the Revenue Recognition section above and for disaggregated revenue information refer to Part I, Item 1 (e), Notes to the Condensed Consolidated Financial Statements, Note 14: Segment Information.

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory”. The guidance is part of the “Simplification Initiative” to identify and re-evaluate areas where the generally accepted accounting principles may be complex and cumbersome to apply. The guidance will require that inventory be stated at the lower of cost and net realizable value as opposed to the lower of cost or market. Net realizable value is the estimated selling price for the inventory less completion, disposal and transportation costs. The guidance is effective for fiscal years beginning after December 15, 2016. Adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” that requires most equity investments to be measured at fair value and subsequent changes in fair value to be recognized in net income. The guidance covers presentation and disclosure requirements of financial liabilities and the classification and measurement of financial instruments. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017. Adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which will require a lessee to recognize assets and liabilities with lease terms of more than 12 months. Both capital and operating leases will need to be recognized on the balance sheet. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating this statement and its impact on its results of operations or financial position.

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation” which simplifies various aspects of the accounting for employee share-based payment transactions, including the accounting for income tax consequences, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The guidance is effective for annual and interim reporting periods beginning after December 15, 2016 with early adoption permitted. Adoption of this guidance did not have a material impact on results of Company operations or financial position.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses”, which requires a financial asset to be presented at the net carrying value which is the amount expected to be collected net of expected credit losses. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019 with early adoption permitted. The Company is currently evaluating this statement and its impact on its results of operations or financial position.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes – Classification of Certain Cash Receipts and Cash Payments”. The guidance involves eight specific cash flow issues and aims to unify accounting for these transactions. The guidance is effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted. Adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits”. The guidance separates service cost from other pension cost components changing the presentation of net periodic benefit cost related to company sponsored defined benefit or other postretirement benefits. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017 with early adoption permitted. Adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The guidance allows reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the application of the U.S. Tax Cuts and Jobs Act. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018 with early adoption permitted. The Company elected to early adopt this guidance during the quarter ended January 26, 2018. Adoption of this guidance had a material impact on Retained Earnings and Other Comprehensive Income (see Item 1.c. of this Report).

Off-Balance Sheet Arrangements

We are not engaged in any “off-balance sheet arrangements” within the meaning of Item 303(a)(4)(ii) of Regulation S-K.